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Kolotex Hosiery (Australia) Pty. Ltd. v. Federal Commissioner of Taxation.

Judges:
Barwick CJ
Gibbs J
Stephen J

Court:
Full High Court

Judgment date: Judgment handed down 18 February 1975.

Barwick C.J.: The appellant in its return of income for the year ending 30 June 1967 claimed to deduct from its income of $515,826, the sum of $509,367 as accumulated and unrecouped losses suffered by it in the preceding seven years. The claim for the deductions was based upon sec. 80 of the Income Tax Assessment Act 1936-1967 (the Act). There was no doubt that the appellant had in fact suffered losses to the total amount claimed and that there had been no recoupment. But the Commissioner disallowed the claim.

It appears that the disallowance was referable to the provisions of sec. 80A and 80C: but the basis of the Commissioner's use of those sections was not communicated to the appellant at the time of assessment although the adjustment sheet served with it indicated that the claim for the deduction had been disallowed. The evidence of the ground upon which the Commissioner acted in disallowing the claim for the deduction now depends upon the contents of the Commissioner's official file which was put in evidence in the hearing of the matter before my brother Mason, and upon

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inferences to be drawn therefrom. I shall need to return later in these reasons to this feature of the case.

Meantime I must refer to the statutory provisions governing the case. There will be no need for me to recite the full details of the facts and circumstances of the matter; these are to be found in the reasons for judgment of my brother Mason, from whose order dismissing the appellant's appeal against the assessment the present appeal is brought. However, I shall refer to such of the facts as are necessary to the comprehension of my reasons for judgment.

The relevant provisions of the Act are sec. 80, 80A(1), 80B(5), and 80C(1). It seems to have been thought by the officers of the Commissioner reporting on the affairs of the appellant that the appellant had made a request to the Commissioner under sec. 80D; but, as his Honour found, the appellant in fact made no such request. I shall not need, therefore, to refer to that section except briefly in relation to the construction of an expression found in sec. 80A(1) and in sec. 80C(1).

The group of sections to which I have referred represents an endeavour by the legislature to ensure a sufficient continuity of control and of shareholding of and in a corporate taxpayer claiming to deduct losses of prior years from its current income; a continuity extending throughout the period in which the loss was sustained and the period of the receipt of the income from which it is sought to make the deductions. No doubt this generalisation needs some qualification in points of detail: but in my opinion, it suffices for present purposes in its description of the purpose of this group of sections.

The total effect of these sections so far as presently relevant is that a corporate taxpayer is not entitled to the deduction for which sec. 80 provides unless the Commissioner is satisfied that both throughout the year of income and the year in which the loss was incurred, the same persons beneficially owned shares in the taxpayer which between them carried (a) the right to exercise not less than two-fifths of ``the voting power in the company'', (b) the right to receive not less than two-fifths of any dividends which might be paid by the taxpayer, and (c) the right to receive not less than two-fifths of any distribution of capital upon a winding up or a reduction of capital (see sec. 80A(1)). But in determining whether he is so satisfied the Commissioner may in his discretion treat a shareholder as not beneficially owning his shares at the relevant time, which will in general be the year of income, if in fact before or during that time the shareholder had entered into a contract, agreement or arrangement, or had granted or been granted a right, power or option (including a continuing right, power or option) that in any way directly or indirectly affected or depended for its operation on any one of the things described in sub-para. (i) to (iv) inclusive of sec. 80B(5) where the or a purpose of the making of a contract, etc., or the granting of the right, etc., was to enable the taxpayer to make a claim to a deduction under sec. 80.

However, where the taxpayer was for any part of the year in which the loss occurred a subsidiary of another company (the ``holding company'' - described as a company in which no other company had a controlling interest), there are further conditions to be met before the claim to the deduction of the losses may be allowed. In that event by reason of the terms of sec. 80C(1) a claim will not be allowable unless in addition to the matters I have already mentioned the Commissioner is satisfied that throughout the year of income the holding company had itself a controlling interest in the taxpayer and that throughout both the year of income and the year of loss the same persons beneficially owned shares in the holding company which between them carried the rights (a) to (c) which I have earlier described in connection with the requirements of sec. 80A(1).

It should be observed firstly that the terms of sec. 80B(5) are made applicable to sec. 80C(1) by sec. 80C(3) though to what extent they are to apply may need discussion later; and secondly that the discretion given to the Commissioner under sec. 80B(5) depends not upon his opinion of the facts but upon the actual facts as to the making and purpose of a contract, etc., or of the grant of the right, etc., as the case may be.

I have expressed the conditions, which must be satisfied before a deduction must be allowed, as cumulative if there is a holding

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company at any time in the year of loss, as in my opinion they are. Section 80A is expressly made subject to, amongst other sections, sec. 80C which section is expressed to operate notwithstanding, amongst other sections, sec. 80A. However, if it should be concluded that the limiting conditions of sec. 80C(1) have not been met in this case, assuming that section to be applicable, it would not be necessary to decide whether or not the conditions of that section are cumulative on those of sec. 80A. If for no other reason, the paramountcy of sec. 80C would enable the disposal of the case against the appellant on the basis of that section alone. But if sec. 80C(1) is applicable and its conditions are satisfied, those laid down by sec. 80A(1) must in my opinion also be fulfilled.

