John v. Federal Commissioner of Taxation.
Judges:Yeldham J
Court:
Supreme Court of New South Wales
Yeldham J.
The facts and the issues of law raised for consideration in this appeal are complex. The original hearing before me concluded on 11 March 1986. Thereafter, written submissions were lodged by counsel (and from these I have derived much assistance), the amended submissions of the respondent being only received on 15 September. In the meantime, on 11 July, at the request of the parties, short oral submissions in addition to those contained in the written arguments were made. The remainder of the delay, caused in part by my absence on circuit and my other commitments, is mine.
The appellant is Margaret Ruth John who, with her husband, was at all material times a director of a company selling farm machinery in Tamworth. On 14 April 1977, in circumstances which I will relate, she executed a partnership agreement and became a member of a partnership with 19 other persons, including her sister-in-law and Messrs Mitchell, Rosenblum and Wiseman, to whom I will refer, whose business was to be that of ``Traders in shares, share rights, and share options''. In respect of the year ended 30 June 1977 that partnership, which was called the Malindi Trading Co., claimed in its return of income an ``adjusted net loss'' of $2,577,286 of which the sum of $2,571,054 was said to be ``dividends received and included in Profit and Loss Account but not assessable under sec. 44(2)''. Under the heading ``Dividends received'' it is said:
``The following dividends received were by way of bonus issue of shares brought to account at par value and paid wholly and exclusively out of profits (not assessable under s. 26AAA) arising from the sale or re-valuation of assets not acquired for the purpose of re-sale at a profit, and accordingly are not assessable pursuant to s.44(2).''
Below this appears the following list:
The same return of the Malindi Trading Co., under the heading ``Statement of Distribution of Net Loss'', assigns to each of the partners, including the present appellant, five per cent of such loss, which is the sum of $128,864.
The appellant's return of income for the same period claims as a deduction the loss of $128,864 as a partner in the Malindi Trading Co.
On 8 March 1978 the Commissioner issued an adjustment sheet to the partnership upon a basis which is no longer persisted in and which was related to expenditure considered to be incurred in relation to the gaining or production of exempt income. That calculation had the effect of converting the losses returned into a profit of $312,405.
On 20 March 1978 there was issued to the appellant a notice of assessment and an adjustment sheet allegedly based upon the increase made in the income of the partnership by the Commissioner. On 25 May 1978 the latter issued to the partnership an amended adjustment sheet which said that the adjusted net income of $312,405, as previously advised, had been reduced to nil, and that pursuant to sec. 26AAA the profit arising from the sale of shares in the companies, which had originally been listed in the return of income of the partnership, and which I have set out above, had been included in the assessable income, this amounting to $1,397 in all. The amended adjustment sheet says: ``This basis of assessment will be reviewed if and when it is established that the facts are within the ambit of the `Curran' decision''. The reference here is, of course, to the decision of the High Court in
Curran v. F.C. of T. 74 ATC 4296; (1974) 131 C.L.R. 409. That decision was given in November 1974 and related to income received in the year ending 30 June 1969. The terms of sec. 26AAA (which was introduced into the Act in 1973) I will set out in due course.
The appellant lodged notice of objection dated 8 May 1978 against the assessment which she received, as adjusted. A decision upon that objection was not conveyed to her until 28 March 1980. The objection was partially allowed. The appellant's share of the income from the Malindi Trading Co. was reduced from $15,620 to $69 and there was added in ``dividend income received by Malindi Trading Co. from Compinge Pty. Limited now included as assessable income in accordance with the amended partnership distribution'', the amount being $23,436. A letter from the Commissioner to the accountants dated 28 March 1980 said, inter alia:
``The reason for the disallowance of your client's share of the loss from the Malindi Trading Co. is that the partnership loss was
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not incurred in carrying on a business of share trading. The net income of the Malindi Trading Co. has been amended to include as assessable income dividends received from Compinge Pty. Limited. These bonus shares represent a dividend wholly assessable under s. 44(1) as the dividend was not paid wholly and exclusively out of profits arising from the sale or re-valuation of assets not acquired for the purpose of re-sale at a profit.''
Against that amended assessment the appellant lodged an objection. However on 2 November 1981 the Commissioner again wrote to the appellant disallowing her objection, and on 25 November 1981 through her accountants, she requested that the objection be treated as an appeal and forwarded to the Supreme Court.
In the meantime, the Commissioner had issued a further amended adjustment sheet to the Malindi Trading Co. in respect of the return lodged for the period in question, to add as assessable income the amount of $468,720, the amended adjustment sheet saying:
``Dividend of $468,720 paid by Compinge Pty. Limited included as assessable income in terms of s. 44(1)(a) of the Income Tax Assessment Act.
Note: The net income of the Malindi Trading Co. has been amended to include as assessable income dividends received from Compinge Pty. Limited. These bonus shares represent a dividend wholly assessable under s. 44(1) if the dividend was not paid wholly and exclusively out of profits arising from the sale or re-valuation of assets not acquired for the purpose of re-sale at a profit.''
Thus it will be seen that on a number of occasions and over an extended period the Commissioner has assigned different reasons for making various adjustments to the return of the partnership and of the appellant.
Section 92 of the Act provided that the assessable income of a partner shall include his individual interest in the net income of the partnership of the year of income, and his individual interest in a partnership loss incurred in the year of income shall be an allowable deduction. So also the exempt income of a partner shall include his individual interest in the exempt income of the partnership in the year of income. Section 90 provides a definition of ``partnership loss'' which I need not set out.
In the present appeal the appellant claims that the partnership in which she had a one-twentieth share incurred a loss during the relevant year, which amounted to a deduction under sec. 51, and that, by reason of the operation of sec. 92, she herself is entitled to claim her share of the partnership loss as a deduction.
Section 51(1) provides that all losses and outgoings, to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions, except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.
It is convenient here also to set out certain other provisions of the Act, as they were then in force, having regard to issues which it will be necessary to determine.
Section 26AAA provides that where a taxpayer has sold property or an interest in property before the expiration of 12 months from the date on which he purchased it then, subject to the provisions of the section, his assessable income includes any profit arising from the sale of the property or the interest in it. By subsec. (5) it is provided that subsec. (2) does not apply in relation to a sale by a taxpayer of property if the latter was included in the assets of a business carried on by him and, as a result of the sale, an amount will be included in his assessable income of the year of income under a provision of the Act other than sec. 26AAA. Subsection (7) provides that where a taxpayer has purchased shares in a company, and before the expiration of 12 months from the date of purchase the company has issued bonus shares to the taxpayer in satisfaction of a dividend (including a dividend debited against an amount standing to the credit of a share premium account) payable to the taxpayer in respect of the first mentioned shares, the taxpayer shall be deemed, for the purposes of sec. 26AAA, to have purchased the bonus shares at the time when, and as part of the transaction by which, he purchased the
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shares in respect of which the dividend was paid.Section 44(1) provided that the assessable income of a shareholder in a company shall (generally speaking) include dividends paid to him by the company out of profits derived from any source. Subsections (2) and (2D) were in these terms:
``(2) Subject to the succeeding provisions of this section, the assessable income of a shareholder shall not include dividends paid by a company wholly and exclusively out of profits (not being profits that are included in the assessable income of the company by reason of section 26AAA) arising from the sale or re-valuation of assets not acquired for the purpose of re-sale at a profit or from the issue at a premium of any instrument that is a convertible note for the purposes of Division 3A (not being a convertible note in relation to which sub-section (1) of section 82A or sub-section (1) of section 82SA has effect or has at any time had effect) if the dividends paid from such profits are satisfied by the issue of shares (other than redeemable shares) of the company declaring the dividends.
(2D) For the purposes of sub-section (2), a share issued by a company shall be deemed to be a redeemable share if -
- (a) the share is, or at the option of the company is to be, liable to be redeemed; or
- (b) the share was issued in pursuance of, or as part of, an agreement or arrangement, whether oral or in writing and whether entered into before or after the commencement of this sub-section, that had the purpose, or purposes that included the purpose, of enabling the company, by means of the redemption, purchase or cancellation, or of a reduction in the paid-up value, of that share or of any other share in the company, to pay, transfer or apply to, on behalf of or at the direction of the person to whom the share was issued or any other person, whether upon the exercise of an option by the company or by any other person or not, any money or other property other than shares in the company.
(2E) Notwithstanding anything in any other provision of this Act, the Commissioner may amend an assessment for the purpose of giving effect to the last preceding sub-section if the amendment is made within three years after the date upon which the tax became due and payable under the assessment.''
It is necessary to set out the facts relevant to the present appeal in some detail. The partnership agreement dated 14 April 1977 of ``The Malindi Trading Co.'', after providing that the business of the partnership should be that of traders in shares, share rights, and share options, stipulated that it should continue until 31 December 1977 and thereafter until dissolved by a majority of partners giving three months notice in writing to the others. The initial capital of the partnership was said to comprise $100,000, to be contributed as to one-twentieth each by the partners. The profits and losses of the business were expressed to be divided and borne in equal proportions. A management committee, consisting of three members to be appointed by the partners was set up and its powers and duties defined. Provision was made (inter alia) for the furnishing of quarterly balance sheets and profit and loss accounts of the partnership to each partner. The agreement contained 29 clauses in all (it is exhibit ``C'').
