Grant v. Federal Commissioner of Taxation.
Judges:Bowen CJ
Fisher J
Beaumont J
Court:
Full Federal Court
Bowen C.J., Fisher and Beaumont JJ.
This is an appeal from the dismissal by the Supreme Court of New South Wales (Yeldham J.) [reported at 85 ATC 4806] of an appeal to that Court from a decision of the Deputy Commissioner of Taxation disallowing the appellant taxpayer's objection against an assessment of income tax in respect of the year of income ended 30 June 1978.
The matter for determination in the Supreme Court was whether the taxpayer, a chartered accountant, was entitled to an allowable deduction under sec. 51 of the Income Tax Assessment Act 1936 (the Act) in respect of a loss claimed to have been incurred by him as a result of certain share trading transactions. The deduction in respect of the loss claimed arose out of an attempt by the taxpayer to deduct the ``cost'' to him of the issue of certain bonus shares. The deduction was said to be justified by Curran's case (
Curran v. F.C. of T. 74 ATC 4296; (1974) 131 C.L.R. 409). In disputing the deduction claimed, the Commissioner relied, inter alia, upon the provisions of sec. 6BA of the Act as they stood before their amendments in 1979. Those provisions, which were apparently intended to deny a deduction in a situation such as arose in Curran, came into operation on 22 June 1978. However, by sec. 3(2) of Act No. 57 of 1978, sec. 6BA applied in every case where the bonus shares in question were allotted after 16 August 1977. The taxpayer denied, for reasons independent of the time at which the allotment occurred, that sec. 6BA applied in the present case.
The primary facts are not in dispute. Until 1 July 1978, the taxpayer, Mr E.G. Chant and Mr D.L. Nicholl (the partners) carried on practice as chartered accountants under the firm name of Dulhunty, Grant & Co. as partners in equal shares. Earlier in 1978 it was proposed that the firm merge with a larger firm of chartered accountants. The partners then became concerned that the proposed merger could result in the creation of a substantial income tax liability for the partners because of the treatment, for the purposes of the merger, of the firm's work-in-progress. They sought the advice of a solicitor, Mr Baffsky, with a view to minimising the incidence of income tax. Mr Baffsky advised that the partners should enter into a scheme similar to that held to be effective in Curran. Mr Baffsky said that, by entering into such a scheme, the partners would be able to obtain a deduction in the order of $600,000. Mr Baffsky advised that in order that the scheme might succeed, it would be necessary for the partners to become share traders. He suggested that, for this purpose, the partners retain the services of Messrs P.N. Burke & Co., a firm of chartered accountants.
On 3 April 1978, acting on the advice of Messrs P.N. Burke & Co., the partners entered into a share management agreement with Morlop Enterprises Limited, a Hong Kong
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company. For a remuneration of $33,000, payable in such manner as might be agreed, Morlop agreed to manage the partners' business of share trading. On 5 April 1978, the partners paid the sum of $6,600 to Morlop. Pursuant to this scheme, a number of dealings were executed by the partners, involving shares in two private companies. It appears that a ``loss'' of $660,065 was generated by these activities. The partners' objective, in embarking on these dealings, as the learned Judge found, was to obtain a ``Curran'' deduction by carrying on the business of trading in shares.However, in April 1978, the partners learnt that it was proposed to introduce legislation (subsequently enacted as sec. 6BA of the Act) which might deprive them of the benefits of their plan. Mr Baffsky then advised that a variation of the ``Curran'' scheme would achieve their objective of minimising tax without any further cost. Mr Baffsky arranged for Mr Wales, a partner in the firm of Messrs P.N. Burke & Co., to explain the details of the new scheme to the partners.
