Case A41

Judges:
JL Burke Ch
RC Smith M
RE O'Neill M

Court:
No. 1 Board of Review

Judgment date: 18 July 1969.

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JL. Burke (Chairman) and RC. Smith QC. and RE. O'Neill (Members): By a deed of 1 May 1959 a superannuation fund was constituted to provide retirement benefits for such employees of a group of four private companies as might be nominated by directors. The beneficial ownership of all the issued shares in the companies was in the hands of G, his wife and two children. G and his wife were the only directors of the companies. Although there were non-shareholder employees of the group the only persons ever nominated as members of the Fund were G and his wife. Company contributions to the Fund were made each year in respect of both G and his wife and each of them also made contributions.

2. In January 1960 a fifth company, M Pty. Ltd., was formed. G and his wife each subscribed for one $2 share and the trustees of the Fund subscribed for 400 shares of $2 each. Up to 30 June 1966 no other shares were issued. Soon after its incorporation M Pty. Ltd. bought rent producing properties at a cost of $37,500 approximately. Of that cost more than $28,000 was borrowed at interest from the trustees of the Fund. The moneys thus loaned to M Pty. Ltd. by the Fund were obtained by the Fund as interest-free loans from group companies and from G himself.

3. By 30 June 1965 the beneficiaries' account in the Fund totalled $17,813, built up as follows-

   Company contributions                $5,600
   Members' contributions                4,400
   Investment income -
   Dividends from M Pty.
   Ltd.                    $1,043
   Interest from M Pty.
   Ltd.                    $5,678
   Interest on Government
   Bonds, etc.              1,323
                         --------
                            8,044
   Less expenses              231       $7,813
                         --------    ---------
                                       $17,813
                                     ---------
      

4. The beneficiaries' account was augmented during the year ended 30 June 1966 by $4,729 comprising-

   Company contributions                    $600
   Members' contributions                  1,600
   Investment income -
   Dividend from M
   Pty. Ltd.                $1,400
   Interest from M Pty.
   Ltd.                        680
   Other interest              449         2,529
                          --------      --------
                                          $4,729
                                        --------
      

5. Thus at 30 June 1966 the beneficiaries' account stood at $22,542 represented by -

   Loan to M Pty. Ltd.                     $36,792
   Shares in M Pty. Ltd.                       800
   Commonwealth Bonds                        6,000
   Cash in bank                              2,250
                                         ---------
   Total Assets                             45,842
   Less loans from group
   companies                                23,300
                                         ---------
                                           $22,542
                                         ---------
      

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ATC 235

6. At no time were the trustees of the Fund liable to pay interest on moneys loaned to them by any of the group companies. On the other hand M Pty. Ltd. at all times paid interest to the trustees of the Fund on moneys loaned to it by them.

7. In respect of the year ended 30 June 1966 the Commissioner admits that the Fund comes within the terms of sec. 23F and, in particular, that all the requirements of sub-sec. (2) of sec. 23F were satisfied. Further, the Commissioner has not sought to apply sec. 23F(18) so as to deny exemption from tax to the amount of $680 interest paid to the Fund by M Pty. Ltd. However the Commissioner not being in terms of sec. 23F(16) of the opinion that it would be reasonable to exempt from tax the dividend of $1,400 paid to the Fund by M Pty. Ltd., has assessed the trustees to tax on such dividend pursuant to sec. 121CA. The trustees now seek to have the Board review the Commissioner's action. The dividend, we should add, was at the rate of 175 per cent and was in line with the ``sufficient distribution'' requirements of Div. 7, Part III, of the Act.

8. Of the 402 issued and fully paid up shares in M Pty. Ltd., whose only income is rents from properties owned by it, the Fund holds 400. The Fund is thus entitled to receive virtually all the profits distributed by that company by way of dividends. The only members of the Fund are G and his wife who, together with their two children, are the beneficial owners of all the issued shares in a group of four other companies which during the relevant year were engaged in a manufacturing business. These latter companies made interest free advances to the Fund to enable it to finance at interest the purchase by M Pty. Ltd. of rent producing properties. In these circumstances we entirely agree with the Commissioner that there are no grounds to support an opinion in terms of sec. 23F(16) that it would be reasonable to exempt from tax the dividend of $1,400 paid to the fund by M Pty. Ltd. Accordingly we uphold his decision on the objection and confirm the assessment.

Claim disallowed