Whim Creek Consolidated N.L. v. Federal Commissioner of Taxation.

Judges:
Bowen CJ
Franki J
Deane J

Court:
Federal Court

Judgment date: Judgment handed down 16 November 1977.

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Bowen C.J., Franki and Deane JJ.: This is an appeal from a judgment of the Supreme Court of Western Australia delivered on 5th April 1977 which confirmed the disallowance by the Commissioner of Taxation of a deduction of $250,000 claimed by Whim Creek Consolidated N.L. in its return of income for the year ended 30th June 1972.

Whim Creek Consolidated N.L. is a no liability company incorporated in Western Australia and is a resident for the purposes of sec. 77D of the Income Tax Assessment Act 1936 as it then was.

Westfield Minerals (W.A.) N.L. (hereinafter called ``Westfield'') is a no liability company incorporated in Western Australia and is a mining company within sec. 77D. It is a subsidiary of the appellant.

The appellant was the funding company and Westfield the exploration company for their mining ventures. The two companies had the same local directors.

The following is a statement of moneys lent by the appellant to Westfield: -

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ATC 4505

                                                  ``Loans           Balance
      1st December  1969 to 30th June 1970       $100,000         $100,000
      1st July      1970 to 30th June 1971       $350,000         $450,000
      1st July      1971 to 26th June 1972       $215,000         $665,000
      27th June     1972 to 30th June 1972       $ 35,000         $700,000''
        

The amounts were debited in the appellant's books to Westfield's loan account and credited in the books of Westfield to the appellant's advance account.

The following is a statement of the expenditure by Westfield on mining and prospecting: -

      ``1st December  1969 to 30th June 1970            $ 42,582
      1st July      1970 to 30th June 1971            $221,417
      1st July      1971 to 30th June 1972            $267,397
      1st July      1972 to 30th June 1973            $280,303
      1st July      1973 to 31st December 1974        $506,558.''
        

The issue in this case arises in relation to an application made by the appellant to Westfield on 26th June 1972 for the allotment of 500,000 shares of fifty cents each in the capital of that company.

On 26th June 1972 the directors of Westfield resolved that those shares be allotted to the appellant. They were allotted and the appellant was registered as the holder of 500,000 shares of fifty cents each fully paid. The appellant's advance account was debited with the sum of $250,000, being the amount of the subscription money on the shares, thus reducing Westfield's indebtedness to the appellant by that amount. It will be necessary to refer later to the circumstances in more detail.

Pursuant to sec. 77D(3), Westfield lodged with the Commissioner a declaration which, omitting formal parts, read as follows: -

``(2) Westfield Minerals (W.A.) N.L. is a `mining company' as defined in sec. 77D(1) of the Act.

(3) Westfield Minerals (W.A.) N.L. received during the year ended 30th June, 1972, `moneys paid on shares' as defined in sec. 77D(1) of the Act, amounting to $250,000 from a company which is a `resident' of Australia within the meaning of `Resident' contained in sec. 6(1) and 77D(1) of the Act.

(4) Westfield Minerals (W.A.) N.L. has expended, or proposes to expend, the `moneys paid on shares' on `mining or prospecting outgoings' as defined in sec. 77D(1) of the Act.

(5) `Moneys paid on shares' was received from Whim Creek Consolidated N.L. whose registered office is situated at c/- Lindquist Stacy and Fountain, 81 St. George's Terrace, Perth, W.A.''

The Commissioner in due course gave a notice in writing to Westfield as follows: -

``Income Tax Assessment Act 1936-1972 Section 77 D Declaration in respect of Year Ended 30 June 1972

Westfield Minerals (W.A.) N.L. is hereby informed for the purposes of sec. 77D of the abovementioned Act that I am not satisfied that the amount of $250,000 received as `advances' and specified in the declaration lodged on behalf of the company pursuant to sub-sec. (3) of sec. 77D of that Act and dated 26 July 1972, constitutes `moneys paid on shares' as defined in sub-sec. (1) of sec. 77D.

Accordingly the above declaration has not been accepted.''

In its return for the income year ended 30th June 1972, the appellant claimed a deduction pursuant to sec. 77D(4) in respect of the sum of $250,000. The Commissioner, by notice of

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ATC 4506

assessment, accompanied by an adjustment sheet, disallowed the deduction, stating: -

      ``Section 77D claim not
       allowable                     $250,000.''
        