Mr Wales' explanation need not be recounted in any detail. Since the scheme envisaged by him was, in fact, implemented, it will suffice, for present purposes, to record the procedures involved in the execution of the scheme as follows. On 21 June 1978, the directors of Amanada Pty. Limited (Amanada) resolved to allot to Tonnegar Pty. Limited (Tonnegar) 138,542 ordinary shares in the capital of Amanada. The shares, of $1 each, were paid up to one cent and were at a premium of $99 per share. The balance of 99 cents per share and the premium of $99 per share were both left at call. On 22 June, the partners purchased 6,667 of these shares from Tonnegar for $33. On 23 June, the directors of Amanada resolved that the amount of $99.99 owing on each of these shares be called, payable on 27 June 1978. Notice of the call, requiring payment by the partners of the sum of $666,633.33, was given. On 27 June, Huntspill Pty. Limited (Huntspill) advanced the partners the sum of $667,000. On that day, Amanada received an amount of $13,852,814.58 which included an amount of $666,633.33 paid on behalf of the partners. The directors of Amanada then resolved that the sum of $13,715,658 standing to the credit of the company's share premium account be applied in paying up 13,715,658 of the company's unissued ordinary shares of $1 each and that such shares, when so paid up, be issued as fully paid bonus shares to the holders of the issued ordinary shares in the proportion of 99 bonus shares for each one ordinary share held. Pursuant to this resolution, 660,033 fully paid bonus shares were allotted to the partners. On 28 June, the directors of First Minot Investments Pty. Limited (First Minot) resolved to endeavour to purchase from the existing shareholders all the issued ordinary shares in the capital of Amanada for $13,855,582 plus any costs and expenses. Mr Baffsky was appointed to negotiate the acquisition. They also resolved that $13,856,000 be borrowed from Huntspill. Instructions were given for the registration of the transfer, to First Minot, of the 666,700 ordinary shares (being 6,667 original shares together with 660,033 bonus shares) held by the partners. The sum of $666,766 was expressed as the consideration for the transfer. Cheques were exchanged between the parties to enable the partners to repay the amount of $667,000 owing to Huntspill.
The sum of $658,346, described in the partnership adjustment sheet issued by the Commissioner as ``net loss on share trading'' and disallowed by him, was made up as follows:
$
Amount paid for 6,667 partly paid shares in Amanada 33
Plus call paid 666,633
Plus cost of bonus shares issued 660,033
---------
1,326,699
Less the proceeds of sale 666,766
Profit on trading to 30.6.78
(other than on sale of shares in Amanada) 1,554
--------
Difference: $658,346
--------
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The profit on share trading of $1,554 arose from a relatively small number of share transactions embarked upon by the partners in April, May and June 1978.
In the Supreme Court, the taxpayer claimed that, at all material times, he was engaged in the business of share trading. In accordance with the decision in Curran, he further claimed that, in computing his taxable income, a deduction should be made of his share of the partnership loss of $658,346. He contended that the partnership should be allowed a deduction in respect of the transactions looked at as a whole and, specifically, that the sum of $660,033, being the amount applied from the share premium account in paying up the bonus shares allotted to the partners, should be treated as if the partners had paid that amount for the bonus shares. The taxpayer relied on sec. 51(1) of the Act in claiming a deduction of his share of the partnership loss in accordance with sec. 90.
The Commissioner, in the first place, denied that the taxpayer engaged in the business of a share trader. He further claimed that the transaction was a sham; or a ``fiscal nullity''; or otherwise void by virtue of sec. 260 of the Act. Finally, he argued that the provisions of sec. 6BA of the Act operated so as to deprive the taxpayer of any deduction which might otherwise have been available as a result of the decision in Curran.
Yeldham J. held that, notwithstanding the existence of a motive to obtain a substantial tax deduction, the partnership did in fact carry on the business of share trading. But his Honour also held that the provisions of sec. 6BA applied. In the learned Judge's opinion, the application of the share premium account fell within the concept of a ``dividend'' for the purposes of sec. 6BA(1)(a). In the result, the Commissioner's assessment was upheld.
It is convenient to deal first with the question whether sec. 6BA applied in the present circumstances. It is common ground that the decision in Curran was the ``mischief'' intended to be remedied by the enactment of sec. 6BA. It is important, therefore, to understand what was there decided. Mr Curran was a stockbroker who dealt in shares. He purchased shares in various companies which, after he had become a shareholder, resolved to issue bonus shares either out of the proceeds of the realisation of assets not acquired for the purpose of resale at a profit, or out of the amount of the revaluation of assets not acquired for the purpose of resale at a profit, or out of a share premium account or out of a combination of these elements (see [74 ATC 4296 at pp. 4297-4298]; (1974) 131 C.L.R. at p. 411).