Prior to April 1977 conversations had taken place between Mr Mitchell, who was senior partner in the firm of accountants, D.B. Mitchell & Co., Mr Powell, senior partner in the accountancy firm of Powell Kwok Baker & Co., and Mr Rosenblum, who was senior partner in the firm of solicitors, R.I. Rosenblum & Partners. The three men discussed setting up a share trading partnership in which some of their clients might be involved ``so that we can start up a share trading business and take advantage of the decision in Curran's case if we can find some suitable companies''. Agreement was reached in principle that this should be done and Mr Wiseman, a partner in Mr Rosenblum's firm, who himself became a member of the partnership, prepared the relevant agreement and he, with Messrs Kwok (a partner with Mr Powell), Mitchell (who had been the appellant's tax adviser for a number of years) and Rosenblum (who was a solicitor) constituted the management committee. The
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latter appointed a sub-committee, the members being Messrs Mitchell (Chairman), Powell, Wiseman and Mr McNeill. The latter is a person with considerable experience and interest in the stock and share market over a number of years, and since about 1962 had traded in shares, rights and options. He had been known to Mr Mitchell for a long time and was asked to manage the share trading partnership and this he agreed to do through his company, Killechronan Pty. Limited. He was provided with an office by Mr Powell and thereafter engaged, on behalf of the partnership, in the buying and selling of shares in public companies, he being paid a retainer, as also was his company, and it was agreed that he would receive a share of any profits made by the partnership. I should here say that I accept the evidence of all of the witnesses called on behalf of the appellant and it is from their evidence, and the documentary material (which was voluminous), that the facts which I find are derived. Mr McNeill was informed by one of those who engaged him that the objects of the share trading partnership were twofold: firstly, to generate a profit for the partnership members; and secondly, to undertake certain transactions in private company shares which would create certain tax advantages for the partners. Mr NcNeill was never privy to the latter arrangements and he played no part in any of the dealings in the shares in private companies. He continued to advise the partnership and place orders for the sale and purchase of listed securities on its behalf until June 1980.It should here be said that as well as the Malindi Trading Co., a second partnership, called Paratinga Trading Co. was formed, with similar objectives, but the appellant was not a member of that partnership. The members of the sub-committees in each case were substantially the same, although the actual partners were different.
During about the first three months following the formation of the partnership, the sub-committee would meet on an average of twice per week, recommendations made by Mr McNeill in relation to stock specified in the minutes (exhibit ``D'') would be considered and decisions made in relation to the sale and purchase of shares. The minutes record that the first meeting took place on 19 April and that there were in all, in the period ending on 30 June 1977, 18 meetings of the sub-committee and four meetings of the management committee. The return of income for the partnership for the period ended 30 June 1977 contains a schedule of share trading and a further schedule of option trading, both of which show significant sales and purchases of shares in public companies (leaving aside the dealings in private companies to which specific reference must be made) and in options.
The involvement of the appellant in the partnership came about as a result of a conversation between Mr Mitchell and the appellant's husband (he being the accountant for them and for their Tamworth business) and also with her brother-in-law, whose wife became a partner also. To Mr John, Mr Mitchell said words to the effect: ``I am planning putting together a share trading partnership. There is a chance of a significant tax deduction for the members of the partnership but there would obviously be a business risk involved. You will have to put up capital of about $5,000 together with some others moneys, probably about $2,000 to cover other costs of establishing the partnership. The proposal is backed by a High Court decision which should entitle the partners to a significant deduction if the partnership is conducted properly, do not go into this unless you are perfectly happy about it.'' Subsequently, Mr Mitchell was informed that the appellant and her sister-in-law would be prepared to become partners. They flew to Sydney and executed the agreement in Mr Mitchell's office.
Mrs John said that prior to becoming a member of the Malindi Trading Co. she had not been involved in the business of trading in shares, share rights or options, nor had she any knowledge or experience in such matters. She said that although she did not really understand the objects of the partnership and the manner in which she might be entitled to a tax deduction by joining it, she ``understood and intended by signing the said agreement to enter into partnership with the other nineteen persons named in the agreement for the purpose of carrying on the business of trading in shares''. The only other partners whom she knew were her sister-in-law, Mr Mitchell and Mr Rosenblum. She did not attend any meetings of the partnership nor meet any of the other partners. She regularly received notices
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concerning such partnership together with balance sheets and accounts.On the recommendation of Mr McNeill, the partnership engaged Messrs Ord Minnett, and MacDougall & Co. as its brokers, and they were formally appointed by letters dated 18 April 1977.
Mr Rosenblum undertook the responsibility of locating a group of private companies which would be suitable for acquisition by the proposed share trading partnership with a view to the partners obtaining taxation advantages. In February or March 1977 he had ascertained the availability of a group of private companies then known as the Dickens and Carey group. Their availability and details concerning them and their financial position was obtained from Mr Elkam, then an employee of another firm of accountants, who wrote to him on 2 March 1977 enclosing various financial details. To Mr Powell was assigned the task of investigating some of the companies in the Dickens and Carey group, later to change their names from Dickens and Carey to Compinge. Those which were investigated, and which were of interest to the partnership, were Dickens and Carey (Holdings) Pty. Limited, Dickens and Carey (Tamworth) Pty. Limited, Dickens and Carey (North) Pty. Limited, Dickens and Carey (Sydney) Pty. Limited and Dickens and Carey Pty. Limited. The result of that investigation is set out in annexures to the affidavit of Mr Powell sworn 23 April 1985.
What then occurred is best taken verbatim from several of the affidavits, in view of its complexity and the need to record the various events with accuracy. In so far as the matters dealt with in the affidavits are the subject of documentation, such documents were tendered and bear out what was said by the various deponents. Mr Rosenblum said this:
``10. I further recall that in a telephone conversation of 8th March, 1977 with Mr Elkam, Mr Elkam advised me that his client agreed to accept our price for the shares in the Dickens & Carey Group equal to Seven thousand and five hundred dollars ($7,500) less than the value of the net tangible assets. The value of the net tangible assets was approximately Two million dollars.
11. In order to finance the acquisition of the Dickens & Carey Group it was necessary to obtain short term financing. I recall having discussions with Mr Powell and Mr Mitchell and it was agreed that we would contact both the Australia & New Zealand Banking Group Limited and Hill Samuel Australia Limited. Annexed hereto and marked with the letter `B' is a copy of a letter from R.I. Rosenblum and Partners to Hill Samuel Australia Limited dated 30th March, 1977.''
The letter written to Hill Samuel Australia Limited was in these terms:
``We refer to your recent discussions with Mr N.B. Powell and Mr D.B. Mitchell and at their request set out for your consideration proposal for the financing of the purchase by the above Company of shares in Compinge Holdings Pty. Limited (`Compinge'), a holding company of a group of 18 companies with net tangible assets of approximately $2,000,000 which will on completion be represented by cash at Bank at a price of $7,000 less than net tangible assets:
- 1. Medola (No. 8) Pty. Limited (`Medola'), with the assistance of loan funds provided by your Company, on the security of a First Registered Floating Charge over the assets of Medola, will purchase the shares in Compinge.
- 2. Medola will sell its shares in Compinge in equal proportions, for full value, to two companies, Company Y and Company Z, the consideration for such sale remaining outstanding as a debt due and payable on demand.
- 3. Medola will apply, at a large premium, for shares in Company Y and Company Z, the consideration for the issue of such shares being sufficient to extinguish Medola's loan accounts with Company Y and Company Z.
- 4. Medola will sell the issued shares in Company Y and Company Z, for full value, to R.M. Services Pty. Limited, the consideration for such sale being a debt due and repayable on demand.
- 5. Compinge will lend sufficient moneys to R.M. Services Pty. Limited to discharge the latter's liability to Medola.
- 6. Medola will then discharge its liability to your Company.
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We would submit that if the above-mentioned proposals are implemented, no breach of Section 67 of the Companies Act 1961 will have been committed. Compinge will not, whether directly or indirectly, have given any financial assistance for the purchase of its own shares or of the shares in its holding company. The finance which Compinge will have given will have been provided to enable R.M. Services Pty. Limited to acquire the shares in Companies Y and Z, neither of which is the holding company of Compinge. Your Company will have provided finance for the acquisition by Medola of the issued shares in Compinge which will have been repaid by Medola from the proceeds of the sale of Companies Y and Z to R.M. Services Pty. Limited.''
Asked about that letter in evidence, Mr Rosenblum said:
``Q. Could we go to annexure B; the plan outlined in annexure B was in fact carried into effect subject to some alterations in the identity of the particular participants, was it not? A. May I just read it again?
Q. Yes, certainly. A. The order was changed, where Medola No. 8 Pty. Limited is referred to there would be substituted R.M. Services Pty. Limited and for Companies Y and Z would be substituted Medola No. 5 Pty. Limited and Medola No. 6 Pty. Limited and for R.M. Services would be substituted Medola No. 7 Pty. Limited.
Q. For completeness one would substitute the reference in the second and third lines of one to your company with Wolkara Pty. Limited? A. That is right.
Q. Wolkara Pty. Limited, in other words, was the apparent financier of R.M. Services acquisition? A. That is correct.
Q. Of the Compinge Companies? A. That is correct.
Q. As you recall it, that acquisition was accomplished by the exchange of two cheques, coupled with a series of journal entries? A. I an afraid I can't recall the details.
Q. Is it not the case that the vendors were provided with a cheque drawn by Medola No. 7 and, in turn, the Compinge companies provided Medola No. 7 with a cheque? A. To the best of my recollection the cheques which were provided were provided by - to the vendors were provided by Wolkara Pty. Limited.''
His affidavit continued:
``12. On 7th April, 1977 Medola (No. 5) Pty. Limited (hereinafter called `Medola (No. 5)'), a company of which I was a Director, established a branch register of members at the office of Wilson, Bishop, Bowes and Craig, Chartered Accountants, at 62 Cavenagh Street, Darwin. On the same day Medola (No. 6) Pty. Limited (hereinafter called `Medola (No. 6)'), a company of which I was also a Director, established a branch register of members at the office of Wilson, Bishop, Bowes and Craig...
13. On 13th April, 1977 I attended a meeting of Directors of R.M. Services Pty. Limited (hereinafter called `R.M. Services') a company controlled by Phillip Wiseman and myself, at which meeting it was resolved to execute a Power of Attorney from the R.M. Services in favour of John William Rosier in respect of the proposed Deed between Daross Investments Pty. Limited and Valpam Investments Pty. Limited of the first part, R.M. Services of the second part and Compinge (Holdings) Pty. Limited (hereinafter called `Holdings') of the third part, relating to the purchase by R.M. Services from Daross Investments Pty. Limited and Valpam Investments Pty. Limited of the whole of the issued shares in Holdings...
14. On the same day I forwarded by courier to Wilson, Bishop, Bowes and Craig the following documents:
- (i) Power of Attorney referred to in paragraph 13 hereof;
- (ii) Deed referred to in paragraph 13 hereof;
- (iii) Transfer of Shares from Daross Investments Pty. Limited to R.M. Services in respect of Eight hundred and two (802) shares of Two dollars ($2.00) each in Holdings;
- (iv) Transfer of Shares from Valpam Investments Pty. Limited to R.M. Services in respect of Eight hundred and two (802) shares of Two dollars ($2.00) each in Holdings; and
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- (v) Transfer of Shares from R.M. Services in respect of One (1) share of Two dollars ($2.00) in Holdings to myself...''