It is immediately apparent from a perusal of sec. 80A and 80C that in its desire to ensure its purpose of confining the operation of sec. 80 in the case of corporate taxpayers within the limits set by its insistence upon the required continuity of control and of shareholding, the Legislature has taken what to my mind is an undesirable course in removing the processes of assessment to a significant extent from the objective scrutiny of the Courts. The Commissioner's satisfaction or lack of it in relation to a situation of mixed fact and law is made a critical element in the process of assessment in connection with this group of sections. Thus the citizens' rights are made to depend upon subjective attitudes of the Commissioner. Where his lack of satisfaction has material upon which it may properly be based and is not arrived at through error of law, the Court as well as the taxpayer will be bound by his conclusion. The permissible extent of the Court's examination of the Commissioner's state of mind is indicated in the judgment of Sir Owen Dixon in
Avon Downs Pty. Ltd. v. F.C. of T. (1949) 78 C.L.R. 353 at p. 360 .

But it is important to observe that where the Legislature takes such a course it will be the Commissioner's relevant state of mind at the point of assessment which will be determinative. In emphasising that the Commissioner's state of mind at the time of assessment is the relevantly critical fact, I include in that connection the time up to the date of the issue of the assessment, a period during which the Commissioner may reconsider his assessment. Once the assessment is issued, however, it is the Commissioner's state of mind which then exists as to the relevant matters which is the critical element in the process of assessment: for it is the Commissioner's state of mind which is the warrant for his action in the process of assessment of allowing or not allowing the deduction for which sec. 80 provides.

It is, therefore, of prime importance that the Commissioner before or at the time of assessment should apply his mind to the matters about which his satisfaction or lack of satisfaction has such importance, and that he should at the same time clearly record his relevant state of mind and the facts or his view of the facts on which it is based. If, as is the case in the present matter, there is more than one such matter upon which the Commissioner's state of mind is of the essence of the assessment, the Commissioner should arrive at and record his satisfaction or lack of it as to each of these matters along with its factual basis. It should not be left as it is in the present case for the Court to draw inferences as to whether such a matter was considered by the Commissioner, and, if it was, as to what was his relevant state of mind with respect to it. Further, consistently with what I have pointed out in another connection (cf.
Giris Pty. Ltd. v. F.C. of T. 69 ATC 4015 at p. 4018; 119 C.L.R. 365 at p. 373 ) the Commissioner must expose to the taxpayer, particularly if so requested, both his state of mind at the relevant time and its basis.

Quite clearly the Court cannot in any event substitute its view of any of the matters as to which the Act says the Commissioner is to be satisfied. It can of course decide that because of established facts or because of legal considerations the Commissioner could not have failed to have been satisfied. But if he is satisfied, it matters not in my opinion that he ought not to have been satisfied. The Court cannot overturn that satisfaction.

It may be that in a case where the records of the Commissioner do not disclose whether or not he was satisfied of such a matter, the Court may treat the Commissioner as having been satisfied if the assessment in question is

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consistent with his having been so satisfied. On the other hand, in such a case if upon the material which is shown to have been before him at the time of assessment he could not properly have been satisfied it may be that the Court may treat the Commissioner as not having been satisfied. But if upon all the material which is placed before the Court the Commissioner could not properly have failed to have been satisfied, the Court will treat him as having been satisfied. But, as I have said, neither the Court nor the taxpayer should be left in such a situation.

Where the Commissioner has in fact been satisfied, in my opinion, he may not resile therefrom. The taxpayer will have no reason to challenge that satisfaction, being a circumstance in its favour. No issue as to the Commissioner's satisfaction will arise in the proceedings before the Court in relation to the assessment, and, as I have indicated, the Court may not examine that satisfaction or substitute its own conclusion for the affirmative conclusion of the Commissioner.

Thus in the present case if it were concluded that the Commissioner had in fact been satisfied at the time of assessment of the requirements of sec. 80A or sec. 80C, it is my opinion that there would be no warrant for the Court to do other than to accept and act upon that state of satisfaction whatever the Court may think of its propriety. The Commissioner could not in my opinion become dissatisfied after the issue of the assessment and seek to defend the assessment upon a new basis of fact or legal construction leaving it to the taxpayer to establish that the assessment was excessive. In the case of a statutory provision which makes the satisfaction or lack of satisfaction on the part of the Commissioner of a fact or situation an element in the process of assessment, the Commissioner when he has issued his assessment is, in my opinion, bound by his own subjective conclusions held by him at the time of the assessment. Consequently, I am respectfully unable to accept my brother Mason's comments on the applicability of Sir Owen Dixon's judgment in Avon Downs Pty. Ltd. v. F.C. of T. (supra).

