Case V19
Members:RA Balmford SM
Tribunal:
Administrative Appeals Tribunal
R.A. Balmford (Senior Member)
Introduction
The applicant in this matter, E Pty. Ltd., has been nominated pursuant to subsec. 18(3) of the Taxation (Unpaid Company Tax) Assessment Act 1982 (``the TUCT Act'') as the person to exercise the rights of the two vendor shareholders under Div. 2 of Pt V of the Income Tax Assessment Act 1936 (``the Assessment Act'') in relation to the liability of B Pty. Ltd. for company tax in relation to the year ending 30 June 1980.
2. On 2 April 1982 the respondent issued to B Pty. Ltd. a notice of assessment in the amount of $1,569,040.68 for ordinary company tax in respect of the year ending 30 June 1980 and a further $784,520 in respect of that year being additional tax for late return. On 11 February 1983 the respondent issued to B Pty. Ltd. a further notice of assessment in respect of the same year, in the amount of $276,287.50 undistributed profits tax pursuant to Div. 7 of the Assessment Act. The total amount assessed was thus $2,629,848.18. The
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basis of calculation of this amount is set out in para. 13 infra.3. By virtue of subsec. 18(3) of the TUCT Act, E Pty. Ltd., the nominated former owner of shares in B Pty. Ltd., is entitled to exercise the same rights of objection and appeal against the assessment of B Pty. Ltd. as are available to that company itself. Accordingly, objections against both assessments were lodged by E Pty. Ltd. Those objections were disallowed. E Pty. Ltd. requested that the objections be referred to a Board of Review, and that request was complied with by the respondent. By virtue of sec. 223(1) of the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986 and subsec. 189(2) of the Assessment Act that referral of the decisions on the applicant's objections is deemed to constitute the making by the applicant of an application to the Tribunal for review of those decisions.
4. The scheme of the TUCT Act was summarised at ATC pp. 4230-4233; C.L.R. pp. 55-60 of the joint judgment of Gibbs C.J., Wilson, Deane and Dawson JJ. in
MacCormick v. F.C. of T. 84 ATC 4230; (1984) 52 A.L.R. 53 in which the High Court rejected an argument that the taxes imposed by the TUCT Act were beyond the power of the Commonwealth. Their Honours said (omitting passages relating solely to promoters recoupment tax and other material not relevant to the present matter):
``In these actions, which come before the Court by way of demurrer, the plaintiffs attack legislation aimed at the collection of moneys found to be irrecoverable by way of company tax from companies which were stripped of the assets, including profits before tax and any assets representing provisions for tax, from which payment of the tax might otherwise have been made or recovered. Such companies may conveniently be referred to as `target companies'. The legislation seeks to impose liability upon the vendors of shares where the sale of the shares was followed by a stripping operation and upon those who promoted the scheme of which the sale formed part. The liability is imposed upon the vendor shareholders by the Taxation (Unpaid Company Tax - Vendors) Act 1982 (Cth) and upon the promoters by the Taxation (Unpaid Company Tax - Promoters) Act 1982 (Cth). In relation to both those taxing Acts there is the one Assessment Act, namely, the Taxation (Unpaid Company Tax) Assessment Act 1982 (Cth). In that regard, the trilogy of Acts follow what Fullagar J. described as `the invariable practice since the establishment of the Commonwealth', namely, that the actual imposition and fixing of the rate of tax is effected by a `Taxing Act' while an `Assessment Act' provides for `the incidence, assessment, and collection, of the tax and for a variety of incidental matters' (
Re Dymond (1959) 101 C.L.R. 11 at p. 18).The Taxation (Unpaid Company Tax) Assessment Act (`the 1982 Assessment Act') provides for the calculation of a primary taxable amount where shares in a company were sold under a scheme between specified dates and under specified conditions. `Scheme' is defined broadly to mean any agreement, arrangement, transaction, understanding or scheme. The conditions which are specified include the requirements that the rights attaching to the shares sold should have conferred control of more than 90 per cent of the voting power in the company, that the total consideration given for the shares should have exceeded the net value of the assets of the company after deducting its liabilities, including its liability for tax, and that an assessment of ordinary company tax or undistributed profits tax should have been made under the Income Tax Assessment Act 1936 (Cth), as amended. There are further conditions that the period for objecting against the assessment should have expired and that any objection against the assessment should have been finalised, leaving unpaid an amount of ordinary company tax or undistributed profits tax, referred to as overdue company tax. A further condition is that there should have been an arrangement or transaction, whether or not part of the scheme, which secured or achieved the result that the target company was unable, having regard to other debts of the company, to pay the overdue company tax.
...
