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

Judges:
Mason J

Court:
High Court

Judgment date: Judgment handed down 23 August 1973.

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Mason J.: This is an appeal by Kolotex Hosiery (Australia) Pty. Limited (formerly known as Partition Industries Pty. Limited) against an assessment to income tax for the year ended 30 June 1967. By its return of income for that year the taxpayer disclosed an assessable income of $515,826 from which it claimed as a deduction past losses amounting to $509,367, leaving a taxable income of $6,459. The Commissioner disallowed the past losses and assessed the taxpayer to income tax on a taxable income of $515,826. The issue is whether the past losses should have been disallowed. The assessment and the defence of the assessment turn largely on the application of the provisions of sec. 80, 80A, 80B(5) and 80C of the Income Tax Assessment Act 1936-1967. It is common ground that the taxpayer sustained trading losses amounting to $509,367 in the seven years which ended on 30 June 1966 which had not previously been allowed as a deduction and which would have been deductible under sec. 80, had the taxpayer been an individual. It is necessary, therefore, to review the changes which took place in the relevant period in the beneficial ownership of shares in the taxpayer and in the group of companies of which it was a member, for the Commissioner was not satisfied that the shareholding in the taxpayer and in its parent companies in the year of income complied with the conditions prescribed by sec. 80A and 80C. In arriving at this conclusion the Commissioner treated certain shares, in particular those held by Mr. J.S. Howie in Moomba Pty. Limited (hereinafter called ``Moomba''), as not having been beneficially owned by him at any time during the year of income - see sec. 80B(5).

Before turning to the details of the changes

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in beneficial ownership of shares in the taxpayer and the related companies, I shall outline the relationship which existed between the companies in the group and the circumstances in which Mr. J.S. Howie came to acquire an interest in them. The taxpayer was a member of a group of companies consisting of H. & J. (Holdings) Pty. Limited (hereinafter called ``H. & J.'') which, as its name suggests, was the holding company, Levi & Hill Pty. Limited (hereinafter called ``Levi & Hill'') (a subsidiary of the holding company), the taxpayer (a subsidiary of Levi & Hill) and Partition Industries (Overseas) Pty. Limited (hereinafter called ``Overseas'') (a subsidiary of the taxpayer). The companies were engaged in the business of manufacturing and selling partitions and wall coverings. The principal shareholders in the group were Henry Josephson, Irvine H. Stanton and his wife Doone Stanton, who held respectively 10,334, 3,751 and 3,125 fully paid $1 ordinary shares in H. & J.

In the same year, that is, the year ended 30 June 1960, at the invitation of Mr. Josephson, Mr. Howie became interested in the group. Mr. Howie then had an established family company, Moomba, in which he held 2,000 Governor's shares. The balance of the 23,000 issued shares where held by four of Mr. Howie's family companies, one of which, Andrew Holdings Pty. Limited, held 22,700 shares. By the end of that year Mr. Howie and Moomba were allotted respectively 1 and 3,999 fully paid ordinary shares in H. & J. Mr. Howie was allotted one fully paid ordinary share in Levi & Hill and Moomba was allotted 9,999 fully paid ordinary shares in Overseas.

The beneficial ownership of the issued shares in H. & J. in the years ended 30 June 1960 to 30 June 1967 is shown in the following table -

             30/6/60 30/6/61 30/6/62 30/6/63 30/6/64 30/6/65 30/6/66 30/6/67
H. & J. Holdings
     P/L:
Ordinary Shares
 (fully paid):
K. Barnett      375      -       -       -      -       -       -       -
A.W. Bowen        1      1       -       -      -       -       -       -
H. Josephson 10,334      -       -       -      -       -     100     100
I.H. Stanton  3,751      1       1       1      1       1     101     100
A.C. Sharpe     959      -       -       -      -       -     100     100
D. Stanton    3,125      -       -       -      -       -     100     100
J. Reid         225      -       -       -      -       -     100     100
J.S. Howie        1      1       1       1      1       1       1       1
Moomba Pty.
Ltd.          3,999 62,017  62,241  62,241 62,241  62,241  60,991  31,191
P.I.O.C.
Investments       -      -       -       -      -      -        -  29,801

``B'' Ordinary Shares
   (fully paid):
M. Maxwell      250      -       -       -      -        -    250     250
Moomba Pty.
Limited           -      -       -       -      -        -      -       -

12 1/2% Preference
Shares (fully paid):
M. Maxwell      500      -       -       -      -       -     500     500

Total Shares
Issued       23,520 62,020  62,243  62,243 62,243  62,243  62,243  62,243
      

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The Josephson group of companies met with severe trading losses after Mr. Howie and Moomba had been induced to invest in the group. Mr. Howie was not fully informed as to the financial position of the companies before he acquired an interest in them. Mr. Josephson's health failed and Mr. Howie decided to take control of all the companies. By the end of the next financial year, 30 June 1961, Moomba had beneficially acquired all the issued shares in H. & J. It was registered as the holder of all but three shares which were held on trust for it. By the end of the same year H. & J. had acquired benefically 56,212 $2 shares in Levi & Hill, being the whole of its issued capital except for 500 $2 shares held by Moomba which H. & J. acquired in the following year. In turn, by 30 June 1961 Levi & Hill had acquired beneficially the whole of the taxpayer's issued capital. Levi & Hill was registered as the holder of all but four shares which were held on trust for it. In the course of the year ended 30 June 1961 the issued capital of each of the three companies had increased in consequence of Moomba subscribing further capital to H. & J. At the same time Moomba became the holding company of the group.