It is important to remember that the question before the Court on an appeal against an assessment is whether or not the assessment is excessive. It is not the taxpayer's liability under the Act upon established facts which is directly in question, though undoubtedly within the ambit and the limitations of the assessment that liability falls to be considered. In the case of statutory provisions of the kind I have so far been discussing the question is whether the assessment based on the Commissioner's state of mind, satisfaction or lack of it, is excessive. Put another way the taxpayer, where the Commissioner is satisfied, need not show that the Commissioner could properly have been satisfied of that of which he was in fact satisfied. The taxpayer has the benefit of that satisfaction which as I have said the Commissioner may not retract. Nor as it seems to me can the Commissioner defend the assessment (to use language found in the Commissioner's file on the present case), by attempting to establish a different state of mind formed after the making of the assessment and perhaps upon material not before him at the time of the assessment. Facts supervening upon the making of an assessment or which though then existing were subsequently ascertained may possibly give rise to grounds for amendment of the assessment: but in my opinion they cannot justify a state of mind not present at the time of the assessment. However, where the process of assessment has no such subjective element in it the distinction between the question of whether an assessment is excessive and the question of a taxpayer's liability under the Act may not be of such significance. Further, where the satisfaction of the Commissioner is an integral part of the process of assessment the Commissioner by his failure to record and inform the taxpayer of his relevant state of mind at the time of making the assessment cannot throw upon the taxpayer the burden of establishing what was his state of mind at the relevant time.

The situation in which the Commissioner is satisfied of the relevant fact or situation, is to be contrasted with that in which he is not satisfied of such fact or situation. In each instance of course it is the Commissioner's state of mind which is determinative, but whereas in the case of his satisfaction no issue will arise in an appeal against his assessment, in the case of his lack of satisfaction upon the challenge of the taxpayer an issue does arise, and upon that issue the taxpayer will be

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informed of the material which was before the Commissioner at the time of assessment. But the taxpayer will be at liberty to establish other facts which if he had known them ought to have satisfied the Commissioner of the fact in question. It is not to my mind an acceptable conclusion that by not fully investigating the matter or by being in ignorance of relevant facts the Commissioner may be regarded as properly dissatisfied on such material as happens to be in his possession. It is otherwise in the case where he is satisfied, for he may be satisfied on inadequate material or for that matter upon an erroneous construction of the Act: but as I have said no issue arising as to that satisfaction, its basis will not be examined.

Before turning to apply these considerations to the present matter there is another aspect of appeals against assessments of tax on which a comment in my opinion is presently appropriate. The reading of transcripts of proceedings at first instance in this Court in appeals against assessment of income tax provokes the thought that all too often the time of the Court is taken up by endeavours on the part of the Commissioner to establish by admission facts easily to be otherwise conclusively established, and to endeavour to build up a case in defence of the assessment by eliciting facts of which he might have been but he is not aware. I have had occasion to indicate the very considerable width of the Commissioner's power of investigation for the purposes of assessment (see
Southwestern Indemnities Ltd. v. Bank of N.S.W. and F.C. of T. 73 ATC 4171 ). This power, in my opinion, rather than the time of the Court should be used before the assessment is made so as to ascertain the facts necessary to be considered in order that a proper assessment should be made. Failure on the part of the Commissioner to ascertain and verify the facts before the assessment is made, and where, as here, his state of mind is critical to the propriety of the assessment, failure both to form and unambiguously to record his relevant state of mind and its basis, will inevitably lengthen the hearing of an appeal against the assessment. It may lead to an unacceptable waste of the Court's time and may create a risk that sec. 190 becomes a scourge for the citizen rather than a proper protection for the revenue which is both its function and its justification.

The principal facts of the matter briefly are that for the year 1960 and part of the year 1961 H & J Holdings Pty. Ltd. (H & J) had a majority shareholding in Levi & Hill Pty. Ltd., which in turn held a majority shareholding in the taxpayer. In the tax year 1967, the year of income, Moomba Pty. Ltd. (Moomba) had a majority shareholding in H & J. But H & J still held the same shareholding in Levi & Hill, and Levi & Hill in the taxpayer as they had in 1960 and part of 1961.

In February 1961 Moomba acquired the whole of the shares of H & J, and Levi & Hill acquired the minority shareholding in the taxpayer so as to become the sole beneficial shareholder. Thus, apart from the position of Mr. Howie, the Governing Director of Moomba, from February 1961 through the intervening years and in 1967, the year of income, Moomba had a controlling interest both in H & J and through H & J and Levi & Hill in the taxpayer. In February 1962 the Articles of H & J, of Levi & Hill and of the taxpayer were amended so as to include the following, namely -

``16. John Stephens Howie shall be Governing Director of the Company and shall hold such office until he dies or resigns or becomes disqualified pursuant to Article 29(q) hereof.

17. The said John Stephens Howie when present in person or by proxy or attorney at any general meeting of the Company and both on a show of hands and on a poll shall have the right to as many votes in the case of an ordinary resolution as shall constitute a majority of the votes given personally or by proxy or attorney on such resolution and in the case of an extraordinary or special resolution as shall constitute a three-fourths majority of the votes given personally or by proxy or attorney on such resolution.

18. The said John Stephens Howie shall notwithstanding anything in these Articles contained and so far as the law allows have power to exercise all the powers conferred upon the Company and/or its shareholders by the Memorandum of Association and by those Articles.

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19. The decision of the said John Stephens Howie as to all matters affecting the Company shall be paramount and he may veto any resolution of the Company howsoever made or carried.''