Where there is only one vendor shareholder, the primary taxable amount in relation to that person is the whole of the overdue company tax. Where there is more than one
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vendor shareholder, the primary taxable amount in relation to each person is that proportion of the overdue company tax which is commensurate with the proportion of the total consideration received by that person for the sale of his shares....
Where a primary taxable amount exists it constitutes, together with any secondary taxable amount (to which we shall refer shortly) a vendors taxable amount. A tax equal to the whole amount is imposed by the Taxation (Unpaid Company Tax - Vendors) Act upon the vendors taxable amount. That tax is referred to in the 1982 Assessment Act as vendors recoupment tax.
Where a vendors taxable amount exists in relation to a company and that company has ceased to exist, or where, because of the sale of shares in that company or a holding company, the Commissioner is of the opinion that it would be unreasonable that the company should be liable to pay recoupment tax on the vendors taxable amount or where the Commissioner is of the opinion that recoupment tax payable on a vendors taxable amount by a company is unlikely to be paid, a secondary taxable amount exists. It exists, broadly speaking, in relation to those shareholders who had rights in a capital distribution by the company. The secondary taxable amount in relation to each shareholder is that part of the vendors taxable amount or the unpaid recoupment tax, as the case may be, which is proportional to the shareholders entitlement if a distribution of capital equal to the consideration received for the sale of the shares in the target company had been made immediately before a specified time, ordinarily the time of the sale of those shares. This tracing process is repeated until the liability to pay recoupment tax falls upon individuals or upon companies which are able to and can reasonably be expected to pay the tax.
...
Whilst a penalty is imposed for late payment of recoupment tax, provision is made that recoupment tax shall not be increased on account of any additional tax payable by the target company as a penalty for late payment that accrues after the assessment for recoupment tax is made.
The Act contains provisions which enable those who may become liable for recoupment tax to contest an assessment of company tax in relation to the relevant target company. A representative class is constituted comprising every vendor shareholder who is a natural person and whose address is known to the Commissioner, every vendor shareholder which is a company still carrying on business and the other persons traceable through a vendor shareholder liable to pay recoupment tax based on the target company's assessment, but if those persons exceed five in number, five of those persons selected by the Commissioner as appropriate representatives of those persons. Where a notice of assessment of company tax payable by a target company has not been served on the company and vendors recoupment tax is payable or, in the opinion of the Commissioner, it is likely to become payable, instead of serving the notice of assessment on the company, the Commissioner is required to serve it on the company by serving it on any of the persons liable, or likely to become liable, to pay the vendors recoupment tax. Where there is more than one such person, the Commissioner is required to serve a copy of the notice on each person (other than the person on whom the notice was served) who is included in the representative class in relation to the vendors recoupment tax.
Where there is only one person liable, or likely to become liable, to pay the vendors recoupment tax and notice of the assessment in relation to the target company is served upon that person, that person has the same rights as the company has under Div. 2 of Pt V of the Income Tax Assessment Act to object to the assessment. Where there is more than one person liable, or likely to become liable, to pay the vendors recoupment tax, one person only from the representative class is entitled to the rights which the company would have had to object to the assessment. That person is required to be nominated by a notice signed by more than one half of the persons included in the representative class.''
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5. It should be noted that, as pointed out in the second paragraph of the extract from their Honours' judgment, the effect of para. 5(1)(f) and (g) of the TUCT Act is that the assessment of a primary taxable amount depends on, inter alia, the finalisation of any objection against the assessment of ordinary company tax or undistributed profits tax against the ``target company'' (in this case B Pty. Ltd.) leaving an amount of unpaid tax. Thus there can be no assessment of a primary taxable amount or imposition of vendors recoupment tax against E Pty. Ltd. and the other shareholder unless and until the present proceedings are finalised in such a way that an amount of tax remains due and unpaid by B Pty. Ltd. However, as the Tribunal, constituted by Mr Roach, Senior Member, said in Decision No. 3925, decided on 20 November 1987:
``Whether the assessment is excessive does not depend in any respect upon the provisions of the [TUCT] Act because that legislation has nothing to say about the determination of taxable income of any target company. Neither can the provisions of the [TUCT] Act affect the interpretation of those provisions of the [Assessment] Act which must be applied in order to determine whether or not the assessment of [the target company] is excessive. That arises because there is no scope for the view that the [TUCT] legislation of 1982 proposes, either expressly or by implication, any modification of the operation of the provisions of the [Assessment] Act which fix the quantum of liability of any target company.''
