Hennessey v. Federal Commissioner of Taxation.

Judges:
Zelling J

Court:
Supreme Court of South Australia

Judgment date: Judgment handed down 24 January 1975.

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Zelling J.: These are three appeals from three determinations of Taxation Board of Review No. 3 dated the 21st day of June, 1973. That Board by a majority dismissed references to the Board of objections by the three taxpayers against amended assessments in respect of income derived during the year ended 30th June, 1970.

It was agreed between counsel that the determination of the appeal of Cecil John Malone would decide the fate of all three

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ATC 4009

appeals and this judgment proceeds on that basis.

Cecil John Malone and Kathleen Malone are husband and wife and Kathleen Mary Hennessey is their daughter. The appellant Cecil John Malone is a public accountant and in the course of his profession he caused a company named W.I. Development Proprietary Limited to be incorporated as a private limited company on 23rd March, 1959. Malone was at that stage a director of the company but not a shareholder. On June, 27, 1960 Malone, his wife and daughter acquired the issued shares in the company from the original shareholders who thereupon retired as directors and his wife and daughter joined Malone as the directors of the company.

Shortly after the three appellants took over the shareholding and the directorate of the company, the articles of association of the company were amended so as to give to the company the status of a public company for the purposes of the Income Tax Assessment Act. This was achieved by the creation and issue of redeemable preference shares so that the company followed the scheme set out in
W.P. Keighery Pty. Ltd. v. F.C. of T. (1958) 100 C.L.R. 66.

The Income Tax Assessment Act was amended by amendments which took effect from 1st July, 1965 to overcome the effect of the decision of the High Court in Keighery's case, whereupon the preference shares were redeemed and the company has since remained a prescribed proprietary company, private companies having ceased to exist in South Australia after the passing of the Companies Act 1962 (No. 56 of 1962).

Between 1960 and 1965 W.I. Development Proprietary Limited acquired shares in two groups of operating companies which were controlled by Mr. Malone and his family. One group of companies carried on a galvanising business under the name of Eglinton Galvanisers and the other group of companies carried on a financing business under the name of John Andrew & Co. In each case the companies concerned formed a partnership of companies for this purpose. W.I. Development Proprietary Limited in effect became the holding company for all the family operating companies. There were a very few shares in the operating companies held by persons other than Mr. and Mrs. Malone and Mrs. Hennessey, but they are of no significance for the purpose of these appeals.

Over the period of five years during which the company enjoyed public company status for taxation purposes, approximately $350,000 of dividends were received from the operating companies. These dividends were lent back to the operating companies and in particular by way of loan to the partnership of John Andrew & Co. After July, 1965 what I have referred to as the operating companies ceased to pay dividends to W.I. Development Proprietary Limited because, as it was no longer a public company for income tax purposes, it had lost a great deal of its usefulness as a holding company. It did not cease to derive income altogether after 1965 as it held shares in companies both listed and unlisted on the stock exchange and also engaged to some extent in land dealing. Out of the income which it did in fact derive, it was of course required by the Income Tax Assessment Act to make a sufficient distribution and to pay its taxes. In actual fact in 1969 when the events took place out of which these appeals arise, the company was in what I might describe as an ``overdistributed situation'' so that it was under no obligation during that year to make a distribution for the purposes of the Act.

In 1968 the South Australian Parliament passed the Gift Duty Act 1968 which Act was by sec. 2 deemed to have commenced on 6th September, 1968. By virtue of that Act there was a liability for gift duty where a company distributed dividends on a basis which discriminated between various classes of shares. The operation of this Act further reduced the value of the company as a holding company in the hands of the appellants.

Accordingly about the middle of the year 1969 the appellants agreed amongst themselves without any formal resolution in that behalf, that because the company was not serving any useful purpose within the group they should dispose of the shares in that company. It is common ground that the appellant Cecil John Malone was the adviser of his family and that he really made the decisions with regard to the

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ATC 4010

company, and the argument on the appeals has proceeded on that basis.

