Hooker-Rex Pty. Ltd. v. Federal Commissioner of Taxation.

Judges:
McTiernan J

Court:
High Court

Judgment date: Judgment handed down 30 July 1970.

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McTiernan J.: This is an appeal from an assessment to income tax and social services contribution based upon income derived during the year ended 30 June 1961. The appellant, pursuant to sec. 187(b) of the Income Tax and Social Services Contribution Assessment Act 1936-1961, has requested the Deputy Commissioner of Taxation to treat its objection as an appeal and to forward it to this Court.

The appellant alleges that the amount of income in dispute was earned in a large land development project by a subsidiary company of the appellant, which was not a private company within the meaning of Div. 7 of Pt. III, and which had previously incurred losses amounting to some $500,000 which could be used as an allowable deduction under subsec. (2) of sec. 80 as it then was. It alleges that this profit was matched by the allowable deduction, and consequently almost the entire profit was declared as a tax-free dividend to the appellant company under the provisions of sec. 46 of the 1961 Act. The respondent Commissioner has invoked sec. 260 in order to tax the amount in dispute in the hands of the appellant.

The appellant company was a subsidiary company in what may be called the Hooker group of companies. During the relevant period this company was engaged in what was known within the group as ``horizontal'' development, that is, land subdivision and development.

The company which managed the group finances was L. J. Hooker Investment Corporation

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Ltd. This company secured finance for projects by member companies in the group, advanced money as loans to member companies for their day-to-day needs, and received all money received by member companies. The object was, it was said, to make use of every bit of money within the group rather than have money idle within the group whilst borrowing from outside. All accounting within the group was done centrally in Sydney.

The appellant company had several subsidiaries. By 18 November 1959 it had acquired a company previously known as Contractors Engineering and Industrial Ltd., which was renamed Town and Country Development Pty. Ltd. (I shall refer to this company as Town & Country). This company was notable only for its accumulated loss, amounting to approximately $500,000, which could be used as a basis for deductions under sec. 80 as it then stood. At least one of the other subsidiaries was also what is colloquially known as a ``loss company''.

In 1959 it was decided by the Hooker group to engage in a land development scheme on the outskirts of Brisbane. The appellant had no office in Queensland, although the estate agency company in the group, L. J. Hooker Ltd., did. A well-established firm of solicitors therefore conducted a great deal of the initial transactions relating to acquisition of the lands involved. Most of the initial interests taken were in the form of options.

It happened that the firm of solicitors had shortly before this time acted for a company which had been granted an option which was expressed to be exercisable ``by the Purchaser or by its duly appointed nominee''. A purported exercise of that option was made in the name of the company and another. The grantor refused to execute a transfer and carry out the terms of the agreement. The persons purporting to exercise the option sued for specific performance. In
A. F. Grant Pty. Ltd. and Anor. v. MacDonald (1960) Qd. R. 465, the Full Court of the Supreme Court of Queensland unanimously held on demurrer that the option had not been exercised because the grantor had not granted an option to the company or its nominee, but rather had ``granted the company the right to exercise the option either by itself or its nominee'' (per Townley J.). Moreover, the option was expressed to be exercisable by the company or its nominee, not by the company and its nominee.

The instructed member of the Queensland firm of solicitors for the appellant (to whom I shall refer as the Hooker solicitor) took the view that as the result of this case it would not be possible in Queensland for options to be exercised by a nominee on its own behalf. He therefore consulted the Queensland Deputy Commissioner of Stamp Duties as to how to avoid double stamp duty if it were (as he believed) necessary for the grantee of an option to exercise the option himself, even if he wished the transfer to be to his nominee. The Deputy Commissioner pointed out that, if at the time the option was exercised, a document was brought into existence evidencing that the grantee exerciser of the option was acting as a trustee, and if the option fees and deposits were paid by the beneficiary, double stamp duty would not be levied. Such a document was referred to by the appellants as a ``declaration of trust'' following the terminology used in the First Schedule of the Stamps Act of the State of Queensland. Evidence was produced of the adoption of such a procedure in an unrelated matter prior to those in issue in this case.

