Casuarina Pty. Ltd. v. Federal Commissioner of Taxation.

Judges:
Windeyer J

Court:
High Court

Judgment date: Judgment handed down 25 August 1970.

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Windeyer J.: Casuarina Pty. Ltd., a company which I shall for convenience call simply ``Casuarina'' or ``the taxpayer'', appeals against the Commissioner's assessments of income tax payable by it in respect of the year of income which ended on 30 June 1968. The question is how far, if at all, its tax liability was avoided by its playing a part in a scheme devised originally to enable others to escape tax. The scheme was as ingenuous as it was ingenious. There was in it nothing hidden or dishonest or in any strict sense of law sham or false. It was based upon competent legal advice and was carried out according to the tenor of that advice. The evidence I heard leaves no doubt as to its purpose and the mode of its execution. The only question before me is as to its legal consequences for Casuarina.

It is, I think, convenient at this point to list the dramatis personae before explaining the parts they were called upon to play and played. To adhere for the moment to theatrical metaphor, the producer was a firm of accountants, Messrs. Wilson, Bishop and Henderson of Melbourne. The composition of this firm changed after the period with which this case is concerned, and they became known as Wilson, Bishop, Bowes and Craig: but, whoever were the members of the firm at relevant times, I shall in this judgment for convenience refer to them as ``the accountants'' or ``the firm''. Two senior employees of theirs were G. F. Sheehan and B. G. Jacobson. They gave evidence before me and in each case candidly and helpfully. Sheehan worked in the accountants' Melbourne office. Jacobson in 1967 worked in a branch or associated office at Burnie in Tasmania.

The first person who, in point of time, comes upon the scene is one Lex Sternberg. In 1967 he was engaged, and had been for some time theretofore engaged, in the selling of motor cars at Burnie. This business was carried on by a company, Lex Sternberg Motors Pty. Ltd., which I shall call ``Lex Sternberg Motors''. It was in 1967 a private company within the meaning of the Income Tax Assessment Act. The shares in it were held by members of the Sternberg family until April 1966 when another company, Hesso Pty. Ltd., was formed by Sternberg. It acquired from him a parcel of shares in Lex Sternberg Motors. The two companies

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ATC 4072

were closely associated and in practice controlled by Sternberg and used by him for his purposes.

Casuarina is a proprietary company which was formed by the accountants and incorporated on 12 April 1967. It was on its inception entirely under the control of the accountants. It did not at once commence any business. It was simply ``upon the shelf'' in the firm's office, to use the expression that was used. It was there with other similar companies ready to be called into action if a client of the firm should require its services.

The next actor to come upon the scene is a company, Forum Holdings Ltd., which I shall call ``Forum''. It was incorporated on 17 February 1967, having been formed by the accountants. Its affairs were controlled by them. It was intended from its first conception in their minds that it would become a public company within the meaning of the Act by becoming a subsidiary of a public company. It was called into existence for the purpose of adopting as its own subsidiaries other companies involved in the tax-avoidance scheme and thereby conferring upon them its own character as a public company for the purposes of the Act. To enable it to acquire the status of a subsidiary in the statutory sense of a public company or public companies 4,995 shares in it were on 19 April 1967 allotted to a company, W. B. & H. Nominees Pty. Ltd., which I shall call ``Nominees''. This last-mentioned company was, as its name suggests, a company which acted as the nominee or agent of the accountants' firm as the holder of shares that were allotted to it to be held on terms they arranged. On 24 April 1967 Nominees transferred to each of Denton Hats Ltd., Nationwide Finance Ltd. and Victorian Broadcasting Network Ltd. 1,300 of its shares in Forum. Each of these three companies was a public company within the meaning of the Act at that time. Later the shares that Nationwide Finance Ltd. held in Forum were sold by it to another finance company, Cambridge Credits Ltd., but that was after the period with which this case is concerned. On 19 June 1968 Denton Hats Ltd. having gone into voluntary liquidation, its 1,300 shares in Forum were transferred to F. T. Wimble & Co. Ltd., unquestionably a public company. The residue of the original parcel of 4,995 shares in Forum that had been allotted to Nominees, together with five original subscriber shares that it held, remained with Nominees, making its total holding 1,100. This then accounts for the whole of the issued capital, 5,000 shares, in Forum.

