Patcorp Investments Limited (formerly Patrick Corporation Limited) & Ors. v. F.C. of T.

Judges: McTiernan J

Gibbs J
Stephen J
Jacobs J

Court:
Full High Court

Judgment date: Judgment handed down 17 August 1976.

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Gibbs J.: These appeals are brought from orders of Mason J. made on the hearing of appeals against the decision of the Commissioner of Taxation to disallow objections lodged against the assessment to income tax in each of eight cases. The relevant facts are set fully set out in the judgment of Mason J. and his Honour's findings have not been challenged in any material respect. It is, however, necessary to give some account of the facts for the purpose of showing the nature of the questions we have to decide and the arguments advanced in relation to them.

During the years of income ended 30th June 1968, 1969 and 1970 respectively, Mining Traders Ltd. (whose name later became Patrick Corporation Ltd. and is now Patcorp Investments Ltd.) (``Mining Traders'') carried on the business of trading in stocks and shares. In each of those years it conducted a dividend-stripping operation on the shares of one or more private companies. There were eight such transactions in all, but seven of these may be considered together, since they were indistinguishable in all material respects save one, which will be mentioned. The seven private companies the subject of these transactions were the following: in 1968, Remfore Pty. Ltd. (``Remfore''); in 1969, E.P. & A. Fraser Pty. Ltd. (``Fraser''), Austral Stevedoring and Lighterage Company Pty. Ltd., Thomas Napier & Co. Pty. Ltd. and Stevedoring Insurance Co. Ltd.; in 1970, Yarra Investment Co. Pty. Ltd. (``Yarra'') and Harbour Holdings Pty. Ltd. (``Harbour Holdings''). It is convenient to refer to each of these companies as ``the stripped company''. In each case the stripped company had ceased to trade, but had a fund of undistributed profits and had assets which could readily be realized. Mining Traders entered into an agreement to buy the whole of the issued capital of the stripped company, for a price which in four cases was the same as the value of the assets, in one case was a little more and in another a little

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ATC 4229

less; in the seventh case the value of the assets was not established by the evidence. Transfers of the shares to Mining Traders were executed, and a meeting of directors of the stripped company resolved that the transfers be registered. Subsequently it was resolved that a dividend be paid out of unappropriated profits. According to the unchallenged findings of Mason J., the transfers to Mining Traders of the shares in Remfore and Harbour Holdings were in fact registered before the dividend was declared on the shares in the former company and before the second of two dividends was declared on the shares in the latter company, but in all the other transactions (including the first dividend declared by Harbour Holdings) the dividends were declared and paid before the transfers of shares were registered. This is the one possible point of distinction between these seven transactions. However, in each case the share register shows that Mining Traders became a shareholder on the day on which registration was approved. After the dividend had been received Mining Traders resold all the shares in the stripped company to another company at a price very much less than it had paid for them. The resale took place within a short time - usually a matter of days - after Mining Traders had first agreed to buy the shares. The entire operation was in each case carried out within one financial year, and towards the end of that year; in four cases the shares were resold on 30th June and in the other cases the resales were made in the month of April or the month of June. In each case the directors of Mining Traders bought the shares with the knowledge that they could be resold as in fact they were, and with the intention of engaging in the dividend-stripping operation. The purchases were financed by loans made by the stripped company, and cheques were exchanged for this purpose. In each transaction the purchase and resale of the shares resulted in a substantial loss to Mining Traders, but Mining Traders received dividends which - except in one case - more than offset that loss so that on the whole Mining Traders ended the transaction with a net gain. The exception was the case of Yarra, where the loss on resale was exactly balanced by the amount of the dividend so that there was ultimately neither gain nor loss. Mining Traders, in its returns of income tax, showed an overall profit (in 1968 and 1969) or loss (in 1970) on share trading which was arrived at after deducting or including, as the case may be, the losses incurred on the sale of the shares in the stripped company, i.e. the difference between the price paid for the shares and the price obtained on their resale. The dividends received from the stripped companies were treated as income but Mining Traders claimed to be entitled to a rebate in respect of the whole amount of the dividends under sec. 46 of the Income Tax Assessment Act 1936 (as amended) (``the Act''). The Commissioner, in his assessment, refused to allow any rebate under sec. 46, and in consequence assessed Mining Traders to tax on the basis that on each transaction it had made a profit calculated by deducting the cost price of the shares from the sum of the price received on resale and the dividends received. Mason J. upheld the contentions of Mining Traders in respect of all these transactions and from his decision in these cases the Commissioner has appealed to this Court (Appeals 109, 110 and 102).

