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.

Jacobs J.: There are before the Court eight appeals from decisions of Mason J. (reported sub nom .
Patrick Corporation Ltd. v. F.C. of T. 74 ATC 4149 ) in one of which there is a cross-appeal:

The appeals by the taxpayers have a common ground, namely, that Mason J. was in error in finding that, though the dividends included in the taxable income of the respective taxpayers otherwise fell within the terms of sec. 46(2) of the Act, nevertheless the taxpayers were not entitled to rebates in their respective assessments because they were not at the relevant time ``shareholders'' in the companies from which the dividends were received.

The two appeals and the cross-appeal by the Commissioner raise the ground that Mason J. was in error in finding that the taxpayer Patcorp Investments Limited was a ``shareholder'' of the companies from whom dividends were received. They raise a number of other grounds which I will consider later in these reasons.

In the two appeals and the cross-appeal by the Commissioner the name of the purchaser Patcorp Investments Limited (or Mining Traders Ltd. as it was then named) was either prior to or subsequent to the declaration of dividends entered into the register of the respective companies as shareholder; but in each case the resolution of the directors of the companies approving the transfer to Patcorp Investments Limited was passed before the declaration of the dividend. Mason J. concluded that, provided the resolutions approving the transfer had been passed, the transferees were correctly to be regarded as ``shareholders'' within the meaning of sec. 46 thenceforth even though the entries were made subsequently. In my opinion he was correct in this conclusion.

When the word ``shareholder'' is used in the Income Tax Assessment Act it refers to a person who is regarded as a shareholder under the general law governing the relationship of a person so described to the association in which he has a share. It has been so held in the case of a shareholder in a corporation the capital of which is divided into shares. See particularly
Dalgety Downs Pastoral Company Pty. Limited v. F.C. of T. (1952) 86 C.L.R. 335 at pp. 341-343 . By the definition in sec. 6 the word ``shareholder'' includes a member or a stockholder. The inclusion of the former word covers a subscriber to the memorandum of association and a member of a corporation the capital of which is not divided into shares and a member of an unincorporated association, not being a partnership, whether or not the capital is intended to be so divided. See the definition of ``company'' in sec. 6.

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However, to say that in the law governing incorporated companies a person is only a ``shareholder'' at any particular date if his name appears on the register of members at that date is an over-simplification. For some purposes, e.g. qualification as a director, it has been decided (prior to the enactment of what is now sec. 116 of the Companies Act, 1961 (N.S.W.)) that a person is only the holder of shares if at the date of his appointment as director he appears on the register of members. Spencer v. Kennedy (1926) Ch. 125. On the other hand it is fundamental to company law that despite the language of such sections as sec. 16(5) and sec. 151(1) the register of members is not conclusive. Indeed, sec. 151(4) makes it clear that the register is no more than prima facie evidence of the matters which it is required or authorised to contain. The provision in sec. 155 that the register may be rectified embodies the concept that, once it is rectified, the rights of the person whose name is entered therein or removed therefrom are determined as at the date at which the rectification is ordered to have effect. It appears to me that the question which arises in the present case is whether the meaning of ``shareholder'' in the Income Tax Assessment Act is confined to a person whose name appears on the register of members. In my opinion it is not. It also includes a person who is entitled as against the company to be registered and whom the company is absolutely entitled to register as a member of the company. If a company is at the relevant date absolutely entitled to register the person concerned and he is absolutely entitled to have the register rectified so that his name appears thereon as a shareholder at that date, such a person has more than a beneficial interest in the shares enforceable primarily against the vendor. He is in a direct relationship with the company involving reciprocal rights and duties between them.

In the present case once the directors of each company had approved the respective transfers and directed registration the transferee was absolutely entitled to have its name entered on the respective registers. It was not only beneficially entitled to the shares as property with consequent rights against the vendor in whose name the shares stood. It was entitled vis-a-vis the companies to be treated as a shareholder and to be registered as such and was therefore a ``shareholder'' within the meaning of the Income Tax Assessment Act. I do not regard this conclusion as inconsistent with the reasoning in the Dalgety Downs case (supra) despite the generality of some of the statements therein. The particular question now being considered did not there arise and my conclusion conforms with the approach of the Court in that case.