Of the majority, (Barwick C.J., Menzies and Gibbs JJ. - Stephen J. dissented), Barwick C.J. held that the taxpayer was entitled to deduct the notional cost to him of the acquisition of the bonus shares, notwithstanding that the dividend applied in paying up the bonus shares was exempt under sec. 44(2)(b)(iii) of the Act. The learned Chief Justice held that whether or not the taxpayer pays income tax on the amount credited in connection with the bonus issue could have no relevance to the question whether he was entitled to treat himself as having paid the amount credited to him by the company as the cost of the bonus shares. That did not mean, in his Honour's opinion, that the appellant was not to be regarded as having paid for those shares the amount of their paid-up value (at ATC p. 4300; C.L.R. p. 415). Menzies J. agreed with this reasoning (at ATC p. 4301-4302; C.L.R. pp. 416-417). Gibbs J. was of the opinion that it was not possible to arrive at the taxpayer's ``true income'' without taking the bonus shares into account as trading stock acquired, whether or not those shares could properly be regarded as having been purchased: the taxpayer's trading account would not reveal ``the real situation'' if it brought in at no value shares which were in fact valuable, because the amount which it would then show as income would include the value which the shares possessed when they were first brought into stock; and the ``only practicable way of reaching a true result... would be to bring the articles into the account at an appropriate value as though they had been purchased, and there is no provision in the Act that would require any different approach'' (at ATC p. 4304; C.L.R. p. 421).
The decision in Curran was referred to, with approval, in
London Australia Investment Co. Ltd. v. F.C. of T. [77 ATC 4398]; (1976-1977) 138 C.L.R. 106 (see per Gibbs J. at ATC 4404-4405; C.L.R. p. 119; per Jacobs J. at ATC pp. 4411-4412; C.L.R. pp. 132-133).
At the relevant date, sec. 6BA provided:
ATC 4417
``6BA(1) Where -
- (a) a dividend (including an amount debited against an amount standing to the credit of a share premium account) is payable to a taxpayer by a company in respect of shares (... the `original shares') in the company; [our emphasis].
- (b) the company issues other shares [... the `bonus shares'] to the taxpayer; and
- (c) the amount of the dividend payable to the taxpayer is applied by the company, in whole or in part, in payment or part payment of the moneys payable by the taxpayer in respect of the bonus shares or the dividend is otherwise satisfied, in whole or in part, by the issue of the bonus shares,
then the following provisions of this section have effect for the purposes of the Act.
(2) Subject to sub-section (4), any part of the dividend that is applied by the company in payment or part payment of the moneys payable by the taxpayer in respect of the bonus shares or is otherwise satisfied by the issue of the bonus shares shall not be treated as being an amount paid or payable by the taxpayer in respect of the bonus shares or as in any way constituting any part of the cost to the taxpayer of the bonus shares.
(3)...
(4) Sub-sections (2) and (3) do not apply -
- (a) in the case of a taxpayer being a person other than a company... - to the extent (if any) that a part of the dividend that is applied by the company in payment or part payment of the moneys payable by the taxpayer in respect of the bonus shares or is otherwise satisfied by the issue of the bonus shares has been or will be included in the assessable income of the taxpayer of any year of income, either directly or through any interposed partnerships or trusts; or
- (b)...''
On this branch of the argument, the question which arose for determination in the Supreme Court was whether the transaction entered into between Amanada and the partners could properly be described as resulting in a ``dividend... payable to a taxpayer'' for the purposes of sec. 6BA(1)(a).
On behalf of the taxpayer, reliance was placed upon the definition of ``dividend'' in the general definition provision, sec. 6(1) of the Act. By that provision, unless a contrary intention appears, ``dividend'' in the Act includes:
``(a) any distribution made by a company to any of its shareholders, whether in money or other property;
(b) any amount credited by a company to any of its shareholders as shareholders; and
(c) the paid-up value of shares issued by a company to any of its shareholders to the extent to which the paid-up value represents a capitalization of profits,
but does not include -
(d) moneys paid or credited by a company to a shareholder or any other property distributed by a company to shareholders (not being moneys or other property to which this paragraph, by reason of sub-section (4), does not apply), where the amount of the moneys paid or credited, or the amount of the value of the property, is debited against an amount standing to the credit of a share premium account of the company.''
Subsection (4) and (5) of sec. 6 provide:
``(4) Subject to the next succeeding sub-section, where, in pursuance of or as part of an agreement or an arrangement, whether oral or in writing, being an agreement or arrangement made after the commencement of this sub-section -
- (a) a company issues shares at a premium, being a premium in respect of which the company credits an amount to a share premium account of the company; and
- (b) the company pays or credits any moneys, or distributes any other property, to shareholders in the company and the amount of the moneys so paid or credited or the amount of the value of the property so distributed is debited against an amount standing to the credit of that share premium account,
paragraph (d) of the definition of `dividend' in sub-section (1) does not apply to the
ATC 4418
moneys so paid or credited or to the property so distributed.(5) Where moneys so credited are, in pursuance of or as part of the agreement or arrangement, applied or to be applied in paying up an amount on a share issued or to be issued by the company, the credit shall be disregarded for the purposes of the last preceding sub-section unless, in pursuance of or as part of the agreement or arrangement, the company, by means of the redemption or cancellation, or of a reduction in the paid-up value, of that share or any other share in the company, is to pay or transfer to, or pay, transfer or apply on behalf of or at the direction of, the holder of the share, any money or other property other than shares in the company.''