The project out of which the disputed profit resulted was initiated early in 1959. The proposed development covered an area of over 3,000 acres on the south side of the Brisbane River in the Moggill-Darra area, at that time classified as ``green belt'', in which urban subdivision was prohibited. Any company proposing to subdivide such land had to secure two objects simultaneously. Approval by the Brisbane City Council was required, but the land had to be secured before prices were inflated by the change in classification, or even, to a certain extent, by the knowledge of such an application to the Council. The commercially practicable way of securing the second objective without incurring the very large expense of buying all the land in anticipation of approval of the development, was to purchase options over all the land. This therefore was done in the majority of cases. An inter-office memorandum of 28 July 1959, in my opinion, makes it quite clear that it was not considered important which company was named as grantee of an option. The relevant part is as follows-

``(The solicitors) point out that on no account should any option be taken in the name of L. J. Hooker Ltd., as this being an agency company would be acting in contravention of the Auctioneers and Commission

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Agents Acts. The option should therefore be taken either in the name of the company which is ultimately to develop the land or in the name of the Hooker-Rex Co. or its nominee. It will therefore be necessary for me to represent myself as a representative of the Hooker-Rex Co. when approaching owners to obtain options.''

This rather implies that it was not intended to use the appellant company to develop the land at all. (Incidentally the form of option attached to this memorandum is in a form which would fall within the decision of the Queensland Supreme Court in Grant's case.)

In the second half of 1959 the Hooker organisation in Queensland endeavoured to enter into contracts with all the owners of land within the project area. In some cases owners were unwilling to grant options, and it became necessary for the land to be purchased immediately. One contract in evidence dated 26 February 1960 is an acknowledgment of the sale by N. E. Bremner to Town & Country of approximately 263 acres within the project area.

The consequences of the activity of the Hooker organisation in the project area was evidently realised by at least one person not connected with the company. In the period from August to October 1959, a Mr. John D. Booker had entered into terms contracts of sale, through his company John D. Booker Developments Pty. Ltd., with the owners of about one-third of the project area. The land in this area was a great deal of the best land both in soil, and in position, overlooking the Brisbane River. The Hooker project, as originally conceived, could not continue without the purchase of the Booker interests. Accordingly, on 17 December 1959 the appellant company purchased from John D. Booker Developments Pty. Ltd. four options to purchase its interests in lands in the project area for rather more than double the amount for which the Booker company had agreed to purchase the same land. These options were to expire on 31 March 1960.

All this activity occurred before approval of the project by the Brisbane City Council had been obtained.

It is sufficient to say that approval in principle to the project was not given by the Town Planning Advisory Committee of the Brisbane City Council until the end of March 1960, after an earlier application had been rejected. (There is some confusion in the evidence as to the month.) The approval given was subject to a full development agreement being reached. The terms of this agreement were not finalised until 12 October 1961.

As approval in principle had not been notified until the very end of March, the appellant was not willing to exercise the options which were to expire on 31 March. The Hooker solicitor therefore asked the solicitor acting for the Booker company if it would agree to an extension of the options for one week to 5 April. The extension was signed by Mr. Booker as managing director. It was then discovered from the Booker solicitor that John D. Booker Developments Pty. Ltd had, on 4 February, assigned its interests in the four properties in the project area to what was known as the ``Oxley Syndicate'', comprised of Mr. & Mrs. Booker and Mr. & Mrs. I. K. Redpath. It was therefore agreed that new options be drawn up, by which the Booker company as assignor and the Oxley Syndicate as assignee of the interests in the land purchased by the Booker company, granted options for a period of one month to 30 April to the appellant, to purchase the land for the same price as in the previous option agreements. The option fees were ten times the fees on the old options. These new option agreements were typed in the office of the appellant's solicitors and were executed on 31 March. No use was therefore made of the extension of the old options.