The appellant duly lodged a notice of objection and this was disallowed. The appellant then requested the objection be treated as an appeal and forwarded to the Supreme Court of Western Australia. This was done and the matter came on to be heard by the Supreme Court. The appeal was dismissed and the assessment was confirmed. In the reasons for judgment, the central question was stated to be: -

``Were those moneys - the listed advances - `moneys paid on shares' for the purposes of the application of the section?''

It was held that they were not.

A secondary question which was mentioned was whether, if they were moneys paid on shares, Westfield could properly make the declaration that the moneys had been, or were intended to be, expended on mining or exploration. It was suggested that this was doubtful since at 26th June 1972 Westfield only had some $7,000 of its own to spend.

We turn now to relevant parts of sec. 77D as they stood at the time. These are as follows: -

``77D. - (1) In this section -

...

`moneys paid on shares', in relation to a company, means moneys paid to the company on or after the first day of July, One thousand nine hundred and sixty-nine, in respect of shares in the company by the owners of the shares, including owners who are beneficial owners only, but does not include -

(then follow certain paragraphs not material to this appeal)

...

(3) Subject to this section, a mining company that has, in a year of income, received moneys paid on shares may, for the purposes of the next succeeding sub-section and Divisions 10 and 10AA of this Part, within one month after the end of that year of income or within such further time as the Commissioner allows, lodge with the Commissioner a declaration in writing signed by the public officer of the company that the company has expended, or proposes to expend, such of those moneys as are specified in the declaration upon mining or prospecting outgoings.

(4) The amount of any moneys paid on shares paid by a person in a year of income of that person to a company and included in moneys specified in a declaration lodged by the company under the last preceding sub-section shall, subject to this section, be an allowable deduction from the assessable income derived by that person in that year of income.

(5) If, at any time, the Commissioner is not satisfied, as to any moneys specified in a declaration duly lodged by a company under sub-section (3) of this section, that those moneys have been or will be expended by the company in accordance with the declaration, the Commissioner may inform the company, by notice in writing given for the purposes of this sub-section, that he is not so satisfied and, upon the company being so informed, the amount of any deduction allowable under the last preceding sub-section by virtue of the declaration shall be reduced by an amount which bears to the amount of the deduction before being so reduced the same proportion as the amount of the moneys as to which the Commissioner is not so satisfied bears to the amount of the moneys specified in the declaration.''

The first and main question is whether the satisfaction of the amount payable on allotment of the shares in accordance with the procedure which was adopted, constituted payment and receipt of moneys on the shares or, to use the language of the Act, ``moneys paid'' to and ``received'' by the company ``in respect of'' the shares.

The learned trial Judge held that it did not. His Honour referred to the rule which applied under company legislation that when the liability upon shares and the liability upon a cross demand against the company of a sum certain immediately payable were mutually extinguished by an agreed set off, this amounted to payment for the shares ``in cash'' for the purposes of that legislation. For the formulation of the rule, generally referred to as the rule in Spargo's case (In
re Harmony & Montague Tin and Copper Co.) (1873) L.R. 8 Ch. App. 407 at p. 412), the learned trial Judge

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ATC 4507

referred to the joint judgment of Knox C.J. and Dixon J. in
Commr. of Stamp Duties (N.S.W.) v. Perpetual Trustee Company Limited (Saxton's case) (1929) 43 C.L.R. 247 at pp. 262-3 cited in
Joseph v. Campbell (1933) 50 C.L.R. 317 at p. 324. Reference may also be made to
F.C. of T. v. Steeves Agnew & Co. (Vict.) Pty. Limited (1951) 82 C.L.R. 408 at pp. 420-1 and
Curran v. F.C. of T. 74 ATC 4296; (1974) 131 C.L.R. 409 at ATC pp. 4299-4301, C.L.R. pp. 414-416 and 417.

Where a payment satisfies this rule, we think it correct to hold that it constitutes moneys paid and received in respect of shares for the purposes of sec. 77D. Neither the words used in sec. 77D nor the policy disclosed by those words appear to require a payment in actual cash or by cheque. The section appears to take the law relating to the allotment of shares by companies as it finds it. On the other hand, it does not follow that because a payment fails to satisfy the rule in Spargo's case that it will necessarily fall outside the provisions of sec. 77D. The question depends ultimately upon the application of the words of sec. 77D to the facts of the particular case.

Having referred to the company law rule the learned Judge said: -

``But that is not this case. Here there was no `sum certain immediately payable' by Westfield to the appellant, nor was there any `agreed set-off' of such a sum. There was simply a reduction of indebtedness on a general debit account.''