Daross Investments Pty. Limited and Valpam Investments Pty. Limited were respectively the family companies of Messrs LeMarchant and Creary. Mr Rosenblum's affidavit continued:
``15. On 15th April, 1977, I attended a meeting of Directors of R.M. Services, at which meeting it was resolved that R.M. Services borrow the sum of Two million one hundred and twenty-five thousand four hundred and forty-two dollars ($2,125,442.00) from Wolkara Pty. Limited repayable on demand and interest free...
16. I attended a further meeting of Directors of R.M. Services at which meeting I tabled two Transfers of Shares from Phillip Wiseman and myself to R.M. Services in respect of two shares of One dollar ($1.00) each in the capital of Medola (No. 5) and two Transfers of Shares from Phillip Wiseman and myself of One dollar ($1.00) in the capital of Medola (No. 6), each transfer being in consideration of the sum of One dollar ($1.00). At the said meeting it was resolved that R.M. Services acquire the shares in Medola (No. 5) and Medola (No. 6)...
17. Later on the same day I attended a meeting of Directors of Holdings at which meeting it was resolved that the Transfers of Shares from Daross Investments Pty. Limited and Valpam Investments Pty. Limited to R.M. Services and the Transfer of Shares from R.M. Services to myself, being the Transfers of Shares comprising part of Exhibit `RIR3', be approved and registered...
18. On 15th April, 1977 I attended a further meeting of Directors of R.M. Services at which meeting I tabled an Agreement between R.M. Services of the one part and Medola (No. 5) and Medola (No. 6) of the other part, under which R.M. Services agreed to sell the whole of the issued shares in the capital of Holdings to Medola (No. 5) and Medola (No. 6) equally for the sum of Two million one hundred and twenty-five thousand four hundred and forty-two dollars ($2,125,442.00). The meeting resolved that I be authorised to sign the said Agreement on behalf of R.M. Services and that the common seal of R.M. Services be affixed to the Transfers of Shares in respect of the transaction...
19. On the same day I attended meetings of Directors of Medola (No. 5) and Medola (No. 6) at which meetings it was resolved that each company acquire the shares on the terms contained in the Agreement comprising part of Exhibit `RIR5'...
20. On 15th April, 1977 I also executed a Transfer of Shares from myself to R.M. Services in respect of One (1) share of Two dollars ($2.00) in Holdings...
21. Later on the same day, I attended a meeting of Directors of Holdings at which meeting it was resolved that the Transfers of Shares, referred to in paragraphs 18 and 20 of this my Affidavit, be registered...
22. On 15th April, 1977 I attended a meeting of Directors of R.M. Services at which meeting it was resolved that the R.M. Services would make an application for an allotment of Two thousand one hundred and twenty-five (2,125) shares of One dollar ($1.00) each in the capital of Medola (No. 5) and a further application for the allotment of Two thousand one hundred and twenty-five (2,125) shares of One dollar ($1.00) each in the capital of Medola (No. 6)...
23. On the same day I attended meetings of Directors of Medola (No. 5) and Medola (No. 6) at which meetings it was resolved to approve the applications for the allotment of Two thousand one hundred and twenty-five (2,125) shares of One dollar ($1.00) each in the capital of each company at par plus a premium of Four hundred and ninety-nine dollars ($499.00) per share...
24. On 15th April, 1977 I attended a further meeting of Directors of R.M. Services, at which meeting I tabled an Agreement between R.M. Services as Vendor and Medola (No. 7) Pty. Limited (hereinafter called `Medola (No. 7)') as Purchaser under which R.M. Services agreed to sell and the Purchaser agreed to purchase the issued shares in the capital of Medola (No. 5) and Medola (No. 6) for the sum of Two million one hundred and twenty-five thousand and
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four dollars ($2,125,004.00). It was resolved at the said meeting that R.M. Services sell the shares on the terms contained in the said Agreement...25. On the same day I attended a meeting of Directors of Medola (No. 7), at which meeting it was agreed that Medola (No. 7) purchase the issued shares in the capital of Medola (No. 5) and Medola (No. 6)...
26. On the same day I attended a further meeting of Medola (No. 7), at which meeting it was resolved that One (1) share in the capital of each of Medola (No. 5) and Medola (No. 6) be transferred to me as nominee for Medola (No. 7)...
27. On the same day I attended meetings of Directors of Medola (No. 5) and Medola (No. 6), at which meetings it was resolved to register the Transfer of Shares, referred to in paragraphs 16, 24 and 26 of this my Affidavit, on the Darwin Branch registers of each company...
28. On 15th April, 1977 the Directors of R.M. Services resolved that R.M. Services direct Medola (No. 7) to pay all moneys due to R.M. Services on the sale of its shares in Medola (No. 5) and Medola (No. 6) to Medola (No. 7) to Wolkara Pty. Limited. This amount was to be in payment of the loan made by Wolkara Pty. Limited to R.M. Services referred to in paragraph 15 of this my Affidavit...''
Mr Mitchell in his affidavit said:
``13. On 15th April, 1977 I attended meetings of Directors of Compinge (Holdings) Pty. Limited (hereinafter called `Holdings'), Compinge (N.S.W.) Pty. Limited (hereinafter called `NSW'), Compinge (Tamworth) Pty. Limited (hereinafter called `Tamworth'), Compinge (North) Pty. Limited (hereinafter called `North'), Compinge (Sydney) Pty. Limited (hereinafter called `Sydney') and Compinge Pty. Limited (hereinafter called `Compinge') (hereinafter collectively called the `Compinge Companies'). I was appointed Director, Secretary and Public Officer of each of the Compinge Companies at the said meetings. Now produced and exhibited to me at the time of swearing this my Affidavit and marked `DBM4' are copies of the Companies Form 43 lodged with the Corporate Affairs Commission in respect of each company which correctly record the appointment of Directors of Compinge Companies. On the same day I attended further meetings of Directors of the Compinge Companies at which meetings it was resolved that a Northern Territory register of members be established at the offices of Wilson, Bishop, Bowes and Craig, Chartered Accountants of 62 Cavenagh Street, Darwin in respect of each of the Compinge Companies...
14. On 22nd April, 1977 I was present at the meetings of Directors of NSW, Tamworth, North, Sydney, Compinge, and Holdings, at which meetings it was resolved to convene Extraordinary General Meetings in respect of each company for the purpose of passing special resolutions...
15. On the same day I attended further meetings of Directors of Medola (No. 5) Pty. Limited (hereinafter called `Medola (No. 5)') and Medola (No. 6) Pty. Limited (hereinafter called `Medola (No: 6)'), Compinge, Tamworth, North, and Holdings at which meetings the Directors of the said companies, being Members of the Compinge Companies, consented to the holding of the Extraordinary General Meetings as referred to in paragraph 14, and such consents to the holding of the said meetings were given notwithstanding that less than twenty-one days notice was given. Now produced and exhibited to me at the time of swearing this my Affidavit and marked `DBM7' are the said Minutes of Meetings of Directors which I signed as a correct record of the proceedings of the said meetings together with the consents to short notice and variation of rights. At the meeting of Medola (No. 5) I was appointed to act as its Representative at all meetings of Holdings. At the meeting of Compinge I was appointed to act as its Representative at all meetings of Tamworth. At the meeting of Tamworth I was appointed to act as its Representative at all meetings of North and at the meeting of North I was appointed to act as its Representative at all meetings of Sydney. Now produced and exhibited to me at the time of swearing this my Affidavit and marked `DBM8' are the certificates as to Appointment of Representative pursuant to Section 140(3) of the Companies Act.
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16. On 22nd April, 1977 I was present at the duly convened Extraordinary General Meeting of the members of Holdings in my capacity as Representative of Medola (No. 5). The said meeting resolved to increase the authorised capital of the Holdings from Two hundred thousand dollars ($200,000) to One million nine hundred and ten thousand dollars ($1,910,000) by the creation of Eight hundred and fifty-five thousand (855,000) ordinary shares of Two dollars ($2.00) each. Accordingly, the authorised capital of Holdings as of that date consisted of Nine hundred and fifty-five thousand (955,000) ordinary shares of Two dollars ($2.00) each...
17. On 22nd April, 1977 I was present at the Extraordinary General Meetings of Members of Tamworth, North, and Sydney in my capacity as Representative of Compinge, Tamworth, and North respectively. On the same day I also attended the Extraordinary General Meetings of NSW and Compinge in my capacity as a member of the two companies. The said meetings resolved to increase the authorised capital of the Companies as follows:
- (a) Tamworth increased its authorised capital from One hundred thousand dollars ($100,000) to Eight hundred thousand dollars ($800,000) by the creation of Three hundred and fifty thousand (350,000) ordinary shares of Two dollars ($2.00) each. Therefore the capital of Tamworth as at that date consisted of Four hundred thousand (400,000) ordinary shares of Two dollars ($2.00) each.
- (b) North increased its authorised capital from One hundred thousand dollars ($100,000) to Five hundred and fifty thousand dollars ($550,000) by the creation of Two hundred and twenty-five thousand (225,000) ordinary shares of Two dollars ($2.00) each. Therefore the capital of North as at that date consisted of Two hundred and seventy-five thousand (275,000) ordinary shares of Two dollars ($2.00) each.
- (c) Sydney increased its authorised capital from One hundred thousand dollars ($100,000) to Five hundred thousand dollars ($500,000) by the creation of Two hundred thousand (200,000) ordinary shares of Two dollars ($2.00) each. Therefore the capital of Sydney as at that date consisted of Two hundred and fifty thousand (250,000) ordinary shares of Two dollars ($2.00) each.
- (d) NSW increased its authorised capital from Two hundred thousand dollars ($200,000) to Four hundred and seventy thousand dollars ($470,000) by the creation of One hundred and thirty-five thousand (135,000) ordinary shares of Two dollars ($2.00) each. Therefore the capital of NSW as at that date consisted of Two hundred and thirty-five thousand (235,000) ordinary shares of Two dollars ($2.00) each.