On 7 February 1962, by special resolutions passed at extraordinary general meeting of members in H. & J., Levi & Hill and the taxpayer, Mr. Howie (who already enjoyed a preponderance of the voting power in Moomba by virtue of the voting rights attaching to his Governor's shares) was appointed Governing Director of each company and a preponderance of the voting power in each company was conferred upon him in his capacity as Governing Director. The articles of each of the three companies were amended so as to contain provisions similar to the following articles of H. & J. -

``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 Art. 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.''

In 1963 and 1964 the group (which now included Moomba) encountered further financial difficulties. Early in 1964 a receiver was appointed of the taxpayer and on 23 March 1964 a winding-up order was made against it. It was at this time that Mr. Howie met Mr. Ohlsson, an accountant who acted as a consultant in the rehabilitation of unsuccessful companies and who had had experience in the sale of loss companies for tax purposes. From the oral evidence given by Mr. Howie and Mr. Ohlsson I have not been able to gain a detailed picture of what then passed between them, but I am satisfied that they contemplated from a very early stage that the companies in the group would be sold as loss companies for tax purposes.

On 23 March 1964 (the day on which the winding-up order was made) Moomba, Mr. Howie and Mr. Stanton, being the only shareholders in H. & J., granted an option to Mr. Ohlsson's company, Neil Ohlsson Pty. Limited, to acquire 75% of the share capital in H. & J. for the sum of $4,000, the option to be exercised before 31 December 1964. Subsequently the option was extended until 31 December 1965. The option was not exercised and the agreements were mutually rescinded by a later agreement in June 1965 by which the three shareholders gave Neil Ohlsson Pty. Limited an option until 30 June 1966 to acquire 60% of the issued capital of H & J for $4,000. Clause 7 provided that the purchaser was entitled to specify another person or company as the purchaser in the notice exercising the option. Again the option was not exercised, but during its currency a scheme of arrangement between the taxpayer, Overseas, Levi & Hill, H. & J. and Moomba and their unsecured creditors was formulated and considered by meetings of the unsecured creditors held in January 1966 pursuant to an order made by the

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Supreme Court of New South Wales. Some time before July 1965 negotiations for the sale of the taxpayer, as a loss company commenced between Mr. Ohlsson and those in control of Kolotex Holdings Limited, the holding company of another group of companies carrying on business as manufacturers of hosiery products. By a letter dated 23 July 1965 from Mr. Ohlsson's solicitors, Messrs. Allen, Allen & Hemsley, to the solicitors of Kolotex Holdings Limited, it was recited that the purchaser would pay 3/6d in the £ of the confirmed losses of the taxpayer, that a scheme of arrangement would be submitted to the Court, that the agreement for sale would provide for 60% of the shares in H. & J., Levi & Hill and the taxpayer to be transferred to the purchaser, and that Mr. Howie would retain the beneficial ownership of shares in Moomba having 40% of the voting and dividend rights and the right to receive 40% of any distributions of capital.

The letter went on to say -

``Mr. Ohlsson has asked us to draw your attention to the difficulties created by the changes in the shareholders of H. & J. (Holdings) Pty. Limited in the years 1960 and 1961 (see Section 80C).''

This was a reference to the circumstance that the requirements of sec. 80C (which had been introduced by Act No. 110 of 1964) could not be satisfied, as they applied to the taxpayer's losses for the years ended 30 June 1960 and 1961, because the beneficial ownership of more than 60% of the shares in H. & J. had altered in 1961, notwithstanding that the losses in the two years were deductible under the legislation previously in force.

At some time in 1965 Mr. Ohlsson and his wife became the principal shareholders in Andrew Holdings Pty. Limited, one of the Howie family companies. They each acquired 9,500 `C' redeemable preference shares of $2 each. Mr. Ohlsson acquired 502 fully paid $2 `A' shares and his wife acquired 500 fully paid `A' shares, leaving Mr. Howie as the only other shareholder in the company with one `B' share.

In December 1965 the Supreme Court ordered that meetings of creditors of the taxpayer, Moomba, Levi & Hill, H & J. and Overseas be convened to consider a draft scheme of arrangement. The scheme was approved by creditors in January 1966 and by the Court on 15 December 1966 when the Court also made an order staying the winding-up of the taxpayer. The scheme provided that the shareholders of Moomba should sell 60% of their shares to a purchaser and that 49% of the shares in H. & J., Levi & Hill, the taxpayer and Overseas should be sold to the same purchaser. It also provided that Redcliffe Property Exchange Pty. Limited, another company under the control of Mr. Ohlsson, should pay $4,000 to the trustee of the scheme and that this sum together with certain other moneys should be paid to creditors in satisfaction of their debts and that releases would be executed by them. Independently of the provisions of the scheme it was agreed that Redcliffe Property Exchange Pty. Limited would make a payment of £3,337 to Mr. Howie as the consideration for his participation in the scheme, the sum to be applied by him in paying out certain creditors of the companies whose debts were guaranteed by him.