The effect of the transactions may be illustrated by taking on example. On 21st April 1969 Mining Traders agreed to buy and Patrick Stevedoring (Victoria) Pty. Ltd. (``Patrick Stevedoring''), the owner of the share capital in Fraser, agreed to sell the whole of the issued capital in Fraser for $190,497. The similarity of the name of Patrick Stevedoring to that which Mining Traders later adopted is quite coincidental, for the companies were in no way connected. On 22nd April 1969 the directors of Fraser resolved to register the transfers of the shares to Mining Traders and its nominees. The share register shows that Mining Traders became a shareholder on 22nd April 1969. On the same day Mining Traders drew a cheque in favour of Patrick Stevedoring for $190,497, the price of the shares. On the same day a cheque for $190,497 drawn by Patrick Stevedoring in favour of Fraser in repayment of a loan and endorsed by Fraser in favour of Mining Traders was deposited to the credit of Mining Traders' bank account - the endorsement was by way of loan from Fraser to Mining Traders. On 23rd April 1969 the directors of Fraser resolved to declare a dividend of $189,247. On the same day a cheque in that amount was drawn by Mining Traders in favour of Fraser in partial repayment of the loan made by Fraser to Mining Traders. The cheque was endorsed by Fraser in favour of Mining Traders and credited to the latter's bank account; this endorsement and delivery of the cheque back to Mining Traders was intended to represent

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ATC 4230

payment of the dividend. On 24th April 1969 Mining Traders sold the whole of the issued capital of Fraser to Warrina Pty. Ltd. for $4,250. Mining Traders claimed that it made a loss of $186,247 ($190,497 minus $4,250) on the resale of the shares and that the dividend of $189,246 [sic] was entirely rebatable. The Commissioner reassessed on the footing that as a result of this transaction Mining Traders made a profit of $2,999 ($4,250 plus $189,246 [sic] minus $190,497). The discrepancy of $1 in the amount of the dividend is quite immaterial.

The eighth transaction with which these appeals are concerned involved the purchase and later resale of the entire share capital of Austin Sales (Australia) Pty. Ltd. (``Austin''). The purchasers were Mining Traders, the appellants Patrick Corporation Securities Ltd. (formerly Minwall Pty. Ltd.), M.T.A. Pty. Ltd., M.T.B. Pty. Ltd. and M.T.D. Pty. Ltd. (all of which were wholly-owned subsidiaries of Mining Traders), the appellant Minsoul Pty. Ltd. (whose share capital was owned as to one-half by Mining Traders) and another company A.O.M. Securities Pty. Ltd. (which had no connection with Mining Traders and is not a party to the present proceedings). By an agreement dated 30th June 1970 it was recited that British Leyland Motor Corporation of Australia Ltd. had agreed to sell and the purchasers had agreed to purchase in the proportions set out in the schedule the whole of the issued shares in Austin for $6,176,698. It was a term of the agreement that completion of the purchase should take place on 30th June 1970 ``when the said issued shares shall be transferred to the Purchasers...''. All the appellant companies carried on business as share traders in the year ended 30th June 1970. This transaction was also a dividend-stripping operation, and was in most respects conducted in the same way as the seven transactions already discussed. There were, however, some points of distinction, one of which Mason J. regarded as crucial. On 30th June 1970 the directors of Austin passed a resolution in the following terms:

``The Chairman advised that British Leyland Motor Corporation of Australia Limited the beneficial owner of the whole of the issued share capital of the company had agreed to sell its shareholding in the Company to the undermentioned purchasers in respect of the number of shares set opposite their respective names: -

[Then followed the names of the purchasers and the respective numbers of the shares.]

The Chairman produced written directions from the purchasers directing that the transfers of shares be in the names of Nominees on behalf of the purchasers as follows: -

      Patrick Nominees

       Pty. Limited            181,008 shares

      John Albert Keir               1 share

      Brian Henry Davidson           1 share
          

The Chairman then tabled transfers of shares from British Leyland Motor Corporation of Australia Limited to the Nominees in respect of the numbers of shares abovementioned.

IT IS RESOLVED that the transfers be accepted and that the shares be registered in the books of the Company in the names of the respective transferees.

IT IS NOTED that the transferees accepted the transfers of shares to nominees for the purchasers abovementioned.''