Moomba was a company in which Mr. Howie's family either directly or through shareholding in other family companies held all the shares. Mr. Howie was Governing Director holding 2,000 Governor's shares and through them had control of that Company. There was at this time no question of any resort to sec. 80, though the group of companies which included the taxpayer had suffered from financial difficulties. But subsequently additional losses were incurred until in 1964 an order was made winding up the taxpayer.

Out of discussions which thereafter took place between Mr. Howie and an accountancy consultant experienced in the rehabilitation of unsuccessful companies and their disposal as ``loss companies'', the idea was formed of disposing of the taxpayer as a loss company for the purposes of the Act. The execution of this idea involved a scheme of arrangement of the affairs of the taxpayer; the acquisition by some of the former shareholders of H & J of an appropriate shareholding in that company, the alteration of the rights of shareholders in H & J and the acquisition by the purchaser of the corporate structure of the taxpayer of 60% of the shareholding in Levi & Hill and in the taxpayer, with Mr. Howie retaining shareholding in Moomba carrying 40% of the voting, dividend and distribution of capital rights.

As an accidental matter in relation to the disposal of the taxpayer, it was desirable for Moomba to sell its assets other than its interest in H & J, particularly as these had a sentimental value for the Howie family. Accordingly, they were sold to another family company and as a result Mr. Howie owed Moomba the sum of $328,272 payable on demand. Whether or not so intended, in fact the existence of this debt ensured compliance by Mr. Howie with the wishes of the purchaser of the taxpayer.

All these steps were taken including the purchase by six of the former shareholders of H & J of a number of shares which, having regard to the changes which were made in the Articles of Association of H & J, were sufficient to maintain the necessary identity of the shareholders in H & J during 1960 and 1967 and to satisfy the requirements of sec. 80A, if Mr. Howie's situation and that of Moomba in 1961 were left on one side.

With these facts in mind I turn to consider the matters arising in the appeal.

The first matter to be resolved, in my opinion, is the proper conclusion to be drawn from the Deputy Commissioner's endorsement ``take this action'' on the officers' recommendation and report. There has been in this case, in my opinion, a failure unambiguously expressly to record the Commissioner's relevant state of mind. I regret to say that having regard to the contents of the officers' report this has to some extent been deliberate.

The officers' recommendation was based upon their report and it is, in my opinion, not proper to dissociate the one from the other so as to treat the Deputy Commissioner's endorsement as no more than a reference to the ultimate recommendation made. In my opinion, the endorsement must be regarded as an acceptance of the report: where that report expresses or indicates a relevant state of mind in the officers, the endorsement is an adoption of that state of mind as that of the Commissioner.

As I read the report, the officers took the view that unless the Commissioner exercised his discretion under sec. 80B(5) and treated Mr. Howie's shares as not beneficially held by him at the relevant time, the requirements of sec. 80A(1) and 80C(1) were fully met in respect of the years 1962 to 1967 inclusive. They recommended the exercise of that discretion which they thought was available to the Commissioner, because as they thought Mr. Howie had made an arrangement falling within sec. 80B(5).

They were of the view that upon their construction of sec. 80C(1), which was erroneous, the provisions of that section were not met in relation to the years 1960 and 1961. The Deputy Commissioner by his endorsement, in my opinion, exercised the

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discretion given him by sec. 80B(5), and thus produced a deemed state of fact different from the actual facts, upon which deemed state of fact the Commissioner lacked satisfaction as to the requirements both of sec. 80A and of sec. 80C.

The officers' report adverted to sec. 80C in para. 44, 45 and 46 of the report. Undoubtedly they concluded that H & J was a controlling company of the taxpayer in the year 1960 and in part of the year 1961 within the meaning and operation of the section, and that Moomba was a controlling company of the taxpayer for part of 1961 and for all of the subsequent years within that meaning and operation, subject to the exercise of a discretion by the Commissioner under sec. 80B(5). But the officers thought that, because Moomba had a controlling interest in H & J in the year of income, H & J could not be regarded as having in that year a controlling interest in the taxpayer. Consequently, for that reason but only for that reason, sec. 80C(1) in their view denied the taxpayer a deduction for the losses incurred in the year 1960 and the year 1961, but in the case of the latter year subject to the situation of Moomba in that year. It is thus clear, in my opinion, that the officers were satisfied that upon the actual facts otherwise sec. 80C(1) itself did not stand in the way of the taxpayer: they were satisfied that on those facts the requirements of that section were met. In respect of the years 1961 to 1967 inclusive, subject to the application of sec. 80B(5), the officers treated sec. 80C(3) as making the Commissioner's discretion under sec. 80B(5) available both in relation to the holding company itself and to the shares in the holding company. That conclusion need not be examined in order to decide this appeal; but to my mind as at present advised it is not absolutely clear that sec. 80C(3) is effective to introduce the provisions of sec. 80B(5) into sec. 80C(1) except in relation to the holding company itself, though such a limited operation of sec. 80B(5) may be of little consequence.