Earlier in 1969 the appellants had had some experience in selling shares in another of their family companies named Quinto Proprietary Limited. The appellant Cecil John Malone who gave evidence before me, said that the procedure adopted in relation to the sale of shares in Quinto differed from that adopted in relation to W.I. Development Proprietary Limited. It may be appropriate for me to say at this stage that I accept Malone as a witness of truth. He was a good and impressive witness who was called before me solely for the purpose of cross-examination. I watched him carefully in the witness box. I have accepted his evidence and acted upon it. The other two witnesses called before me, were called on behalf of the Commissioner to prove technical details in relation to the settlement. Nothing turns on their credibility in the decision of these appeals.

Turning again to the history of the company, Malone saw an advertisement in The Australian Financial Review of Friday October 17, 1969, a copy of which was tendered before me as Exhibit R.1 reading as follows -

``Companies

Wanted for Cash

With Accumulated Profits

With Capital Reserves

Non-operating Subsidiaries

With Losses

Investment Companies

Pastoral Companies

Inoperative Companies

Immediate Cash Settlement

Essington Investments Pty. Ltd.

Company Acquisition Specialists

4th Floor, 44 Hunter Street, Sydney

Phone 28-5517.''

It may be noted that the advertisement covers a variety of types of company, many of which vary widely from that under consideration here and that the advertisement gives no particulars of the reasons for acquiring such companies or of what was intended to be done with them after acquisition. With such a wide variety of companies, it is a fair inference that both the reasons for acquisition and the procedure after acquisition would differ from company to company.

Malone replied to the advertisement by letter, enclosing a copy of the balance sheet of W.I. Development Proprietary Limited as at 30th June, 1969 and particulars relating to the company. The letter has not been produced either before the Board of Review or before me but I am satisfied that it was merely a letter of enquiry in response to the advertisement and did not set out any suggested arrangement with Essington Investments Pty. Ltd. As in fact that company and one of its directors became the purchasers of the shares held by the appellants in W.I. Development Proprietary Limited, I shall hereafter refer to it as the purchaser company. At the time when the appellant Malone saw the advertisement he had no knowledge of the purchaser company and he was not acquainted with its directors, two men named Neil Ernest Ohlsson and Nicholas Sticpewich.

On 21st November, 1969 the purchaser company wrote to Malone a letter reading as follows -

``Mr. Cecil J. Malone,

Public Accountant,

175 Waymouth Street,

Adelaide. S.A. 5000.

Dear Mr. Malone,

Re: W.I. Developments Pty. Ltd.

As discussed we enclose the following documents to facilitate the purchase of the above company for your consideration.

• 1. Two copies of Purchase Agreement.
• 2. Two copies of Deed of Indemnity (These may be used as final documents if satisfactory).
• 3. Suggested procedure for settlement.
• 4. Share Transfers for each class of share.

The writer will contact you on arrival in Adelaide on Tuesday next.

Yours faithfully,

Essington Investments Pty. Limited.

N. Sticpewich (sgd.)

N. STICPEWICH.''

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ATC 4011

In my opinion the suggested procedure for settlement referred to in that letter which provided for various steps to be taken is in my experience a common form of requirements when a purchaser is purchasing all the shares in a proprietary company. Malone had to prepare an audited balance sheet of the company as at the 25th November, 1969 signed by the directors. The shares in the company were to be transferred as directed in the procedure. Settlement was to take place at the branch of the bank with whom W.I. Development Proprietary Limited banked, namely the Commercial Bank of Australia Limited, 30 Waymouth Street, Adelaide, on a date and at a time to be arranged. The directors, the secretary and the public officer were to tender their resignations in writing. Minutes were to be passed to appoint Ohlsson and Sticpewich as directors of the company and to appoint Mrs. Beryl Patricia Ohlsson to act as an alternate director for either Ohlsson or Sticpewich. The directors' meeting was to accept the resignation of the present directors and officers of the company as submitted. The purchase agreement and deed of indemnity submitted by the purchaser company were to be executed and handed over at settlement.