- (e) Compinge increased its authorised capital from One hundred thousand dollars ($100,000) to Nine hundred and fifty thousand dollars ($950,000) by the creation of Four hundred and twenty-five thousand (425,000) ordinary shares of Two dollars ($2.00) each. Therefore the capital of Compinge as at that date consisted of Four hundred and seventy-five thousand (475,000) ordinary shares of Two dollars ($2.00) each...
18. On 26th April, 1977 I attended a meeting of the Management Committee of the Partnership. Mr Rosenblum, the Chairman of the Meeting, tabled six Agreements under which the Partnership was to acquire shares in the Compinge Companies. I crave leave to refer to page 14 of the Exhibit `DBM2', on which page the Minutes of Meeting of the Management Committee accurately reflect the proceedings of the meeting. At the meeting it was resolved that Messrs MacDougall & Co. be instructed to make an offer to purchase the shares in the Compinge Companies on behalf of the Partnership to the existing members of the companies.
19. On 27th April, 1977 I attended a further meeting of the Management Committee of the Partnership. I crave leave to refer to page 17 of Exhibit `DBM2' which sets forth the Minutes of Meeting of the Management Committee. The Minutes accurately record the proceedings of the meeting. In
ATC 4658
accordance with the resolution of the meeting of the Management Committee, I executed under the Power of Attorney conferred on me under the Partnership Agreement the following documents:
- (i) Agreement between, inter alia, Medola (No. 6) and the Partnership transferring from Medola (No. 6) Eight hundred and two (802) ordinary shares of Two dollars ($2.00) in Holdings to the Partnership in consideration of the sum of One million sixty-two thousand seven hundred and twenty-three dollars and twenty cents ($1,062,723.20);
- (ii) Transfer of Shares in respect of the above transaction;
- (iii) Agreement between, inter alia, Compinge, Holdings, and the Partnership transferring from Holdings One (1) ordinary share of Two dollars ($2.00) in Tamworth to the Partnership in consideration of the sum of One thousand eight hundred and fifty-six dollars and forty-three cents ($1,856.43) and transferring from Compinge Two hundred and fifty-one (251) shares of Two dollars ($2.00) in Tamworth to the Partnership in consideration of the sum of Four hundred and sixty-five thousand nine hundred and sixty-three dollars and ninety-four cents ($465,963.94);
- (iv) Transfer of Shares in respect of the transfer from Holdings to the Partnership in the above transaction;
- (v) Transfer of Shares in respect of the transfer from Compinge to the Partnership in the above transaction;
- (vi) Agreement between, inter alia, Tamworth, Holdings and the Partnership transferring from Tamworth Two hundred and fifty-one (251) of ordinary shares of Two dollars ($2.00) in North to the Partnership in consideration of the sum of Three hundred and eight thousand and three hundred and sixty-eight dollars and fifteen cents ($308,368.15);
- (vii) Transfer of Shares in respect of the above transaction;
- (viii) Agreement between, inter alia, North, Holdings, and the Partnership transferring from North Two hundred and fifty-one (251) ordinary shares of Two dollars ($2.00) in Sydney to the Partnership in consideration of the sum of Two hundred and seventy-one thousand and three hundred and thirteen dollars and eighty-seven cents ($271,313.87);
- (ix) Transfer of Shares in respect of the above transaction;
- (x) Agreement between, inter alia, Holdings, and the Partnership transferring from Holdings Four hundred and fifty-one (451) ordinary shares of Two dollars ($2.00) in NSW to the Partnership in consideration of the sum of Two hundred and ninety-five thousand nine hundred and seventy-four dollars and twenty cents ($295,974.20);
- (xi) Transfer of Shares in respect of the above transaction;
- (xii) Agreement between, inter alia, Holdings and the Partnership transferring from Holdings Two hundred and fifty-two (252) ordinary shares of Two dollars ($2.00) in Compinge to the Partnership in consideration of the sum of Four hundred and eighty-seven thousand nine hundred and fifty-one dollars and seventeen cents ($487,951.17); and
- (xiii) Transfer of Shares in respect of the above transaction...
20. On the same day I transferred the Two (2) shares which I held in NSW to Holdings.... I also transferred on the same day Two (2) shares in Compinge to Holdings... I also witnessed the affixing of the Common Seal of Holdings on the said Transfers in my capacity as Secretary of Holdings.
21. On the same day I attended meetings of Directors of Holdings, Medola (No. 6), Compinge, North and Tamworth, at which meetings it was agreed to accept the offers received from Messrs MacDougall and Co. on behalf of the Partnership to purchase each of the company's shares in the Compinge Companies. It was also resolved at the meetings which I attended to execute the Agreements comprised in Exhibit `DBM11'. Now produced and exhibited to me at the time of swearing this my Affidavit
ATC 4659
and marked `DBM12' are copies of the Minutes of Meetings of Directors of the companies referred to above, which Minutes accurately record the proceedings of the said meetings. Also annexed hereto and marked with the letter `E' are copies of the letters from Messrs MacDougall and Co. addressed to the companies referred to in this paragraph advising the companies of the offer made by the Partnership to purchase shares in the Compinge Companies.22. On 27th April, 1977 I attended meetings of Directors of the Compinge Companies, at which meetings it was resolved to approve and register the Share Transfers in the Compinge Companies referred to in paragraphs 19 and 20...
23. On 28th April, 1977 I attended meetings of Directors of the Compinge Companies. It was resolved to convene Extraordinary General Meetings of Members of each of the Compinge Companies for the purpose of considering special resolutions the effect of which were to:
- (i) Alter the Articles of Association to pay dividends; and
- (ii) To capitalise capital profits reserves and asset revaluation reserves...
24. On 28th April, 1977 I attended the Extraordinary General Meetings of Members of the Compinge Companies at which meetings it was resolved to pass the special resolutions tabled. I also attended meetings of Directors of the Compinge Companies at which meetings it was resolved to allot following shares: -
- (a) NSW allotted 115,907 shares to the Partnership.
- (b) Compinge alloted 236,124 shares to the Partnership.
- (c) Tamworth allotted 199,080 shares to the Partnership.
- (d) Holdings allotted 476,388 shares to the Partnership.
- (e) Sydney allotted 122,990 shares to the Partnership.
- (f) North allotted 135,038 shares to the Partnership.
Now produced and exhibited to me at the time of swearing this my Affidavit and marked `DBM15' is a bundle containing copies of the Minutes of Meetings of Members of the six Compinge Companies which I signed, the consents to short notice which I also signed and the Minutes of Meetings of Directors of the Compinge Companies.
25. On 29th April, 1977 I was present at a meeting of the Management Committee of the partnership. At that meeting it was resolved that MacDougall and Co. be instructed to sell the Partnership's shares in the Compinge Companies. I crave leave to refer to page 19 of Exhibit `DBM2' which contains the Minutes of Meeting of the Management Committee of the Partnership, which Minutes accurately record the proceedings which took place. Later on the same day I attended another meeting of the Management Committee of the Partnership, at which meeting the Chairman, Mr Rosenblum, noted that the Partnership's offer to sell the shares in the Compinge Companies had been accepted. I crave leave to refer to page 21 of Exhibit `DBM2', on that page the Minutes of Meeting of the Management Committee of the Partnership accurately record the proceedings of the meeting. In accordance with the resolution of the meeting of the Management Committee of the Partnership, the Partnership resolved to sell its shares in the Compinge Companies to Jenmin Trading Pty. Limited (hereinafter called `Jenmin') as follows:
- (a) 477,190 ordinary shares in Holdings in consideration of the sum of $1,062,973.19;
- (b) 199,332 ordinary shares in Tamworth in consideration of the sum of $468,070.88;
- (c) 135,289 ordinary shares in North in consideration of the sum of $308,617.64;
- (d) 123,241 ordinary shares in Sydney in consideration of the sum of $271,563.36;
- (e) 116,358 ordinary shares in NSW in consideration of the sum of $296,223.90;
ATC 4660
- (f) 236,376 ordinary shares in Compinge in consideration of the sum of $488,201.68.
Now produced and exhibited to me at the time of swearing this my Affidavit and marked `DBM16' are copies of the Agreements made the 29th April, 1977 in respect of the above transactions which I executed as Attorney for the members of the Partnership.
26. On the same day I attended meetings of Directors of the Compinge Companies. At the said meetings it was resolved, inter alia, that the share transfers in respect of the shares being transferred by the Partnership to Jenmin be approved. It was also resolved to accept resignations of Mr Rosenblum, Mr Powell and myself as Directors of each of the companies...''
Again the documents which were annexed or exhibited confirmed the accuracy of the statements made in the affidavit. Again I have set out in full the relevant paragraphs of Mr Mitchell's affidavit having regard to the need to detail precisely and with accuracy the various transactions and events which took place.
Mr Wiseman, in his affidavit, gave details of the steps which he took to ensure that all the necessary documentation in relation to the various transactions was carried out. It is not necessary to refer to what he said.
The Dickens and Carey group originally contained 18 companies. A graph showing the original capital control within the group, after the names have been changed from Dickens and Carey to Compinge (which was exhibit 9), was in this form: [refer to p. 4661]
The Medola companies shown on the graph were not, of course, within the Dickens and Carey group.
Only six of such companies were the subject of acquisition by the Malindi partnership. These were Compinge Holdings Pty. Limited, Compinge (New South Wales) Pty. Limited, Compinge Pty. Limited, Compinge (North) Pty. Limited, Compinge (Sydney) Pty. Limited and Compinge (Tamworth) Pty. Limited. The remaining companies in the group were never acquired by the Malindi Trading Company which never took any interest in them either
ATC 4662
direct or indirect. A document (which was exhibit 10) and which summarised the net asset position of the Compinge companies was in these terms:
``Name of Company Shares in Inter-company Cash At Provision for Net (abbreviated) Subsidiaries Loans Bank Tax/Dividend Assets $ $ $ $ $ Compinge (Tamworth) 1,000 (226,650) 544,447 (1,910) 316,887 Compinge (North) 1,000 75,988 99 77,087 Compinge (Sydney) 2,000 99,822 30 101,852 Compinge (Newtown) 1,000 39,745 125 40,870 Dickens & Carey (Q) 1,000 (207,688) 515,078 (5,056) 303,334 Dickens & Carey (Brisbane) 61,324 83 61,407 Compinge (Albury) 600 (207,396) 370,653 (4,895) 158,962 Compinge (V) (117,599) 156,275 (488) 38,188 Compinge (South) 54,112 21 54,133 Compinge (West) 14,952 119 15,071 Compinge (Goulburn) (84,012) 172,364 88,352 Compinge (Sales) 2,156 107,739 3,227 (3,148) 109,974 Compinge (Hunter) 39,639 388 40,027 Compinge (NSW) 1,200 127,078 135 128,413 Compinge (Dubbo) 600 56,540 97 57,237 Compinge (Bathurst) (132,198) 338,152 205,954 Compinge 1,000 7,747 35,040 43,787 Compinge (Holdings) 128,760 290,850 535 (111,830) 308,315 ------- -------- --------- --------- --------- 140,316 (7) 2,136,868 (127,327) 2,149,850 ------- -------- --------- --------- ---------The total for the net assets column of $2,149,850 equals the aggregate of the total share capital and reserves. It should be noted that the figures for shares in subsidiaries are shown at cost.''