It is thus plain, it seems to me, that, but for the change in facts which the exercise by the Commissioner of his discretion under sec. 80B(5) would produce, the officers were satisfied that neither sec. 80A(1) nor sec. 80C(1), the provisions of which they treated as cumulative, would operate to prevent the taxpayer's right to claim deductions in respect of the years 1961 to 1967 inclusive. They were not satisfied that the terms of sec. 80C(1) had been met in relation to H & J in the years 1960 and 1961 because of their construction of sec. 80C(1) and of Moomba's control of H & J in the year of income.

Taking first the officers' opinion, adopted as I think by the Commissioner as his opinion, that because the holding company is described in the early part of sec. 80C(1) as a company in which no other company has a controlling interest, the company which satisfies that description in the year of loss must also satisfy it in the year of income. This was to treat the description in the opening part of the section as a definition for all the purposes of the section. I agree with my brother Mason J. and for the reasons he gives that this view of the section is erroneous and that sec. 80C(1) does not prevent a company being a holding company within the section in the year of income if in that year it is itself controlled by another company.

It is thus quite clear that the grounds of the Commissioner's lack of satisfaction in respect of H & J's position in the years 1960 and 1961 are untenable.

I turn then to the basis on which the officers and then the Commissioner lacked satisfaction in relation to Moomba in the years 1961 to 1967 inclusive. Here, as I have pointed out, the lack of satisfaction was based on a deemed situation of fact created by the exercise by the Commissioner of the discretion given him by sec. 80B(5). The existence of that discretion depended upon the actual facts. The officers indicated in their report the basis for their conclusion that in fact Mr. Howie had made an arrangement within the terms of sec. 80B(5). The facts listed in the report included Mr. Howie's concurrence in the various steps by which the deductibility of the losses ``was to be preserved for the benefit of the Kolotex Group'', his participation in the scheme of arrangement, his receipt of a sum of money for such participation, and his approval of the agreement for the purchase of shares by P.I.O.C. Investments Pty. Ltd. These facts, the

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officers believed, warrant the conclusion that Mr. Howie had entered into a contract or agreement that depended for its operation on his beneficial ownership of the shares held by him in Moomba and that he did so for the purpose of enabling the taxpayer to obtain a deduction for the losses of previous years.

I agree entirely with his Honour that this conclusion of fact was erroneous. But with respect I cannot agree that upon the material referred to in the report it would not have been unreasonable for the Commissioner to have taken the view which the officers did of these facts.

Thus the officers' view in recommending lack of satisfaction in respect of the requirements of each of the sec. 80A and 80C depended upon their view on one matter of law and on one matter of fact on each of which they were, and therefore the Commissioner was, in error.

The question now arises as to how the assessment of the Deputy Commissioner should be treated once it is concluded that the bases upon which the Commissioner was not satisfied were untenable. Ought the Court, notwithstanding that his actual state of mind was induced by error, to treat the Commissioner as not satisfied of the requirements of the section, if there is any view of the facts, some of which may not have been before the Commissioner but only established before the Court in the hearing, upon which he could have failed reasonably to be satisfied (see, in this connection,
F.C. of T. v. Brian Hatch Timber Co. (Sales) Pty. Ltd. 72 ATC 4001 ; (1972) 46 A.L.J.R. 111 ); or should the Court, having displaced the erroneous conclusions on which the Commissioner based his lack of satisfaction, treat the Commissioner as having been satisfied, as in fact he was, that but for the effect of these errors the requirements of the sections were met?

In my opinion, it is most unsatisfactory to treat the Commissioner as having had a particular state of mind, particularly on material which was not before him, which in fact he did not have. As I have indicated earlier, in arriving at his view of satisfaction he is free to take a view of the law and the facts which might not have commended itself to the Court if occasion could arise to examine the basis of his state of mind. But, in my opinion, such an occasion does not arise when the Court is able to see the precise basis upon which he has departed from a state of satisfaction to a lack of satisfaction and which basis the Court is satisfied was erroneous. This must particularly be so where the erroneous basis is the erroneously deemed facts resulting. That is to say, it can be seen that on the actual facts he was satisfied, but that on the deemed facts produced by his own error he was not.

The application of sec. 80A and 80C must be as to each separate year of loss and the year of income. The losses are annual, although the deduction is made from the single year of income. Thus, if sec. 80C is applicable the Commissioner should be taken, in my opinion, as having been satisfied in respect of the loss years 1961 to 1966 inclusive upon the actual facts. As to the year 1960 his lack of satisfaction was based solely upon a misconstruction of a section. It seems to me that the Commissioner should be regarded as satisfied that the requirements of the sections properly construed were met.

It seems to me that if the Commissioner had expressed himself properly in relation to this matter he would have said that he was satisfied as to the various elements in respect of which the officers were satisfied, but that he lacked satisfaction in relation to the year 1960 in the long run because of his view of the law and because of the deemed situation brought about by sec. 80B(5) and his exercise of his discretion under that section in relation to the years 1961 to 1967.

On this analysis, I would for these reasons alone allow this appeal. But my brother Mason, not taking the same view of the effect of Deputy Commissioner's endorsement and of the errors of law and of fact, with respect to which we are in agreement, examined the facts as established before him to determine whether the appellant had established that the assessment was excessive. In doing so he considered whether upon that material the Commissioner ought to have been satisfied of the requirements of the sections and concluded that it could not be so held.