This Court has jurisdiction to hear and determine appeals from judgments of State Supreme Courts exercising Federal jurisdiction in income tax matters (Federal Court of Australia Act 1976 sec. 24(1)(c)). In an appeal, the Court is to have regard to the evidence given in the proceedings out of which the appeal arose and has power to draw inferences of fact and, in its discretion, to receive further evidence (sec. 27). It may in the exercise of its appellate jurisdiction (inter alia) affirm, reverse or vary the judgment appealed from and give such judgment or make such order as, in all the circumstances, it thinks fit, or refuse to make an order (sec. 28(1)(a) and (b)).

In hearing such appeals from judgments or orders of Supreme Court judges involving decisions by them on questions of fact, the Court will apply the principles which were laid down by the High Court in
Paterson v. Paterson (1953) 89 C.L.R. 212 and, more recently, in
Da Costa v. Cockburn Salvage and Trading Pty. Limited (1970) 124 C.L.R. 192 and
Edwards v. Noble (1971) 125 C.L.R. 296. Before this Court will reverse such a finding of fact, it will have to be convinced that the trial Judge came to a wrong conclusion.

We turn now to examination of the stated findings in this case and the evidence which was before the learned Judge.

Dealing with the first finding that there was no sum certain immediately payable, it seems that the stress here is upon there being no sum immediately payable. The amount owing to the appellant by Westfield was always capable of precise ascertainment and appeared in the relevant accounts of the two companies. It was not a disputed amount and it was not a fluctuating amount, except insofar as the appellant from time to time lent further amounts to give its operating subsidiary additional working capital. The question whether the amount was immediately payable raises more difficulty.

There is no evidence anywhere of any express contractual terms agreed on between the appellant and Westfield governing the loans. However, in the balance sheet of the appellant at the 30th June 1972, the following appears: -

^{``INTEREST IN SUBSIDIARY COMPANIES}

      Shares in Westfield Minerals
      (W.A.) N.L. — at cost                   308,000

      ...

      Long Term Advance to
      Westfield Minerals (W.A.)
      N.L.                                          450,000''
        

In the balance sheet of Westfield at the 30th June 1972, the following appears: -

      ``LESS DEFERRED LIABILITY

      ...

      Advance from Holding
      Company Whim Creek
      Consolidated N.L.                             450,000''
        

Mr. McRae, Secretary of the appellant, and Mr. Lindquist, Chairman of the appellant, gave evidence on this matter. Mr. McRae, in

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ATC 4508

his cross-examination, gave evidence as follows: -

``Q. I think you have told us that it received all of its funding from Whim Creek?

A. Yes.

Q. All of the matters referred to in exhibit C - the moneys or the loans - they were regarded as long term loans, were they not, in the books?

A. Yes.

Q. Was interest payable on any of them?

A. No.

Q. They were free of interest loans?

A. Yes.

Q. Is there anything in the minutes that deals with the manner in which they were granted?

A. Not that I've seen in the minutes.

Q. Would you not expect to find something in the minutes relating to them?

A. I've seen it mentioned in the annual reports - shareholders' annual reports.

Q. But nothing in the directors' minutes?

A. Not that I've noticed, no.''

In his re-examination, he gave further evidence as follows:

``Q. My learned friend asked you if you thought the terms of the loans made by Whim Creek to Westfield were long term loans. You said `Yes'. I would just like to ask you in what sense you meant that they were - in the sense that they were owing for a long time or in a sense they were made for a fixed term?

A. For a long time was my interpretation.

Q. Had been owing for a long time?

A. I beg your pardon?

Q. They had been owing for a long time?

A. Yes.

Q. Was there any evidence in the books that they had been made for a fixed term, such as 12 months, six months, two years?

A. Not to my knowledge. I haven't sighted anything.''

Mr. Lindquist, in his examination in chief, gave the following evidence: -

``Q. We have heard that advances were made by Whim Creek to Westfield - various amounts over times. On what terms were these advances made?

A. At call.

Q. At call?

A. At call and as money was required.

Q. `At call' - you mean repayable on demand?

A. Repayable on demand.

Q. Was any loan made for any fixed term at any time?

A. Not to my knowledge.

Q. You would have known about it if there had been?

A. I would have.''

In his cross-examination he gave the following evidence: -

``Q. Turning to the moneys that were lent by Whim Creek to Westfield, were they payable on demand?

A. Yes.

Q. Did that apply to each of the particular loans made?

A. They were all the same - all made at call; no fixed term.

Q. Is there no written record anywhere in the minutes of either company setting out the terms of each of them?

A. I cannot answer that without going through the minute book.''

In re-examination, he gave the following evidence: -

``Q. Mr. Lindquist, my learned friend just referred to the balance sheets and a deferred liability of $450,000 under the Whim Creek balance sheets of a long-term advance. Could you explain these - why they appear in the balance sheet this way?