6. The Tribunal had before it extensive documentary material. Evidence was given at the hearing by Mr B, who, with his sister, Miss B, had until the morning of 30 June 1980 constituted the board of directors of each of the applicant E Pty. Ltd., the target company B Pty. Ltd., and the second former shareholder in the target company, F Pty. Ltd.; by officers of the ANZ Banking Group and the Director of Public Prosecutions; by Mr P, who was in 1980 the accountant engaged by the B group of companies; and by Mr X, also an accountant, who was during part of 30 June 1980 a director of B Pty. Ltd., and also of K Pty. Ltd. and S Pty. Ltd., two other companies which are relevant to these proceedings. It appears that Mr X was associated with an organisation which will, for present purposes, be called Taxation Advisers Pty. Ltd. The evidence of Mr X was, by arrangement, given in confidence. The solicitor for the applicant gave evidence of attempts which he had made to have Mr Y, also of Taxation Services Pty. Ltd., attend the Tribunal for the purpose of giving evidence, and of Mr Y's refusal to do so.
7. On the first day of the hearing of this case the Tribunal was constituted by Mrs Balmford and Mr Stewart, Senior Members, and Mr Trinick. On the second day, some weeks later, Mr Stewart had ceased to be available for the purposes of the proceedings. Accordingly, pursuant to a direction given under subsec. 20(2) of the Administrative Appeals Tribunal Act 1975, the hearing and determination of the matter was completed by Mrs Balmford sitting alone. On the first day of the hearing the applicant was represented by inadequately instructed counsel, and the respondent by Mr Nettle of counsel. On the second day, and thereafter, the applicant was represented by Mr Myers Q.C. and Mr de Wijn of counsel, and the respondent by Mr Pagone of counsel.
8. Further submissions were lodged on behalf of the applicant after the close of the hearing. No arrangement for further submissions had been made at the hearing. The Tribunal accordingly asked the solicitor for the respondent whether he was prepared, on the basis that the respondent be entitled to make further submissions in reply thereto, to consent to the Tribunal receiving the further submissions of the applicant. Consent was received from the respondent, together with further submissions in reply, to which the applicant sought to reply again. The solicitor for the respondent again consented to the Tribunal's receiving the further submissions, and advised the Tribunal that the respondent did not wish to respond thereto. It will be appreciated that the making of those several further submissions has considerably delayed the determination of this application for review.
The issue
9. In the early months of 1980 Mr B was, as he had been for some time, a director, with his sister, of two companies, E Pty. Ltd. and F Pty. Ltd. Each of those two companies held one of the two issued shares in another company, B Pty. Ltd., of which Mr and Miss B were also the directors. E Pty. Ltd. was
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apparently the beneficial owner of both shares. B Pty. Ltd. conducted a prosperous manufacturing and share-trading business. Mr B said that he heard from several different sources that there were people interested in purchasing companies with taxable profits available to them; and that they would do so in a manner which resulted in the tax on those profits being paid by the purchaser. He consulted Mr P, who told him that a sale of the kind proposed would be legal. Mr P said that on Mr B's instructions he prepared certain documents on the understanding that Taxation Advisers Pty. Ltd. would be purchasing the shares in B Pty. Ltd., and he had discussions, to that end, with an accountant in Fitzroy, with whom it was agreed that $3,896,763 would be an acceptable price for the shares.10. As a result, a number of transactions took place on or about 30 June 1980. Eventually, after the enactment of the TUCT Act, and its associated legislation, those transactions led to the issue of the assessments described in para. 2 supra. The case for the applicant is that, as a result of those transactions, B Pty. Ltd. had, by virtue of the operation of sec. 71 of the Assessment Act, no taxable income in the year ending 30 June 1980, and accordingly that no tax is payable by it in respect of that year. Section 71 at all relevant times has read:
``71. Where a loss incurred by the taxpayer through embezzlement, larceny, defalcation or misappropriation by a person, including an agent, employed by the taxpayer, not being a person employed solely for private or domestic purposes, of, or in respect of, money that is or has been included in the assessable income of the taxpayer is ascertained in the year of income, that loss shall be an allowable deduction.''
11. The balance sheet of B Pty. Ltd. as at 30 June 1979 showed assets totalling in value $5,148,712, consisting of trade debtors, stock, plant and machinery, goodwill and shares in companies. The principal liability was $4,239,205 shown under the heading ``Associated Companies''. As at 31 May 1980, the company's only asset was $4,237,431 shown as ``Associated Companies'' and described by Mr P in evidence as the amount of a loan to associated companies. The liabilities shown were $1,569,041 provision for taxation and $170,120 bank overdraft, giving net assets of $2,498,270. The profit and loss account for the 11 months ending 31 May 1980 shows income for the period amounting to $3,410,958 less $1,569,041 provision for taxation.
12. A fresh balance sheet, prepared as at 10.30 a.m. on 30 June 1980, showed assets of $5,465,804, being $4,067,311 ``bank'' and $1,398,493 ``goodwill''. The only liability was $1,569,041 provision for taxation. Mr P said in cross-examination that the goodwill figure represented the difference between the net assets as at 31 May of $2,498,270 and the agreed price for the shares, namely, $3,896,763.