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Whilst on my own view of the matters such an enquiry was not open, I feel obliged in all the circumstances to express my own opinion of the case on the assumption that my earlier expressed view is unacceptable.

The situation of H & J in relation to the years 1960 and 1961 is that upon the actual facts and the proper construction of sec. 80C(1) the Commissioner, in my opinion, could not have failed to have been satisfied that the requirements of the section had been met, unless his Honour's view of the effect of Mr. Howie's position under Article 17 of the Articles of H & J in the year of income is accepted.

The situation of Moomba in relation to the years 1961 to 1967 inclusive turns on parts of sec. 80C not dealt with by the officers and thus not influential in forming the Commissioner's state of mind at the time of assessment.

If, as the result of considering Mr. Howie's position in relation to the requirements of sec. 80A and 80C, it could properly be concluded that the Commissioner could not have been satisfied of the fulfilment of their requirements, such an examination as his Honour undertook if open to him could yield a practical result, in that it could be concluded that because he could not have been satisfied, the Commissioner was not satisfied. But if the examination resulted in the possibility that the Commissioner could have been satisfied, it is by no means clear to me what practical result would ensue. However, as I have formed a firm view myself that the Commissioner upon the actual facts could not have failed to have been satisfied, I have no need to explore the possibilities and resolve the question.

His Honour took the view that the voting rights given to Mr. Howie by Article 17 of the Articles of H & J, Levi & Hill and of the taxpayer, though personal to Mr. Howie in his capacity of Governing Director, formed part of the voting power in the company within the meaning of that expression both in sec. 80A and sec. 80C. He also took the view that, because of the paramountcy of those voting rights, H & J did not have a controlling interest in the taxpayer at any time during the subsistence of those voting rights in Mr. Howie, that is to say, from the introduction of Articles 16 to 19 inclusive into the various Articles of the companies on 7th February, 1962. His Honour also took the view that because of the existence of Mr. Howie's voting rights no combination of shareholders in the company could be said to hold shares carrying between them the right to exercise not less than two-fifths of the voting power in the company, Mr. Howie being excluded on this view from the body of shareholders. Because of these views, his Honour held that the Commissioner could not have been satisfied either in respect of sec. 80A or sec. 80C in relation to any of the years of loss and the year of income.

A number of questions arise in connection with these views of his Honour, with respect to all of which I would wish to express my own view. The first of these questions is the meaning of the expression ``the voting power in the company''.

Both sec. 80A(1) and sec. 80C(1) use the expression ``the voting power in the company'' and require shares to be held which carry the right to exercise a specified proportion of such voting power. The sections, in my opinion, evidently presuppose shareholding which carries voting rights which are described as rights to exercise voting power in the company. They further presuppose that the voting right carried by each share will represent a proportion of the voting power in the company. The sections themselves do not require the company to have such a shareholding, but assuming that there are shares which carry rights to exercise voting power the section requires such shares carrying the stated proportion of voting power to be beneficially owned for the stipulated period.

Whilst the definition of ``a voting interest in a company'' in sec. 80D with its reference to ``the voting power in the company'' is for the purposes of that section, it is not without significance in considering the meaning of voting power in the earlier sections. The group of sec. 80A, 80B, 80C and 80D were all treated by the Legislature at the same time by Act No. 103 of 1965. Though perhaps a possible view, I would not regard the definition in sec. 80D as having been introduced in order to distinguish the meaning of the expression ``the voting

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power in the company'' in that section from the meaning to be given to the same expression in the other sections. Rather I would think that the expression should have a like meaning and significance throughout the group of sections of which sec. 80D formed part, subject of course always to context. Indeed the relationship of sec. 80D to other parts of this group of sections is to be seen for example in sec. 80D(2). Also the situation of Governing Director with no Governing Director's shares as such is, I should think, sufficiently unusual not to have been within the purview of a draftsman when the choice of the expression ``voting power in the company'' was used in sec. 80A and 80C.

In my opinion, the proper reading of para. 80A(1)(c) and 80C(1)(b)(i) is that the shares to be beneficially held are to carry between them two-fifths of the total votes carried by the shareholding as a whole, that is to say, which can be cast by shareholders. The very nomination of a fraction of voting power to be carried by shares points strongly, in my opinion, in that direction. Further, voting power in a company is of significance only in a general meeting of shareholders at which, as I will indicate, only shareholders may cast a vote; a further consideration which points to the meaning which I would give those paragraphs. Unless the voting rights of Mr. Howie are to be accounted as part of the voting power of the shareholders they will not, in my opinion, be reckoned in the voting power in the company. In this, I respectfully differ from his Honour.

However, in my opinion, upon a proper construction of Article 17 as found in the Articles of the various companies, Mr. Howie's voting rights depended upon his being both Governing Director and a shareholder of the company. If he were not a shareholder he could not, in my opinion, vote in a general meeting and could not control a general meeting of shareholders by the exercise of any voting rights. If he were not a shareholder and desired to control the affairs of the company he would need to resort to the powers given to him by Articles 18 and 19, for whatever effect they may have.