A. Well, the deferred liability is... I suppose we all knew that it wasn't going to be repaid within close proximity to the preparing of the balance sheet and probably that is why it was shown that way, but I really can't...

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ATC 4509

Q. Do you mean it would be a waste of time calling it up unless you were applying for shares?

A. Well, at that stage it would have been.

Q. But do you know whether any fixed term was agreed between the companies?

A. No, there was no fixed term.''

One might, perhaps, speculate that where the parent company was providing working capital to its subsidiary in the form of loans to enable it to undertake the desired exploration and had no intention of defeating this purpose by calling the money up, some steps would be taken in the respective balance sheets to reflect this position. One might imagine that the parties would not wish to hamper the operations of the subsidiary by presenting its accounts in such a way as to suggest it might be insolvent. Perhaps there are better ways in which the matter could have been dealt with, as, for example, by means of explanatory notes to the balance sheets. However that may be, there emerges from the material which we have quoted, no evidence that the loan was for a fixed term and, in our view, no reasonable basis for inferring that there existed between the appellant and Westfield some contractual term in relation to the loans which made them payable as a matter of law otherwise than on demand. The learned trial Judge does not say that he disbelieved the evidence of Mr. McRae or Mr. Lindquist and, indeed, no sufficient reason appears why he should have done so. He makes no comment on the manner or demeanour of either of these witnesses. His Honour seems simply to have inferred that the loans were not, in law, repayable on demand because of the wording of the headings in the balance sheets. This is a finding which appears to us, taking the evidence before him as a whole, to be plainly wrong so that the intervention of this Court is called for.

Turning to the second finding that there was no agreed set off, it is to be noted that in the minutes of the appellant of a meeting of directors of 26th June 1972 held at 9.30 a.m. the following resolution appeared: -

``APPLICATION FOR SHARES:

It was resolved to apply for 500,000 shares of 50c each in Westfield Minerals (W.A.) N.L. and the Common Seal of the Company was placed on the form of application in the presence of the Board.

The Secretary was instructed to request Westfield Minerals (W.A.) N.L. to allow the deduction on these shares under sec. 77D of the Income Tax Assessment Act.

It was resolved that past advances made to Westfield Minerals (W.A.) N.L. and held as a credit to the loan account in that Company, be applied as to $250,000 in payment of the shares applied for.''

It is also to be noted that in the minutes of Westfield of a meeting of directors on 26th June 1972 held at 11.00 a.m., the following resolution appears: -

^{``APPLICATION FOR SHARES:}

The Secretary tabled an application by Whim Creek Consolidated N.L. for 500,000 ordinary shares of 50c each with the request that these shares be subject to a sec. 77D deduction under the Income Tax Assessment Act. It was resolved that the shares be and they are hereby allotted and that the Company grant the request for the shares to be issued under sec. 77D of the Income Tax Assessment Act.''

The set off against the loan account was recorded in a memorandum from Mr. Lindquist, as Director of Westfield, to his co-directors dated 26th June 1972 which was in the following terms: -

``I confirm that a Board Meeting of the Company was held today and was attended by myself and C.A.K. Stacy (Alternate for Dr. D.R. Derry). The Company allotted 500,000 ordinary shares of 50c each to Whim Creek Consolidated N.L. and agreed that this application would be the subject of a taxation deduction under sec. 77D of the Income Tax Assessment Act and the Secretary was requested to make the necessary declaration to the Taxation Department.

Payment for these shares has been satisfied by the advances which Whim Creek has made to this company and the loan account has been reduced accordingly.''

The shares in question were allotted as fully paid and there was evidence that in the accounts of Westfield there was an entry in the journal recording that the advance account of the appellant was debited in respect of the sum of $250,000 and the share application account was credited in respect of an equal amount.

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ATC 4510

With all respect to the learned trial Judge, it appears to us that the only reasonable inference from the evidence before him was that there was an agreed set off of the sum of $250,000.

The second question mentioned earlier, was whether Westfield could properly make the declaration which it lodged. It appears to us that on the facts of this case that question does not arise. It is not suggested the declaration was fraudulent or a sham. Under sec. 77D(3) and (4) it is the lodgment of the declaration that matters, not the justification of its terms.