It is plain from facts proved in evidence which I accept that on 28 April 1977 the six companies referred to made a bonus issue of shares in favour of their shareholders who, on that day, consisted of the members of the two partnerships, one being the partnership of which the appellant was a member. It is trite to point out that a so-called ``bonus share issue'' is in law a capitalisation of profits by a company which declares a dividend out of such profits and which does not pay it to the shareholders in cash, but issues new shares to the existing shareholders and applies the dividend in paying up those new shares.
The ultimate issue in the present appeal is whether, in calculating the net income of the partnership for the purposes of sec. 90 and 92 of the Income Tax Assessment Act, it is appropriate to allow a deduction under sec. 51(1) in respect of the cost of the ``bonus shares'', this being the amount of the dividends which had been declared by each of the companies and applied in paying up the bonus shares. It should here be observed that in the case of five of the six companies in question, it is conceded by the respondent that the dividends were of the kind that fell within sec. 44(2) of the Act. In the case of Compinge Pty. Limited the evidence shows that, unknown to the various persons involved at the time, included in the balance of $936,457.88 standing to the credit of the capital profits reserve account of Compinge Pty. Limited as at 27 April 1977 was the sum of $5,530, being the surplus received by that company from the surrender of certain insurance policies on the lives of Messrs Creary and LeMarchant who were directors of the company for a considerable time until their retirements on 15 April 1977. Thus it is that in relation to this
ATC 4663
company the dividends were not paid wholly and exclusively out of profits of the kind described in sec. 44(2). I am satisfied that as at the commencement of April 1977 the Compinge companies, and in particular the six with which the present appeal is principally concerned, were dormant, their combined net tangible assets amounted in all to $2,149,850, and the shares in the holding company were owned by Daross Investments Pty. Limited and Valpam Investments Pty. Limited which were in turn controlled by Messrs LeMarchant and Creary. At all material times R.M. Services Pty. Limited, Medola (No. 5) Pty. Limited, Medola (No. 6) Pty. Limited and Medola (No. 7) Pty. Limited were companies associated with and under the control of Mr Rosenblum. On 15 April 1977 R.M. Services Pty. Limited purchased for $2,125,442 from Daross Investments Pty. Limited and Valpam Investments Pty. Limited the whole of the issued shares in the capital of Compinge (Holdings) Pty. Limited, the purchase price being borrowed from Wolkara Pty. Limited and paid to the vendors. Later on the same day, R.M. Services Pty. Limited sold to Medola (No. 5) Pty. Limited and Medola (No. 6) Pty. Limited between them in equal parts for the price of $2,125,442 the whole of the issued shares in the capital of Compinge (Holdings) Pty. Limited. Later on the same day R.M. Services Pty. Limited applied for 2,125 shares of $1 each at a premium of $499 per share in the capital of each of Medola (No. 5) Pty. Limited and Medola (No. 6) Pty. Limited. This extinguished the debt which had previously been owing by each of these companies to R.M. Services Pty. Limited on account of the purchase price of the shares in Compinge (Holdings) Pty. Limited. On the same day R.M. Services Pty. Limited sold its shares in the two Medola companies to Medola (No. 7) Pty. Limited for $2,125,004 which amount became owing as a debt by Medola (No. 7) to R.M. Services Pty. Limited. Later on the same day R.M. Services Pty. Limited directed Medola (No. 7) to pay the amount owed by it to Wolkara Pty. Limited in discharge of the obligation which R.M. Services Pty. Limited owed to Wolkara. Medola (No. 7) obtained the money which it paid to Wolkara at the direction of R.M. Services by borrowing it from the members of the Compinge group of companies. Between 15 and 27 April 1977 the shares in the remaining 12 Compinge companies were sold to a third party. In consequence of the foregoing, by 27 April Medola (No. 7) was the owner of all the shares in Medola (No. 5) and Medola (No. 6) and those companies in turn owned all the shares both in Compinge Pty. Limited and Compinge (N.S.W.) Pty. Limited. Compinge Pty. Limited owned all the shares in Compinge (Tamworth) Pty. Limited. The latter owned all the shares in Compinge (North) Pty. Limited which in turn owned all the shares in Compinge (Sydney) Pty. Limited. On 22 April 1977 the capital of each of the Compinge companies was increased to accommodate the contemplated bonus issue. On 26 April Malindi Trading Co. instructed a firm of stockbrokers to offer to purchase half of the issued shares in the capital of each of the six Compinge companies. On 27 April 1977 Malindi resolved to purchase half of the issued shares in the capital of each of the six Compinge companies for a total price of $2,894,150.96. On the same day the Malindi partnership purchased and became registered as holders of part of the issued shares in the capital of each of the six Compinge companies which by that time had been transferred to the Darwin register. Since 15 April 1977 the directors of each of the six Compinge companies had been Messrs Mitchell, Powell and Rosenblum. The Compinge companies, prior to the transactions referred to above, had between them various capital reserves. In addition the sales to the Malindi Trading Co. and the Paratinga partnership on 27 April produced further capital profits. On 28 April the directors of each of the six Compinge companies resolved to convene shareholders meetings for the purpose of altering the Articles of each company to enable the proposed bonus issues to take place. On the same day meetings of shareholders of each of the six companies passed the appropriate resolutions, which were duly registered. At those meetings it was resolved to declare dividends out of the capital profits and to capitalise those profits by bonus issues of shares. On that day also the directors of each of the six companies resolved to allot the bonus shares and the register of members was amended to record the allotment. Hence by the end of 28 April 1977 the members of the Malindi Trading Co. were still the registered holders of half of the issued shares in the capital of each of the six Compinge companies. Such capital had been increased by the allotment of the bonus shares, the dividends which had been declared having been applied inATC 4664
shares. On 29 April the Malindi Trading Co. sold to Jenmin Trading Pty. Limited for an aggregate purchase price of $2,895,650.65 all the shares owned by the Malindi Trading Co. in the capital of each of the six Compinge companies. The transfers of the shares were executed and registered.I am satisfied that each of the relevant Compinge companies made capital profits (inter alia) by selling its shares in its subsidiary company. The capital profit arose in each case because the sale price exceeded the cost of the shares of the subsidiary company as shown in the books of account of the relevant holding companies. The net assets purchased by the Malindi Trading Co. as at 27 April 1977 were as follows:
``Shares at Cost
Compinge (Sydney) Pty.
Limited $271,313.87
Compinge (North) Pty.
Limited $308,368.15
Compinge (Tamworth)
Pty. Limited $467,820.37
Compinge Pty. Limited $487,951.17
Compinge (N.S.W.) Pty.
Limited $295,974.20
Compinge (Holdings)
Pty. Limited $1,062,723.20
-------------
$2,894,150.96
Unsecured loans owing to: --
Compinge (North) Pty.
Limited $271,313.87
Compinge (Tamworth)
Pty. Limited $303,368.15
Compinge Pty. Limited $465,963.94
Compinge (Holdings)
Pty. Limited $785,781.80
-------------
$1,831,427.76
-------------
Net assets acquired: $1,062,723.20''
Although, in support of some of its submissions, the respondent argued in substance that the purchase price of the shares in the six Compinge companies was excessive by an amount of $1,831,427.76 and that in reality the contracts for the sale of shares in the Compinge companies to the partnership should be rewritten so as to reduce the price attributable to the shares, the fact is that the purchasers of such shares did not buy the ultimate holding company of the group but only the shares in each member of the group. The price paid in each case accurately reflected the value of what they were buying, i.e. successively the shares in the holding company in each of the series of subsidiaries and sub-subsidiaries. It should here be said that the balance sheets annexed to the respective sale agreements (exhibit ``M'') which record the loans were not challenged by the respondent and the amounts there set out reflect the underlying assets of each of the companies.
I am satisfied that, as recorded in the journal entries of the Malindi Trading Co. recording the payment of debts totalling $1,831,427.76 owed by the partnership to four of the Compinge companies for shares in subsidiary companies purchased on 27 April 1977 and a loan of $1,831,427.76 by Medola (No. 7) to the partnership, the debts owing in respect of the unpaid purchase price of $1,831,417.76 for shares acquired by the Malindi partnership in the subsidiaries of the four companies were paid to the appropriate vendor companies on behalf of the partnership by Medola (No. 7). The amounts owing by the latter to each of the Compinge companies were repaid immediately before the sale to Jenmin Trading Pty. Limited so that the assets of the Compinge companies at the time of settlement with Jenmin consisted of cash at bank. Further, upon settlement, the proceeds of settlement of $2,895,650.65 were immediately lent by the partnership to Medola (No. 7). Prior to this loan being made the partnership was indebted to that company in the sum of $1,831,427.76. Following the loan by the partnership to Medola (No. 7) the latter was indebted to the partnership in the sum of $1,064,222.89.