13. No taxation return was lodged by B Pty. Ltd. for the year ending 30 June 1980. The Commissioner's statement in accordance with subreg. 35(1) of the Income Tax Regulations indicates the Commissioner's acceptance of B Pty. Ltd.'s taxable income for the 1980 tax year as not less than $3,410,958 and of the tax assessable thereon as $1,569,040.68. These are the amounts shown in the profit and loss account to 31 May (para. 11 supra). B Pty. Ltd., having failed to lodge a return, became liable under subsec. 226(1) of the Assessment Act for additional tax equal to the amount of the tax assessable. The Commissioner, pursuant to subsec. 226(3), remitted approximately 50 per cent of that amount, assessing additional tax at $784,520. Undistributed income calculated according to sec. 103 of the Assessment Act was not less than $552,575, and accordingly additional undistributed profits tax of $276,287.50 was payable. The assessments described in para. 2 supra issued accordingly, the Commissioner taking the view that no part of the $3,410,958 claimed as a loss in the applicant's notice of objection was an allowable deduction under sec. 51, 71 or any other provision of the Assessment Act.
The transactions
14. The change in the asset structure of B Pty. Ltd. which was evidenced by the financial statements described in para. 11 supra resulted from a sale to an associated company, namely, E Pty. Ltd. (according to Mr B's evidence) or ``a company newly named B Australia Pty. Ltd.'' (according to Mr P's evidence of the company's assets as they stood at the end of June 1979). That sale took place in May 1980.
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15. The sale of the shares in B Pty. Ltd. was evidenced by an agreement, to which was annexed the financial statements prepared at 31 May, and which bore the date 30 June 1980. The parties to that agreement were F Pty. Ltd. and E Pty. Ltd. as vendors, S Pty. Ltd. as purchaser, and Mr and Miss B as guarantors. Clause 10 of the agreement read:
``The Purchaser hereby warrants to the Vendors and each of them and it is a term and condition of this Agreement as follows:
- The Purchaser will not whether directly or indirectly and whether by means of a loan guarantee or a provision of security or otherwise use or cause [B Pty. Ltd.] to use the whole or any part of [its] assets in or towards payment for the purchase of the [shares the subject of the agreement] or any of them.''
The agreement was executed by being sealed by A Pty. Ltd. as attorney under power for each of the parties, and contained a memorandum that A Pty. Ltd. had received no notice of revocation of any of the powers of attorney pursuant to which the agreement had been executed. The seal is attested each time, and the memorandum signed, with the same indecipherable squiggle.
16. On 8 July 1980 (i.e. after the completion on 30 June of the sale of the shares in B Pty. Ltd., yet to be here described) Taxation Advisers Pty. Ltd. wrote as follows to Mr G of the Darwin office of a firm of chartered accountants:
``Re [B Pty. Ltd.]
We enclose documents in relation to the purchase of the above Company by S Pty. Ltd.
This purchase can only be completed after you have executed the enclosed Share Purchase Agreement as Attorney for the Purchasers, and unless you advise us otherwise, the Settlement Date shall be 30th June 1980.''
That letter was signed by Mr X. A letter to Taxation Advisers Pty. Ltd. from the Darwin chartered accountants signed by an unidentified, indecipherable squiggle (which bears some similarity to the squiggle used on behalf of A Pty. Ltd.), and dated 7 August 1980, enclosed inter alia, ``a copy of the duly executed and stamped Sale Agreement dated the 30th June, 1980''.
17. Documents before the Tribunal indicate that on 26 June 1980:
- (a) each of B Pty. Ltd., E Pty. Ltd. and Mr and Miss B executed a power of attorney in favour of A Pty. Ltd., of Darwin, to execute documents in respect to the sale of shares in B Pty. Ltd.;
- (b) the directors of B Pty. Ltd. resolved to open a branch register of members at an address in Darwin and appointed Mr G as branch registrar;
- (c) requests for two shares to be transmitted to the Darwin register had been executed and were held by the directors;
- (d) on the instructions of Mr X, written on the letterhead of Mr Y, a bank account for B Pty. Ltd. was opened at the ANZ Bank, 388 Collins Street, Melbourne, and $10 deposited. Bank charges were to be debited to the account of S Pty. Ltd. Authorised signatories were Mr X, or Mr Y, or two other named employees of Mr Y jointly (these individuals were among the authorised signatories for the bank accounts of K Pty. Ltd. and S Pty. Ltd.);
- (e) the Darwin branch share register was duly opened and two shares in the name of S Pty. Ltd. entered therein.