It is not clear at what stage it was decided to use Town & Country as the development company for what may be called the Booker lands. In cross-examination the Hooker solicitor agreed that in a letter of 7 August 1962 he had stated that he had been ``instructed late in 1959 that it was desired to make use of tax loss companies under the control of Hooker-Rex Pty. Ltd. in connection with the acquisition of land on the Centenary Estate, except where it became necessary to acquire in the name of Hooker-Rex Pty. Ltd. for reasons concerned with the public acceptance of that company's name.'' It is clear that at the date of the first options from the Booker company Town & Country was completely controlled by the appellant. As the judgment in the Grant's case was given on 30 September 1959, the Hooker solicitor would have been of the opinion at the date of purchase of the first options that their old procedure

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for exercising options could not be used. He must therefore either not have known that the appellant wished Town & Country to be used, or must have formed the opinion that it did not matter if the appellant purchased the land. If he had known that Town & Country was to purchase the land, he would not have agreed to a contract between the Booker company and the appellant, except as a last resort, because, if the appellant paid the option fees he would not have known any way in which Town & Country could acquire the land, except by a double transfer with double stamp duty. However it is quite clear from the evidence as a whole that the Hooker executives in Sydney did not appreciate the stamp duty problem at this stage, and therefore the option agreement of 17 December is not inconsistent with a continuing intention that a nominee company be used, and not the appellant.

It appears from the correspondence in evidence that no real consideration was given as to the exercising of the options of 17 December because approval of the project had not been notified. Despite the evidence of the Hooker solicitor that the matter of the exercise of the options was discussed from mid-February into April, the memoranda of 7 and 11 April do not appear consistent with prior knowledge of the problem in Sydney. In my view the solicitor was the only one who understood the problem until April 1960. He knew in March that it was desired to use Town & Country to purchase the Booker lands, and he was of opinion, too, that the existing options could not be exercised so as to transfer the land to Town & Country without double stamp duty being payable. When therefore new options were negotiated bringing in the Oxley Syndicate, he realised that he had the opportunity to use the trust scheme which the Deputy Commissioner of Stamps had worked out with him, whilst to ask for a new company to be inserted on the Hooker side of the contract would result in the Booker solicitor insisting on time in which to do a full search of the inserted company. He was not willing to give them this time, because he was very concerned that the Booker parties might try to escape from the bargain, as the land was appreciating in value. A special cause for concern was an opinion he had received in January that the contract between the Booker company and one of the original landholders, the Augustinian Fathers, might be unenforceable for technical reasons. The solicitor, therefore, confident in his solution, requested that money from Town & Country be sent by telegraphic transfer to his office, with which he paid the option fees, although the contracts were expressed to be with the appellant.

In the month of April 1960 the Hooker solicitor was informed that, despite the initiation of the trust scheme by the payment of the option fees by Town & Country, the Hooker ``acquisitions committee'' wished the actual contracts and transfers to be from the Oxley Syndicate to Town & Country. The Hooker solicitor was most anxious to have the options exercised with time to spare in case any difficulties arose. However, acting on instructions, on 22 April the Hooker solicitor telephoned the Booker solicitor to inquire whether his clients would be prepared to facilitate the transfer of the land direct to Town & Country by allowing the existing options to lapse, and to be replaced by new ones in the name of Town & Country. This was agreed upon, subject to the appellant guaranteeing all payments. (The diary note of the Booker solicitor is in somewhat different terms. It does not refer to new options, but merely refers to Town & Country being the party named in the contract of sale instead of the appellant.)

The Hooker solicitor was obviously more worried as the date for the expiry of the options drew near. It is clear that anticipating an exercise of the option by the appellant as trustee for Town & Country he prepared all the documents, including the document evidencing the existence of a trust before he went to Sydney on 28 April to discuss the exercise of the options with the ``acquisitions committee'' of the Hooker group. At the meeting in Sydney he explained in detail the reasons why he thought the options should be exercised as he had planned, and the mechanics of it. This action was approved, and on 29 April, being a Friday, he signed the relevant documents in Brisbane as attorney under a resolution of the appellant dated 31 March 1960. I accept the evidence that the so-called ``declaration of trust'' was signed on 29 April despite the very unusual series of losses.

The beneficial interest in the Booker lands thereby passed to Town & Country as beneficiary under a trust of which the appellant was trustee. A letter dated 6 May 1960 was

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subsequently sent by the appellant to the Hooker solicitor authorising the course of events which actually occurred. This was asked for at the Sydney meeting in order to cover the correspondence already on the file requiring a different course. Requisitions on title were then sent to the vendors in the name of Town & Country.