Article 17 does not assign a given number of shares to the Governing Director as Governing Director's shares and assign to those shares preponderant voting rights. What Article 17 does, in my opinion, is to give the Governing Director when he is present as a shareholder at a general meeting voting rights which are beyond those which would attach to his shareholding, whatever it might be. The Articles require a Governing Director to be present at the general meeting ``in person or by proxy''. Only a shareholder may appoint a proxy to vote or attend a general meeting. Consequently, in my opinion, a Governing Director could not exercise any voting rights unless he was a shareholder and present in person or by proxy at the general meeting at which he desired to cast any votes. I would not construe the Article as itself giving Mr. Howie a right to attend the general meeting or to appoint a proxy. It assumes his right to attend or to appoint a proxy under other Articles of the company or under the general law.

Not only do the Articles not purport to give the Governing Director a given number of shares carrying specified voting rights, but Article 17 does not nominate a number of votes which the Governing Director may cast at a general meeting at which he is present in person or by proxy. It is in every instance necessary to know what number of votes are cast at the meeting in a sense contrary to that which the Governing Director desires a general meeting to decide before the number of votes he may cast can be determined. When this is known, the Article confers the rights to so many votes as equal those so cast plus one in the case of an ordinary resolution. In the case of an extraordinary or special resolution it would be necessary to know the total number of votes cast on the resolution apart from those of the Governing Director and the number of votes cast in the sense favoured by the Governing Director. The number of votes which the Governing Director could cast could then be calculated so as to produce the three-fourths majority on the resolution.

A contrary view as to the meaning of Article 17 to that which I have expressed would raise considerable difficulties. If Mr. Howie's voting rights were not considered to be exerciseable by him only when both Governing Director

ATC 4039

and a shareholder, how exactly would you compute a fraction of the voting power in the company? It may be that you could decide that the voting power in the company was the total number of votes which could be cast wholly on one side on an extraordinary or special resolution and then add to that number three-quarters of it to represent the votes which Mr. Howie could cast in order to carry the extraordinary or special resolution. Of course, he would not need so many votes to defeat it. On that footing, assuming the total shareholders' votes to be 100, two-fifths of the voting power would be 70 votes. This seems to me a highly artificial result and one which I do not think could have been contemplated by the legislation. In any case, I have no need myself to resolve what looks like a conundrum because, in my view, which I have already expressed, Mr. Howie's votes would be cast by him as a shareholder and Governing Director. The fact that to exercise his voting rights, Mr. Howie had currently to be Governing Director does not deny the proposition that it is as shareholder that he casts his votes. As he was both Governing Director and shareholder at all relevant times it seems to me a permissible view that his share with the voting rights which his Governing Directorship gave to it through Article 17 should be reckoned in the two-fifths of the shareholding. Obviously, they would always be more than that. On that footing, the conclusion would be quite clear that the requirements of the paragraphs in sec. 80A and 80C to which I have referred would be satisfied.

Mr. Howie's voting rights were thought by his Honour to preclude the conclusion that Moomba or H & J were at any time holding companies having a controlling interest directly or indirectly in the taxpayer. Mr. Howie had one share in H & J which he held on trust for Moomba. The manner in which he cast the vote attaching to that share alone might be the subject of control by equitable proceedings brought by Moomba. However, could he have been controlled as to the manner in which he cast votes, the right to which he derived from the fact that he was as well Governing Director? Clearly enough in the case of Moomba itself his Governing Director's shares could be voted in such manner as he personally thought fit. The object of his being Governing Director in that company with the Governing Director's shares was to give him personal control of that company's affairs. But the purpose of the introduction of Articles 16, 17, 18 and 19 into the Articles of H & J, Levi & Hill and the taxpayer is not so plain. The solution of that problem will determine whether or not Mr. Howie could be controlled by Moomba in the exercise of the voting rights accruing to his shareholding by reason of his Governing Directorship.

Two views are possible as to the intention in amending the Articles to include Articles 16 to 19 inclusive. Firstly, it may be thought that this step was taken to enable Moomba itself to control those companies. On this view, Mr. Howie, the Governing Director of Moomba, was given the powers under this group of Articles in the other companies so that he could exercise them for Moomba. Secondly, it could be thought that the purpose of that group of Articles was to place Mr. Howie personally in direct control of each of the companies in the group. The choice between the two views I have found difficult. Of course it would not have mattered very much to Moomba as the family company of the Howie family whichever view were adopted. But it is a matter of moment in the application of the Act in order to determine the deductibility of the losses. My conclusion in the long run is that Moomba could have obtained equitable control of the way in which Mr. Howie cast his vote as Governing Director and shareholder in the other companies: that is to say, I think Mr. Howie could only exercise his voting rights in those companies in the interests of Moomba. This conclusion is consistent with the view that the share by virtue of which Mr. Howie was able to exercise his Governing Director's voting rights at all was clearly subject to the control of Moomba.