18. Mr P gave evidence that at 9 a.m. on 30 June 1980 a meeting of directors of B Pty. Ltd. resolved to appoint Mr Y and Mr X as directors of the company, and accepted the resignations as directors of Mr and Miss B. Mr X was appointed secretary. The balance sheet as at 10.30 a.m. on 30 June 1980, described in para. 12 supra, was presented. The minutes of that meeting were handed to the purchaser of the shares and could not be produced to the Tribunal.
19. After the meeting Mr P went to the ANZ Bank at the corner of La Trobe and Elizabeth Streets, Melbourne, where the B group of companies had their accounts. He took with him a cheque, payable to the bank, for $4,067,311 drawn on the account of E Pty. Ltd., which he described in evidence as being ``in payment of the associated companies loans that were effective up till that morning''. He exchanged that cheque for a bank cheque
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payable to B Pty. Ltd., for the same amount, $4,067,311.20. The bank cheque was handed by Mr P to a representative of Taxation Advisers Pty. Ltd., in exchange for a cheque payable to E Pty. Ltd. for $3,896,763, the agreed purchase price for the two shares in B Pty. Ltd. That latter cheque was immediately paid by him into the bank account of E Pty. Ltd.
21. Authenticated copies of bank records and company books in the material before the Tribunal indicate that on 30 June 1980 B Pty. Ltd. paid to K Pty. Ltd. the sum of $4,067,311; K Pty. Ltd. paid the same sum to S Pty. Ltd. and S Pty. Ltd. paid $3,896,763 to E Pty. Ltd. It is to be supposed that the amount of $170,548, being the difference between $4,067,311 and $3,896,763, was retained as being the amount of the fee agreed to be paid by (speaking loosely) the B group to (speaking loosely) Taxation Advisers Pty. Ltd., but the Tribunal has no evidence on this matter.
22. A document in the material before the Tribunal, which was said to contain information derived from the Corporate Affairs Office, but was not authenticated, indicates that Mr Y and Mr X were appointed as directors of B Pty. Ltd. on 30 June 1980; that they resigned and were replaced on the same date by three other persons; and that one of those three resigned on 6 August 1980 and was replaced on the same day.
23. Extracts from the Darwin Branch Register of B Pty. Ltd. and other documents show that the two shares in the name of S Pty. Ltd. transmitted from the Victorian Register on 26 June 1980 were transmitted back to Victoria on 30 June 1980, when the register was closed.
24. Bank records show that the account in the name of B Pty. Ltd. at 338 Collins Street was closed on 28 July 1980.
25. Records from the Corporate Affairs Office indicate that on an illegible date in 1984 S Pty. Ltd. became defunct.
26. Mr B said that neither he nor his sister had authorised the opening of a bank account for B Pty. Ltd. at the Collins Street ANZ Bank branch, nor had they authorised the drawing of the cheque for $4,067,311 on that account. After the sale of the shares in B Pty. Ltd. (by which he may well have intended to refer to the sale of the assets of that company) the business of manufacturing and share trading which had been carried on by that company was continued by another company, of which he was a director.
27. There is nothing before the Tribunal, save inconsistent and unauthenticated statements by counsel, as to the later history of B Pty. Ltd.
28. Mr P said that he had nothing to do with the drawing of the cheque on the account of B Pty. Ltd. for $4,067,311; and that before 11 a.m. on 30 June 1980, he had never heard of K Pty. Ltd. So far as he was aware, the execution of the powers of attorney was related to the avoidance of Victorian stamp duty, which was ``going on the whole time'' and was ``the normal thing to be done with a large share transaction''. So far as he was aware, nobody had authority, on 26 June 1980, to open any bank accounts.
29. Mr P was asked by Mr Pagone, for the respondent, about the basis of the advice he gave his client, and the transcript reads as follows:
``You were asked to give advice about entering into a transaction for the sale of shares in a company? - That is correct.
What inquiries did you make in order to give that advice? - In regard to specifically this particular thing?
Yes? - The only inquiries I really made was to find out how Mr [B] had in fact been approached to ascertain whether it sounded like a reputable organisation he was dealing with and from what I could see, first appearances were, yes it was a reputable organisation so my advice was it was worth pursuing the matter.
On what basis did you draw the conclusion it was a reputable organisation? - On the basis of documentation that came through. There were reputable people that did show up at certain points, people who I had known of who had been in business. [Taxation Advisers Pty. Ltd.] had been in business for some years and in fact I had transacted business with them for other clients in prior years and there had been no problems at all in relation to any of those transactions. They impressed me with the expertise that they showed and the documentation that came through led me to
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believe everything was fine and above board.Did you ask for any details to be given to you about what the transactions would involve? - No, because as I saw it, it was none of the vendor's business what the purchaser was to do. I was aware there was a number of avenues open to a purchaser to utilise the funds of that company to their advantage and it was for that reason that I justified the figure they were paying for what I later termed the goodwill.