Reliance was also placed by the taxpayer upon sec. 60(1) of the Companies Act 1961 (N.S.W.). It provided that where a company issued shares for which a premium was received by the company, a sum equal to the aggregate amount or value of the premiums on those shares was to be transferred to an account called the ``share premium account'', and the provisions of the Act relating to the reduction of the share capital of a company applied as if the share premium account were paid up share capital of the company. By sec. 60(2) the share premium account could be applied:
- (a) in paying up un-issued shares to be issued to members of the company as fully paid bonus shares;
- (b) in paying up in whole or in part the balance unpaid on shares previously issued to members of the company;
- (c) in the payment of dividends if such dividends are satisfied by the issue of shares to members of the company...
The taxpayer further relied upon the provision in Amanada's articles of association, empowering its directors, whenever there was a sum standing to the credit of the company's share premium account, to cause the company to apply that sum or any part thereof in paying up unissued ordinary shares in the capital of the company, to be issued to members of the company holding ordinary shares in the company as fully paid bonus shares; any such bonus shares should be issued to the holders of ordinary shares in proportion to the number of ordinary shares held by each such member (Art. 105).
On behalf of the taxpayer it was then submitted that for the purposes of sec. 6BA(1)(a) of the Act, no dividend was involved here. It was said that, as a matter of general principle, a distribution by a company to shareholders out of its share premium account is made out of capital, not profits. Moreover, the taxpayer argued, a sum debited against an amount standing to the credit of a share premium account fell outside para. (a), (b) and (c) of the definition of ``dividend'' in sec. 6(1) of the Act. Further, the argument ran, sec. 6(5) did not apply here so that the exclusion from the definition of ``dividend'' in sec. 6(1) found in para. (d) of that provision stood. Thus, the taxpayer argued, even if the general law, which would characterise the dealing with the share premium account as an affair of capital, were to be displaced by the special definition of ``dividend'' in sec. 6(1) of the Act, para. (d) of that definition would apply so as to exclude the subject transaction from the definition of ``dividend'' and thus from the operation of sec. 6BA(1)(a) itself.
Yeldham J. rejected the taxpayer's arguments, construing the words in brackets in sec. 6BA(1)(a) as indicated ``a clear legislative intention that the word `dividend' wherever used in the section is to be extended to include `an amount debited against an amount standing to the credit of the share premium account', notwithstanding the exclusion of such amounts in the definition in sec. 6(1), which must give way to a contrary intention''.
We agree with this construction.
The explanatory memorandum dealing with the Bill containing sec. 6BA, explained that the ``law [was] to be amended to overcome the decision of the High Court in Curran's case by providing that tax-free bonus shares allotted after 16 August 1977... [would] be treated as having no independent cost to the taxpayer''. It was further explained that sec. 6BA(1) set out the basic conditions under which the section was to apply:
``These [were] that a dividend be payable to a taxpayer on `original' shares in a company and that the amount of the dividend be satisfied in whole or in part by an issue of `bonus shares' to the taxpayer. The dividend to which the section applie[d] can include a
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tax-free amount that is not a dividend for income tax purposes, because of being declared out of funds in a share premium account.''(Our emphasis)
As Finlay J. observed in Slingsby v. Westminster Bank, Limited (1931) 2 K.B. 173 at p. 188, ``dividend'' can be used in the narrower sense as meaning that part of the profits of a company divisible among its shareholders; it can also be used in the broader sense as meaning that which is to be divided. In the case of sec. 6BA(1)(a), it is clear from the reference, in the words in brackets, to a share premium account that the narrower meaning of ``dividend'' could not have been intended. That is to say, the reference, in sec. 6BA(1)(a) to the share premium account must have been intended to include, as a dividend, a distribution made to shareholders out of that account, even if such a division could not be characterised as a ``dividend'' in the narrower sense of the word.