At a later meeting, held on the same day, it was resolved that Austin declare an interim dividend totalling $5,789,677.98 ``payable to Patrick Nominees Pty. Limited on behalf of beneficial shareholders in the following proportions''; there were then set out the names of Mining Traders and the other appellant companies and A.O.M. Securities Pty. Ltd. and the amount of dividend payable on behalf of each. The exchange of cheques made to enable the transaction to be effected was carried out on behalf of the purchasers by Patrick & Co., a firm of stockbrokers closely associated with Mining Traders, and on 30th June 1970 that firm, having received from Austin a cheque representing the dividend, credited the account of each of the purchasers in its books with the amount to which each was entitled. By a further agreement made on 30th June 1970 Mining Traders, the other appellant companies and A.O.M. Securities Pty. Ltd. agreed to sell the whole of the issued shares in Austin to Hill Minerals N.L. for $362,020. After the dividend and the price received on the resale of the shares in Austin have been set off against the cost of the purchase of those shares, this transaction, unlike the others, resulted in an overall loss - which in total exceeded $25,000. Later on 30th June the directors of Austin tabled a transfer of all the shares held by Patrick Nominees Pty. Ltd. and Mr. Keir to

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ATC 4231

Hill Minerals N.L. and it was resolved that the transfers be accepted and the shares be registered in the name of Hill Minerals N.L. It was noted that Mr. Davidson held one shares in his own name as nominee for Hill Minerals N.L. In these circumstances neither Mining Traders nor any other of the appellant companies was ever entered in the register of Austin as the holder of any shares. Mason J. held that in consequence none of them was ``a shareholder'' within sec. 46 and that for that reason no rebate was allowable under that section. From this decision appeals have been brought by Mining Traders (Appeal No. 101 - there are thus cross-appeals in respect of Mining Traders' assessment for the year 1970) and the other appellant companies (Appeals No. 103, 104, 105, 106 and 107). It will be convenient to use the expression ``the appellant companies'' to refer generally to Mining Traders as well as to the other companies which are appellants.

According to the submission made on behalf of the appellant companies, the results of these transactions have been correctly shown in their income tax returns for the following reasons. The price received on the resale of the shares was assessable income within sec. 25 of the Act. The dividends received were included in the assessable income by virtue of sec. 44, but were rebatable in accordance with sec. 46. The amount paid to purchase the shares was an allowable deduction within sec. 51. On behalf of the Commissioner it was strongly urged in reply to these submissions that each of the transactions fell within sec. 260 of the Act and that the effect of that section was to avoid, as against the Commissioner, the whole transaction - the purchase of the shares, their resale and the declaration of a dividend. In the circumstances of the present case it is convenient, before discussing sec. 260, to consider the position on the assumption that the transactions did not fall within the scope of that section. It is also convenient to proceed, in the first place, on the further assumption that the appellant companies were all shareholders within sec. 44 and 46 of the Act at the time when the dividends were received - an assumption which is of course admittedly correct in relation to the receipt by Mining Traders of the dividend in Remfore and the second dividend in Harbour Holdings. On these assumptions the Commissioner did not advance any argument in support of the view that the appellant companies were not entitled to a rebate under sec. 46, but he did contend that the purchase price of the shares was not an allowable deduction under sec. 51, because the expenditure on the purchase of the shares was not incurred as an incident of the business of share trading carried on by the appellant companies and was of a capital nature. Consistently with this view he argued, or conceded, that the proceeds of the sale of the shares were not part of the assessable income under sec. 25.

It was not challenged that each appellant company was a dealer in shares. It was clearly established that in the case of each transaction the appellant company bought the shares with the intention of taking the dividend and then reselling the shares within a short time. If the purchase and sale of the shares formed part of the appellants' business of share trading there can be no doubt that the proceeds of the sale of the shares would be assessable income, or that the expenditure incurred in the purchase of the shares would be deductible under sec. 51. Such expenditure would not be of a capital nature, because in the circumstances mentioned the shares would be trading stock within sec. 51(2). So much was established by
Investment and Merchant Finance Corporation Ltd. v. F.C. of T. 71 ATC 4140 ; (1971) 125 C.L.R. 249 . However, the Commissioner contended that the transactions presented such extraordinary features that they should properly be regarded as isolated dealings not forming part of the ordinary ebb and flow of the business of share trading carried on by the appellant companies. The so-called extraordinary features of these transactions go only to show that the motive that inspired the appellant companies to enter into the transactions, and the effect which they were intended to achieve, was to improve their taxation position by taking advantage of the provisions of sec. 46 of the Act. In addition it might be said, in relation to the shares in Austin and possibly also in relation to those in Yarra, that it was not intended to make a commercial gain, i.e. that the only object of those transactions was to derive a fiscal benefit. However, the fact that a dividend-stripping operation is carried out for the purpose of obtaining taxation advantages, and not to make a profit, does not mean that it must be regarded as outside the scope of the taxpayer's share trading business, or that the shares cannot be treated as trading stock. The Commissioner's submissions are contrary to what was decided in Investment and Merchant