In June 1966 or shortly before, Mr. Ohlsson approached six of the former shareholders of H. & J. and prevailed upon them to take a transfer of shares in that company at a price of $1 per parcel of shares. By transfers which were executed in June 1966, approved by the directors of H. & J. and subsequently registered, Moomba transferred a parcel of 100 ordinary shares each to Mr. Josephson, Mr. I.H. Stanton, Mrs. D. Stanton, Mr. A.C. Sharpe and Mr. J. Reid. On 26 June 1966 Moomba likewise transferred 250 ordinary shares (wrongly described as `B' ordinary shares) and 500 shares (wrongly described as ``preference'' shares) in the same company to Mrs. Margaret Maxwell, a former shareholder in H. & J. By a special resolution passed on 27 June 1966 it was provided that the 500 shares transferred to Mrs. Maxwell should be converted into preference shares carrying a right to a fixed cumulative preferential dividend of 12½% and a preferential right to a return of capital in a winding up with no right to participate in surplus assets. By the same resolution the 250 shares transferred to Mrs. Maxwell were converted from ordinary

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to `B' ordinary shares and it was provided that they should rank pari passu with ordinary shares in respect of dividends and participation in a winding up. By means of these transactions the beneficial ownership of shares in H. & J. was so arranged that, subject to one question of construction, it complied with the requirements of sec. 80C(1) in relation to losses incurred in the years ended 30 June 1960 and 1961.

Another step which remained to be taken was to dispossess Moomba of its assets other than the shares which it owned in companies in the group. Moomba had shares in Records Pty. Limited which carried on an independent business. The shares derived from an inheritance which Mr. Howie had received from his father. Moomba had some other assets, including insurance policies and a debt due by Peter Holdings Pty. Limited. At a meeting of directors of Moomba on 30 June 1966 attended by Mr. and Mrs. Howie it was resolved to sell all the assets of Moomba (except the shares in the group) to Peter Holdings Pty. Limited (one of the Howie family companies) for $789,532, to be discharged by the purchaser assuming liabilities amounting to $464,260, the balance of $325,272 to be paid in cash by Peter Holdings Pty. Limited. In accordance with the resolution the relevant assets were transferred to Peter Holdings Pty. Limited. A cheque for the balance of the purchase price was given by the purchaser to Moomba, that company gave a cheque in the like amount to Mr. Howie who in turn gave a cheque for the same amount to Peter Holdings Pty. Limited. In the result Mr. Howie owed Moomba $325,272 (an amount which was payable on demand) and was owed a like amount by Peter Holdings Pty. Limited. The disposal of these assets by Moomba was actuated partly by the desire of Mr. Howie to retain them and, as well, by the disinclination of the Kolotex interests to acquire indirectly through Moomba an interest in assets which were of no relevance to their business activities. The existence of Mr. Howie's large debt to Moomba, payable on demand, placed him in a situation of some weakness as against the Kolotex interests.

The sale of the taxpayer as a loss company was effected by an agreement dated 17 January 1967 between Mr. Ohlsson, Redcliffe Property Exchange Pty. Limited, P.I.O.C. Investments Pty. Limited (a company which Kolotex Holdings Limited caused to be incorporated on 9 January 1967), Andrew Holdings Pty. Limited, Elaine Holdings Pty. Limited, John Holdings Pty. Limited, Peter Holdings Pty. Limited and Mr. Howie. Under the agreement Mr. Ohlsson was the vendor. He agreed to procure transfers of the relevant shares (except those held by Andrew Holdings Pty. Limited) to P.I.O.C. Investments or its nominees for the price of $12, to be apportioned in the sum of $1 to each shareholder. For Andrew Holdings Pty. Limited's shares in Moomba (comprising 1,200 `A' shares of $2 each paid to 5c, 12,360 fully paid `B' shares of $2 each and 60 `B' shares of $2 each paid to 5c) P.I.O.C. Investments agreed to pay $25,200 on completion and such additional amount as would increase the purchase price by 17.5c for every dollar of loss sustained by the taxpayer if and when such loss is allowed as a deduction from the taxpayer's assessable income. Mr. Ohlsson, rather than Mr. Howie, stood to benefit from the sale, as he and his wife held all but one share in Andrew Holdings Pty. Limited.

As a result of the agreement and the transfers, P.I.O.C. Investments acquired 60% of the share capital of Moomba (excepting Mr. Howie's 2,000 Governor's shares) and slightly less than 50% of the share capital of H. & J., Levi & Hill, the taxpayer and Overseas. In H. & J., P.I.O.C. Investments acquired 29,801 shares of which all but one share was transferred to it by Moomba.

The taxpayer carried on business in the year ended 30 June 1967, making the profit already mentioned. On 31 October 1967 P.I.O.C. Investments acquired the outstanding shares in Moomba and the seven parcels of shares in H. & J. which had been transferred by Moomba to the six former shareholders in June 1966. For his remaining shares in Moomba Mr. Howie received a cheque for $100,000. He handed to Moomba his cheque in the same amount in partial repayment of the debt which he owed that company. The balance of that debt was then written off. The individual shareholders were each paid $25 for the parcels of shares which

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they held. The sale price of the shares in the two companies was based on an assets valuation of the shares made by the auditors of the companies.