In the period from 28 March 1960 to 30 June 1961 all moneys actually paid for the Booker lands were posted at the Hooker group's accounting division in Sydney in the books of the appellant, except for the amount of £14,000 paid on 17 May under the terms of the contract in respect of the land originally owned by Sanders which was posted to Town & Country.

The appellant called an accountant employed in the Hooker group to explain the system of accounting used. He said that cheques were drawn for sums requested by a company which did not necessarily incur any of the expenditure. It was only at a later date that the cheque would be ``dissected'' and the amounts posted to the accounts of the company which actually incurred the expenditure. He said also that at that time the group was expanding rapidly, but that the accounting section was not expanding at the same rate. He had been working overtime four nights a week, and also one day in each weekend. He said that when working at night it was difficult to obtain information about correct postings from the company officers. The appellant produced evidence of one occasion, dated 1 June 1961, on which another accountant wrongly in a correcting entry attributed a large amount to the appellant instead of leaving it attributed to Town & Country. Some time after 30 June 1961 and before the completion of accounts these errors and the postings to the appellant instead of Town & Country were discovered and by one of a series of entries dated 30 June 1961 the amounts were correctly reposted. For what it is worth it was admitted that this could have occurred after a visit by an officer of the respondent Commissioner to the appellant's offices.

In November 1960 the ``credit squeeze'' occurred. The original plan had been that the Hooker group should undertake the whole development. In the first half of 1961 it was decided that a new public company should be formed to which the whole area would be sold. This new company would continue to develop the land and sell it as individual home sites. At the same time the sale to the new company, Centenary Estates Ltd. (to which I shall refer as Centenary), would provide a profit and liquid assets for the appellant company in a difficult year.

It now became even more apparent that it would be very desirable to have as much of the actual profit as possible received by companies with accumulated tax losses which could be used as taxation deductions. Town & Country owned absolutely and beneficially considerably less than half the land. Consideration was therefore given to selling the remainder to other ``loss companies'' in other sections of the Hooker organisation at cost, before these in turn sold it at a profit to Centenary. However, the latter plan was not proceeded with, principally because of the risk that the Commissioner of Taxation would consider the sale to the ``loss companies'' as having been made for the purpose of altering the incidence of taxation, and would treat the sale as void in accordance with the provisions of sec. 260. Other factors which influenced the decision not to go ahead were that stamp duty would have to be paid on both conveyances; the first transfer at cost might attract gift duty; and that a double transfer might attract unfavourable comment from financial editors.

Preparations were therefore made to incorporate Centenary Estates Ltd. in the Australian Capital Territory, and to sell all the land in the project area to it. In my opinion it is evident that despite the Sydney meeting of 28 April 1960, the officers of the appellant in Sydney had no real understanding of the beneficial ownership of the Booker lands by Town & Country, or of the operation of trust documents. In a memorandum of 18 May 1961 the secretary of the appellant company speaks of ``exercising Declarations of Trust'', presumably meaning transferring the land into the name of the beneficiary. He also seems, from the terms of the attached letter, to have believed that all land in the name of the appellant was covered by the so-called ``Declarations of Trust''. In a memorandum of 20 April 1961 he speaks of Town & Country having ``ownership'' of only 341 acres, which it is agreed does not include the Booker lands. He was pressing for the transfers to be actually in the name of Town & Country which, as he said in a memorandum of 18 May 1961, would ``provide a little

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extra `window-dressing' which is useful, should time permit''. Time did not, however, allow for this preliminary transfer. In order to secure the profit in the 1960-1961 financial year, a timetable had been drawn up, under which contracts were to be exchanged by 31 May. It was then accepted that the transfer would have to be in the name of the appellant, although the land would be included in the Town & Country contract. The beneficial interest would be transferred from Town & Country and that company would, therefore, receive the proceeds. The contract was dated 30 June 1961 providing for the payment of £200,000 on execution with the balance at specified dates to follow.