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ATC 4232

Finance Corporation Ltd. v. F.C. of T . In that case the shares were purchased and the dividends received in one income year and the shares were resold in the next income year and the amount which the taxpayer paid for the shares exceeded what it got by way of dividend and on resale. The question for decision was whether the shares were trading stock whose value at cost should be taken into account in the second year of income. The majority of the Court answered this question in the affirmative. Walsh J. said (at ATC p. 4150; C.L.R. pp. 270-271):

``I do not assert, of course, that shares are always trading stock in the hands of their owner; and even where the owner is a dealer in shares the circumstances may show that particular shares are not trading stock. But when shares are bought by a dealer in shares and it is intended that they are to be resold and that this will probably occur in the not distant future, I do not think they are to be denied the description of trading stock, either because the trader expects or intends that they will be sold at less than their cost price or because he seeks to obtain a commercial advantage from the transaction otherwise than from a profit on the resale, that is, an advantage from an expected dividend and from an expected taxation benefit.''

It may be observed that both Windeyer J., whose decision at first instance was reversed on appeal, and McTiernan J., who dissented on the appeal, agreed with the majority of the Court that the amount expended in buying the shares was deductible in the first year of income (see 70 ATC at p. 4007; 120 C.L.R. at p. 189, and 71 ATC at p. 4144; 125 C.L.R. at p. 259). On behalf of the Commissioner it was submitted that this case was distinguishable, but I am unable to agree that the circumstances of that case differed from those of the present in any material particular. It is true that in that case arrangements for the resale of the shares had not been made prior to their purchase, and they were not in fact resold for more than a year, but it had been planned from the outset that the shares should be resold.

In the argument of the Commissioner reliance was placed upon two decisions of the House of Lords by which it was held that the dividend-stripping transactions there in question, which had been carried out for the purpose of establishing claims against the revenue, should not be regarded as being trading transactions in the course of the taxpayers' trade of dealers in shares:
Lupton (Inspector of Taxes) v. F.A. & A.B. Ltd. (1972) A.C. 634 ;
Thomson (Inspector of Taxes) v. Gurneville Securities Ltd. (1972) A.C. 661 . The question which the House of Lords had to decide in those cases arose under sec. 341 of the Income Tax Act, 1952 (U.K.), which applied where ``any person sustains a loss in any trade...''. It is unnecessary for present purposes to discuss in detail the reasoning by which their Lordships reached their conclusion, but a few short passages will illustrate the nature of their approach. In Lupton's case, Lord Morris of Borth-y-Gest said (at p. 647): ``some transactions may be so affected or inspired by fiscal considerations that the shape and character of the transaction is no longer that of a trading transaction'', and Lord Simon of Glaisdale said (at p. 660): ``what is in reality merely a device to secure a fiscal advantage will not become part of the trade of dealing in shares just because it is given the trappings normally associated with a share-dealing within the trade of dealing in shares''. In Thomson's case, Lord Donovan said (at p. 675): ``when shares are bought for the sole or main purpose of dividend-stripping, the transaction is not a trading transaction; and a loss shown by the writing down of the value of the shares consequent upon the dividend-stripping is not a loss sustained in trade''. This reasoning cannot, I think, be reconciled with that accepted in Investment and Merchant Finance Corporation Ltd. v. F.C. of T., and if the two sets of statutory provisions were the same in relevant respects it might be necessary to reconsider what was said in the latter case in the light of these decisions of the House of Lords. However, the scheme of the English legislation is very different from that of the Australian Act. In particular the English legislation does not contain a provision like sec. 260 of the Act which is aimed generally at tax avoidance. The presence of sec. 260 makes it impossible to place upon other provisions of the Act a qualification which they do not express, for the purpose of inhibiting tax avoidance. In other words, it is not permissible to make an implication which does what sec. 260 fails to do in preventing the avoidance of tax. If it is suggested that a taxpayer has engaged in a device to secure a fiscal advantage, and the relevant provisions of the Act do not expressly deal with the matter, the case depends entirely on sec. 260. These

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ATC 4233

considerations are sufficient to distinguish the two decisions of their Lordships. Moreover, the Parliament, by enacting sec. 46A of the Act (which was not in force at the time material to this case), has legislated in an attempt to overcome what it regarded as the undesirable effects of the decision in Investment and Merchant Finance Corporation Ltd. v. F.C. of T., and that is a further reason why we should not reconsider the authority of that case.