I turn now to the appeals by the taxpayers in relation to the Austin Sales (Aust.) Pty. Limited transactions. The only ground of appeal by the various taxpayers is that Mason J. was in error in holding that they were not respectively ``shareholders'' within the meaning of sec. 46 so as to be entitled to the rebates provided for in that section.

The facts upon which this conclusion was based are set out in the reasons for judgment of Mason J. and his findings of fact in this respect are not challenged. It is therefore not necessary to repeat them at length in the present context. It is sufficient to say that the sale of the shares, the payment of the dividend by Austin Sales (Aust.) Pty. Limited, and the resale of the shares were all carried into effect on 30th June 1970. As Mason J. said ( supra at p. 4160). ``Speed was of the essence of the transactions''. A sum of $6,176,698 was credited to the account of the vendor shareholder, British Leyland Motor Corporation of Australia Ltd. Thereafter on the same day a meeting of the directors of Austin Sales (Aust.) Pty. Limited was held. Transfers from British Leyland Motor Corporation of Australia Ltd. to Patrick Nominees Pty. Ltd., Mr. Keir and Mr. Davidson were approved. New directors were then appointed. Shortly afterwards a meeting of the new directors was held. An interim dividend was declared; the dividend now in question. was declared ``payable to Patrick Nominees Pty. Ltd. on behalf of beneficial shareholders in the following proportions'' and the sum of money payable as dividend to the various appellants were set out. The dividend was then paid to Patrick Nominees Pty. Ltd. who credited the account of each of the purchasers with the share of the dividend to which it was beneficially entitled. Thereafter on the same day the Austin Sales shares of Patrick Nominees Pty. Ltd. and Mr. Keir were sold ex dividend to Hill Minerals N.L. and the new directors of Austin Sales (Aust.) Pty. Limited resolved that share transfers from Patrick Nominees Pty. Ltd. and Mr. Keir to Hill Minerals N.L. should be registered.

Thus the appellants' names did not, and were never intended to, appear in the Austin Sales

ATC 4240

register of members at any time. The shares were transferred to Patrick Nominees Pty. Ltd., Mr. Keir and Mr. Davidson as nominees, that is in the context, as trustees for the new beneficial owners, the appellants.

Mason J. held that a person who is a beneficial owner of shares in a company (save perhaps a subscriber to the memorandum) but who is not, and has never been, registered in the register as the holder of those shares cannot accurately be described as a shareholder within the meaning of the Income Tax Assessment Act . It is this conclusion which is challenged by the appellant taxpayers.

The appellants, in respect of the amounts received from Austin Sales (Aust.) Pty. Limited, were not ``shareholders'' within the meaning of sec. 46. They were not registered as such and they had no absolute right against the company Austin Sales (Aust.) Pty. Limited to be registered; nor did that company have any right to enter their names as members. Further it seems to me that
F.C. of T. v. Angus (1960) 105 C.L.R. 489 is an authority directly opposed to the contention that these appellants were shareholders. In that case it was claimed that certain income of the taxpayer was exempt income under sec. 23(q) upon the ground that it was derived from Singapore, that it was not exempt from income tax in Singapore, and that the tax thereon had been paid in Singapore. These conditions were found by the majority to be satisfied in somewhat complex circumstances which it is not necessary to consider for present purposes. The facts so far as they are presently relevant were that the taxpayer was entitled under the will of her father to a life interest in one-third of his residuary estate. Included in the latter were shares in a Singapore company. The shares continued in the name of the deceased father in the company register, but the company at the direction of the trustees paid one-third of the dividends direct to the taxpayer, less Singapore income tax. The taxpayer claimed that the income was exempt income under sec. 23(q). If the income received by the taxpayer was a dividend received by her as shareholder in the company, then by virtue of sec. 44(1A) the dividends would be part of her assessable income unaffected by the provisions of sec. 23(q). That would have been sufficient to establish a liability in the taxpayer to Australian income tax on the amount in question. However the case proceeded on the basis that the taxpayer did not receive the dividends as a shareholder in the company although the ultimate source of the income was the distribution of the dividend. At p. 498 Dixon C.J. stated:

``But she was not a shareholder: she was in fact a beneficiary in the estate of the shareholder on the register who had died some years earlier and she received the dividends under a direction by the executors to the company to send the dividends directly to her. Had she been a shareholder she could not have claimed the protection of sec. 23(q) for the dividends, because subsec. (1A) of sec. 44 of the Assessment Act, which was inserted by Act No. 11 of 1947 to overcome the effect of the decision of this Court in
Reid v. F.C. of T. (1947) 73 C.L.R. 282 provides that the operation of subsec. (1) of sec. 44 shall not be affected by the provisions of para. (q) of sec. 23. Now sec. 44 governs the liability of dividends to income tax and subsec. (1), so far as material, provides that the assessable income of a shareholder in a company (whether the company is a resident or non-resident) shall, subject to the section, if he is a resident include dividends paid to him by the company out of profits derived by it from any source. Had she been the shareholder the result would have been that the dividends received by the taxpayer from the company must have been included without regard to sec. 23(q)...''

At p. 501 he said:

``It seems reasonably plain that she ought not to be regarded as a shareholder receiving dividends but as a beneficiary of a trust. Although they have never been formally placed upon the company's register, it seems that the executors (or trustees) should be regarded as the shareholders for the purpose of payment of dividend and any consequent tax thereon: see Halsbury's Laws of England, 3rd ed., vol 6, pp. 262, 263 and the cases there cited and
A.L. Campbell & Co. Pty. Ltd. v. F.C. of T. (1951) 82 C.L.R. 452 at pp. 455-460 .

Notwithstanding the acceptance on the part of the Commissioner of the assumption that subsec. (1A) of sec. 44 cannot prevent the application of sec. 23(q) to this case if otherwise it be applicable it is not easy to avoid some uneasiness at the seeming anomaly that is occasioned. For apparently if the appellant had been entitled to the

ATC 4241

shares instead of an equitable life interest in them and had been registered accordingly she could have had no recourse to sec. 23(q); but because she has an equitable life interest only and is not the shareholder her recourse to sec. 23(q) is not barred by subsec. (1A) of sec. 44.''

Fullagar J. at p. 506 stated:

``The income received by her was not dividend income, but income of a trust estate, in which she had a beneficial interest for her life, and it is on that basis that the question in the present case must be approached and decided. The position is the same as if the short cut had not been taken but the trustees had received the two dividends from the company, and had paid one-third of each to the taxpayer. A very important result of this is that the case is not governed by sec. 44(1) and (1A) and sec. 45 of the Australian Assessment Act, and it will not necessary to refer further to those provisions.''

Menzies J. at p. 515 stated:

``What the company did instead of paying the dividends to the trustees - as in strictness it should have done - was to divide them equally into three and pay one portion to each life tenant. Although it is necessary to recognize that the taxpayer was not a shareholder in the company and that what she received was in her her hands part of the income of the trust estate and not dividends paid to a shareholder, there is no doubt that the income in question was derived from Singapore where the trustees were resident, and if sec. 23(q) of the Income Tax and Social Services Contribution Assessment Act can apply at all, the matter for determination thereunder is whether that income was exempt from income tax in Singapore.''

It is correct to state that it was not argued in F.C. of T. v. Angus (supra) on behalf of the Commissioner that the taxpayer was a shareholder and that the moneys received by her were dividends. Therefore the Court did not determine this question after a disputed hearing between the parties. However, the passages which I have quoted show that there was no hesitation in the acceptance by the Court of the view that a beneficiary in these circumstances was not a shareholder and this view was an essential step in the ultimate conclusion which was reached by the Court. It is probably correct that this Court would in such circumstances, more readily than it ordinarily would, reconsider a view so adopted; but, on the other hand, the construction and effect of the provisions of the Income Tax Assessment Act which has been adopted by the Court in one case as a basis for decision should not without very good reason by varied or discarded in a later case simply upon the ground that the particular point of construction or effect of the legislation had not been argued or fully argued in the earlier case. In the application of a fiscal act of this kind, there must be consistency and as much certainty as its complexity will allow. The principle stated in F.C. of T. v. Angus (supra) - that a beneficiary who is entitled to income which is the product of dividends is not thereby a shareholder - should be accepted as established law unless it can be said that it is clearly wrong. That certainly cannot be said. On the contrary, the plain fact of the matter is that the taxpayers here were not shareholders in any sense of the term.