The accounts of Town & Country for the 12 months ending 30 June 1961 disclose a net profit of £223,031.14.0 from trading in the Centenary Estates project. Of this amount £147,988 was profit from dealing with the Booker land. Total net profit was £403,343.0.11, of which $403,300 was paid out as a dividend to the sole shareholder, the appellant company. Amongst expenses listed in the land trading account is the amount of £225,600 paid to the appellant company as a management fee for work done on the land before sale to Centenary.

Section 260 of the Income Tax and Social Services Contribution Assessment Act 1936-1961 is as follows-

``260. Every contract, agreement, or arrangement made or entered into, orally or in writing, whether before or after the commencement of this Act, shall so far as it has or purports to have the purpose or effect of in any way, directly or indirectly-

(a) altering the incidence of any income tax;

(b) relieving any person from liability to pay any income tax or make any return;

(c) defeating, evading, or avoiding any duty or liability imposed on any person by this Act; or

(d) preventing the operation of this Act in any respect, be absolutely void, as against the Commissioner, or in regard to any proceeding under this Act, but without prejudice to such validity as it may have in any other respect or for any other purpose.''

The word ``arrangement'', said Lord Denning speaking for the Privy Council in
Newton v. F.C. of T. (1958) A.C. 450 at p. 465; 11 A.T.D. 442 at p. 445 ``is apt to describe something less than a binding contract or agreement, something in the nature of an understanding between two or more persons-a plan arranged between them which may not be enforceable at law. But it must in this section comprehend, not only the initial plan but also all the transactions by which it is carried into effect-all the transactions, that is, which have the effect of avoiding taxation, be they conveyances, transfers or anything else''.

In dealing with company transactions it would seem that any plan approved by the board would of necessity be an ``understanding between two or more persons''. But it cannot be presumed that because, after examination of the taxpayer's activities, some plan is discovered which would constitute at least an arrangement, every transaction which has affected the subject matter of the plan after its conception occurred in order to carry it into effect. The plan may miscarry or some new factor intervene which would make the original plan ineffectual, or perhaps require a further plan to overcome the obstacle raised. Moreover, decisions may be made or action taken with an incomplete understanding or no appreciation of the legal consequences. If no plan is admitted, one may be discovered by taking all the transactions and attempting to fit them into a logical pattern pointing back to a commencement at which time it can be deduced that the arrangement, with all its terms, was formulated. Those which do not fit a pattern cannot be said to be part of a plan and thus part of an arrangement. The ascertainment of the constituents of the arrangement is of greatest importance because it is its terms which are examined in determining whether the arrangement is one which ``has or purports to have either directly or indirectly the purpose or effect'' mentioned in the section. As Lord Denning said in Newton's case:

``In applying the section you must, by the very words of it, look at the arrangement itself and see which is its effect-which it does-irrespective of the motives of the persons who made it''

((1958) A.C. 450 at p. 465; 11 A.T.D. 442 at p. 445).

Transactions falling outside the arrangement must therefore be put aside in determining the purpose.

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I believe that the only ``arrangement'' in this case was limited to a general intention of the acquisitions committee to make Town & Country the company in the group which would develop the Booker land until it was sold to individuals as home sites, with Hooker-Rex providing its staff and facilities. This decision must have been reached early in 1960. The only actions by which this intention was effected were the decision at the Sydney meeting of 28 April 1960 to use the ``declaration of trust'' method in the exercise of the option, and the subsequent exercise on the following day. The payment of the management fee I believe also to be part of the arrangement.