The expression ``trading stock'' is defined in sec. 6(1) of the Act to include anything purchased for the purposes of sale. The shares in the stripped companies answered that description. The purchases were made, not as ``individual forays in particular stocks'' (as in
A.C. Williams v. F.C. of T. 72 ATC 4157 at p. 4168; (1972) 128 C.L.R. 645 at p. 656 ), but by companies which carried on the business of share trading. The only reason advanced for isolating the transactions in question from the general run of the business of the appellant companies was that they were designed for the purpose of tax avoidance, but for the reasons I have given I consider that that reason cannot be accepted, apart from sec. 260. I therefore hold that the appellant companies were entitled to a deduction under sec. 51 in respect of the expenditure incurred in the purchase of the shares in the stripped companies, unless sec. 260 avoided any part of the transactions. Similarly, of course, the price obtained on resale was income under sec. 25.

I now turn to consider whether the appellant companies were shareholders in the stripped companies at the respective times when the dividends in those companies were declared and paid. By sec. 6(1) of the Act, ``shareholder'' is defined to include ``member or stockholder'', but that definition provides no assistance in the present case, because in the case of a company limited by shares a member must be a shareholder. For present purposes, the terms ``shareholder'' and ``member'' are synonymous. Their meaning must be sought in the rules of company law. Section 16 of the Companies Act, 1961 (N.S.W.) (as amended) provides (inter alia) as follows:

``(4) On and from the date of incorporation specified in the certificate of incorporation, but subject to this Act, the subscribers to the memorandum together with such other persons as may from time to time become members of the company shall be a body corporate by the name contained in the memorandum...

(5) The subscribers to the memorandum shall be deemed to have agreed to become members of the company and on the incorporation of the company shall be entered as members in its register of members, and every other person who agrees to become a member of a company and whose name is entered in its register of members shall be a member of the company.''

These provisions appear to declare, in the clearest possible way, that a person, other than a subscriber, does not become a member of a company until his name is entered on the register. By sec. 151 the company is required to keep a register of its members and to enter therein (inter alia) -

``(a) the names and addresses of the members...

(b) the date at which the name of each person was entered in the register as a member.''

Counsel for the appellant companies submitted that the effect of this section is that the register records the fact of membership but does not in itself confer the status of membership. This submission, however, gives too little weight to the words of sec. 16 and is opposed to the views that have consistently been expressed in cases decided on similar company legislation.

In
Avon Downs Pty. Ltd. v. F.C. of T. (1949) 78 C.L.R. 353 and
Dalgety Downs Pastoral Company Pty. Ltd. v. F.C. of T. (1952) 86 C.L.R. 335 this Court considered the effect of sec. 80(5) of the Act as then in force, which referred to ``persons who beneficially held shares of the company carrying not less than twenty five per cent of the voting power on the last day of the year in which the loss was incurred''. It was held that a person ``held'' shares within this provision by having his name on the register. In Avon Downs Pty. Ltd. v. F.C. of T., one Jack L. Vivers had bought and paid for 258 shares before the last day of the year, but the resolution that the transfer be registered was not passed, and the transfer was not in fact registered, until after that day. Dixon J. said (at p. 363): ``Beneficially the 258 shares belonged to Jack L. Vivers, but until his transfer was registered and his name placed on the share register he could not be said to `hold' them within the meaning of sec. 80(5).'' In Dalgety Downs Pastoral Company Pty. Ltd. v. F.C. of T . it was again contended that a

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ATC 4234

beneficial owner, not on the register, ``held'' the shares, and again the contention was rejected The Court said (at pp. 341-342):

``Indeed it is not too much to say that the verb `hold' and its variants, when used in relation to shares in companies, normally refers to the legal ownership of the shares according to the register of members. The Companies Acts of the United Kingdom and of the several States of the Commonwealth have uniformly used the word in this sense, and common usage has followed their example. Before a different meaning is accepted, some justification must be found in the context, or the subject-matter.''