The assessment of the taxpayer's income for the year ended 30 June 1967 was made by Mr. Jackson, an Assistant Deputy Commissioner, who is now deceased. As far as is known the material which he had before him has been tendered in evidence. It consists of a lengthy report made by two investigation officers of the department, together with supporting documents, the comments of Mr. Argent, a supervising investigation officer, and the further comments of Mr. Hope, the chief investigation officer. The report and the assessment were made in the mistaken belief that the taxpayer had made an application under sec. 80D of the Act. In fact it had not done so, but nothing turns on this misapprehension.

The report concluded that the loss for the 1960 year was not deductible because, contrary to sec. 80C, H. & J. was the holding company having a controlling interest in the taxpayer in that year, whereas it did not have such an interest in the year of income, Moomba then having a controlling interest. The report further recommended that the shares held by Mr. Howie in Moomba after the sale to P.I.O.C. Investments in February 1967 should be treated as not beneficially owned by him under the provisions of sec. 80B(5) with the consequence that there was no compliance with sec. 80C in relation to the remaining years of loss, Moomba having a controlling interest in the taxpayer in those years.

The grounds on which this recommendation was based are to be found in para. 50 and 51 of the report. They state -

``50. Extracts from the minute books of Moomba Pty. Ltd. and its subsidiaries detailing the steps taken whereby the deductibility of the previous years losses of the taxpayer company, was to be preserved for the benefit of the Kolotex Group, are summarised on folio 4. All of these necessary positive actions had to be approved by Howie who, throughout the year ended 30 June 1967, possessed plenary powers in all companies. When these positive actions by Howie are considered, together with -

• (a) The scheme of Arrangement.
• (b) The fact that Howie was to receive £6,000 (subsequently reduced to £3,337) from Redcliffe Property Exchange Pty. Ltd. for his participation in the scheme.
• (c) The Agreement dated 17 January 1967 relating to the purchase of shares by P.I.O.C. Investments Pty. Ltd. in Moomba Pty. Ltd. and its associated companies, including the taxpayer company

it is clear that the deductibility of the previous years losses for the taxpayer company could not have been preserved for the benefit of the Kolotex Group without the direct participation and agreement of Howie.

51. J. W. Howie, being a person who beneficially owned shares in Moomba Pty. Ltd. throughout the years losses were incurred by the taxpayer company and beneficially owned shares in the former company throughout the year of income, has clearly -

• (a) entered into a contract agreement or arrangement that depended for its operation on his beneficial ownership of those shares; and
• (b) the arrangement etc. was entered into for the purpose of enabling taxpayer company to obtain a deduction for previous years losses.

The requirements of sec. 80B(5) are met and one consequence is that the shares beneficially held by Howie in Moomba Pty. Ltd. during the year of income are to be disregarded in determining whether the provisions of sec. 80C have been satisfied during the years 1961 to 1967, inclusive. It has already been stated (para. 46) that sec. 80C denies a deduction to the taxpayer company for the loss incurred in the 1960 year.''

Mr. Argent, in agreeing with the recommendations in the report, stated -

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``An arrangement of the type envisaged by sec. 80B(5) which depended for its operation on the beneficial ownership of shares in Moomba Pty. Ltd. by John S. Howie, has clearly been entered into for the purpose of enabling Kolotex Hosiery Australia Pty. Ltd. to obtain a deduction for previous years losses. It is considered that in the circumstances present in this case, the shares owned by Howie should be treated as not having been beneficially owned at all times during 1967 year, by a shareholder who beneficially owned them in the years when the losses were incurred.''

The recommendation of the investigation officers was supported by Mr. Hope, and Mr. Jackson made the comment on the file, ``Take this action''. It is to be taken, therefore, that he came to this conclusion on the material in, and on the annexures to, the report.

Before Act No. 110 of 1964 introduced sec. 80A, 80B and 80C, the only condition imposed on the deduction by a corporate taxpayer of losses in previous years was that the Commissioner should be satisfied that on the last day of the year of income shares of the company carrying not less than 25% of the voting power were beneficially held by persons who beneficially held shares carrying not less than the same percentage of voting power on the last day of the year in which the loss was incurred (sec. 80(5)). Sections 80A, 80B and 80C, as amended by Acts Nos. 103 of 1965 and 50 of 1966, imposed different and more far-reaching conditions.

Section 80A(1) provided that a company's losses of previous years should not be taken into account unless the Commissioner was satisfied that at all times during the year of income shares carrying rights to not less than 40% of certain entitlements were beneficially owned by persons who, at all times during the year in which the loss was incurred, beneficially owned shares carrying rights of those kinds. Section 80B contained a series of provisions relating to the beneficial ownership of shares and rights attaching to shares. Section 80B(5) empowered the Commissioner, in the circumstances there mentioned, to treat shares in the company as not being beneficially owned by a person. In its original form this provision was directed to shares the subject of an option and enabled the Commissioner to treat the person having the option, or the benefit of the option, as the beneficial owner. However, in its amended form the subsection was differently expressed.