The significance given to the question whether Mr. Howie's voting rights were beneficially held, or were equitably the rights of Moomba, has sprung from the view that if the former is the right conclusion Mr. Howie and not H & J will have had a controlling interest in the taxpayer in 1960 and 1961: or, perhaps more accurately, that H & J will not have had such a controlling interest. There is also the position of Moomba in relation to the

ATC 4040

control of the taxpayer in the years 1961 to 1966 inclusive and the year of income. But in this case there are an additional two matters to be mentioned.

In the first place, what is the nature of the controlling interest to which these sections refer as part of the legislative insistence on a certain measure of continuity of control of the corporate taxpayer seeking to deduct prior losses from current income? In my opinion, the nature of the control with which the Legislature has concerned itself is control by the exercise of voting power at a general meeting of shareholders. Thus the controlling interest required of the holding company by sec.80C(1) is a shareholding interest which, whether or not directly held in the taxpayer, enables control by the holding company of what is to occur at a general meeting of shareholders of the taxpayer. It is of course possible that a company may be controlled otherwise than by the exercise of voting power but, in my opinion, it is the control by means of voting power with which sec. 80A and sec. 80C are concerned. The control which the holding company must have in order to satisfy sec. 80C(1) is to be by means of its interest in the subsidiary. That interest, it seems to me, is to be evidenced by and to inhere in the shareholding of the subsidiary controlled either directly or indirectly by the holding company through shareholding in intervening subsidiaries. Whilst a controlling interest in a company may not necessarily be manifested by the holding of shares in the controlled company and may be exerted through shareholding in intervening subsidiaries, it is in my opinion by means of shareholding that the interest is established. The control of controlling interest accepted in
Mendes v. Commr. of Probate Duties (1967) 122 C.L.R. 152 , was a control or controlling interest by and inhering in shareholding. In concluding that that shareholding need not be held in the controlled company it was not said in that case that there can be a controlling interest divorced from and not exerciseable through shareholding and the voting power which it carries. It is, in my opinion, such an interest of which sec. 80C(1) speaks. The enquiry whether any company had a controlling interest in the taxpayer at any time must be determined by examination of the control of a general meeting by the voting of shareholders of that company. Thus, if Mr. Howie's voting rights are exerciseable without his being a shareholder, I do not think he could, in any case, be regarded as relevantly having himself a controlling interest in H & J or the taxpayer.

In the second place, even if Mr. Howie's voting rights as Governing Director and a shareholder enable him personally to determine what shall be decided in a general meeting of H & J, is not the resultant resolution a resolution of that company and not that of Mr. Howie? In my opinion, it is what emerges from such a meeting, as a means of determining what is to occur by reason of shareholding in the taxpayer at a general meeting of its shareholders, which is part of the control of the taxpayer by H & J, and none the less so because Mr. Howie was able to determine what H & J should decide. In other words, in my opinion, whatever the right conclusion as to the nature of Mr. Howie's voting rights in H & J, H & J had relevantly a controlling interest in the taxpayer in the year of income. Equally Moomba itself had such a controlling interest in the years 1961 to 1966 inclusive and in the year of income, notwithstanding the dominance of Moomba by Mr. Howie by virtue of his Governing Director's shares. It is because of these views held by me that it would be unnecessary finally to decide whether Moomba could control the exercise by Mr. Howie of his voting rights in H & J, although I have already expressed my view on the matter.

But Article 17 existed in the Articles of the taxpayer in whose capital Mr. Howie did not have a share. Thus, conformably with the views I have expressed, he could not be held to have had a controlling interest in the taxpayer. But if contrary to my own view it is decided he had, two consequences will be observed. Firstly, as I think, Moomba could control his use of his voting rights which on the view opposed to my own would give him a controlling interest; and, secondly, if in relation to the year 1967 he held a controlling interest, and not Moomba or H & J, sec. 80C would not be applicable at all in relation to the years 1962 to 1966. He and not a company would hold the controlling interest in H & J in these years. The primary condition of its applicability is that there is a holding

ATC 4041

company, as described, of the taxpayer. If it is not applicable, the limitation it lays on the operation of sec. 80 will not apply. However, I am able to accept the view of my brother Mason that, because of Mr. Howie's position as Governing Director and the terms of Article 17, H & J did not have a controlling interest in the year of income. In my opinion, H & J had a controlling interest in the taxpayer in the year of income notwithstanding its relationship with Moomba at that time and the position of Mr. Howie as Governing Director of Moomba and as Governing Director of H & J. It follows that the Commissioner would have been bound to have been satisfied that the loss met the requirements of sec. 80A and 80C in respect of the year 1960 and also in respect of the year 1961 unless he was bound to be satisfied as to the position of Moomba in that year.

What I have already said would indicate that, in my opinion, the Commissioner was bound to be satisfied that Moomba had a controlling interest in H & J and in the taxpayer from February 1961 until the conclusion of the tax year 1967.

During the argument of the appeal the Commissioner made a submission that the shareholders in H & J who acquired their shares in 1966 had made an arrangement within sec. 80B(5). Apart from the consideration I have already pointed to which limit the Commissioner in a case of this kind to his situation at the time of the making of his assessment, I agree with his Honour that the submission should be rejected. I find no evidence to support it. In fact Mr. Ohlsson, whom his Honour accepted on the point, specifically denied the making of any such arrangement.

For all these reasons, I would allow the appeal.


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