The facts in the present case are stronger against the taxpayers' contention that they were shareholders within the meaning of sec. 44 and consequently sec. 46 than were the facts in F.C. of T. v. Angus (supra) . In the latter case the dividends were in fact received directly by the taxpayer beneficiary. In the present case the dividends were received by the trustee and the setting out in the resolution of the directors of the company of the beneficial interests of the taxpayers was no more than an acknowledgment of an intended or actual assignment of the dividends by the trustee by way of an appropriation among the beneficiaries. The assignment of a dividend does not bring the assignee within the description of shareholder in sec. 44:
Norman v. F.C. of T. (1963) 109 C.L.R. 9 at p. 16 . It makes no difference that the assignment was by way of an appropriation of income of trust property among beneficiaries. I am therefore of the opinion that Mason J. was correct his conclusion in this respect and that the appeals of the taxpayers fail.

There remain to be considered the further grounds of the two appeals by the Commissioner in respect of the 1968 and 1969 years of income and the cross-appeal by the Commissioner in respect of so much of the 1970 year of income as relates to the shares in

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Yarra Investment Co. Pty. Limited and Harbour Holdings Pty. Limited. In my opinion, just as the Commissioner has the benefit of the decision in F.C. of T. v. Angus (supra) so on these further grounds of appeal he is faced with authority in this Court by which, unless it can be distinguished in the manner in which on his behalf it has been sought to distinguish it, a conclusion in his favour is precluded.

The grounds raised by the Commissioner in each case are:

It may here be noted that the rebate calculated under sec. 46 would in each case be 100 per cent. On the other hand, if the lastly stated argument of the Commissioner be correct, then the deductions would in each case absorb the whole of the rebate under sec. 46.

The Commissioner's submissions numbered (2) and (3) above are, it may be noted, not consistent with the assessments which he made. In each assessment the Commissioner assessed the taxpayer to tax on the footing that it was entitled to deduct as a loss the difference between the purchase price which it paid for the shares in the company from which it received the dividend and the sale price of those shares. This appears from the adjustment sheet issued with each notice of assessment. The Commissioner included the amount of the dividends in the taxable income but declined to allow the rebate on tax provided for in sec. 46. If the purchase by Patcorp Investments Limited of the Remfore shares be taken as an example, the Commissioner allowed a loss of $129,389 on the purchase and sale of the shares but disallowed the 100 per cent rebate on the dividend of $138,323. The latter sum was therefore taxed. However, if sec. 260 be applied as submitted by the Commissioner under (1) above, the purchase (at $209,065), the sale (at $79,676) and the dividend (of $138,232) should all be treated as void against the Commissioner. That is to say, the income of the taxpayer otherwise derived would be unaffected. The taxpayer should be deemed still to have the net amount expended by it on the purchase and sale of the shares, namely, $129,389, the difference between the cost price and the sale price of the shares. Since the dividend of $138,323 should be disregarded the amount by which the dividend exceeded the net amount can have no character of income. Again, if the purchase of the shares and the sale are treated as not made in the course of share trading as submitted in (2) above, the dividend will be rebatable under sec. 46, but the loss on the purchase and sale of the shares, namely $129,389, will not be allowed. Nevertheless all the grounds relied on by the Commissioner may be considered.