The acquisition by the three public companies, Victorian Broadcasting Network, Denton Hats and Nationwide Finance, of 1,300 shares in Forum was pursuant to an arrangement or understanding arrived at before Forum was incorporated. One of the partners in the firm of accountants, Mr. Davis, was at that time a director of each of the three companies. He knew what role Forum was to be called into existence to play. He took care that it had and retained the legal character necessary for it to fulfil its destiny. It was admitted by counsel for the Commissioner that each of the three above-mentioned companies that held shares in Forum on 30 June 1968 beneficially owned its shares. It is not questioned that two at least of these companies were at all relevant times public companies within the meaning of the Act. Any two of them together owned 2,600 out of 5,000 issued Forum shares with corresponding voting power. Without setting out further facts in detail or all relevant provisions of the constitution of Forum, I say at this point that I am satisfied that throughout the year of income in question, and at the end of that year, Forum was ``a subsidiary of a public company'' as defined by sec. 103A(4) of the Act.

Having now described the actors on the stage, I proceed to narrate some of their doings. The Commissioner called no evidence. What occurred was made perfectly plain by the evidence given in examination and cross-examination of the witnesses called for the taxpayer and by voluminous contemporary documentary records. I do not think I need recount all of this. I shall merely state the conclusions of fact I have reached on such matters of fact as are critical in the case and relate these to the issues which arise under the relevant statutory provisions, sec. 103A and 260 of the Income Tax Assessment Act 1936-1968. Section 46 also made an appearance in the argument; but it recedes into the background in the view I take. I need not set out the sections in terms, as anyone concerned to read this judgment will, I suppose, be aware of the provisions of sec. 103A, although he may not find these easy to comprehend at first sight.

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ATC 4073

The events begin sometime early in 1967. Sternberg, a client of the Burnie office of the accountants, consulted Jacobson about taxation matters. His company, Lex Sternberg Motors, had a rapidly growing and profitable business. It was a private company for the purposes of Div. 7 of the Act. Sternberg and members of his family held its shares. He wanted to find a way by which the company could avoid, at least for a time, distributing its profits to its shareholders, his family, and at the same time avoid having to pay the additional tax which, pursuant to sec. 104 of the Act, would become payable if it did not do so. Jacobson advised Sternberg that one course would be to so arrange affairs that a public company would derive the profits of his private company's business. Jacobson, called as a witness on behalf of the taxpayer, gave evidence-in-chief as follows-

``I told him [Sternberg] that I knew of a public status company plan which was either implemented or would be implemented in the near future and I outlined it to him as I knew it and suggested to him that if he was interested I would get in contact with Mr. Sheehan of Wilson, Bishop & Henderson to get further information and see if such a company would be available to him and if it would be satisfactory for his particular needs.

Did you have the conversation that you anticipated you would with Mr. Sheehan?-Yes, Mr. Sheehan recommended to me that Mr. Sternberg did follow the lines which I had suggested and become eligible for public status in some manner with his companies. He did suggest to me if Mr. Sternberg was interested there would be a company in the Melbourne office of Wilson, Bishop & Henderson which would qualify for public status purposes if certain requirements were carried out.

Did he explain to you how that company derived its status as a public company?-He did.

How was that?-Firstly there would be three public companies who would hold shares in another company which at that time I think was being referred to as the public status company or something of that name and which is now known as Forum Holdings and the company now known as Forum Holdings would hold a 51% shareholding in a company owned by Sternberg now known as Casuarina. These would be redeemable preference shares which could be redeemed by the directors of Casuarina Pty. Ltd., who would be the Sternbergs, at any time by giving seven days' notice except for certain restrictions around 30 June.

Therefore by doing that Mr. and Mrs. Sternberg, as directors, would be able to control the affairs of Casuarina and at the same time enjoy the benefits of public status because Casuarina would then be a subsidiary of a public company and any dividends transferred from Lex Sternberg or Hesso could remain in Casuarina for the time being without being paid out-and therefore defer the incidence of transfer tax [sic] until such time as the Sternberg affairs were able to pay out these dividends to the shareholders.''

Later-

``Was anything said between Mr. Sheehan and yourself about the distribution of dividends by Casuarina?-Yes. Mr. Sheehan informed me that Forum Holdings, being the holder of the 51 preference shares, would require a dividend and the shareholders in Forum would require a reasonable dividend which would make them contented. I asked him what he considered that would be and he indicated they would probably be looking for something in the range of $200 to $300 per annum. I transmitted this information to Sternberg to give him an indication of what...