In Curran v. F.C. of T. (ante) a taxpayer, who carried on a business of trading in shares, bought 200 shares in a private company for $186,046.48. The company thereafter allotted to him 191,000 shares which were paid up by the company through the declaration and application in his favour of a dividend under such circumstances that it was exempt under what was then sec. 44(2)(b)(iii) of the Act (now simply sec. 44(2)). Later on the same day he sold the 200 shares originally held for $197.52 and the other 191,000 shares for $188,631.60. He claimed that in computing his taxable income a deduction should be made of $191,000 being the amount applied in his favour in paying up the 191,000 shares, so that the entire transaction gave rise to a loss of
ATC 4665
$188,217.36. The High Court, by a majority of three to one, held that he was entitled to this deduction. Barwick C.J. pointed out that a shareholder who has been credited actually or notionally with an amount of distributable profits pursuant to a resolution to capitalise them and to issue bonus shares to a total paid up value equal to or less than the amount of such profits, by accepting the bonus shares, has paid for them. His Honour observed that for the purpose of income tax under the Act the amount of the distributable profits thus credited to the shareholder constitutes income. He continued (at ATC p. 4300; C.L.R. p. 415):``Thus, where a company having distributable profits impliedly effects their distribution by the issue against them of bonus shares fully or partly paid up, the recipient of the shares, having regard to the definition of `dividend' in sec. 6 of the Act, must treat himself as having received income to the amount of the profits of the company applied to pay for the bonus shares and, in my opinion, will be entitled to regard those shares as having cost him that amount of money, even though the resolutions of the company do not provide for payment to him of that sum of money. Whether or not the recipient of the bonus shares must pay income tax in respect of the amount credited by him by the company in connection with the issue of the bonus shares depends on the provisions of the Act. But, in my opinion, whether or not he pays income tax on the amount so credited can have no relevance to the question whether he is entitled to treat himself as having paid the amount credited to him by the company as the cost of the bonus shares.''
The Chief Justice then pointed out that in that case sec. 44(2)(b)(iii) as it stood exempted from income tax the amount credited to the appellant in respect of the issue of the shares, but this did not mean that he was not to be regarded as having paid for them the amount of their paid up value. He was bound to treat the amount of $191,000 credited by the company as income received by him though, by reason of sec. 44, it was not assessable income. He was entitled also to treat himself as having paid for the bonus shares the amount credited to him by the company in connection with the issue of those shares. ``He paid for them by means of the credit given him by the company of his aliquot share of the distributable profits of the company derived from the realisation of assets not acquired for resale at a profit.'' Menzies J. expressed the same view. After saying that the company had declared a dividend, and that this should be applied to pay up in full the shares to be issued as bonus shares, his Honour added (at ATC pp. 4301-4302; C.L.R. p. 417):
``By reason of this, and the appellant's acceptance of the bonus shares, a payment was made for those shares out of a credit created in favour of the appellant by the declaration of the dividend. It matters not that the dividend had to be so applied and was not payable in cash. The significance of this is simply that the dividend was one within sec. 44(2)(b)(iii) of the Act.
I do not think it correct to ignore the part played by the company leading to the allotment of the bonus shares and to treat them as but part of the appellant's original purchase notwithstanding that the purchase was made with an eye to what was, in due course, done.''
Gibbs J. (as the Chief Justice then was) decided the case on the ground that the 191,000 shares became trading stock of the taxpayer, and that the only practicable way of reaching a true result was to bring them into account at an appropriate value as though they had been bought. His Honour did observe that the effect of the special resolution was that capitalised profits to the extent of $191,000 were credited to the appellant and applied on his behalf in paying up the shares and ``in a sense, therefore, it may be said that the shares cost the appellant $191,000, and that it was appropriate to treat their acquisition as a purchase for that amount''. The Income Tax Assessment Act was amended to endeavour to deal with the effect of the decision in Curran but such amendment only related to bonus shares allotted after 16 August 1977 and hence is of no relevance in the present case.
I turn to the various issues raised in the appeal.
Has the appellant proved that at the relevant time the partnership of which he was a member carried on the business of a share trader?
Although, in written submissions lodged on behalf of the respondent, it is submitted that ``the taxpayer has not discharged the onus of
ATC 4666
proof that she in fact did carry on the business of a share trader'', it is clear that the question is not whether she was a share trader but whether the partnership of which she was a member can be so described. The significance of this inquiry lies principally in the provisions of sec. 26AAA(5) and (7). It is of course relevant in relation to sec. 51 itself. The members of the partnership claim to be entitled to a deduction in respect of outgoings incurred in the purchase of trading stock, including the cost of bonus shares under sec. 51(1), in computing the partnership loss under sec. 90 and 92.In
Grant v. F.C. of T. 85 ATC 4806 at pp. 4811-4813 I dealt with a number of the authorities concerned with this question. Most of them were recent decisions of courts of high authority, and hence I do not think it is instructive or necessary to refer to what was said in 1880 in a different context in
Smith v. Anderson (1880) 15 Ch.D. 247 (to which the respondent referred me) even by so eminent a Judge as Sir George Jessel.
On behalf of the respondent it was submitted that the appellant and the other members of the partnership did not have the time, disposition or expertise to themselves trade in shares, and what they did was simply to subscribe a capital sum, to engage Mr McNeill as a consultant, and thereafter to oversee his activities without apparent disapproval, notwithstanding that they produced a continuous and continuing loss. It was submitted that the taxpayer herself was admittedly quite disinterested in the fate of her capital contribution and in the day-to-day activities of the partnership. Furthermore, she had not met any of the partners other than those whom I have earlier mentioned. It was argued also that the partnership set out to create an illusion of share trading activity by placing emphasis on the volume of turnover rather than on any carefully considered market strategy designed to achieve maximum profitability. Counsel submitted that the appellant's predominant objective in purporting to enter into the partnership was to obtain a taxation advantage and not to carry on business as a trader in shares, and thus her expenditure was essentially of a private or domestic nature and not within the purview of sec. 51. Reference was made to
Magna Alloys & Research Pty. Ltd. v. F.C. of T. 80 ATC 4542 at p. 4549, to
F.C. of T. v. Ilbery 81 ATC 4661 at p. 4668 and to
Deane v. F.C. of T.; Croker v. F.C. of T. 82 ATC 4112. It was further submitted that, for reasons developed in the written submissions in particular, and on pp. 73 and 74 of the transcript those who were in control of the activities of the companies and of the partnership purported to have the six subject companies derive capital profits which were wholly artificial, with the consequence that the acquisition and disposal of the private company shares formed no part of any share trading activity. In other words, it was argued that the way in which the partnership went about its acquisition and disposal of the private company shares was such as to deny such activity a place in the mainstream of any share trading that might otherwise have been conducted in the shares of public companies.
However, I have come to the conclusion that the appellant has established that the partnership was, between mid-April 1977 and 30 June 1977, engaged in the business of share trading. The authorities which I consider give most adequate guidance to the test to be applied are those which I mentioned in Grant's case and which I need not again discuss in this judgment.
It is, of course, crucial to bear in mind that the expenditure incurred in purchasing the relevant shares was not made individually by the appellant but by the partnership of which she was a member. The share trading activities engaged in by such partnership during the period in question were regular, extensive and systematic. They were managed by a sub-committee which appointed Mr McNeill to advise and implement decisions made concerning the purchase and sale of shares, he and his company being remunerated as earlier set out. Such sub-committee met regularly, and two firms of sharebrokers acted on behalf of the partnership. The total initial capital of the latter, contributed by its members, was $100,000. During the year ended 30 June 1977 (i.e. a period of about ten weeks) total purchases of shares in public listed companies amounted to $143,953 and total sales amounted to $67,584. As at 30 June 1977 there was stock on hand of $74,669. In my opinion the proper inference is that it was the intention of the members of the partnership that the latter should if possible make profits. The only ``loss'' which it set out to make was a ``tax loss'' arising from its dealings in the shares in the Compinge companies although, in fact, it
ATC 4667
made a commercial profit from these and in respect of that the Commissioner made assessments under sec. 26AAA. There is no doubt that the members of the partnership were primarily motivated to enter into it by a desire to take advantage of the decision in Curran's case, which in turn involved engaging in transactions that created a ``tax loss''. They entered into a written partnership agreement, which I am satisfied was not a sham and which described share trading as the business of the partnership. It is, in my view, irrelevant that the appellant herself did not have any active personal involvement in the share trading activities of the partnership. She contributed capital and is entitled to her share of any advantages. The purchases and sales of shares were central to the business activities of the partnership and fell within the scope of its business as defined in the relevant agreement. In my opinion, for reasons set out in some of the cases to which I referred in Grant, the fact that the partners were motivated (as they undoubtedly were) to carry on the business of buying and selling shares by a desire to obtain a tax benefit or advantage is of little or no relevance. The fact that the appellant, and indeed the partners collectively, sought a tax advantage does not preclude them from relying upon sec. 51(1) to obtain an allowable deduction. If authority is needed for this proposition it may be derived from Curran's case. I have no difficulty in concluding, as I do, that at the relevant time the partnership of which the appellant was a member was engaged in the business of share trading.Were the bonus shares validly issued?
The respondent submitted that they were not, because no proper notice of the extraordinary general meeting allegedly held on 27 April 1977 was given by any of the Compinge companies to their members.
The Articles of Association of each of the six Compinge companies, in respect of which by 11.55 a.m. on 27 April 1977 transfers in favour of the members of the two partnerships had been registered, incorporated (inter alia) art 55, 103 and 105 of Table A of Sch. 2 to the Companies Act 1936 (New South Wales). These Articles respectively provided:
- 55. In the case of joint holders the vote of the senior who tenders a vote whether in person or by proxy shall be accepted to the exclusion of the votes of the other joint holders; and for this purpose seniority shall be determined by the order in which the names stand in the register of members.
- 103. The notice may be given by the company to any member whether personally or by sending it by post to him to his registered address...
- 105. The notice may be given by the company to the joint holders of a share by giving the notice to the joint holder named first in the register of members in respect of the shares.
At the relevant time sec. 144 of the Companies Act 1961 provided, inter alia, that, to be effectual as a special resolution, not less than 21 days' notice of intention to propose such resolution as such must be given. This is qualified by subsec. (2) as follows:
- (2) Notwithstanding the provisions of sub-section (1) of this section, if it is so agreed by a majority in number of the members having the right to attend and vote at the meeting, being a majority which together holds not less than ninety-five per centum in nominal value of the shares giving that right... a resolution may be proposed and passed as a special resolution at a meeting of which less than twenty-one days' notice has been given.