You were giving this advice to whom, exactly? - To Mr [B]. He is the principal of the [B] group of companies.
A director? - He is the director, chairman of directors.
He was relying upon what you had done? - Yes.''
The submissions for the applicant
30. Mr Myers submitted that the series of transactions described in para. 19-21 supra was carried out in fulfilment of a prearranged plan on the part of Mr X and Mr Y, as the directors of B Pty. Ltd., to strip that company of its assets and make the proceeds of the strip available for the purpose of paying the purchase price of the company's own shares. There was thus a clear breach of sec. 67 of the Companies Act 1961 which was in force at the relevant time and read, so far as here relevant:
``67. (1) Except as is otherwise expressly provided by this Act no company shall give, whether directly or indirectly and whether by means of a loan guarantee or the provision of security or otherwise, any financial assistance for the purpose of or in connexion 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.
...
(3) If there is any contravention of this section, the company and every officer of the company who is in default shall be guilty of an offence against this Act.
Penalty: Imprisonment for three months or one thousand dollars.''
31. On that basis, he submitted that, in terms of sec. 71 of the Assessment Act (set out in para. 10 supra):
- (a) ``a loss'' of $4,067,311 was ``incurred by the taxpayer'' in that that sum was paid out by the company for the illegal purpose of purchasing its own shares;
- (b) this loss was incurred ``through defalcation or misappropriation'' by ``a person, including an agent'', namely Mr Y and Mr X, who were when the transaction took place the directors of the company, who clearly were ``not... employed solely for private or domestic purposes'' and who acted in breach of their fiduciary duty to the company;
- (c) the money lost had ``been included in the assessable income of the taxpayer'', in that the amount of $3,410,958 appeared as income in the May 1980 profit and loss account, and the balance of the $4,067,311 might well represent accumulated profits of earlier years; and
- (d) the loss was ``ascertained in the year of income'' in that it was known to the directors, who knew what they were doing when they paid out the money on 30 June 1980, the last day of the year of income in respect of which the assessments in question issued.
32. As Mr Myers pointed out, the applicant in this case faced formidable difficulties of proof. Nevertheless, even on the assumption that all facts necessary to establish the applicant's case as stated above have been proved, I am of the opinion that the applicant must fail.
33. Let it be supposed that this Tribunal finds, on the evidence before it, that there was on 30 June 1980, in respect of B Pty. Ltd., a contravention of sec. 67 of the Companies Act 1961 as it then stood. That would indicate the probability that there was evidence on which a court of competent jurisdiction could decide that, by virtue of the provisions of subsec. 67(3), the company was guilty of an offence against that Act. Such a finding of fact is fundamental to the submission of the applicant, and for present purposes it will be assumed that it is justified by the evidence.
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34. In the further written submissions referred to in para. 8 supra, the applicant submitted that the payment of the $4,067,311 out of the bank account of B Pty. Ltd. could not be an act of the company because it was an illegal payment and accordingly ultra vires the company.
35. However, in my view, Parliament, in creating, by the enactment of subsec. 67(3) of the Companies Act 1961, an offence expressly capable of being committed by a company, must thereby be taken to have either recognised the validity of, or impliedly validated, the relevant actions of a company engaging in the conduct constituting the offence. If this were not so, in a case where the acts in contravention of the section were the acts of the company itself, there could be no contravention and thus no offence. The initial prohibition in subsec. 67(1) is directed at the company, and must contemplate the possibility, and hence the potential validity, albeit illegality, of a contravention by the company.
36. In
Mudge v. Wolstenholme (1965) V.R. 707, a company was found to be in contravention of subsec. 56(1) of the Companies Act 1958. That section was the predecessor of sec. 67 of the Companies Act 1961, and included a provision similar to subsec. 67(2). O'Bryan J. rejected an argument that the transaction was void by virtue of being a crime and therefore ultra vires the company.
37. Companies are daily charged with, and convicted of, offences against statute or common law. In the fourth edition of Gower's Principles of Modern Company Law (1979) at pp. 169-170 the following passage appears:
``Two further sources of confusion can, it is thought, now safely be regarded as heresies. The first is that the ultra vires doctrine can be invoked to enable a company to escape liability in tort or crime. Although at first sight it may appear absurd that the commission of a tort or crime can ever be within the authorised objects or powers of companies, they are constantly made liable for both and the overwhelming weight of academic opinion favours the view that they may be liable whether or not the offence was committed in the course of ultra vires activities. Unless one goes back to the distant past, such judicial authority as there is supports this view in relation to tort, and there seems to have been no modern case in which it has even been argued that a company can escape criminal liability by pleading ultra vires. It can therefore be taken as established that the doctrine has no application except in relation to contract and property transactions which are the only cases where, in practice, it is invoked.''