Later in the judgment, the Court referred to the definition of ``shareholder'' in sec. 6 of the Act and to sec. 108 and 109 of the Act, and said (at p. 343):

``The policy manifested by these sections might quite well have led to their being expressed so as to be applicable to loans made or remuneration paid to persons entitled to shares in equity only, as well as to registered members, but evidently the uncertainty resulting from a desertion of the register of members as the sole source of information as to the persons in respect of whom the sections apply was considered a decisive practical reason for not carrying the policy to that length. The same uncertainty provides no less a cogent consideration in relation to sec. 80(5)...''

In
F.C. of T. v. Angus (1961) 105 C.L.R. 489 , a taxpayer was entitled under the will of her late father to a life interest in one-third of his residuary estate which consisted of shares in a company incorporated and resident in Singapore. Notwithstanding his death the shares continued to stand in his name on the company register but pursuant to a direction given to the company by the trustees of the estate one-third of the amount of the dividends was paid by the company direct to the taxpayer. The question which the Court had to decide, whether the income was exempt under sec. 23(q) of the Act, is not one which now concerns us. However, if the taxpayer had been a shareholder she could not have claimed the protection of sec. 23(q), because of the provisions of sec. 44(1A). The Court held that she was not a shareholder: see per Dixon C.J. at p. 501, per Fullagar J. at p. 506 and per Menzies J. at p. 515. Dixon C.J. said (at p. 501) that the executors or trustees of the deceased shareholder should be regarded as shareholders for the purpose of the payment of dividend and any tax thereon; that does not indicate a departure from the general rule that the shareholder is the person whose name is entered on the register, for the name of the deceased shareholder remained on the register: see
A.L. Campbell and Company Pty. Ltd. v. F.C. of T. (1951) 82 C.L.R. 452 where the position of the personal representatives of a deceased shareholder is discussed.

These decisions affirm the general principle that entry on the register is necessary to constitute membership of a company, and clearly establish that the beneficial ownership of shares, without registration, does not make a person a shareholder. In my opinion it follows that none of the appellant companies was ever a shareholder in Austin. It is true that they became the beneficial owners of the shares in that company. However, no transfers of the shares were executed in favour of the appellant companies, no resolution was passed by Austin or its directors that the appellant companies be registered and they never were registered. Since they were not shareholders of Austin they were not entitled under sec. 46 to a rebate in respect of the sums which they received as a result of the declaration of dividends in that company. For this reason, appeal No. 102 brought by Mining Traders, and appeals No. 103, 104, 105, 106 and 107 brought by the other appellant companies, must fail.

Mining Traders was clearly a shareholder in all the other stripped companies - it was duly registered as such - but (except in the two cases mentioned, of Remfore and Harbour Holdings) registration was not effected until after the dividend had been declared. The registration, when effected, showed that Mining Traders had become a member on the date on which registration had been approved - a date which was before that on which the dividends were declared. The register correctly showed the date ``at which'' the name of Mining Traders was entered in the register (see sec. 151(1)(b) of the Companies Act ), rather than the date on which its name was registered. According to the register, therefore, Mining Traders was a shareholder in all the stripped companies (except Austin) when the dividends were declared. This is in my opinion sufficient for the purposes of sec. 44 and 46 of the Act. To depart from the register would lead to the practical inconvenience mentioned in Dalgety

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Downs Pastoral Company Pty. Ltd. v. F.C. of T. at p. 343. The present case of course is one in which the register does not need rectification - it is correct.

We were referred to some cases in which it was held that where the holding of shares is a condition precedent to becoming a director, the director must be actually registered before he is appointed; it is not enough that at the date of his appointment he had acquired an absolute right to registration and that he was subsequently registered:
Spencer v. Kenned (1926)Ch. 125 ;
Holmes v. Keyes (1958) Ch. 670 at pp. 675-676 ; reversed on other grounds (1959) Ch. 199. It is unnecessary to consider whether those decisions were correct, but if it be assumed that they were correct, they do not lay down any rule of general application that a person to whom a transfer has been approved for registration, and is subsequently registered, cannot thereafter be regarded as having been a shareholder at a time after the approval but before the actual registration, even though the register shows that he was a shareholder at that time. Astbury J. recognized the limited scope of the decision in Spencer v. Kennedy when he said (at p. 134):

``They contend that as before their appointment the Morgan tranfers were passed for registration, and nothing but the purely ministerial act of registration remained to be done, they really held one share each before they were appointed. For many statutory purposes that may be so. But they were not members until they were actually registered...''