Would you be more specific about precisely the information you conveyed to Sternberg?-Yes. I went back to Sternberg and explained to him the whole system of the public status company...

As you have just described it to his Honour?-Yes. I informed Mr. and Mrs. Sternberg that they would have complete control of the Casuarina company because of the fact that they would be the directors, and they did have the power to redeem the redeemable preference shares if they were not satisfied with the plan in any way. By doing this he would attain public status. I also told them that Mr. Sheehan had informed me that Queen's Counsel opinion had been obtained on this that it was completely within the income tax law; that is the opinion.

What was said between yourself and Mr. Sternberg about dividends?-I had informed

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ATC 4074

him that Casuarina would be expected to pay an annual dividend on the redeemable preference shares and that the amount of dividend would be between $200 and $300 per annum but that he and Mrs. Sternberg as directors had to decide what that figure was.''

This plan was carried into execution as follows: Casuarina was taken off the shelf. Its only shareholders at that time were the original subscribers, Messrs. J. B. Hutchins and D. M. Hutchinson, accountants with the accountants' firm. They were also its directors until July 1967, when they resigned and Sternberg and Mrs. Sternberg took their places. The company's minute book records that on 24 April Hutchins and Hutchinson as directors resolved ``that 47 ordinary shares be issued for cash to Alexander and Mary Sternberg as at this date'', and that at the same meeting the transfer by Hutchinson of his one share to Sternberg was approved and the transfer by Hutchins of his one share to Mrs. Sternberg was approved. An application was signed by Hutchins in his capacity as a director of Forum that 51 redeemable preference shares in Casuarina be allotted to that company. This was accompanied by a cheque, apparently deposited in Casuarina's bank account on 24 April. The minute book records that on 15 May 1967 another directors' meeting was held, Hutchins and Hutchinson being still in office. The minute, signed by Hutchins in his capacity as chairman of that meeting, shews that he and Hutchinson resolved to allot 51 shares to Forum in accordance with the application he had signed on behalf of Forum. I should add that I accept the evidence that the shares that Forum got in Casuarina were, within the meaning of the Act, owned beneficially by Forum. It could in law exercise its voting rights as it thought fit.

Holders of redeemable preference shares in Casuarina were entitled to receive a 7% fixed non-cumulative preferential dividend and also to share ratably with ordinary shareholders in other dividends. Ordinary and redeemable preference shares had equal voting rights. The company's articles provide that redeemable shares in Casuarina might be redeemed by the company at their par value on seven days' notice in writing, ``provided that no such redemption shall be made between the 24th day of June and the 7th day of July (both days inclusive) in any year''.

Forum in fact thus became a majority shareholder in Casuarina but took no part in its affairs. Forum's raison d'être was well understood by those in charge of it, who included Hutchinson as a director and Sheehan as secretary. They were satisfied to receive from Casuarina as dividends two amounts of $207.57 as contemplated in July 1967 and August 1968. These, with dividends received from other companies which had come for similar reasons under Forum's aegis, produced for it a revenue enabling it to pay an amount by way of dividend satisfactory to the three public companies whose shareholdings had enabled it to qualify as a subsidiary of a public company. Casuarina acquired shares in Lex Sternberg Motors. On 29 March 1968 that company declared a dividend of $6,560 in favour of Casuarina. This is the only item shewn in Casuarina's tax return for the period in question. It was reduced by $3 for expenses incurred, so that the taxable income of the company for the year in question was shewn in its return as $6,557. This amount was not actually received by Casuarina as, pursuant to arrangement, it allowed dividends declared in its favour to remain as loans without interest to Lex Sternberg Motors, except only for such amounts as were needed by Casuarina for its own outgoings including the sums it paid as dividends to Forum to enable Forum to make the necessary payments to the three obliging companies on whose public status its own status as a public company depended.