Section 80C(1) provided that a subsidiary company's losses of previous years should not be taken into account unless the Commissioner is satisfied that in the year of income the holding company, being a company in which no other company had a controlling interest in the year of loss, had a controlling interest in the subsidiary and that during the year of income shares in the holding company carrying rights to not less than 40% of certain entitlements were beneficially owned by persons who, at all times during the year of loss, beneficially owned shares carrying rights of those kinds. The provisions of sec. 80B(3) to (8) inclusive were made applicable by sec. 80C(3).

Section 80A(1) was expressed to be subject to ``the next four succeeding sections''. Section 80C(1) commences ``Notwithstanding sections eighty, eighty AA and eighty A of this Act''. The relationship between the two sections is not entirely clear. As their provisions are negative, there is something to be said for the view that their requirements are cumulative, subject perhaps to the paramountcy of sec. 80C in the event that there is a compliance with its requirements. However, in the circumstances of this case it is unnecessary to decide this question, because, as will appear later, I take the view that the requirements of sec. 80C, in so far as they apply, are not satisfied.

The three sections give rise to some difficulties of interpretation. Sections 80A and 80C seem to have been drafted on the assumption that voting power is necessarily attached to shares, whereas in this case by the articles of H. & J., Levi & Hill and the taxpayer it is exercisable by Mr. Howie in virtue of his office as Governing Director. Against this background it is necessary to ascertain what is meant by the expression ``voting power in the company'' in sec. 80A(1)(c) and sec. 80C(1)(b)(i). In my opinion the words should

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be given their natural meaning, signifying the entire voting power in the company, not merely that voting power which is attached to shares.

A cognate question arises in connection with the expression ``controlling interest'' in sec. 80C(1). The appellant submitted that in determining whether H. & J. or Moomba had a ``controlling interest'' in the taxpayer within the meaning of sec. 80C(1)(a), the votes attributable to Mr. Howie's position as Governing Director of Levi & Hill and the taxpayer should be disregarded. The appellant pointed to statements made in the decided cases which indicate that capacity to control a company resides with the shareholders who by virtue of the voting power attaching to their shares are able to control the company in general meeting. A notable example is the often-quoted observation concerning ``controlling interest'' made by Rowlatt J. in
B.W. Noble Ltd. v. Commrs. of I.R. (1926) 12 T.C. 911, at p. 926: ``it means the man whose shareholding in the company is such that he is the shareholder who is more powerful than all the other shareholders put together in general meeting''. See also
I.R. Commrs. v. J. Bibby & Sons Ltd., [1945] 1 All E.R. 667, at p. 670, per Lord Macmillan.

However, these statements are neither decisive nor persuasive, in relation to the question now under consideration. They were invariably made in a context in which the voting rights in the company were attached to shares, where there was no issue as to the relevance of voting rights attaching to an office, not to shares. Central to the concept of control of a company is the capacity to control a general meeting. That capacity rests on majority voting power and it matters not whether the majority voting power is, or is not, attached to shares. It has not been suggested that the voting power given by the articles to Mr. Howie in his capacity as Governing Director infringes the requirements of the Companies Act or is otherwise invalid. Accordingly, it is my opinion that in determining whether H. & J. or Moomba had a controlling interest in the taxpayer from 7 February 1962 onwards regard must be had to the voting power exercisable by Mr. Howie as the Governing Director of the company.

As Kitto J. remarked in
Mendes v. Commr. of Probate Duties (Vic.) (1967) 122 C.L.R. 152, at p. 161, although the word ``interest'' might be thought to refer to a holding of shares and therefore to the voting power which shares give at a general meeting, rather than to the control of a company's affairs by whatever means, the weight of authority establishes that there is no relevant difference between the two expressions ``having a controlling interest in the company'' and ``having control of the company'' and that a ``controlling interest'' is not restricted to a beneficial or proprietary interest in shares in the company the subject of the control (
British American Tobacco Company Ltd. v. I.R. Commrs. [1943] A.C. 335;
Barclays Bank Ltd. v. I.R. Commrs. [1961] A.C. 509). It is now beyond question that company A has a controlling interest in company C if, having control of company B, it has the majority voting power in company C by means of the votes attaching to its shares in company C and those attaching to its shares in company C and those attaching to the shares held in company C by company B. It is consistent with this approach to say that a parent company has a controlling interest in another company, its sub-subsidiary, even though it holds no shares in the sub-subsidiary, provided that it controls the majority in voting power in its subsidiary which in turn controls the majority voting power in the sub-subsidiary. This statement accords with the remarks of Kitto J. in Mendes case (supra), at p. 162. And it gains added support from the provisions of sec. 80C(3) which, when it speaks of the interposition of a company between the holding company and the subsidiary, contemplates a holding company which may not be a beneficial owner of shares in the subsidiary.

On this point it is necessary to consider the submission put forward on behalf of the Commissioner that sec. 80C(1) requires of the holding company not only that it was a company in which ``no other company had a controlling interest'' at any time during a year in which the subsidiary incurred a loss but also that in the year of income no other company should have a controlling interest in the holding company. By way of alternative it was suggested that when

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another company acquired a controlling interest in the original holding company and maintained that controlling interest in the year of income, the necessary consequence was that the original holding company could not be said to have a controlling interest in the subsidiary in that year in conformity with sec. 80C(1)(a). In my opinion, neither construction is correct.