Clause 7 of the suggested settlement procedure was not carried out in two ways. Clause 7 reads -

``7. Essington Investments Pty. Limited tenders Bank Cheques as follows -

      Cecil John Malone           133,000.00
      Kathleen Malone             135,000.00
      Kathleen Mary Hennessey      94,500.00
                                 ------------
                                 $362,500.00
                                 ------------
                                 (approx)''
          

First the settlement figure was altered to $360,156.30 as appears from the ink annotations on the exhibit, and secondly one cheque for this amount was drawn in favour of the financier company of the appellants John Andrew & Co. and not three cheques one in favour of each vendor shareholder.

By cl. 8 of the suggested settlement procedure the company's assets at the date of settlement were to consist of a bank cheque in favour of W.I. Development Proprietary Limited for a figure which was ultimately agreed at $363,794.24. Prior to that date the company's assets had consisted very largely of a loan to John Andrew & Co. and of a small number of shares in other companies. Such of the shares as were saleable were sold and some were completely unsaleable and the loan was called in. At the settlement the vendors were to hand over duly executed share transfers, the balance of the company's documents, the company's seal, and any other property of the company.

It is probable that there was at least one telephone conversation between Malone in Adelaide and Sticpewich in Sydney between the 21st and 26th of November, 1969, but I do not think that anything turns upon the telephone conversation which, so far as the memories of the parties went, dealt simply with details of settlement and did not constitute any contract or arrangement which might attract the provisions of sec. 260 of the Income Tax Assessment Act. In fact the purchaser paid for the assets of W.I. Development Proprietary Limited, after their conversion into cash, their face value less one per cent. No reason appears to have been given by the purchaser company for the deduction of the one per cent but Malone believed that it was to cover stamp duty, travelling expenses and other matters incidental to the acquisition of the shares and this seems a reasonable explanation.

The purchaser company banked with the Bank of New South Wales at its branch at Liverpool and Castlereagh Streets, Sydney, and that branch caused the branch of the Bank of New South Wales at Morphett and Waymouth Streets Adelaide to act for it in Adelaide in relation to the settlement.

The settlement took place on 26th November, 1969 at the branch of the Commercial Bank to which I have referred. An officer, but not the manager, of the Morphett and Waymouth Streets branch of the Bank of New South Wales attended at the settlement with a Bank of New South Wales bank cheque in favour of John Andrew & Co. for $360,156.30. A Commercial Bank cheque for $363,794.24 made out in favour of W.I. Development Proprietary Limited was handed over by the vendors at settlement. It was taken after settlement to the Morphett Street branch

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ATC 4012

of the Bank of New South Wales and the proceeds were sent by telegraphic transfer to the purchaser company's branch of the Bank of New South Wales at Liverpool and Castlereagh Streets, Sydney. An account in the name of W.I. Development Proprietary Limited had been opened in advance of the settlement by Ohlsson and Sticpewich. I doubt whether, because of the provisions of sec. 67 of the Companies Act 1962 of South Australia, such an account could lawfully be so opened, but nothing turns on that in relation to this appeal. I am satisfied that Malone knew nothing of the opening of this account and knew nothing of the means by which the purchaser company was in effect using the money of W.I. Development Proprietary Limited to provide the money for the purchase price of this company. I am satisfied that that was never part of any arrangement communicated to or assented to by Malone. Both the procedure adopted by the purchaser company and the procedure adopted by Malone in having the settlement cheque made in favour of John Andrew & Co. are explicable on the basis that people who are handling large sums of money do not keep them out of use for any longer than they can possibly avoid doing and that in each case the expedient was to employ the money again in each case as quickly as could be; by the purchaser company in not having to draw on its other funds and by the vendors in having their money back in the hands of their finance company.