Each of these dealings and transactions has been described in detail by Mason J. There can be no doubt that all were conceived and carried out as what are commonly called dividend stripping operations. The motive of the taxpayer was to reduce its liability to income tax on profits which, apart from these operations, had otherwise accrued during the fiscal years in which the operations were conceived and carried into effect. In order to reduce its liability to tax in respect of its other profitable activities in the manner adopted certain circumstances needed to exist. First, the taxpayer had to be a trader in shares so that a loss on the subject transactions could be set off against profits on other transactions. I do not think that it matters for present purposes whether a purchase of shares and a subsequent sale at a lower price is regarded as a loss under sec. 52 or whether the purchase price is regarded as an outgoing under sec. 51 and the sale price as income under sec. 25, because the purchase and sale were in each case completed during the same year of income. There was no

ATC 4243

dispute that the taxpayer was a trader in shares. Therefore this condition was fulfilled.

Secondly, the shares must have been purchased in the course of the taxpayer's trading in shares, that is to say, in the course of that business the profit of which (if any) was assessable income. I shall return to this question presently.

Thirdly, the dividends declared, the so-called ``dividend-stripping'', must have been rebatable in the taxpayer's assessment for the year of income in which the dividend was declared. In other words the requirements of sec. 46 must be satisfied. They were so satisfied in each of the instant cases.

Fourthly, the operation of purchase, declaration of dividend and subsequent sale must not be a contract, agreement or arrangement which falls within sec. 260.

If these conditions were fulfilled, and unless the net outgoing on purchase and sale of the shares should be deducted by virtue of sec. 46(2)(b), sec. 46(7)(a) and sec. 50(a) from the amount of the dividends upon which a rebate is allowable, the taxpayer was entitled to claim the difference between the purchase price and the sale price of the shares as a loss (sec. 52) (or alternatively to treat the purchase price as an outgoing (sec. 51) and the sale price as income (sec. 25)) and at the same time to receive a rebate of 100 per cent on the dividend.

Thus it receives a very substantial fiscal advantage but it is entitled to have the transactions regarded as part of its business of share trading and to the fiscal advantage unaffected by the operation of sec. 260 unless the facts are relevantly distinguishable from those in
Investment and Merchant Finance Corporation Limited v. F.C. of T. 71 ATC 4140 ; (1971) 125 C.L.R. 249 . That, it seems to me, is the essential question to be determined on these appeals and it is necessary, therefore, to go first to the facts and the decision in that case. The taxpayer was a company which traded in shares. In October 1963 it bought certain shares for £ 86,503.17.0 with the intention of causing a dividend to be declared and of then selling the shares. This intention was effectuated. In November 1963 the dividend was declared and the taxpayer received £ 81,900. In December 1964 it sold the shares for £ 21. The taxpayer received a sec. 46 rebate on the dividend in the year of income ended 30th June 1964. It claimed in respect of the following year of income a deduction of £ 86,483, the difference between the purchase price and sale price of the shares. It was held that it was entitled to the deduction.

The question, then, is whether this decision is distinguishable. It has primarily been submitted that the applicability of sec. 260 was not argued in the I.M.F. case (supra) . But if the relevant facts are not distinguishable I do not think that this is a valid reason for not following the earlier decision it being one on the applicability of a fiscal Act. What such a case actually decides is that in certain circumstances there is a certain liability, or freedom from liability, to assessment of income tax, whatever be the expressed reasons for that decision. If in another case the circumstances cannot be relevantly distinguished then the same result should follow if a necessary and most desirable uniformity in the principles of assessment of tax is to be achieved and preserved. The question is not so much whether the applicability of sec. 260 was argued but whether it was overlooked and the decision given per incuriam . That is not suggested. It is true that the applicability of sec. 260 involves a degree of factual inquiry and inference and therefore to a considerable extent its applicability is often a question of fact. But if the facts in one case are not relevantly distinguishable from those in another the same conclusion should follow partly because the ultimate conclusion is, or largely depends on, a question of law as to the true construction and legal effect of sec. 260 and partly for the reason to which I have earlier adverted, the need for uniformity in application of a taxing Act. It seems to me that this need is particularly strong in the case of a statutory provision as notoriously difficult to interpret and apply as sec. 260. If the Court has held that a particular course of operations has a particular fiscal effect and if it has thereby expressly or even impliedly found that it is not a contract, agreement or arrangement falling within sec. 260 it is for the legislature to make whatever special provision it thinks is necessary to displace the effect of the decision. There is now a special provision in the Act respecting rebate on dividends paid as part of a dividend stripping operation. See sec. 46A introduced by Act No. 47 of 1972 and subsequently amended.