Section 80C(1) provides that -

``... where a company in which no other company had a controlling interest (in this section referred to as `the holding company') had a controlling interest in another company (in this section referred to as `the subsidiary company') at any time during a year in which a loss was incurred by the subsidiary company, the loss shall not be taken into account for the purposes of section eighty of this Act unless the Commissioner is satisfied that, at all times during the year of income of the subsidiary company -

• (a) the holding company had a controlling interest in the subsidiary company.''

The words ``(in this section referred to as `the holding company')'' on which the first submission was based do not support the suggested conclusion. There is a clear and recognised distinction between a statutory definition and a convenient means of reference for drafting purposes. The words to which I have referred fall into the second category and I am unable perceive any persuasive reason for giving them any different meaning. The particular paragraphs of sub-sec. (1) spell out precisely the relationship which is required to exist between the holding company and the subsidiary company (para. (a)) and the required identity between the holding company's shareholders in the year of loss and the year of income (para. (b)). It was not submitted that the provision made by para. (b) is an ineffective or inadequate provision in the absence of some such additional requirement as that which is now proposed. And the slender foundation upon which the suggested implication rests stands in marked contrast with the precise and explicit formulation of the requirements in para. (a) and (b). There is an absence of that clarity of language which is required in a taxing statute to deprive the taxpayer of a deduction to which it is otherwise entitled.

The distinction which sec. 80C(3) draws between ``the holding company'' and ``the interposed company'' has no bearing on this question. An interposed company in the contemplation of this provision is one which stands between the holding company (otherwise identified in accordance with the provisions of sub-sec. (1) and the subsidiary company. Accordingly it is not possible to argue from the distinction drawn by sub-sec. (3) that a holding company is the ultimate holding company for the time being in which no other company has a controlling interest.

Likewise there is, I think, nothing to commend the view that the original holding company ceases to have a controlling interest in the subsidiary company if, before or during the year of income, another company acquires a controlling interest in the holding company. The acquisition by the other company of a controlling interest in the holding company will, as a consequence of the holding company's continued controlling interest in the subsidiary company, give the new company a like interest in the subsidiary. But this circumstance depends upon, and does not deny, the continuation of the holding company's controlling interest in the subsidiary. In some contexts, as, for example, where the inquiry is designed to identify the location of an ultimate controlling interest in a group of companies, it may be that the controlling interest resides in one company to the exclusion of another. But here the simple question is whether a company otherwise identified has a controlling interest in the year of income in the company which is the taxpayer. As I have said, the existence of a controlling interest in the first-mentioned company is an irrelevant consideration. As Viscount Simonds said in
J. Bibby & Sons Ltd. v. I.R. Commrs. (1945) 29 T.C. 167, at pp. 184-185: ``Those who by their votes can control the company do not the less control it because they may themselves be amenable to some external control.''

Accordingly, for the purposes of sec. 80C(1), H. & J. was the holding company of

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ATC 4104

the taxpayer for the year ended 30 June 1960 and for part of the succeeding year, when Moomba became the holding company and continued so to be until October 1967. But by reason of the majority voting conferred upon Mr. Howie as Governing Director by the amendments to the articles of the taxpayer, Levi & Hill and H. & J. on 7 February 1962, neither H. & J. nor Moomba had a controlling interest in the taxpayer at any time thereafter up to and including the year ended 30 June 1967. The consequence is that the taxpayer's claim to deduct the losses in the years ended 30 June 1960 and 1961 cannot succeed because H. & J., the holding company in the two years, did not have a controlling interest in the taxpayer in the year of income, the year ended 30 June 1967, contrary to the requirements of sec. 80C(1)(a). Nor did the beneficial ownership of shares in H. & J. in the year of income comply with sec. 80C(1)(b)(i). An additional reason for disallowing the loss incurred in the year ended 30 June 1961 is that Moomba which was the holding company for part of that year did not have a controlling interest in the taxpayer in the year of income. For the same reason the loss in the year ended 30 June 1962 must be disallowed. For part of that year, until 7 February 1962 when the special resolutions affecting the voting power of the taxpayer, Levi & Hill and H. & J. were passed, Moomba was the holding company and it had a controlling interest in the taxpayer; yet, contrary to the requirements of sec. 80C(1)(a) it did not have such an interest in the taxpayer in the year of income. The subsection has no application to the next four succeeding years in which losses were sustained because at no time in these years did Moomba, the holding company, have a controlling interest in the taxpayer.

To deal with the losses in these years sec. 80A(1) must be applied. To entitle the taxpayer to the deduction the Commissioner is required to be satisfied that at all times during the year of income shares in the taxpayer ``carrying between them - (c) the right to exercise not less than two-fifths of the voting power in the company... were beneficially owned by persons who, at all times during the year in which the loss was incurred, beneficially owned shares in the company carrying rights of those kinds''.