Mr. Legoe for the Commissioner invited me to draw some sinister inference from the exchange of cheques. I draw no such inference. In my opinion what was done is consistent with the usual operations of people who are using money as their stock in trade. I must be taken to know that money is dealt with on the money market even on a day to day basis and continually on a short terms basis and I do not think that any other considerations formed part of the exchange of cheques in this manner. It saved the purchasers from having to withdraw other moneys for the purpose and as financiers that caused them to adopt this course.

Then follow a series of events which Mr. Legoe invited me to use as indicating the arrangement which had in fact been entered into by Malone and the purchaser company. On 27th November, 1969 there was a credit entry raised in the bank account of W.I. Development Proprietary Limited with the Bank of New South Wales in Sydney in the sum of $363,794.24, corresponding with the proceeds of the bank cheque given by the vendors. On the same day there is a note of a withdrawal of $363,750 being a loan from W.I. Development Proprietary Limited to the purchaser company. On 28th November the new directors approved the transfers of the shares acquired from the three appellants and at a meeting later the same day of the new directors of W.I. Development Proprietary Limited it was resolved that an interim dividend of $363,336 be declared and paid forthwith to the holders of the C class shares on the register as at that day, the 28th November, 1969. Pausing there, at all material times the issued share capital of the company consisted of fifty-three A class shares, one hundred and fifty-one C class shares and one D class share each fully paid to $2. Although the dividend was declared on that day, it was not paid until 16th December, 1969 on which day a cheque was drawn on W.I. Development Proprietary Limited's account for $363,336 in favour of the purchaser company. On the following day the purchaser company repaid to W.I. Development Proprietary Limited the loan of $363,750. On 22nd December, 1969 the whole of the issued shares in W.I. Development Proprietary Limited was sold by the purchasers to third parties who, so far as can be seen, had no connection whatever with any of the transactions which I have narrated. In my opinion none of these subsequent transactions are evidence against Malone at all. There is no evidence that Malone knew of them or assented to them either himself or by the purchaser company as his agent, or that there was any transaction to which he was privy following the sale on November 26. The evidence taken before the Board of Review was put in before me saving all just exceptions, and parenthetically the only exception taken was to Exhibit 20 which is not material for this purpose, and it is clear from the evidence of Sticpewich at p. 120 of the evidence taken before the Board of Review, that Sticpewich refused to tell Malone what he intended to do with the company and indeed it would appear

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ATC 4013

further from Sticpewich's evidence that on the day of settlement he did not initially know when he bought the company, what the subsequent modus operandi would be: see his evidence before the Board at p. 107. I accept Malone's evidence that he was not familiar with the mechanics of dividend stripping. All he knew was that there was a market for such companies interstate and that those companies had expertise which he did not have. Mr. Legoe laid great stress on the fact that Mr. Malone was a public accountant and must have known or be taken to know how the purchasers would deal with such a company when they acquired it. I am satisfied that his practice as a public accountant had not given him that knowledge and that he was telling the truth in his evidence on the point.

It is quite true that in finding facts sufficient to support an arrangement within meaning of sec. 260 one can have regard to subsequent events. If all one knew in this case was that these subsequent events had taken place, it would have been a possible, but not a necessary inference, depending on the view taken by the tribunal of fact, that the subsequent events showed that they were in the contemplation of the parties when they made their original arrangement and that they therefore formed part of the arrangement between the parties. That is not this case. We know from the evidence, which I accept, that Malone made enquiry as to what was to happen afterwards and was told in effect it was no business of his, that Sticpewich and his co-director had not made up their own minds as to what they would do, and that Malone neither knew of nor assented to nor ratified later any of the events after November 26, 1969. I therefore find that none of those events formed part of any arrangement between Malone and the purchaser company or its directors nor can they be attributed to Malone so as to found the necessary elements required to bring the transaction within the ambit of sec. 260 of the Income Tax Assessment Act. It is true that in one sense the test is objective and not subjective but before one can apply that test one has to ascertain what the arrangement was: see the judgment of Williams J. in
F.C. of T. v. Newton (1957) 96 C.L.R. 577 at 630 where his Honour said -

``The purpose of a contract, agreement or arrangement must be what it is intended to effect and that intention must be ascertained from its terms. 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 effect.''