I do not accept the respondent's submission that there was an intention to bring Town & Country into the scheme only if the negotiations with the Council were successful. I believe the memorandum of 28 July 1959 in which it is stated that ``the option should therefore be taken either in the name of the company which is ultimately to develop the land or in the name of the Hooker-Rex Company or its nominee'', clearly evinces an intention at that stage not to use Hooker-Rex itself at all. I read the latter part of the sentence quoted as being an instruction to insert ``the Hooker-Rex Company or its nominee'' in any option agreement, in order to leave open the name of the nominee company until the date of exercise of the option. It is in my opinion quite clear that if the appellant had to be used in purchasing options it was only with the aim of its nominating the eventual development company. (This instruction was of course given before the final decision in Grant's case was delivered.) I do not regard the payment of the new option fees by Town & Country as part of any arrangement. I believe this was arranged independently by the Hooker solicitor, and he only later convinced the acquisitions committee in Sydney of the value of this move. I regard the postings to Hooker-Rex accounts of amounts paid after the options were exercised as a mistake. It would in my view be much more consistent with an ``arrangement'' that the correct postings should be made. The memoranda at the time of the sale to Centenary demonstrate so confused a state of mind as to be clearly inconsistent with any arrangement. There is some evidence of a plan, based upon the belief that there were ``declarations of trust'' in existence in respect of all the land in the name of Hooker-Rex, under which as much land as would, upon sale, yield a profit which would bring the total profit on the sale of the project land to an amount in excess of the deduction allowable to Town & Country, would be sold by Hooker-Rex, in disregard of the ``declarations of trust'', to another subsidiary company with allowable deductions, for sale to Centenary. But that did not eventuate and it is irrelevant in the present case. Indeed the confused opinions of the Hooker officers in Sydney, and the assertion, which I believe, that the Hooker solicitor was concerned only with minimising stamp duty run quite counter to an arrangement of any wider scope than the one I have propounded. Moreover, any factor in the discussions in 1961 could only evidence an arrangement formed early in 1960 to the extent that they would have been applicable if the land had been sold as individual home sites as originally planned. Any factors inconsistent with that might evidence a separate arrangement formulated not earlier than the decision to form Centenary and sell to it. However I do not believe there was any such arrangement which would attract the operation of sec. 260.

Counsel for the respondent Commissioner spoke of the diversion through Town & Country once the approval of the project was certain. To that I would say first, as stated previously, I do not believe that a plan to do that ever existed. Secondly, to speak of a diversion from the normal path overlooks the very nature of the option document. The grant of an option to the grantee and his assignees and nominees (the terms of the options actually exercised, as distinct from the form of option first proposed in the letter of 26 July 1959, which is in the form of that in Grant's case) specifically leaves it open to an exercise by and in favour of another. The assignee or nominee of the grantee is just as much in contemplation as the grantee.

Since, however, the need arose to draw up new options (not the opportunity to do so) I can see no reason at all why a previously contemplated nominee should not become the grantee of the new option. (The reason for its being only the beneficial grantee has been thoroughly explained.) One just cannot speak of the ``normal course of events'' in the case of an expiring option, unless one speaks of the expiry of the option, in which case nothing results. The very essence of an option is that it is only a preliminary cautionary step (even when, as in this case, the option fee was to

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be absorbed into the deposit on exercise). It is not part of the contract of sale; it is a completely separate contract with a different object and basis.

Having stated that there was an ``arrangement'' it becomes necessary to decide whether it was an arrangement which ``has or purports to have the purpose or effect of in any way, directly or indirectly-altering the incidence of any income tax''. The appellant relies upon the statement in the advice of the Privy Council in
Newton v. F.C. of T. (1958) A.C. 450 at p. 466; 11 A.T.D. 442 at p. 445-

``In order to bring the arrangement within the section you must be able to predicate-by looking at the overt acts by which it was implemented - that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge that the transactions are capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax, then the arrangement does not come within the section.''

I believe that that statement is a condensed way of saying that, in the absence of evidence of actual terms of the agreement, the terms must be deduced from the actions taken in relation to the subject matter, and then the terms of the agreement examined for purpose or effect. Purpose or effect must be sought objectively from the terms of the agreement. Incidentally I cannot see how if the agreement is implemented, the effect objectively determined can be different from the purpose objectively determined and yet be said to be the effect of the agreement. I would therefore re-state the dictum of Williams J. in
Newton's case (1957) 96 C.L.R. 577 at p. 630, as follows-

``These terms may be oral or written or may have to be inferred from the circumstances but, when they have been ascertained, their purpose must be what they and they alone effect.''

One cannot look to the result of the series of events in order to establish the purpose of the agreement; one must look at the events to establish the terms of the agreement and from those terms establish the purpose or effect of the agreement.