The Commissioner, by notice of assessment dated 2 July 1969, assessed Casuarina's tax as $983.55. This, as the adjustment sheet he sent shewed, was arrived at on the basis that Casuarina was a private company within the meaning of sec. 103A of the Act: and the rebate under sec. 46 was calculated in accordance with sec. 46(2). The company objected on numerous grounds by a notice of objection dated 23 July 1969. For some reason which does not appear, the Commissioner gave no decision on the objection until 3 November 1969, when he disallowed it. Thereupon Casuarina requested that, pursuant to sec. 188, the matter be referred to this Court. Concurrently with the assessment of primary tax the Commissioner assessed a liability in $2,786.50 for additional tax under Div. 7 of the Act. This was on the basis that the company had not distributed $5,573, that being the difference between the $6,557 above-mentioned

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ATC 4075

and $984 (which, as stated above, is the amount of primary tax as assessed by the Commissioner). This assessment too was objected to and it now comes before this Court in the same way. Such of the objections taken by the taxpayer as were persisted in before me raise substantially the same question in regard to both these assessments. The basic question in each is whether Casuarina was to be considered for the purposes of tax as being, within the meaning of sec. 103A, a public company or a private company. On top of this the Commissioner relies upon sec. 260.

Section 103A(1) states that for the purposes of Div. 7 ``a company is a private company in relation to the year of income if the company is not a public company in relation to the year of income''. The first question thus becomes: was Casuarina a public company as defined? If it was not, it was a private company and the Commissioner's assessments must, subject to sec. 260, be upheld. The relevant part of the definition is sec. 103A(2)(d)(v) which states that a company is a public company if it was ``in relation to the year of income, a subsidiary of a public company''. Its claim is that the accountants' scheme succeeded, that it at all relevant times was a subsidiary of Forum; and as stated above, Forum is itself a public company for the purposes of the Act because it is a subsidiary of a public company. The attributes that a company must have to be a subsidiary are set out in sec. 103A(4). It is convenient to set out the section so far as is necessary for the appreciation of propositions advanced by counsel for the Commissioner.

``103A(4) For the purposes of this section, a company is a subsidiary of a public company in relation to the year of income if, at the end of the year of income, one or more companies that are public companies...

(a) beneficially owns or own shares representing more than one-half of the paid-up capital of the first-mentioned company;

(b) is or are, by reason of its or their beneficial ownership of shares in the first-mentioned company, capable of controlling or of obtaining control of more than one-half of the voting power in that company;

(c) would be beneficially entitled to receive more than one-half of any dividends paid by the first-mentioned company; and

(d) would be beneficially entitled to receive more than one-half of any distribution of capital of the first-mentioned company in the event of the winding up, or of a reduction in the capital, of that company.''

There is no doubt that at the end of the year of income on 30 June 1968 Forum owned shares representing more than one-half of the paid-up capital of Casuarina. The first requirement is therefore satisfied unless Forum's shares ought not to be counted because they were redeemable preference shares. In respect of voting rights and participation in ordinary dividends they were in the same position as the ordinary shares. I see no reason for excluding them from the denotation of the word ``shares'' in sec. 103A(4). When elsewhere in the Act (e.g. in sec. 80B) the word ``shares'' is not to include redeemable shares they are expressly excluded. However, it was said for the Commissioner that, assuming that the redeemable shares of Forum in Casuarina were shares within the meaning of sec. 103A(4), nevertheless para. (b) of that subsection was not satisfied. Forum, it was said, was not by reason of its ownership of its shares capable at the end of the year of income of controlling or obtaining control of more than one-half of the voting power of the company. It is I think true that if one asks whether a person had a capacity at a given time to do a stated thing the question assumes a hypothetical attempt to do that thing either then or, other factors remaining the same, at some time thereafter. At 30 June 1968, and on the last moment of that day, Forum by reason of its shareholding held one-half of the voting power in Casuarina. If its shares were redeemed it would lose the control they gave. But a liability to lose control in the future does not contradict the present existence of a capacity to control. I do not think that the existence of a capacity in one person to exercise a control of voting power is nullified because another person may be capable of obtaining the control by some formal step readily available in the way discussed by Dixon J. in
Avon Downs Pty. Ltd. v. F.C. of T. (1949) 78 C.L.R. 353 at pp. 361-2. In other words, as I see the matter, a capacity to take over control is not the same thing as an existing capacity to control. Furthermore, the expression ``capable of controlling or of

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ATC 4076

obtaining control'' used in relation to the end of the year of income must, I consider, be read as meaning controllable as at 30 June 1968: and it is not insignificant that Forum's shares were never in fact redeemed and that they could not be redeemed between 24 June and 7 July in any year. Counsel for the Commissioner relied upon certain remarks in
W. P. Keighery Pty. Ltd. v. F.C. of T. (1957) 100 C.L.R. 66 at pp. 88-9. But, properly understood, they do not I think support his contention. Moreover, they were made in reference to statutory provisions different from those I have to consider. For these reasons I am satisfied that Casuarina was for the purposes of the Act a subsidiary of Forum and that it was therefore a public company for the purposes of the Act.