For reasons already stated the expression ``voting power'' in the company includes the voting power exercisable by Mr. Howie as Governing Director. Accordingly, although Levi & Hill beneficially owned 28,902 shares in the taxpayer, carrying 28,902 votes out of a total of 57,402 votes attaching to shares, Levi & Hill's shares carried substantially less than 40% of the voting power of the taxpayer once Mr. Howie's voting power under the articles is taken into account. As Levi & Hill was in the year of income the one beneficial owner of shares in the taxpayer, which was also a beneficial owner of shares in the six years of loss, it follows that the Commissioner could not in law be satisfied that there was a compliance with the requirements of sec. 80A(1)(c) in its application to each of the losses incurred by the taxpayer in the six years preceding the year of income.

Of the grounds on which in my view the taxpayer's losses should be disallowed, one only was relied upon in the recommendations which led to the making of the assessment. It related to the disallowance of the loss in the 1960 year for non-compliance with sec. 80C(1)(a) and it had a slightly different foundation. It was suggested that the Commissioner was thereby debarred from relying on fresh grounds. Reference was made to the observations of Dixon J. in
Avon Downs Pty. Ltd. v. F.C. of T. (1949) 78 C.L.R. 353, at p. 360 where his Honour discussed the extent to which the Commissioner's failure to be satisfied of the state of voting power in accordance with sec. 80(5) of the Income Tax Assessment Act 1936-1944 could be examined by the Court. Those observations were not directed to a situation in which the Commissioner seeks to support the assessment by reference to considerations which were not taken into account at the time when the assessment was made. It is for the taxpayer to show that the assessment is excessive (sec. 190(b)) and this it fails to do if it emerges on the hearing of the appeal that the taxpayer could not in law satisfy the requirements of the statutory provisions regulating the deduction of past losses. It

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ATC 4105

could not be suggested in the circumstances of this case that the Commissioner was satisfied that there had been a compliance with the requirements of sec. 80A(1)(c) and 80C(1).

Although the conclusions already reached make it unnecessary for me to decide other questions which were argued, I propose to express my view on some of them. First, it was submitted that sec. 80A(1) and sec. 80C(1) demand an unbroken continuity of beneficial ownership and that there is a failure to comply with the requirements of each section if, although there is a sufficient identity in beneficial ownership of shares in the year of loss and the year of income, that beneficial ownership has not continued unbroken from the year of loss to the year of income. Although the marginal notes refer to ``Substantial continuity of beneficial ownership'', the operative provisions contain no such requirement and I can perceive no sufficient reason for importing it into the sections. Secondly, there is the submission, relevant to the 1960 and 1961 years of loss, that the Commissioner was not, and is not, satisfied that the six shareholders who took transfers of shares in H. & J. in June 1966 beneficially owned those shares at all times during the year of income and was therefore not satisfied that the provisions of sec. 80C(1)(b) were complied with. The documentary material on which the assessment was based gives no indication that the departmental officers directed their minds to this particular question. The Commissioner's lack of satisfaction seems to have arisen after the assessment was made.

I incline to the view that the Commissioner's lack of satisfaction is a relevant consideration, although it has arisen after the making of the assessment, at least where, as here, the evidence shows that the matter in question was not considered before the assessment. The material before the Court does not disclose the actual material on which the Commissioner acted in coming to this new conclusion. I can only say that on the evidence placed before me I should have been disposed to accept the evidence of Mr. Ohlsson that the six former shareholders of H. & J. agreed in June 1966 with him to take up seven parcels of shares in that company for $1 each and that in September 1967 they agreed to transfer their shares to P.I.O.C. Investments for $25 for each parcel, notwithstanding that Mr. Ohlsson's recollection of other events seems to have been inaccurate or not clear. Certainly there is no doubt that they accepted transfers of the shares in 1966 and transferred the shares to P.I.O.C. Investments in 1967, the transfers being approved by the directors of H. & J. The same account of P.I.O.C. Investments records the debit of the purchase price which it paid. And I accept the evidence of Mr. Ohlsson that there was no agreement in June 1966 that the six shareholders would subsequently transfer their shares to a purchaser when required so to do. Accordingly, in my view the evidence establishes that the six shareholders beneficially owned the shares transferred to them in June 1966.

However, it cannot be denied that there is material which would make it not unreasonable for the Commissioner to refuse to be satisfied of this circumstance (see
F.C. of T. v. Brian Hatch Timber Co. (Sales) Pty. Ltd., 72 ATC 4001, (1972) 46 A.L.J.R. 111). The existence of the minority interests in H. & J. was not disclosed in the accounts of the Kolotex group for the year ended 30 June 1967. And the account given by Mr. Simons, a member of the firm of accountants who acted as auditors of the Kolotex group, of the reason why P.I.O.C. Investments moved to acquire the outstanding interest of the six shareholders was far from satisfactory. His evidence was that after the close of the financial year in 1967 it occurred to him that Kolotex would not wish to disclose the existence of minority interests in H. & J. and Moomba. He suggested to his senior partner that the outstanding interests should be acquired and the acquisition backdated to 30 June 1967 on ``the hindsight principle''. This suggestion was approved by his senior partner and presumably endorsed by Kolotex, notwithstanding that it resulted in accounts which were demonstrably incorrect. However, the importance of what occurred is that it would provide some ground on which the Commissioner could, in the light of the Kolotex group accounts and the curious history related by Mr. Simons, entertain doubt as to the beneficial ownership of the

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ATC 4106

shares and refuse to be satisfied of it, with the consequence that on this ground the losses in 1960 and 1961 would not be deductible. I express no view of an alternative submission made by the Commissioner based on an application of sec. 80B(5) to the shares of the six shareholders.