Senior counsel for the respondent submitted that, as a matter of construction, all of the joint holders of a share have a right, albeit conditional, to attend and vote at any general meeting of the company, and that the condition which qualifies that right is that the holder or holders in seniority abstain from attendance himself or themselves. He submitted that, notwithstanding reg. 105, each of the Compinge companies in order to invoke sec. 144(2) was obliged to obtain the agreement of a majority in number of its members (together holding not less than 95 per cent in nominal value of the shares) to agree to the proposal of the resolutions as special resolutions despite the absence of 21 days' notice, because at the time of convening such meeting there was no certainty or assurance that the most senior member (or indeed that any but the most junior) would necessarily tender a vote. Counsel argued that ``such a majority in each case was personified, having regard to the registration in Darwin of at least 38 of the members of the
ATC 4668
Malindi and Paratinga partnerships. That that was not done in any case vitiates the special resolution''. It was submitted also that reg. 105 is procedural, designed for administrative convenience, and was not susceptible of a construction or operation which may affect substantive rights. In other words, it was argued, a term should be implied in the contract evidenced by the Articles to the effect that, in order for a notice to have been validly given, the senior joint holder to whom it has been addressed must notify all of those junior to him in the register (so as to ascertain their wishes as to the manner in which there votes might be cast) prior to any purported exercise of the voting rights on their behalf. It was argued, in accordance with well-known authority, that the implication of such a term was necessary to give business efficacy to the contract between the company and its members and between the members themselves inter se.The Register of Members identifies Messrs Mitchell and Rosenblum as the senior members in respect of the joint holdings of the Malindi Trading Co. partnership, and also of the Paratinga partnership which at the same time acquired the other half of the issued shares in the capital of the Compinge companies. They did in fact attend at the shareholders meeting and they voted at it. Thus, in my view, by reason of the operation of Art. 55 in Table B their vote was to be accepted to the exclusion of the votes of the other joint holders -
Barclays Bank Ltd. v. I.R. Commrs (1959) 1 Ch. 659; (1961) A.C. 509. In my opinion they were the only people entitled to notice and I reject the submission that sec. 144(2) requires that before the most senior member of a group of joint holders agrees to short notice, he must obtain the consent of all of the joint holders. Such a construction would impose an impossible burden on the company, which would have to inquire into the relations inter se of joint holders. It is to avoid this very situation that Art. 55 is directed.
Nor do I accept the submission that a term should be implied into the relevant contracts between company and members, and members inter se, to the effect that the senior joint holder must notify all of those junior to him in the register prior to any exercise of voting rights. In the present case the partners expressly provided for the regulation of partnership matters in the partnership deed, and they expressly authorised the management committee to deal with partnership affairs. In those circumstances there is no room for the implication of any term that the senior member must notify all of the partners of any company notices which he receives.
Finally, in relation to this aspect of the matter, it should be observed that each member of the partnership accepted the bonus shares and relied upon the allotment to claim for deductions, and hence each clearly ratified such allotment notwithstanding any procedural irregularities, if these (contrary to what I have held) did exist.
Was the original acquisition of Compinge Holdings illegal and void as being contrary to sec. 67 of the Companies Act 1961?
Section 67(1) provides:
- (1) Except as is otherwise expressly provided by this Act no company shall, whether directly or indirectly and whether by means of a loan guarantee or the provision of security or otherwise, give any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company or, where the company is a subsidiary, in its holding company or in any way purchase, deal in or lend money on its own shares.
On behalf of the respondent it was argued that the loans purportedly made by the Compinge companies to Medola (No. 7) were destined to be employed via Wolkara Pty. Limited in satisfaction of the purchase price payable by R.M. Services Pty. Limited to the vendors Daross Investments Pty. Limited and Valpam Investments Pty. Limited. The submission proceeded that, although the promoters endeavoured to present the transactions of 15 April as discrete, none the less each step taken was an integer of the whole, and that none can sensibly be regarded as effectual in isolation. In other words, so the argument ran, the lending by the Compinge companies of the whole of their available assets (represented by cash at bank) was the sine qua non of R.M. Services Pty. Limited obtaining title to the shares in their capital, and ``as a matter of public policy the taxpayer ought not to be permitted to rely upon actions which are illegal and void in order to obtain a fiscal advantage''.
ATC 4669
In my opinion, however, if it be assumed that there was in fact a contravention of sec. 67, the relevant transaction was not thereby rendered ``void'' in the sense that the respondent can ignore it or treat it as having no legal effect -
Spink (Bournemouth) Ltd. v. Spink (1936) 1 Ch. 544 at p. 549;
Rossfield Group Operations Pty. Ltd. v. Austral Group Limited (1981) Qd. R. 279;
M. Dalley & Co. Pty. Ltd. v. Sims (1968) 120 C.L.R. 603 at p. 616. In any event, I am far from satisfied that sec. 67 was contravened in the circumstances. I do not accept that Wolkara was paid money by the Compinge companies before R.M. Services Pty. Limited purchased the shares in those companies from moneys lent to it by Wolkara. On the contrary, R.M. Services obtained its funds from the sale of shares in Medola (No. 5) and Medola (No. 6) in order to repay Wolkara. I do not accept that the loan of $2,125,442 from Wolkara to R.M. Services was other than a genuine loan. The evidence does not establish that Compinge (Holdings) Pty. Limited or any of its subsidiary companies provided finance to a holding company to finance the purchase of shares in itself. At the time when the funds were advanced to Medola (No. 7) there was no holding company in existence which controlled Compinge (Holdings). Its shares were then held to the extent of 50 per cent each by Medola (No. 5) and Medola (No. 6). I therefore reject the submissions based upon sec. 67 of the Companies Act.
Securities Industry Act 1975, sec. 32 and 34:
It was submitted on behalf of the respondent that the whole of the ``share trading activity'' purportedly undertaken by the partnership was illegal and void as contrary to sec. 32 of the Securities Industry Act 1975. Subsection (1) of that section is in these terms:
- A person shall not carry on a business dealing in securities (whether or not that business is part of, or is carried on in conjunction with any other business) or holds himself out as carrying on such a business unless he is the holder of a dealers licence or is a recognised dealer.
A penalty is provided for breach. Subsection (2) provides that subsec. (1) does not apply to or in relation to an exempt dealer. None of the partners was the holder of the relevant licence and Mr McNeill explained in evidence the reason why his licence was not issued until 13 July 1977. However, no argument was developed as to why, assuming sec. 32 was not complied with, it follows that the share trading activity was illegal and void. Certainly the Act does not provide for this consequence. It would indeed be a curious result if the effect of a breach of sec. 32 was that legal title could not pass to the partnership in the shares, or that any contract for the sale of shares on behalf of the partnership could not have been enforced. In the absence of persuasive authority and of some cogent argument (which has not been advanced) I am not prepared to hold that any breach of sec. 32, if one did occur, rendered the share trading activity of the partnership void.
However, I am far from satisfied that there was any breach of sec. 32. Section 4(5) of the Act provides that, in determining for the purposes of such Act whether a person carries on business or holds himself out as carrying on a business of dealing in securities, regard shall not be had to an act done on behalf of the person by the holder of a dealer's licence or by an exempt dealer or by a recognised dealer. In the present case the partnership, in dealing in securities in public companies, and in buying and selling the shares in the Compinge companies, acted at all times through stockbrokers, and in those circumstances I do not consider that any breach of sec. 32 has occurred.
The respondent submitted also that Mr McNeill was in breach of sec. 34, which provided that a person shall not act as, or hold himself out to be, an investment adviser unless he is the holder of an investment adviser's licence or is a recognised investment adviser. But I am satisfied that if there was any such breach by Mr McNeill, it in no way affected the validity of the share transactions.
Does sec. 260 of the Income Tax Assessment Act render void the partnership and/or the various transactions relied upon by the appellant?
Section 260, which ceased to have effect after 27 May 1981, and which has frequently been criticised as creating many difficulties of interpretation, was in these terms:
- 260. Every contract, agreement or arrangement made or entered into, orally or in writing, whether before or after the commencement of this Act, shall so far as it
ATC 4670
has or purports to have the purpose or effect of in any way, directly or indirectly -- (a) altering the incidence of any income tax;
- (b) relieving any person from liability to pay any income tax or make any return;
- (c) defeating, evading, or avoiding any duty or liability imposed on any person by this Act; or
- (d) preventing the operation of this Act in any respect,
be absolutely void, as against the Commissioner, or in regard to any proceeding under this Act, but without prejudice to such validity as it may have in any other respect or for any other purpose.
In
Cridland v. F.C. of T. 77 ATC 4538; (1977) 140 C.L.R. 330, where sec. 260 was held not to render void an arrangement whereby an engineering student applied for a unit of entitlement in two unit trusts, his sole purpose being to average his income as a person who carried on the business of primary production, Mason J., with whom the other four members of the Bench agreed, said this (at ATC pp. 4541; C.L.R. 337-338):
``Although the very restricted operation conceded to sec. 260 by the course of judicial decision and the generality of the language in which the section is expressed stand in high contrast, the construction of the section is now settled. It is therefore a source of some surprise that it continues to be relied upon when its defects and deficiencies have been apparent for so long. More than twenty years ago Kitto J. said in
F.C. of T. v. Newton (1957) 96 C.L.R. 577, at p. 596: `Section 260 is a difficult provision, inherited from earlier legislation, and long overdue for reform by someone who will take the trouble to analyse his ideas and define his intentions with precision before putting pen to paper.' This message, despite its clarity, seems not to have reached its intended destination.It was recently decided in
Mullens Investments Pty. Ltd. v. F.C. of T. 76 ATC 4288; (1976) 51 A.L.J.R. 82 that even if a transaction has been entered into for the purpose of diminishing a taxpayer's liability to tax by securing to the taxpayer a benefit or advantage conferred by a specific provision of the Income Tax Assessment Act, e.g. an allowable deduction, which but for the transaction would not have accrued to the taxpayer, the transaction will not be caught by sec. 260 if it satisfies the provision in question.''
And at ATC p. 4542; C.L.R. p. 340:
``The transactions into which the appellant entered in the present case by acquiring income units in the trust funds in question were not, I should have thought, transactions ordinarily entered into by university students. Nor could they be accounted as ordinary family or business dealings. They were explicable only by reference to a desire to attract the averaging provisions of the statute and the taxation advantage which they conferred. But these considerations cannot, in the light of the recent authorities, prevail over the circumstance that the appellant has entered into transactions to which specific provisions of the Act apply, thereby producing the legal consequences which they express.
Accordingly, it is my view that sec. 260 has no application to this case.''