(the emphasis is mine)

The Commissioner issued a notice of assessment on 13th August, 1971 amending the original assessment on 3rd December, 1970 by including in the assessable income of the three taxpayers the amounts attributed to them by him as being their share of the purchase price, treating them presumably as if they were a dividend in each case and therefore assessable income. In the case of Cecil John Malone the figure was $133,518 additional income; in the case of Mrs. Malone $135,290; and in the case of Mrs. Hennessey the amount of $94,526. The odd cents have been ignored so that there is a difference of $2 between the total of $363,336 as split up and the amount actually added to the assessable income of each appellant.

Counsel for the Commissioner disclaimed before me any suggestion that the Commissioner claimed that the transactions were a sham and said that he relied entirely upon the provisions of sec. 260 and that the Commissioner based the liability to tax on there being an arrangement between the appellants and the purchaser company and its directors which was caught by sec. 260, and which therefore brought the amounts to which I have just referred, to tax in the hands of the appellants. The taxpayers objected to the amended assessments. The objections were disallowed by the Commissioner and on the request of the taxpayers were referred to a Board of Review. The references were duly heard by Board of Review No. 3 which by a majority, the Chairman dissenting, dismissed the references on 21st June, 1973 and from those dismissals these appeals have been brought to this Court.

Mr. Fisher, who appeared for the appellants, argued in substance that this was an ordinary sale of all the shares in a proprietary company. There were no special features about the sale to take it out of the description of an ordinary business transaction and it was somewhat akin to a sale of shares cum dividend. His real

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ATC 4014

argument, however, was that this was the normal way in which a person or persons not wishing to avoid tax but simply to sell all the shares in a proprietary limited company would go about that task and that it was not the type of transaction which attracted the operation of sec. 260. I agree with the Chairman of the Board that ``it may be doubted whether there is any universally accepted notion of what constitutes normality in relation to a sale of shares or for that matter any business transaction. Yet there may be some features of a transaction which immediately put one upon enquiry and unless they can be satisfactorily explained they will lead the observer to conclude that the transaction was not a normal one.'' He then lists five matters on which the Commissioner rested his case that there was an arrangement within sec. 260 and he sets those out in summary form as follows -

``(a) The purchaser dictated the conditions of sale;

(b) The purchaser, in effect, fixed the price that would be paid for the shares;

(c) The purchaser required that the price payable should be less than the asset value of the shares by one per cent of that value, notwithstanding that the purchaser, in taking the bank cheque, was virtually receiving cash;

(d) The purchaser's insistence upon the production of a bank cheque for the worth of the company;

(e) The fact that the purchaser insisted on a deed of indemnity.''