If a person ought to have been on the register on a certain day and he is subsequently registered as from that day, speaking generally I consider that it should be held that he was a shareholder on that day. The registration, assuming it to be a proper registration, operates retrospectively from the date on which it was effected to the date at which the name of the shareholder was entered in the register. In any case, for the reason of convenience already mentioned, I consider that the fact that Mining Traders was registered as a shareholder as at the date at which the dividends were declared, and rightly so registered, is enough for the purposes of sec. 46. It follows that in my opinion Mining Traders was entitled to the rebates which it claimed in respect of all of the stripped companies except Austin, subject to two further questions that remain to be considered.

It was submitted on behalf of the Commissioner that the effect of sec. 46(2)(b), 46(7)(a) and 50(a) of the Act is to require the deduction allowable under sec. 51 in respect of the purchase of the shares, or alternatively the loss incurred on the purchase and resale of the shares, to be deducted from the amount of the dividends paid on those shares with the result that no amount remains subject to the rebate. By sec. 46(2)(b) the rebate is to be arrived at by applying the average rate of tax payable by the shareholder to the part of any dividends that is included in its taxable income. Section 46(7)(a) defines ``the part of any dividends that is included in the taxable income of a shareholder'' as meaning ``the amount remaining after deducting from the amount of the dividends included in the assessable income of the shareholder the deductions allowable to the shareholder under this Act from income from dividends''. It was accepted in
Rowdell Pty. Ltd. v. F.C. of T. (1963) 111 C.L.R. 106 that those words refer to sec. 50(a), which provides as follows:

``Where the assessable income is derived from more than one of the following classes of income, that is to say, income from personal exertion, income from property other than dividends, and income from dividends, the following provisions shall apply to all allowable deductions: -

• (a) where a deduction or part of a deduction relates directly to income from dividends (whether of the year of income or of a previous year of income) the deduction or part of the deduction, as the case requires, shall be made successively from income from dividends, from income from property other than dividends and from income from personal exertion.''

The question therefore is whether the purchase price of the shares, or the loss made on the purchase and resale of the shares, is a deduction which ``relates directly'' to the income from the dividends. I find it difficult to see how the price paid for shares is a deduction which relates directly to the dividends paid on those shares, and even more difficult to accept that the loss on the purchase and resale of the shares answers that description. However, the question is the subject of authority; it was answered in the negative by the majority of this Court in Rowdell Pty. Ltd. v. F.C. of T. (see at pp. 118-119, 137-138; cf. at p. 127). No reason

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ATC 4236

has been shown why we should review the correctness of that decision on this point, and this contention made on behalf of the Commissioner must be rejected.

The final question for consideration is whether sec. 260 has any application to the present case. In Investment and Merchant Corporation Ltd. v. F.C. of T. the Commissioner did not seek to rely on sec. 260 and the effect of that section was not considered by the Court. However, in Rowdell Pty. Ltd. v. F.C. of T. the Commissioner did seek to invoke sec. 260 against taxpayers who had acquired shares in circumstances which Kitto J. described in the following words (at p. 121):

``The transaction consisted in buying shares in the company at prices somewhat lower than the net value of its assets, stripping the company of the whole or a large part of its accumulated profits by means of declarations of dividends or distributions in liquidation or both, and then re-selling the shares if the company was not in liquidation, or, if it was in liquidation, participating in a liquidator's distribution of capital.''

The Commissioner there sought to apply sec. 260 so as to treat the taxpayer as having obtained, not dividends subject to exemption from or rebate of tax, but other income of a taxable character by virtue of the acquisition of the shares. However, the Court held that sec. 260 had no application. Kitto J. (with whose judgment on this point Dixon C.J. agreed) said (at p. 125):

``No doubt among the considerations which led Rowdell to enter into the transactions was the consideration that its tax liability resulting from the transactions would be reduced by the application of sec. 44(2), 46 and 107 (or whichever of them should apply in the circumstances); but it is impossible to point to any tax liability which Rowdell would have incurred if the arrangement had never been made and for the avoidance of which the arrangement was a concerted means.''