The test of business efficacy was first propounded in
Jaques v. F.C. of T. (1924) 34 C.L.R. 328 by Isaacs J. at p. 360 and by Starke J., at p. 362, who said:

``There is nothing wrong in companies and shareholders entering, if they can, into transactions for the purpose of avoiding, or relieving them of, taxation (
Simms v. Registrar of Probates (1900) A.C. 323 at p. 333;
D.F.C. of T. v. Purcell (1921) 29 C.L.R. 464, at p. 472); and it depends wholly upon the construction of the taxing Act whether they have succeeded. The form the transactions took, in this case, was admittedly devised for the purpose of securing a deduction of calls. But the transactions did not, in any business sense, alter the position of the shareholders: their income was not diminished, nor their property increased.''

The appellant does not deny that Town & Country was used in order to obtain for the group a larger profit after tax than would have been available if Hooker-Rex had been used. It points out that the Commissioner has not sought to apply sec. 260 in relation to the profit arising from land bought initially by Town & Country, even though the profit derived by Town & Country in the relevant year of income from dealings other than the Booker lands was considerably larger than the amount in dispute and was part of the one dividend. A large part of the case of counsel for the respondent was aimed at demonstrating that the only reason why a ``bankrupt'' company, with its embarrassing financial history, would be used in land dealing would be that it had available tax losses, and thus that its use would result in less tax being payable by the appellant. Yet the Commissioner regards it as a legitimate choice open to a taxpayer company to decide that its ``tax loss'' subsidiary will engage in a profit-making enterprise, even if the result will be that the taxpayer company will pay less tax. In my opinion the transactions upon which the Commissioner has invoked the operation of the section bear no characteristics which can distinguish them in law, in relation to sec. 260, from the other transactions entered into by Town & Country. I am also of opinion that the purchase of Town & Country can only evidence an arrangement with a similar objective to those arrangements involving its use.

In
W. P. Keighery Pty. Ltd. v. F.C. of T. (1957) 100 C.L.R. 66 at pp. 92-3, in the joint judgment of Dixon C.J., Kitto and Taylor JJ., their Honours said-

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``Whatever difficulties there may be in interpreting sec. 260, one thing at least is clear: the section intends only to protect the general provisions of the Act from frustration, and not to deny to taxpayers any right of choice between alternatives which the Act itself lays open to them. It is therefore important to consider whether the result of treating the section as applying in a case such as the present would be to render ineffectual an attempt to give a company an advantage which the Act intended that it might be given.''

It is clear that in this passage the Court is not merely repeating what was said in
Clarke v. F.C. of T. (1932) 48 C.L.R. 56 at p. 77-

``Where circumstances are such that a choice is presented to a prospective taxpayer between two courses of which one will, and the other will not, expose him to liability to taxation, his deliberate choice of the second course cannot readily be made a ground of the application of the provision. In such a case it cannot be said that, but for the contract, agreement or arrangement impeached, a liability under the Act would exist. To invalidate the transaction into which the prospective taxpayer in fact entered is not enough to impose upon him a liability which could only arise out of another transaction into which he might have entered but in fact did not enter.''

That latter passage merely states the wellsettled principle that the section can operate only to avoid, never to rebuild. Thus in
War Assets Pty. Ltd. v. F.C. of T. (1954) 91 C.L.R. 53, it was held that the application of the section could not construct a set of facts which had not occurred and which the principal actors stated they would not have been interested in arranging.

In
Cecil Bros. Pty. Ltd. v. F.C. of T. (1964) 111 C.L.R. 430, Dixon C.J., with whom Kitto, Taylor and Windeyer JJ. agreed on this point, specifically referred to the matter of deductions in relation to the application of sec. 260 and said-

``I have great difficulty in seeing how it could apply to defeat or reduce any deduction otherwise truly allowable under sec. 51.''

As is pointed out by Woodhouse J. in
Elmiger v. Commr. of I.R. (N.Z.) (1966) 14 A.T.D. 271 at p. 276, such a view would appear to be inconsistent with the views of Rich J. in
Jaques v. F.C. of T. (1924) 34 C.L.R. 328, and of Isaacs and Starke JJ. on appeal in that case (although of course the deduction there sought was not under the equivalent of sec. 51).