He goes on to say that he did not agree with point (b) purely as a question of fact. Counsel for the Commissioner hardly argued this point before me. Further counsel in effect conceded that the fact that the purchaser insisted on a deed of indemnity was nothing more than would be expected in a sale of this kind, where the purchaser has no knowledge of outstanding liabilities and where the experience of many other cases shows that such outstanding liabilities do in fact occur in many unexpected ways which cannot be foreseen at the time of settlement. His real attack was based on points (a), (c) and (d) and in particular on points (c) and (d). It is quite true that the purchaser did for all practical purposes dictate the conditions of sale. In this connection however it must be remembered that Adelaide is not a money market in the way in which Melbourne and Sydney are. If you want to sell shares in this type of company you have perforce in practically every instance to sell them to a purchaser in Melbourne or Sydney. That means that the Sydney or Melbourne purchaser, being in an almost monopoly position in this regard, does dictate the conditions of sale. I have never in my own experience been involved whilst in practice in a case in which the Melbourne or Sydney purchaser did not dictate the conditions of sale. Far from this being an abnormal characteristic of the sale, it is in my experience over many years the invariable concomitant of the fact that Adelaide has for practical purposes no money market in matters of this kind and the purchaser has only one choice: either he sells on the terms offered to him, or he refuses to sell at all. The real thrust of the Commissioner's case is in points (c) and (d) and in particular in the exchange of cheques on the day in question so that the appellant vendors in effect through W.I. Development Proprietary Limited financed the purchase of their own shares. I do not think the reduction by one per cent matters for this purpose. I think that the one per cent discount probably did cover contingencies of the kind which Malone listed. The main point of the Commissioner's argument was that it was the payment by the vendors of the assets in the form of a bank cheque which enabled the purchaser company to finance the purchase out of the vendors' money and that this case was covered by the decisions of the High Court of Australia in
Bell v. F.C. of T. (1953) 87 C.L.R. 548 and
F.C. of T. v. Ellers Motor Sales Pty. Ltd. 72 ATC 4033. I agree immediately that factually this is what happened and that the motives of the persons who make an arrangement are irrelevant. I also accept that the incidence of income tax to be avoided need not be that of the year in which the transaction takes place but may be incidence of taxation in a future year: see the judgment of Walsh J. in Ellers' case to which I have just referred, at p. 4040. This case however to my mind has one distinguishing feature which immediately differentiates it from the type of case dealt with in Bell and in Ellers, and that was that in Bell

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ATC 4015

and in Ellers the taxpayers had the control of the whole transaction at all relevant times, either themselves or by their accountants, solicitors or agents. In Bell the whole essence of the scheme was that the money would be paid in Port Moresby through a feigned sale of a share so that instead of a dividend being declared in Australia there appeared to be a sale in Port Moresby with the result that, as the law then stood, that because the transaction took place in New Guinea it would not be subject to income tax. As the Full High Court say at p. 571 -

``If there had been no more in the case than that Bell, in preference to retaining his share and deriving the dividends which it seemed certain to yield, chose to sell the share for a capital sum equal to the assured dividends, the Commissioner would not have been entitled to treat the capital sum as assessable income on the ground of an actual or supposed economic or business equivalence between the two courses. But there was, of course, much more in the case than that. The sale of the share was a part of a complex transaction carefully planned and carried through by Bell and a number of other persons acting in concert, for one predominant purpose, which was to ensure that Bell and his six colleagues should each receive £11,000 tax-free instead of £11,000 subject to tax.''

Their Honours go on to say at p. 573 -

``Such an arrangement (i.e. an arrangement within sec. 260) was made, clearly enough, when Bell and his co-shareholders and White and his six clients co-operated, in accordance with the preconcerted plan embodied in the Routine document, in so ordering their affairs that although £77,000 of distributable profit was extracted from the Papuan company and Bell and his associates had their cash resources increased by amounts totalling that very sum, yet the company made no distribution to those persons and what they received they received as the sale price of their capital assets, the shares they held in the company. This arrangement, both in purpose and in effect, represented nothing but a method of impressing upon the moneys which came to the hands of Bell and his colleagues the character of a capital receipt and of depriving it of the character of a distribution by a company out of profits. It was therefore a means for avoiding the income tax which would have become payable had the £77,000 been distributed by the company in the normal way. Section 260(c) postulates a duty or a liability imposed on a person by the Act, but this refers, not to a liability to pay a particular amount of tax (which would be a liability imposed by a taxing Act), but to a liability such as sec. 17 of the Act imposed on Bell, to pay tax in respect of his taxable income ascertained by including in his assessable income his proportion of the Papuan company's profits if and when he should participate in a distribution of them. It must therefore be held that the transactions of 2nd, 3rd and 4th February 1948 constituted an arrangement made by Bell and the others who took part, having the purpose, and (apart from the operation of sec. 260) the effect, of defeating and avoiding a liability imposed on Bell by the Act.