Menzies J. (at p. 134) expressed a similar view. That decision appears to me, with all respect, to be in complete accord with the leading authorities on sec. 260. A taxpayer who is entitled to a rebate in respect of dividends does not, by arranging to receive the dividends, avoid any liability imposed on him by the Act. In
Europa Oil (N.Z.) Ltd. v. Commr. of I.R.(N.Z.) 76 ATC 6001 ; (1976) 1 W.L.R. 464 Lord Diplock, speaking of the New Zealand section which corresponds to sec. 260, said (at ATC p. 6009; W.L.R. p. 475):

``Any liability of the taxpayer to pay income tax must be found elsewhere in the Act. There must be some identifiable income of the taxpayer which would have been liable to be taxed if none of the contracts, agreements or arrangements avoided by the section had been made.''

Those remarks apply equally to sec. 260. In Rowdell Pty. Ltd. v. F.C. of T. the taxpayer did no more than arrange his affairs so as to receive income which was rebatable and sec. 260 does not apply to such an arrangement. The Commissioner submitted that the purpose of the arrangements made in the present case was to avoid the tax that would have been payable on the income derived by Mining Traders from its other trading activities. This argument is superficially attractive because, as has been mentioned, the circumstances show quite clearly that the transactions were entered into with a view to their taxation advantages. However, an arrangement whose purpose is to reduce the amount of tax that a taxpayer will have to pay is not necessarily an arrangement whose purpose is to avoid a liability to tax. It was the fact that the dividends were rebatable that made the transactions in the present case so attractive from a fiscal point of view. The shares could be sold at a loss because the declaration of the dividend lowered their value and there would have been no fiscal advantage if the dividends had attracted tax. As I have just indicated, sec. 260 did not prevent the appellant companies from arranging their affairs so that the income that they received would include dividends subject to a rebate. Nor does sec. 260 enable the Commissioner to treat the expenditure on the purchase of the shares as if it had never been made. In
Cecil Bros. Pty. Ltd. v. F.C. of T. (1964) 111 C.L.R. 430 , Dixon C.J. said (at p. 438) that he had great difficulty in seeing how sec. 260 could apply to defeat or reduce any deduction otherwise truly allowable under sec. 51 Kitto and Windeyer JJ. agreed with his judgment, and Taylor J. said that he shared that difficulty. Although there is no doubt that the decision reached in that case was correct, it has been suggested that the doubts expressed as to

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ATC 4237

the application of sec. 260 to deductions under sec. 51 were not well founded:
Hooker-Rex Pty. Ltd. v. F.C. of T. 70 ATC 4033 at p. 4042; (1970) 123 C.L.R. 71 at p. 86 ;
Franklin's Selfserve Pty. Ltd. v. F.C. of T. 70 ATC 4079 at p. 4092; (1970) 125 C.L.R. 52 at p. 74 . It is unnecessary for the decision of the present case to resolve that question. The expenditure made on the purchase of the shares was in truth the price paid by the appellant companies for the purpose of obtaining income. It was not for the Commissioner to say that they should have paid less or more, or that they should not have bought the shares at all. Whether the whole of any of these transactions, or part, be examined it is not possible to find an arrangement whose purpose was to avoid tax. The purpose was to buy, and later resell, shares the dividends from which would be rebatable. It may rightly be said of the present case, as I said in the very different circumstances of
F.C. of T. v. Casuarina Pty. Ltd. 71 ATC 4068 at p. 4081; (1971) 127 C.L.R. 62 at p. 104 , that ``no liability to tax imposed by the Act on the company is avoided for whatever tax is appropriate to its situation remains payable''. The Commissioner relied on a line of cases in which arrangements, which might be described as dividend-stripping operations, were struck down by sec. 260:
Bell v. F.C. of T. (1953) 87 C.L.R. 548 ;
Newton v. F.C. of T. (1958) 98 C.L.R. 1 ;
Hancock v. F.C. of T. (1961) 108 C.L.R. 258 ;
F.C. of T. v. Ellers Motor Sales Pty. Ltd. 72 ATC 4033 ; (1972) 128 C.L.R. 602 . Those were all cases in which the arrangement had the purpose of giving the character of capital to what, apart from the arrangement, would have been received as income and thus of avoiding liability for tax on the amounts received. They are distinguishable from the present case in which the Commissioner's submissions, when analysed, will be seen as an attempt to deny to Mining Traders a rebate to which the Act gives it an entitlement. In other words, the arrangements which the Commissioner seeks to challenge cannot be predicated to be an attempt to avoid tax - they were an attempt (and a successful attempt) to take advantage of the benefit given by sec. 46. In my opinion sec. 260 has no application to the case. It follows that the Commissioner's appeals must also fail.

For the reasons given I am in agreement with the conclusions reached by Mason J. I would dismiss all the appeals.