I believe that the test of ``ordinary business dealing'' propounded by Isaacs J. and Starke J. in Jaques' case, and adopted and expanded by the Privy Council in Newton's case must limit the application of the dicta quoted from Keighery's case and Cecil Bros.' case. That is not, of course, to say that a practice which has escaped the attention of the Commissioner for a sufficient length of time could ever in any way gain exemption from this provision of the Act.

The Income Tax and Social Services Contribution Assessment Act 1936-1961 did not place any special restraints upon the use as deductions of losses incurred by public companies, although it did place restraints upon private companies (sec. 80(5)). Town & Country was not a private company for the purposes of sec. 80(5) because it was a subsidiary of a public company by virtue of sec. 105(4)(b). The relevant provisions have since been entirely recast. However, in the year of income relevant in this case, it was at least open to Town & Country to take advantage of the provision allowing a deduction for past losses. That it was so open, and that the provision was availed of, cannot be conclusive in deciding whether sec. 260 will operate to avoid the arrangement. The arrangement must also be subject to the test of ordinary business practice. The deduction provisions and the provisions of Div. 16 of the Act appear to me just as capable of manipulation to frustrate the general provisions of the Act as any other provisions.

I am of opinion that the arrangement in this case is capable of explanation by reference to ordinary business practice. The use of subsidiaries and sub-subsidiaries is part of modern corporate business practice. Once the element of diversion is rejected the argument of counsel for the Commissioner is reduced to the plain proposition that simply to decide to use a tax loss subsidiary for a project in which profit is anticipated equivalent to the losses available as deductions, and to carry through that decision is an arrangement to which sec. 260 applies.

I am not prepared to accede to that proposition. There may of course be cases in which some further element such as the timing of

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the steps taken will necessarily involve the conclusion that the arrangement is one to which the section applies. However in a case such as the present one where all other factors evidence a perfectly normal business arrangement by the persons in control of a group of companies, it cannot be said that that arrangement has the effect proscribed by the section and thus of frustrating the general provisions of the Act.

To decide that the arrangement did not have one of the purposes or effects proscribed by the section, is not to deny that the motive of the appellant in so arranging its affairs was to lessen the incidence of taxation-

``... the section is not concerned with the motives of individuals. It is not concerned with their desire to avoid tax, but only with the means which they employ to do it.... In applying the section you must, by the very words of it, look at the arrangement itself and see which is its effect-which it does-irrespective of the motives of the persons who made it'', per Lord Denning in
Newton v. F.C. of T. (1958) A.C. 450 at p. 465; 11 A.T.D. 442 at p. 445.

I should also say that the combination of the most extraordinary series of losses of the ``declaration of trust'', and the provocative statements in inter-office memoranda quite justified the initial suspicions of the Commissioner. As I have said I accept completely the evidence of the Hooker solicitor as to the trust document. As to the memoranda, the statements are largely irrelevant. They evidence a complete confusion as to the legal effect of the trust document, the number of these documents in existence, and the area covered by them. They largely relate to a situation and a plan which never occurred. I must say that it would be hard to envisage a series of events more in contrast with the usual mechanical and very intricate series of expertly advised transactions which attract the attention of the Commissioner in regard to this section.

As I am of the opinion that the relevant arrangement is not such as to attract the operation of the section, I do not find it necessary to examine the effect upon the arrangement of what would be the operation of sec. 260 if applicable.

I am therefore of opinion that the appeal should be allowed, that the assessment be set aside and that the Commissioner re-assess tax payable by the appellant in accordance with the Act on the basis that sec. 260 does not apply.

Footnote: This appeal was heard as long ago as May last year. Discussions proceeded between the parties as to the settlement of a statement of admitted and proved facts. It was not until recently that the parties apparently found it impossible to agree upon any such statement.

ORDER:

Appeal allowed with costs. Assessment set aside. Matter remitted to the Commissioner for amendment. Usual order with respect to exhibits.