38. Thus, assuming, as I have said, that there was a contravention of sec. 67 of the Companies Act 1961 and that accordingly B Pty. Ltd. was guilty of an offence against that Act; and assuming further that, as Mr Myers submits, the contravention created the loss said to have been incurred by that company on 30 June 1980: then the creation of the loss derives not from the actions of the directors alone, but also from the actions of the company itself. If that is so, the loss cannot, in my opinion, be found to have been, in terms of sec. 71 of the Assessment Act, ``incurred by the taxpayer through... defalcation or misappropriation by a person, including an agent, employed by the taxpayer''. The loss was an act, not solely of the directors or of any other person but of the taxpayer.
39. Even if this were not so, I would be brought to the same conclusion by a line of authorities, to which I was referred by Mr Pagone. These authorities concern situations where the law requires proof of a mental component, as well as a physical component, of particular acts; an example being the requirement of mens rea as an element of a crime. In those cases, such persons as appropriately authorised managers, or, as here, the directors of closely held and closely controlled companies, have been described as constituting the ``directing mind and will of the company'', so as to be seen as inseparable from the company itself.
40. These cases stem from the speech of Lord Haldane, delivering the judgment of the House of Lords in
Lennard's Carrying Co. v. Asiatic Petroleum Co. Ltd. (1915) A.C. 705 at pp. 713-714. His Lordship said:
``My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the
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corporation, the very ego and centre of the personality of the corporation... If Mr Lennard was the directing mind of the company, then his action must, unless a corporation is not to be liable at all, have been an action which was the action of the company itself within the meaning of sec. 502... It must be upon the true construction of that section in such a case as the present one that the fault or privity is the fault or privity of somebody who is not merely a servant or agent for whom the company is liable upon the footing respondeat superior, but for somebody for whom the company is liable because his action is the very action of the company itself.''
In
Bolton (Engineering) Co. Ltd. v. Graham & Sons (1957) 1 Q.B. 159, Denning L.J., after referring to the passage cited above, said:
``A company may in many ways be likened to a human body. It has a brain and nerve centre which controls what it does. It also has hands which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the company, and control what it does. The state of mind of these managers is the state of mind of the company and is treated by the law as such... So here the intention of the company can be derived from the intention of its officers and agents. Whether their intention is the company's intention depends on the nature of the matter under consideration, the relative position of the officer or agent and the other relevant facts and circumstances of the case.''
In
R. v. McDonnell (1966) 1 Q.B. 233, Nield J. held, after referring to Lennard's case and the Bolton (Engineering) case, that there could be no conspiracy between a company and the sole person responsible for its acts. His Honour went on to say (at p. 245):
``in the particular circumstances here, where the sole responsible person in the company is the defendant himself, it would not be right to say that there were two persons or two minds. If it were otherwise, I feel that it would offend against the basic concept of a conspiracy, namely, an agreement of two or more to do an unlawful act, and I think it would be artificial to take the view that the company, although it is clearly a separate legal entity, can be regarded here as a separate person or a separate mind, in view of the admitted fact that this defendant acts alone so far as these companies are concerned.''
(See also
Morgan v. Babcock & Wilcox Ltd. (1930) 43 C.L.R. 163 at pp. 173-174 per Knox C.J. and Dixon J.;
Tesco Supermarkets Ltd. v. Nattrass (1972) A.C. 153;
W.G. Evans & Co. Ltd. v. Commr of I.R. (1976) 2 NZTC 61,080.)
41. Whatever was the true nature of the transactions which took place after Mr P left the directors' meeting on the morning of 30 June 1980, I am satisfied that they were authorised by Mr X and Mr Y. I am also satisfied that on 30 June 1980, the two shares in B Pty. Ltd. were both held by S Pty. Ltd.; that Mr X was a director of S Pty. Ltd. and K Pty. Ltd.; that Mr Y was the principal and Mr X an employee of Taxation Advisers Pty. Ltd. and that the transactions with which I am concerned were carried out by staff of Taxation Advisers Pty. Ltd., pursuant to arrangements made on behalf of B Pty. Ltd. with Taxation Advisers Pty. Ltd.
42. Mr X and Mr Y were appointed as the directors of B Pty. Ltd. at the directors' meeting held on the morning of 30 June 1980. It was tacitly assumed at the hearing that, if they resigned as directors on that day (as to which see para. 22 supra), their resignations did not take effect until after the completion of the transactions with which I am concerned. It was also tacitly assumed that S Pty. Ltd., the owner at the relevant time of both of the shares in B Pty. Ltd., was effectively owned and controlled by either or both of Mr X and Mr Y. No evidence was led by the applicant to rebut either of those assumptions, and indeed the first of them was essential to the applicant's case as presented.