I turn now to the submissions based on sec. 80B(5). The Commissioner treated the shares in Moomba beneficially owned by Mr. Howie as not having been beneficially owned by him at any time during the year of income under sec. 80B(5) and was not satisfied that in relation to the years of loss 1961-1966 (inclusive) sec. 80C(1)(b)(i) was complied with. Assuming (contrary to the opinion which I have expressed) that Moomba was the holding company and that it had a controlling interest in the taxpayer in the years 1962-1966, as well as the year 1961, the suggested application of sec. 80B(5) to Mr. Howie's shares in Moomba requires consideration (see sec. 80C(3)). For the Commissioner to have validly exercised the power conferred by sec. 80B(5) in relation to Mr. Howie's shares it must appear that he entered into a contract, agreement or arrangement falling within sec. 80B(5)(b) and (c). It was said that the relevant arrangement consisted of the scheme of arrangement, the steps taken by Mr. Ohlsson to transfer shares in H. & J. to the six former shareholders of that company, execution of the transfers by Moomba, the approval of the transfers by H. & J. and the alteration of the articles of that company. With all respect, the argument does no more than point to a catalogue of events and apply to the catalogue the label of an arrangement.

However, I am prepared to infer from the documents and the oral evidence of Mr. Howie and Mr. Ohlsson that it was arranged between them that all necessary steps would be taken to sell the taxpayer as a ``loss company'' for tax purposes and that the steps subsequently taken fall within the contemplation of the arrangement which they made. Even so I have difficulty in appreciating how sec. 80B(5) comes to the aid of the Commissioner. Assuming that the word ``arrangement'' in sec. 80B(5) bears a meaning similar to the meaning which has been assigned to it in sec. 260, that is, 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''
(Newton v. F.C. of T. (1958) 98 C.L.R. 1, at p. 7), it has not been shown that the arrangement is one of a kind described by sec. 80B(5), as it is applied by sec. 80C(3). The arrangement is not one which falls within sec. 80B(5) unless it appears that the arrangement ``indirectly... affected... the value'' of Mr. Howie's beneficial interest in his shares in Moomba. It was submitted that the alteration of H. & J.'s articles giving special and preferred rights to Mrs. Maxwell's shares diminished the value of Moomba's shares in H. & J. and as a consequence diminished the value of Mr. Howie's shares in Moomba. Although the parties did not tender evidence of value, the shares held by Mrs. Maxwell (750) formed such a small proportion of H. & J.'s issued shares (62,243) that in my opinion neither the arrangement nor the alteration of the rights attaching to the shares would cause a reduction in the value of the shares held by Moomba in H. & J., let alone the value of Mr. Howie's beneficial interest in his shares in Moomba.

The submission encounters three further difficulties. One arises from sec. 80C(3) which in applying sec. 80B(5) to sec. 80C in relation to the holding company and any interposed company provides that the relevant subsections of sec. 80B shall apply ``as if references in those subsections to the company were references to the holding company or to the interposed company, as the case may be''. Taken literally, this provision would contemplate the separate application of sec. 80B(5) to each company in a hierarchy and sec. 80B(5)(c) when applied to a holding company would be read as relating to losses of the holding company, not to losses of the subsidiary company. If sec. 80C(3) is given a literal application then the requirements of sec. 80B(5)(c) could not be satisfied in relation to shares beneficially held in Moomba. But the construction of sec. 80C(3) is not a matter which I need decide.

Then there is the difficulty in applying sec. 80B(5)(c) to the arrangement upon which the Commissioner relies: whether it could be said

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ATC 4107

that the arrangement was entered into for a purpose ``of enabling the (taxpayer) company to take into account a loss'' that it had incurred in a previous year, in the sense in which these words were discussed by Barwick C.J. and Menzies J. in F.C. of T. v. Brian Hatch Timber Co. (Sales) Pty. Ltd. (supra), at pp. 112 and 116. Finally there is the taxpayer's argument that, even if it were to be held that all conditions preliminary to an exercise of the power conferred by sec. 80B(5) were made out, the Commissioner has exercised his discretion not to treat the shares as beneficially owned by Mr. Howie because the Kolotex group has engaged extensively in the practice of acquiring loss companies to reduce its tax liability. This circumstance, so it was said, vitiated the exercise of the discretion. If it were necessary to decide the question, I should be disposed to answer it unfavourably to the taxpayer for in my view it does not sufficiently appear that the reference to the group's acquisition of loss companies was expressed as the consideration or reason for exercising the sec. 80B(5) power.

Other submissions were made based on sec. 260 and a suggested application of sec. 80B(5) to Moomba's shares in H. & J. in consequence of the option agreements of 1964 and 1965 but I do not propose to deal with them.

The appeal is dismissed with costs.

ORDER:

Appeal dismissed with costs.

Usual order as to exhibits.