Then if this arrangement be treated as void, what remains? Simply this, that on 3rd February 1948, £77,000, consisting entirely of profits, was withdrawn from the company's bank account, and £11,000 of it passed, indirectly but by steps which are clearly traceable on the face of the bank's ledgers, into Bell's bank account; and Bell is to be considered as remaining at that time a shareholder in the company, his transfer to Corlett being ex hypothesi void as against the Commissioner as an integral part of the arrangement. This means that the application of sec. 260 in this case is to eliminate those features of the case upon which the exclusion of the £11,000 from assessable income depends, and by that means to establish the correctness of the assessment appealed against.''

Equally in the Ellers' case, the directors of the two companies were the same persons and it is clear from the judgment of Mr. Justice Walsh at p. 4042 that the end result was an intended result that the Harcourt profits found their way into the hands of those who had been shareholders and at p. 4043 his Honour said -

``If a taxpayer makes a decision to arrange

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ATC 4016

matters so that income from his property follows one of the courses so described and reaches him with the character of capital, in my opinion he is not thereby exercising a `right of choice between alternatives which the Act lays open to him', whether or not the intermediary which he has chosen to interpose between himself and the course of the money happens to be `Keighery company'.''

And again at p. 4044 -

``It was of the essence of the arrangement that the money which they were to receive upon the sale should come from the profits held by Harcourt and from no other source. In this respect, their position may be contrasted with that of the Lefroys in Hancock's case (see 108 C.L.R., at p. 269).''

(the emphasis is mine)

Accordingly in every case one must see that there is an arrangement of the type contemplated by sec. 260 and this is what I cannot find in the instant case. I take the law to be as it was set out in the judgment of the Privy Council in
Newton v. F.C. of T. (1958) 98 C.L.R. 1 at 8-9 where Lord Denning delivering the advice of the Board said -

``The answer to the problem seems to their Lordships to lie in the opening words of the section. They show that the section is not concerned with the motives of individuals. It is not concerned with their desire to avoid tax, but only the means which they employ to do it. It affects every `contract, agreement or arrangement' (which their Lordships will henceforward refer to compendiously as `arrangement') which has the purpose or effect of avoiding tax. 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. Williams J. put it well when he said `The purpose of a contract, agreement or arrangement must be what it is intended to effect and that intention must be ascertained from its terms. 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 effect' (96 C.L.R., at p. 630). 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. Thus, no one, by looking at a transfer of shares cum dividend, can predicate that the transfer was made to avoid tax. Nor can anyone, by seeing a private company turned into a non-private company, predicate that it was done to avoid Div. 7 tax, see W.P. Keighery Pty. Ltd. v. F.C. of T. (1958) 32 A.L.J.R. 118; 11 A.T.D. 359. Nor could anyone, on seeing a declaration of trust made by a father in favour of his wife and daughter, predicate that it was done to avoid tax, see
D.F.C. of T. v. Purcell (1921) 29 C.L.R. 464. But when one looks at the way the transactions were effected in
Jaques v. F.C. of T. (1924) 34 C.L.R. 328;
Clarke v. F.C. of T. (1932) 48 C.L.R. 56, and Bell v. F.C. of T. (1953) 87 C.L.R. 548 - the way cheques were exchanged for like amounts and so forth - there can be no doubt at all that the purpose and effect of that way of doing things was to avoid tax.''