I turn now to sec. 260, which the Commissioner claimed availed him to support his assessments. The Act places the burden of proving that the assessments are excessive upon the taxpayer (sec. 190). But this is not I think to be taken as meaning that the taxpayer must in his case displace sec. 260 without knowing in what way it is said to operate in the particular case. I did not think that ominous rumbling references by the Commissioner to sec. 260 were enough. The taxpayer was, I considered, entitled to know what was the case under sec. 260 that it had to meet. And for myself, if I were to apply the section to the facts, I needed to be told precisely what was the contract, agreement or arrangement said to be absolutely void as against the Commissioner; who were the parties to or participants in it; and in what way exactly did it operate to alter the incidence of income tax, or relieve any person, and if so, what person, of liability to tax, or to defeat, evade or avoid any liability under the Act or prevent the operation of the Act. I therefore said that if the Commissioner intended to fall back upon sec. 260 his case should be formulated and set out in writing. This was done. So that the document thus produced would remain part of the record in the event of an appeal, I had it marked as an exhibit. It is in two parts, described as ``Commissioner's view A'', and ``Commissioner's view B'',-``of arrangement under Section 260''. The two versions were put forward as alternatives. Each alleges an arrangement made between Sternberg, Casuarina, the firm of accountants (through Jacobson) and Forum (through Jacobson). The arrangement alleged to have been thus made and then carried into effect was that transactions such as did take place would take place. The only substantial difference between the two versions of the arrangement is that A begins with steps by which Sternberg, his family and his companies became interested in Casuarina. Version B takes as the subject of the arrangement events commencing later, namely with the application by Forum for shares in Casuarina. I do not think it necessary to set out either statement here. Whichever be taken, the basic question is the same. Would such an arrangement as alleged, if carried out as alleged, be in whole, or as to any step in it, void as against the Commissioner? Counsel for the taxpayer did not concede that all the allegations in the documents were established. In particular he said that there was no evidence of one allegation: namely that it was arranged that Forum would not interfere in the management of Casuarina and would allow the management to be carried on for the benefit of the Sternberg family as directed by Sternberg. It is true that there was no evidence that this was explicitly arranged and agreed to by Forum. Certainly there was nothing which in law restricted Forum exercising whatever rights it had as beneficial owner of its shares in Casuarina. Had it not been in law free to do so, the scheme would have fallen to the ground. Nevertheless it was, I think, an element in the scheme, well understood by all concerned, that Forum would not in fact interfere in Casuarina's affairs provided it received by way of dividends the stipulated payments for taking Casuarina in as one of its subsidiaries. In fact Forum did not take any part in the internal affairs of Casuarina. I shall consider the application of sec. 260 on the basis that it was understood that it would not do so. Where then do we get to?

I do not doubt that what was done was pursuant to and in accordance with a concerted plan: that it was concerted between Sternberg and Jacobson and was carried out under the direction of its promoters, the accountants. And I do not doubt that the purpose of the plan and the effect of carrying it out was to alter the incidence of income tax that Sternberg's family companies or their shareholders would have had to pay and to relieve them of liability, for a time at all events, of some income tax. And I do not doubt that a scheme within sec. 260 can be an elaborate affair involving several companies and various subsidiary agreements and carried into effect by a sequence of steps. If there

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ATC 4077

were ever any doubt of that, the judgments in the Privy Council in
Peate v. F.C. of T. (1967) 1 A.C. 308 would dispel them. But what the Commissioner seeks to avoid is not the scheme so far as it affected Sternberg, his family and his companies. They are not parties to this case. I therefore refrain from making any finding of what the position would be if the case related to an assessment of the liability of any of them. It does not: it concerns only the assessments of Casuarina's tax liability, and Casuarina was merely a pawn in the whole scheme, perhaps it were better to say a puppet. The case for the Commissioner seems to be that in the carrying out of the scheme for the benefit of Sternberg, Casuarina had to be a public company and not a private company and that its becoming a public company by issuing shares to Forum was therefore void as against him, the Commissioner, and that thus it is to be taxed as if it were a private company. This proposition is I think answered by Keighery's case (supra) as referred to and followed by my brother Menzies in his judgment in
Ellers Motor Sales Pty. Ltd. v. F.C. of T., 70 ATC 4008 at p. 4015. His Honour quoted, and I again quote, the following statement from the judgment of Dixon C.J., Kitto and Taylor JJ. in Keighery's case (supra) at pp. 92-93-

``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 defeat etc. a liability imposed by the Act or to render ineffectual an attempt to give a company an advantage which the Act intended that it might be given.''