Section 77D appears to us to be concerned with the encouragement of financial assistance by way of moneys paid on shares of companies engaged in mining or exploration so as to add to the capital and further the desired extension of mining and exploration (
Mullens v. F.C. of T. 76 ATC 4288). The procedure envisaged by sec. 77D(4) and (5) supports this view. The taxpayer who has subscribed for shares in a mining company may be a member of the public who has not any knowledge of, still less any control over, the manner in which the mining company conducts its affairs. Section 77D(4), subject to any other relevant provision of sec. 77D, gives him a statutory right to a deduction for moneys which he has paid on shares, provided the company has lodged with the Commissioner a declaration in writing signed by the public officer of the company in terms which comply with sec. 77D(3). In the present case the appellant has paid money on shares and the company receiving the money has lodged a declaration in appropriate terms. On the material before us, we consider the appellant is therefore entitled under sec. 77D(4) to a deduction, unless the Commissioner has given notice under sec. 77D(5).

The position of the Commissioner is safeguarded by the provisions of sec. 77D(5). If the Commissioner is not satisfied that the moneys paid on the shares have been or will be expended by the company in accordance with the declaration, he may inform the company in writing that he is not so satisfied. The consequences specified in sec. 77D then follow.

The learned trial Judge took the view that the Commissioner had given a sec. 77D(5) notice. We find ourselves unable to agree with this view. His Honour treated as being a notice under sec. 77D(5), the notice in which the Commissioner stated: -

``I am not satisfied that the amount of $250,000 received as `advances' and specified in the declaration lodged... constitutes `moneys paid on shares' as defined in sub-sec. (1) of sec. 77D.''

The difficulty with his Honour's view is that under sec. 77D(5), the opinion to which the Commissioner has to direct his mind is whether or not he is satisfied the moneys specified in the declaration have been or will be expended by the company in accordance with the declaration. The notice given in the present case does not express any lack of satisfaction about that matter. Indeed, the notice makes it plain that the Commissioner thought it unnecessary to consider that question because he took the view that there were no moneys paid on the shares. Had he taken the view that $250,000 had been paid on the shares, as we have concluded, the notice which he gave affords no indication of what his view may then have been.

In forming the view that he did, the Commissioner appears to have directed his attention to the question whether the initial receipt by Westfield of the money at the time the advances were made constituted a receipt, for the purpose of sec. 77D, of ``moneys paid on shares''. He did not, it would seem, advert to the question whether satisfaction of the appellant's liability upon allotment of the shares by set-off against the moneys owing to the appellant constituted, for the purposes of the section, payment and receipt of the amount of the subscription moneys. He may well have been fortified in adopting that approach by the contents of a letter of 17th May, 1973 from Westfield's solicitors in which the relevant ``moneys paid on shares'' was identified not by reference to the book entries relating to the set-off of the $250,000, but by reference to ``the advances'' which, in their capacity as such, clearly did not constitute ``moneys paid on shares''.

In the context of all the facts, it was, however, clear that the ``moneys paid on shares'' referred to in Westfield's declaration pursuant to sec. 77D(3) were the subscription moneys in respect of the 500,000 shares which were allotted to the appellant. We have held that these moneys were paid and received, for the purposes of sec. 77D, at the time when the

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ATC 4511

relevant book entries were made. The fact that, in a subsequent letter, Westfield wrongly indicated that the subscription moneys had been ``paid'' at the time of the original advance instead of at the time of the relevant debit does not deprive Westfield's declaration of its operative effect as a declaration pursuant to sec. 77D(3) in relation to money which had in fact, for the purposes of the section, been paid on those shares.

If the Commissioner was not satisfied that these ``moneys paid on shares'' had been or would be or, in circumstances where the subscription moneys were satisfied by set-off against an existing indebtedness, could be expended by Westfield on ``mining or prospecting outgoings'' as defined in sec. 77D(1) of the Act, the appropriate procedure appears to have been for him to have given to Westfield notice in writing pursuant to sec. 77D(5). This, as has been said, he failed to do.

It follows that the appellant was entitled to a deduction in the amount claimed. The question whether the Commissioner was or remains entitled to give a notice pursuant to sec. 77D(5) and the effect of any such notice, in the events that he subsequently gives it, does not arise for consideration in this appeal.

The present assessment cannot stand. The appeal will be allowed and the assessment remitted to the respondent Commissioner to be amended in the manner appropriate to the circumstances then existing. The respondent Commissioner will be ordered to pay to the appellant its costs of the proceedings below and of this appeal.

ORDER:

Appeal allowed.

Assessment remitted to the respondent to be amended accordingly.

The respondent pay the appellant's costs of the appeal and of the proceedings in the Supreme Court of Western Australia.