43. On the basis of the matters set out in the two preceding paragraphs, I find that, when the transactions in question took place, Mr X and Mr Y could be said, in the words of Denning L.J. in the Bolton (Engineering) case, to ``represent the directing mind and will of the company and control what it does''.
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44. Section 71 of the Assessment Act provides for a deduction in specific, defined circumstances. It first appears as a separate provision (although not precisely in its present form) in the Income Tax Assessment Act 1936, as originally enacted. In
Ash v. F.C. of T. (1939) 61 C.L.R. 263, the High Court was concerned with a claim for a deduction made in respect of the year ending 30 June 1930 under para. 23(1)(a) of the Income Tax Assessment Act 1922-1930, a forerunner of the present subsec. 51(1) of the Assessment Act, allowing a deduction for ``losses and outgoings... actually incurred in gaining or producing the assessable income''. Latham C.J. said (at pp. 273-274):
``Thus, purloinings by office boys and thefts by shop employees should, prima facie, be allowed as deductions. They may be shown to be incidental to, and perhaps inevitable in, the operations which produce income.
But the case is different when income is actually received and then misapplied by the proprietor of a business or a person in the position of such a proprietor, as, for example, the manager of a company.''
and Dixon J. (as he then was) said at p. 281:
``If a proprietor of a business converts its funds to his own use or uses the opportunities the business affords to defraud its clients or customers, his resulting liability cannot be considered an outgoing of the business, still less an outgoing on revenue account.''
45. The facts in W.G. Evans & Co. Ltd. (cited at para. 40 supra) may be contrasted with those with which I am here concerned. In that case, the accountant to a company, who was one of three directors and held 1% of the shares (the remainder being held by a husband and wife), embezzled nearly $84,000 over four years. Casey J. found those losses to be deductible by the company as incidental to the production of assessable income, in terms of a general provision analogous to subsec. 51(1) of the Assessment Act. Thus it may be seen that in that case the embezzler, although a director, was a minority director with a minute shareholding, and accordingly was in a position analogous to Latham C.J.'s office boy in Ash, rather than to Mr Lennard, Lord Haldane's ``directing mind'' of Lennard's Carrying Co.
46. It is, of course, dangerous to draw analogies from one provision of the Assessment Act to another, or indeed, to rely on general principles in its interpretation. Nevertheless it seems to me unlikely in the extreme that Parliament can have intended, in the enactment of sec. 71, that the simple principle so clearly enunciated in Ash's case could be avoided so as to enable a deduction to be available to a company where the actions giving rise to the loss in question were not ``purloinings by office boys'' but were the actions of the company itself, carried out by directors who, at the time, controlled not only the company but also its sole shareholder.
47. Further, those actions of the directors of a taxpayer constituting the commission of an offence by the taxpayer, should not, in my view, give rise to an allowable deduction so as to benefit that taxpayer. I would refer in this context to the judgment of the Full Court of the Federal Court in
Madad Pty. Ltd. v. F.C. of T. 84 ATC 4115; (1984) 55 A.L.R. 379. The question in issue in that case was the deductibility under subsec. 51(1) of the Assessment Act, prior to the enactment of subsec. 51(4), of penalties under the Trade Practices Act 1974. The Court referred to a number of English and Australian authorities on deductibility of fines and penalties, including the following passage from the judgment of Ormiston J. in the Supreme Court of Victoria in
Mayne Nickless v. F.C. of T. 84 ATC 4458 at p. 4473:
``It follows in my opinion that the policy of the law should support the enforcement of the criminal law whether that be the historical common law of crime or the widening array of regulatory offences, and should strive to see that punishments for breaches of the law are not defeated or frustrated by direct or indirect means. About this there could be little argument.''
The Federal Court concluded, on the basis of those authorities, that the deductions claimed should not be allowed, and noted that the approach indicated, particularly by certain dicta of the High Court ``may well have its origins in public policy''. These passages, while by no means directly in point, in my view are not without relevance to this matter.
Conclusion
48. For the reasons given, I find that the transactions described in para. 19-21 supra did not create ``a loss incurred by the taxpayer
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through... defalcation or misappropriation by a person, including an agent, employed by the taxpayer'' in terms of sec. 71 of the Assessment Act. That being so, it is not necessary for me to consider the other components of the sole argument advanced on behalf of the applicant, namely that, as a result of those transactions, B Pty. Ltd. had, by virtue of that section, no taxable income in the year ending 30 June 1980. Accordingly as the applicant has failed to discharge the burden imposed on it by para. 190(b) of the Assessment Act, of proving that the assessment is excessive, the objection decisions under review will be affirmed.This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.