That statement must be read as relating to the facts of the case in which it appears. It states a limit to the operation that the words of sec. 260 might seem to have if they be considered apart from their place in the Act when the Act is read as a whole. That does not mean that words the Court used are to be read as if they were themselves the language of the statute. They are to be read as an exegesis of, not as a substitution for, that language. Nevertheless the passage I have quoted has, I consider, a direct bearing in the present case. It was sought for the Commissioner to cut this down by pointing to sec. 103A(6), as contrasted with sec. 105 in force at the time of Keighery's case but now repealed. Section 103A(6), it was said, shews that a taxpayer company has not an unrestricted right of choice to be either a public or a private company. That of course is so in a case to which sec. 103A(6) applies. But it does not apply to this case. The voting rights of Forum as a shareholder could not have been abrogated. Casuarina could cancel Forum's shareholding altogether by redeeming its shares: but that is entirely different from affecting its rights while a shareholder.

Counsel for the Commissioner, while reserving the right to contend hereafter that Keighery's case was wrongly decided, urged that it was distinguishable from the present case. Whatever view be taken of some aspects of that case, I would in this case follow the statement I have quoted above, even if I were not bound to do so. A person (individual or corporation) may by choosing one legal status rather than another affect his liability to tax. I cannot agree that sec. 260 enables the Commissioner to assess him as if he had some other status. Two illustrations will shew what a strange consequence that would be. A taxpayer is entitled to a concessional deduction for his wife. But sec. 260 does not enable the Commissioner to treat his marriage as a void arrangement. Similarly a taxpayer's liability depends in some cases upon whether or not he is a resident of Australia or in other cases is a resident in an isolated part of Australia. It cannot be said that if a man takes some employment abroad or in an isolated area, the Commissioner can treat his contract of employment as void because its performance by him would have the effect of relieving him of income tax.

I am not prepared to uphold the assessments on the supposition that Casuarina was not a public company. I do not think that sec. 260, understood as decisions binding upon me have established that it should be understood, compels such a conclusion. It is a provision that operates to nullify, for the purposes of the Act, arrangements that are within its purview, not to create some new arrangement. And, as I understand the authorities, it operates to render void as against the Commissioner the entirety of any arrangement or scheme to which it applies. It does not, I

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ATC 4078

think, enable the Commissioner to select part of a scheme-in this instance the allotment of shares in Casuarina to Forum-and treat that as a nullity while allowing other parts of the scheme-in this instance the receipt by Casuarina of dividends from Lex Sternberg Motors-to stand and exact tax upon that basis. It may be that the Commissioner could altogether disregard the existence of Casuarina. What he cannot do is to regard it as a taxpayer but give it a different character from that which it in fact has. When transactions are, by virtue of sec. 260, absolutely void as against the Commissioner, what is meant is, as the Privy Council said in Peate's case (supra) at p. 331, that ``it [sec. 260] only operates notionally to destroy, for the validity of the transactions is only affected so far as the Commissioner and proceedings under the Act are concerned''. A company is in the eye of the law an entity, a person. Section 260 requires and enables the Commissioner to disregard this in certain circumstances when a company owes its existence to a tax-avoidance scheme. But that does not mean that the company is not in law an entity. It means only that the Commissioner may treat it as a nonentity. Professor Hart in his inaugural lecture, delivered in 1954, entitled ``Definition and Theory in Jurisprudence'', printed in the Law Quarterly Review, vol. 70, p. 37, said (at pp. 49-50) that: ``It is said by many that the juristic controversy over the nature of corporate personality is dead. If so we have a corpse and the opportunity to learn from its anatomy''. In the course of his post-mortem he adverted to the mixed lot of beings to which what he called ``the one-man tax-dodging company'' belongs. Juristic controversies about corporate personality and its derivation may be dead. But they seem to me to be at times stirring in their graves. I adopt the metaphor because the whole topic is so replete with metaphors. Cardozo J. once said in the New York Court of Appeals-