Similarly in
Hancock v. F.C. of T. (1961) 108 C.L.R. 258 the Hancocks entered into an arrangement which it was obvious was an arrangement to avoid a liability imposed by the Act on Mulga Downs Proprietary Limited whereas the Lefroys simply sold their shares in the company. They were not party to or privy to the arrangement. They were party to the arrangement insofar as they sold their shares but they were not party to an arrangement within sec. 260: see on this point the judgment of Menzies J. in
Rowdell Pty. Ltd. v. F.C. of T. (1963) 111 C.L.R. 106 at 132 and 133.

Summarising my views in this matter, the participation of the appellants in the transaction in question ceased on November 26 and they are not affected by any of the acts and transactions which took place after that date. The transaction was the normal way in

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ATC 4017

Adelaide of selling all the shares in a proprietary company. The fact that Essington Proprietary Limited used their money to finance the transaction was unknown to the appellants and for all they knew Essington could just as easily have been using their own money. The cheque was a bank cheque and there was nothing to show the difference. The fact that a request was made for the assets of the company to be reduced to cash and paid in the form of a bank cheque to Essington Proprietary Limited was a prudent request which would be reasonably made in any case of this kind by a purchaser company and does not signify that there was any arrangement, however objectively looked at, between the appellants or any of them and the purchaser company. The transaction was one at arm's length in which the appellants did not have the control which is a significant feature of all the cases on which counsel for the Commissioner relied and it is wholly explicable as an ordinary business transaction. I invited counsel for the Commissioner on several occasions during his argument to tell me in what other way it was suggested that persons wishing bona fide to sell all their shares in a proprietary company could go about doing so without attracting, on his argument, the application of sec. 260 but he was unable to suggest any commercially viable way of doing so.

I am satisfied that the appellants have discharged the onus on them of establishing that there was no arrangement sufficient to attract the application of sec. 260. That means that I do not have to consider the matters set out by the Chairman of the Board at p. 10 of his judgment in para. 27 of his reasons. I do in fact agree with much of what he has to say but it is unnecessary for me to rest my judgment on it.

Similarly there are two other matters referred to by Mr. Fisher which I must notice in case the case goes elsewhere. The first is that there was some $8,000 of capital reserve which could not in any event be taxable by the Commissioner because stripping away the impugned transaction under sec. 260, if that section applied, would have revealed in part the sale of what is without doubt a capital asset which was only transferred to income account by the new purchasers after the settlement with the appellants. The second is that the dividend was declared only on the C class shares and the A class and D class shares must have had some substantial value in themselves and they were the subject of part of the sale price. From the figures submitted to me by the Commissioner, if the transaction had been carried out as the Commissioner thinks it ought to have been by a distribution of dividend and tax paid, there would still have been about $111,000 worth of money after tax paid, so that on normal principles of share valuation those A and D class shares together should have been worth approximately 54/205 of $111,000, which again would be a sale of a capital asset. I do not find it necessary to rule on these submissions, but I record the submissions in case it may be necessary to deal with them elsewhere. If it had been necessary to consider them I would have had to consider some of the interesting questions raised by the New Zealand Court of Appeal in
Commr. of I.R. (N.Z.) v. Gerard 74 ATC 6027; Commr. of I.R. v. Gerard (1974) I NZTC 61,151; (1974) 2 N.Z.L.R. 274 in relation to their cognate sec. 108 but fortunately it is not necessary to do so on this occasion.

For these reasons each of the appeals succeeds, the amended assessments should be set aside and also the penalty tax which was imposed consequent on the amended assessments. The appellants must have the costs of the appeals with one set of counsel fees on the three appeals. I will hear counsel as to whether it is necessary for me to make any ancillary orders in the light of these reasons.

I should add that the Commissioner gave notice of cross appeal which was but faintly argued. The effect of the cross appeal if successful would have been to increase by a very small amount the additional income attributed to the taxpayers in the amended assessments. Whether the cross appeal was even competent in these circumstances is to me a matter of doubt but it is unnecessary to pursue it further here because for the reasons already given it must fail and be dismissed in each case.

[CCH note: Leave to appeal from this decision has been refused.]