In the present matter the respondent argued that the appellant was not confronted with a choice of alternative tax consequences, but rather sought to engage in a transaction or series of transactions incapable of explanation by reference to ordinary business or family dealings. He argued that what was annihilated by the section in the present circumstances are all of the transactions which purportedly were effected between the time of R.M. Services' acquisition of the shares in Compinge (Holdings) and the time of Jenmin's purchase of the shares in the Compinge companies (including the bonus dividends purportedly declared). Reference was made and reliance placed upon various portions of the judgments in
F.C. of T. v. Gulland 85 ATC 4765; (1985) 60 A.L.J.R. 150 to which I will shortly refer. Counsel submitted that the arrangements purportedly entered into by the respondent were all of a contrived and artificial nature and lacked any semblance of ordinary commercial reality. In particular it was submitted that the ``finance'' purportedly provided by Wolkara was not in any sense a genuine commercial loan and that that company was merely used, as
ATC 4671
were the Medola companies, as a vehicle for the channelling of the funds to Daross and Valpam out of the resources of the companies sold by them. It was submitted also that the formation of the partnership itself was within the terms of sec. 260 because the partners or their representatives never met or had any business dealings one with the other; none of them (save the promoters) was privy to the public companies share trading activities, nor was any of them acquainted with the acquisition and subsequent disposal of the Compinge group. In particular the appellant was not even informed of the fact that, within days of her execution of the partnership agreement, she was to be jointly and severally liable for a debt of approximately $2.9 million. Reliance was placed by the respondent upon the decisions inInsomnia (No. 2) Pty. Ltd. v. F.C. of T; Insomnia (No. 3) Pty. Ltd. v. F.C. of T. 86 ATC 4145 and
McLean v. F.C. of T. 86 ATC 4288. However, with the greatest respect to the Judges who decided those cases, I am of the opinion that it is more profitable to consider and apply principles enunciated in the High Court to the facts of this particular case, and that little, if any, assistance is to be derived from considering the application of those principles to different cases and different facts. It should be borne in mind that in Curran's case no argument that sec. 260 applies was apparently relied upon. In this respect the comments of Jacobs J. in
Patcorp Investments Ltd. & Ors v. F.C. of T. 76 ATC 4225 at pp. 4241-4242 and 4243-4244; (1973-1976) 140 C.L.R. 247 at pp. 307-308 and 311-313 should not be overlooked. In
Cecil Bros Pty. Ltd. v. F.C. of T. (1962-1964) 111 C.L.R. 430 Dixon C.J., with whom Kitto, Taylor and Windeyer JJ. agreed on this point, referring to sec. 260, said ``I have great difficulty in seeing how it could apply to defeat or reduce any deduction otherwise truly allowable under s. 51''. Although, as Beaumont J. (with whom Jenkinson J. agreed) said in
F.C. of T. v. Lau 84 ATC 4929, at p. 4946, in strictness their Honours in Cecil Bros did not need to decide that sec. 260 could not apply to defeat or induce any deduction otherwise truly allowable under sec. 51, none the less ``their expressions of opinion on the point should be treated as authoritative for present purposes''. Compare per McTiernan J. in
Hooker-Rex Pty. Ltd. v. F.C. of T. 70 ATC 4033 at p. 4042; (1969-1970) 123 C.L.R. 71 at p. 86.
In Gulland's case, which involved three appeals, all heard together, medical practitioners, who had previously derived income personally, entered into arrangements designed to alter or ``shift'' their income and thus alter the incidence of tax. In my opinion there is not, in the present case, as there was in the three appeals in Gulland, any element of re-arrangement of income which has been regarded as a pre-condition to the operation of sec. 260. It was not suggested in Gulland that Cridland, to which I have referred, was wrongly decided. Amongst the matters principally decided in Gulland (and these I have taken from the headnote of the report in 85 ATC 4765, which I think accurately reflects what was held in the judgments) by Gibbs C.J. (with whom Wilson J. agreed) was that sec. 260 does not refer to the motives of the taxpayer or other person who entered into the arrangement which it is sought to impugn; the purpose or effect of such arrangement must be ascertained from its terms and from the overt acts by which it was carried into effect; not every arrangement that results in a saving of tax will be struck down by the section; an arrangement which is not capable of explanation by reference to ordinary dealing, and which on its face is obviously designed to bring about the result that less tax will be paid, may nevertheless do no more than take advantage of an opportunity to reduce tax which the Act itself provides. A line of decisions illustrates that if the Act offers to the taxpayer a choice of alternative tax consequences, either of which he is free to choose, or offers certain tax benefits to taxpayers who adopt a particular course of conduct, the choice of the advantageous alternative or adoption of the beneficial course does not mean that sec. 260 is attracted. The latter section is an annihilating provision which enables the Commissioner to ignore the arrangement to which it applies, but it does not permit him to substitute a new and fictitious set of facts in its place. The avoidance of tax need not be the sole purpose of the arrangement. If tax avoidance is one of the main purposes in the sense that it is not inessential or merely incidental, that is enough.
The argument in that case which was that by the arrangements made the taxpayers did no more than adopt a course which was available to them under the Act of creating trusts, the income of which would be taxed in accordance
ATC 4672
with the provision of the Act, failed because it was not right to say that the Act allows a taxpayer the opportunity to have his own income from personal exertion taxed as though it were income derived by a trust and held for the benefit of a number of beneficiaries. The judgment of Dawson J. (with whom Brennan and Wilson JJ. agreed) was substantially to the same effect.I have already held that the evidence discloses that during the relevant period the Malindi Trading Co. carried on business as a share trader; the fact that it was plainly done and the partnership arrangement entered into by the partners including the appellant with a view to taxation advantages does not render it void under sec. 260 -
Westraders Pty. Ltd. v. F.C of T. 77 ATC 4444;
Mullens & Ors v. F.C. of T. 76 ATC 4288. The formation of the partnership did not itself have any purpose or effect of the kind described in sec. 260. It had no physical consequences. The Commissioner has not assessed the appellant on the basis that the partnership agreement was void.
The provisions of the Act, and the application of Curran's case, permitted the dividend which was declared to be treated as payment by the relevant shareholders for the bonus shares allotted, with the consequent entitlement to claim advantages under what is now sec. 44(2). In particular the ``cost'' of such shares was an allowable deduction under sec. 51. There was no alteration of the incidence of tax or avoidance of tax and the provisions of the Act operate according to their terms. In my opinion, the conceptual difficulties which stand in the way of using sec. 260 to deny a deduction which is available under sec. 51 are equally applicable to any attempt to use it to deny a deduction under sec. 92, as in the present case. The reason for the transactions which resulted in Medola (No. 5) and Medola (No. 6) each owning fifty per cent of the issued capital of Compinge (Holdings) was to avoid infringing the provisions of sec. 67 and hence are of little, if any, relevance in considering the operation of sec. 260.
What must be borne in mind in the present case is that the appellant and the other members of the partnership were seeking, by the transactions in question, to take advantage, just as Mr Curran took advantage, of sec. 44(2), which treated a dividend declared in particular circumstances as being exempt income. As was said in Cridland's case the taxpayer was entitled to create a situation which attracted tax consequences for which the Act made specific provision, and they are not struck down be sec. 260 merely because she entered into the particular transactions deliberately to gain this advantage. The deduction sought in the present case is the cost of the acquisition of the bonus shares. That is an allowable deduction under sec. 51. Whatever the situation might be under the new provisions which replace sec. 260 I am quite unable to characterise the steps taken to obtain the deduction under sec. 51, with its consequent reflection in the assessable income of the appellant by reason of the provisions of sec. 92, as coming within any of the provisions of sec. 260. Hence I reject the submission that sec. 260 renders the partnership agreement, or any of the steps subsequently taken on behalf of the partnership, void.
Fiscal nullity
It was formally submitted also on behalf of the respondent (but not argued) that the transactions following the acquisition by R.M. Services of Compinge (Holdings) and the ultimate disposal of the group to Jenmin were fiscally null in the sense recognised by the House of Lords in
W.T. Ramsay Ltd. v. I.R. Commrs (1982) A.C. 300. As a necessary corollary of this it was argued that the judgment of the Full Court of the Federal Court in
Oakey Abattoir Pty. Ltd. v. F.C. of T. 84 ATC 4718, in which it was held that the doctrine of fiscal nullity does not apply in Australia and should be perceived as no more than a body of rules governing the interpretation of the United Kingdom legislation for the taxation of capital gains, was erroneous. However, just as Murphy J. in Insomnia (No. 2) Pty. Ltd. v. F.C. of T.; Insomnia (No. 3) Pty. Ltd. v. F.C. of T. 86 ATC 4145 followed the decision of the Federal Court in Oakey Abattoir so also I consider that I should do so. In the absence of any argument in support of the submissions made, I do not think it is necessary to develop this proposition.
Did the partners acquire a beneficial interest in the shares in the Compinge group?
It was submitted (again without any significant argument) that the partners did not at any time acquire a beneficial interest in the shares in the Compinge group so as to be entitled to bring into account the Curran deductions. It was submitted that it was plain
ATC 4673
from the evidence of Mr Rosenblum that Mr Fox had agreed from the outset that his company, Jenmin, would ultimately acquire the Compinge companies and hence the massive ``indebtedness'' supposedly incurred by the partnerships was not in reality ever to be asserted against them. However, in my opinion, there is no substance in the submission and, just as it was formally made, so also I formally reject it.It remains only to deal with the special position of the dividend declared by Compinge Pty. Limited. I have earlier referred to the fact that the proceeds of the life insurance policy were included in the funds out of which the relevant dividend was declared by that company. Thus the provisions of sec. 26AAA would not apply to the transaction involving the Compinge Pty. Limited shares because of the terms of subsec. (5) of that section. The dividend in respect of Compinge Pty. Limited must be added to the assessable income of the partnership, thereby reducing its net loss. Hence the appropriate course is to remit the matter to the Commissioner to re-assess the tax payable.
The result of the foregoing is that the appellant has succeeded in the appeal save to the limited extent that the dividend declared by Compinge Pty. Limited does not satisfy the provisions of sec. 44(2). In my opinion the appropriate order is to remit the assessment to the Commissioner to be amended in accordance with my judgment. The respondent must pay the whole of the appellant's costs.
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