``The whole problem of the relation between parent and subsidiary corporations is one that is still enveloped in the mists of metaphor. Metaphors in law are to be narrowly watched, for starting as devices to liberate thought, they end often by enslaving it. We say at times that the corporate entity will be ignored when the parent corporation operates a business through a subsidiary which is characterised as an `alias' or a `dummy'. All this is well enough if the picturesqueness of the epithets does not lead us to forget that the essential term to be defined is the act of operation. Dominion may be so complete, interference so obtrusive, that by the general rules of agency the parent will be a principal and the subsidiary an agent.''

Berkey v. Third Avenue Railway Co. (1926) 224 N.Y. 84 at pp. 94-95.

I am indebted for a knowledge of this to Paton, Jurisprudence, 3rd ed. by Professor Derham, p. 377. It is referred to in the learned commentary there on jurisprudential theories as to the nature, for the purposes of our law, of corporations as legal persons. I mention that basic question as it seems to me to be inevitably involved in a consideration of the attitude the Commissioner has taken. I do so with some diffidence but undeterred by Professor Wedderburn's acid comment on judicial disregard of academic writings and adherence in this field to outmoded theories: see Modern Law Review (1965), vol. 28, p. 70. A proprietary company may well seem to be, in reality, merely the trade-name in which a man carries on some part of his affairs. But by a following of correct legal forms the name becomes in law a thing. Formalism produces a legal substance, and its ``owner'' can by careful book-keeping get all the advantages, be they limited liability, relief from taxation or other benefit, which the law annexes to his sedulous use of the corporate name. A company like Casuarina may be called prestigious in the proper sense of the word, and the accountants called prestigiators. This and other metaphorical descriptions, dummy, puppet, alias, alter ego and the like come readily to mind: but they remain descriptive not definitive of legal consequences. They suggest agency or instrumentality. That, a generalised concept of agency, can I think provide in some cases a practical solution of theoretical difficulties. Of course I must entertain misgivings arising from the way in which basic doctrine is expressed in
Salomon v. Salomon & Co. (1897) A.C. 22. But the strictness of that has been giving way somewhat in recent times. I alluded to this question in my judgment in
Peate's case (1964) 111 C.L.R. 443 at pp. 478 and 480, and I referred to it too in what I said in
Gorton's case (1965) 113 C.L.R. 604 at p. 627. The latter was a dissenting judgment, but my observations on this matter were merely incidental. I need not go further into the topic here. A company which speaks with the voice of the

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ATC 4079

person who controls it and which acts as he directs is not necessarily to be called a facade, nor its acts in the law called shams. Its existence as a legal person is not incompatible with its practical obedience to orders: and that it acts as a taxpayer directs may be a reason for relying upon sec. 260 to ignore it in some cases. But in the present case the Commissioner does not seek to disregard the existence of Casuarina. On the contrary, he seeks to tax it. He invokes sec. 260 not because of any arrangement it made to enable it to avoid taxation but because it assumed the character of a public company as part of a scheme to enable Lex Sternberg Motors to avoid taxation. Casuarina is a public company within the meaning of the Act: and the Commissioner, having elected to treat it as a taxpayer, cannot I think by turning to sec. 260 treat it as having a different character in law from that which it actually has. I am not concerned with what would be the position if the Commissioner had chosen an entirely different course and the liability of Lex Sternberg Motors to taxation were the question. That does not arise any more than did the position of Aquila Steel Company Pty. Ltd. in Keighery's case (supra). The Commissioner's attempt to treat the allotment to Forum of shares in Casuarina as a ``contract, agreement or arrangement'' void by sec. 260 fails.

I allow both appeals against the assessments and set both the assessments aside. I remit to the Commissioner the assessment of the primary tax as distinct from the additional tax under Div. 7, with liberty to him to issue an assessment of the tax payable by Casuarina as a public company in the year in question.

ORDERS:

In matter No. 40 of 1969-Appeal allowed. Assessment set aside. Matter remitted to the Commissioner with liberty to assess tax payable by the taxpayer on the basis that it was in the year in question a public company.

In matter No. 5 of 1970-Appeal allowed. Assessment set aside.

The Commissioner to pay the taxpayer's costs taxed on the basis that the matters were heard together.

Usual order as to exhibits.