The taxpayer sought to explain the reference to a share premium account in sec. 6BA(1) as intending to do no more than act as an aide-memoire to a reader of the legislation with a view to reminding one that, in the limited circumstances provided by subsec. (5) and (6) of sec. 6, the prima facie exclusion of dealings with a share premium account contained in para. (d) of the definition of ``dividend'' in sec. 6(1) will not apply.
We cannot accept that the reference, in sec. 6BA(1)(a) to a share premium account was intended to operate in such a curious and complicated way. For one thing, some of the distributions in Curran were made out of a share premium account and the extracts we have cited from the explanatory memorandum make it clear that sec. 6BA was intended to reverse the result of that decision. In any event, if, as the taxpayer suggested, the words in brackets in sec. 6BA(1)(a) were intended to do no more than merely pick up the exclusion in para. (d) of the definition of ``dividend'' in sec. 6(1) in conjunction with sec. 6(4) and (5), one would have expected to find, in sec. 6BA(1)(a), a reference to those provisions.
We think it is more likely that, in inserting the words in brackets in sec. 6BA(1)(a), the legislature intended to cover the field of a ``dividend'' funded out of a share premium account for the purposes of sec. 6BA. For these reasons, we agree with Yeldham J. that, for the purposes of sec. 6BA, the definition of ``dividend'' in sec. 6(1), at least in its application to a distribution out of a share premium account, was intended to be modified by the words in brackets in sec. 6BA(1)(a).
It follows, in our view, that sec. 6BA(1)(a) picked up, as a notional dividend, the distribution made out of the share premium account.
A further argument put on behalf of the taxpayer should be noted. It was submitted on behalf of the taxpayer that, in any event, no dividend was payable ``to a taxpayer'' as required by sec. 6BA(1)(a). It was argued that since the dividend payable in respect of the original shares was paid to a partnership, this did not constitute a payment to a taxpayer for the purposes of the application of sec. 6BA(1)(a).
In support of this contention, reference was made to
F.C. of T. v. Sahhar 85 ATC 4072; (1984-1985) 5 F.C.R. 247. A question there arose as to the application of sec. 226(2) of the Act in the context of a partnership. Under that provision, additional tax was payable if a taxpayer included in his return as a deduction for expenditure incurred by him ``an amount in excess of the expenditure actually incurred'' by him. It was held by Fox J. and by Lockhart J., Jenkinson J. not deciding, that sec. 226(2) did not apply to a taxpayer who claimed in his return a deduction for an amount described therein as his share of the partnership loss, because such a claim was not for ``expenditure incurred by him'' within the meaning of that provision. Lockhart J. said (at ATC p. 4075; F.C.R. p. 250):
``A partnership has, of course, no existence independent of its members. The gross income of a partnership is earned jointly by the partners; and partnership outgoings are joint outgoings of the partners. The partnership profits and losses are the profits and losses of the partners. The Act, however, for some purposes treats a partnership as if it were a distinct entity from those who constitute it:
Rowe v. Federal Commissioner of Taxation (1982) ATC 4243 (a judgment of a Full Court of this Court). It is true, as was pointed out in Rowe's case at 4244, that `There is nothing in the Act which denies or alters the basic legal principle that the profits or net income'
ATC 4420
of a partnership are the profits or net income of those who constitute it'; but ss. 90, 91, 92 and 93 of Div. 5 of the Act determine the nature of a partner's interest in the net income of the partnership of which he is a member and his interest in a partnership loss for the purposes of the Act.''(Our emphasis)
In our opinion, it does not follow from the fact that partnerships are specially dealt with, in certain respects, by the provisions of Div. 5 of Pt III of the Act, that the dividend deemed to be paid by sec. 6BA(1)(a) was not ``payable to a taxpayer'' for the purposes of that provision. And, of course, it is appropriate, for present purposes, to interpret ``taxpayer'' as including the plural.
The situation then was one in which a notional dividend was payable by Amanada to the partners. True it is that Div. 5 of Pt III of the Act required that the dividend be treated as part of the gross income of the partnership and be returned for tax accordingly. But, in the terms of sec. 6BA(1)(a), it is none the less accurate to describe the dividend as an amount ``payable to taxpayers''.
In our opinion, the Commissioner correctly applied sec. 6BA in the present case. In the circumstances, it is not necessary that we deal with the other arguments advanced on his behalf to support his assessment.
We would dismiss the appeal with costs.
THE COURT ORDERS THAT:
- 1. The appeal be dismissed.
- 2. The appellant pay the respondent's costs
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