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One difference between the present cases and the I.M.F. case (supra) is that in the latter the rebate had been allowed under sec. 46 in the year prior to the year of sale of the shares. The question whether the dividend was rebatable therefore did not arise. But there could be no question that once the taxpayer was found to be a ``shareholder'' the conditions of sec. 46 were satisfied both in the I.M.F. case (supra) and the instant cases. The Commissioner appears in his notices of assessment in the instant cases and in the argument before Mason J. to have contended that the dividend payments alone were void under sec. 260. Therefore Mason J. limited his consideration of sec. 260 accordingly and he disposed of the contention in a few words, supra at 74 ATC p. 4165:

``There remains the question whether the appellants' claim that dividend payments are rebatable is defeated by sec. 260. The right to a rebate is specifically conferred by the statute in the circumstances to which it refers and which in my view obtain in this case. I am unable to see how sec. 260 can defeat the operation of sec. 46. This conclusion is, I think, supported by the decision in Rowdell Pty. Ltd. v. F.C. of T. (1963) 111 C.L.R. 106.''

In my opinion he was undoubtedly correct in this conclusion. However on these appeals the Commissioner has contended that sec. 260 strikes down not only the dividends but the purchase and sale of the shares as well, and it is that suggested effect of sec. 260 which falls to be examined, in the light of the I.M.F. case (supra) .

I do not find any relevant difference between the facts of the I.M.F. case (supra) and the facts in the instant cases. There was no significant difference in motive or purpose, in so far as these can be distinguished, nor in substantial result of the operations. For the Commissioner it has been submitted that points of distinction are that the company whose shares were acquired in the I.M.F. case (supra) had assets which had not been converted into cash, that the taxpayer did not buy the entire capital but only seven-tenths thereof, that the taxpayer continued to hold the shares for at least fourteen months, that there was no arrangement to sell the shares before they were purchased and thus there was no pre-determined purchaser or purchase price, that no special arrangements were made for financing the purchase and that there was no evidence or suggestion that the shares were acquired to shield from tax particular income which had already been derived. However, none of these matters was of special significance in that none of them led to the conclusion that the purpose of the operation was other than the stripping of the dividend and the consequent reduction in either the value or the sale price of the shares in order that a fiscal advantage might be obtained by virtue of the rebatability of the dividend under sec. 46(2) and the loss on the operation of share trading which was involved. The differences in the facts are no more than incidental. They are therefore not differences upon the basis of which the I.M.F. case (supra) can be distinguished.

This conclusion means that in view of this earlier decision the Commissioner cannot succeed on his contention that the purchases and sales of the shares were not in the course of the business of trading in shares or in his contention that sec. 260 applies to the purchases and sales and to the dividends declared.

The I.M.F. case (supra) was decided before
F.A. & A.B. Ltd. v. Lupton (Inspector of Taxes) (1972) A.C. 634 and
Thomson (Inspector of Taxes) v. Gurneville Securities Ltd. (1972) A.C. 661 . It may well be that the approach in those cases is not consistent with the reasoning in the I.M.F. case (supra) which led to the conclusion that the purchase and sale of the shares by the taxpayer was part of the business of trading in shares but that is no sufficient reason for overruling the I.M.F. case (supra) however cogent the reasoning in the English cases may appear to be. I do not find it necessary to express an opinion on this question. The reversal or alteration of the fiscal effect of the I.M.F. case (supra) was a matter for the legislature.

There remains the argument that the loss on the shares was deductible from the dividends alone and not from the profits of the taxpayer in the respective years of income. This argument was advanced and by majority rejected in Rowdell Pty. Limited v. F.C. of T. (supra) . That decision must also be followed.

I would dismiss the appeals and the cross-appeal.

ORDER:

Appeals dismissed with costs.

 

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