Deane v. Federal Commissioner of Taxation.

Judges:
Rogers J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 19 April 1982.

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Rogers J.

I have before me appeals by two taxpayers from decisions of the Commissioner of Taxation disallowing objections in respect of deductions claimed. The claims were in respect of losses allegedly incurred by each of the taxpayers, arising from the acquisition and subsequent sale of shares. Counsel for the taxpayers placed reliance upon both limbs of sec. 51 of the Income Tax Assessment Act. That section relevantly provides as follows:

``All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions...''

The transactions in question were effected on behalf of the Cropodean Syndicate, of which each of the taxpayers was a member. The appeals were by consent heard together, and it was agreed, and I so ordered, that the evidence in one appeal be evidence in the other.

On 4th November 1974 the High Court of Australia delivered judgment in
Curran v. F.C. of T. 74 ATC 4296; (1974) 131 C.L.R. 409. The scheme which was utilised by the taxpayer and which became the subject of the decision of the Court became known as a Curran scheme, and was, after the decision of the Court was given, entered into by a host of taxpayers.

The basic facts which founded the decision and which comprised the scheme were as follows:

• (a) the taxpayer was a stockbroker and a share trader. It was common ground between the taxpayer and the Commissioner in that case that the stocks and shares the subject of the transaction were part of the taxpayer's stock in trade.
• (b) Mr. Curran purchased 200 shares in Stewart Bacon Holdings Pty. Limited, a private company, for X dollars.
• (c) that company resolved, subsequently to the purchase by Mr. Curran, that part of the undistributed profits arising from the sale of assets, which had not been acquired for the purposes of resale at a profit, be capitalised and distributed amongst members and the capitalised sum applied in paying up in full unissued ordinary shares of the company, and that the same be distributed amongst members proportionately to their shareholding.
• (d) the taxpayer sold the original 200 shares at a substantial loss, and the bonus shares at more or less par value.
• (e) he claimed the loss resulting from the sale of his old shares in returning his assessable income.

The High Court considered that the taxpayer was entitled to the deduction claimed. The majority took the view that the undistributed profit which became the subject of the declaration of dividend was a dividend within the meaning of the Act, in the hands of the taxpayer. It was, however, exempt from tax pursuant to the provisions of sec. 44(2)(b)(iii). At the relevant time that subsection provided that the assessable income of a shareholder shall not include dividends paid wholly and exclusively out of, inter alia:

``profits arising from the sale or revaluation of assets, not acquired for the purpose of re-sale at a profit... if the dividends paid from such profits are satisfied by the issue of shares (other than redeemable shares) of the company declaring the dividend.''

The call of the subsection having been satisfied, and because the dividend was

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ATC 4114

applied in payment for the new shares, Mr. Curran was to be treated as having paid the par value of the new shares.

The decision still represented the law in June of 1977. Messrs. Love and Wallace were, and for that matter are, a firm of chartered accountants carrying on practice in Sydney. The firm had amongst its clients B. & B. Barfield Pty. Limited (in voluntary liquidation). That company owned the whole of the issued capital of Hatfield Enterprises Pty. Limited (``the company''). The company in turn owned shares in Wandarrah Investments Pty. Limited, which shares had not been acquired for resale at a profit. As at the commencement of June 1977 the company included amongst its assets a realised capital gains reserve of $127,734. The company was one of a number of companies controlled by clients of Love & Wallace which could, if called upon, fulfil in a Curran scheme the function of Stewart Bacon Holdings Pty. Limited. Love & Wallace had a number of clients with large taxable incomes which would yield to reduction by the taxpayer in question entering into a Curran scheme. The view was taken by the partners and employees of Love & Wallace that one of the necessary conditions precedent for a successful adoption of a Curran scheme by any taxpayer was that he or she or it should be a trader in shares.

Late in June 1977 the partners in Love & Wallace set about assembling clients into syndicates claimed to be set up for the purposes of share trading. It was hoped that the share dealing into which it was proposed that each syndicate should enter would qualify the syndicate in question as a share trader. That having come about, it was proposed that the syndicate should engage in the equivalent of the Stewart Bacon Holdings Pty. Limited transaction.

The two appellants were both regular clients of Love & Wallace. Mr. Croker was a pharmacist, Mr. Deane a businessman. They both had assessable incomes which could be offset against the paper loss to be realised by the employment of a Curran scheme.

In evidence Mr. Croker said that he had had ``a dabble'' in shares in 1973 and lost money on three occasions. However, in 1977 the market was a rising market. Mr. Croker claimed that he had considered re-entering the market prior to any approach to him by partners of Love & Wallace, but did not do so because he felt that he had insufficient knowledge to enable him to operate successfully and ``did not feel I was prepared to gamble''.

On 22nd June Mr. Stafford, a partner in Love & Wallace, contacted Mr. Croker. According to Mr. Croker's affidavit, Mr. Stafford said to him, ``We are putting together a syndicate, in the office, of a number of clients who are interested in share trading. There might also be the prospect of significant tax losses involved. Are you interested in discussing it further?'' On Mr. Croker signifying that he was interested, Mr. Stafford informed him that Love & Wallace were already managing a number of share trading syndicates, the members of which were quite content with the way matters were progressing, and went on to suggest that Mr. Croker contribute the sum of $3,000 so that the syndicate would have available to it a total capital in the order of $18,000. It was proposed to retain a stockbroker to make recommendations on share trading and give general advice to the syndicate.

Mr. Croker says that he took a day to think over the proposition. When asked what it was that he wanted to consider, he said that he wanted to ``deliberate on it. It was something I had not heard of. I wondered how a syndicate like this would operate. I convinced myself fairly rapidly, I always had the utmost confidence in Love & Wallace and if they were going to employ a stockbroker and run the management of it themselves, it seemed pretty safe.''

Earlier, in detailing the conversation with Mr. Stafford, in answer to the suggestion that it was explained to him that the purpose of the syndicate was to promote tax losses he said, ``No, we were share trading. At the time it was a rising market, and the two seemed to go hand in glove, to me. It was a chance to me to share trade, it was something I wanted to do for some time; there was also the possibility of tax losses.'' A few questions later he asserted that, because the market was a rising market, it seemed a very profitable proposition to him.

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ATC 4115

Seeing that Mr. Croker claimed that he could not understand the nature of the scheme put to him, I have some difficulty in accepting that the share trading and the tax loss ``seemed to go hand in glove''. Again, I have a great deal of difficulty in understanding the basis on which it could be thought that investing $3,000 should yield a very profitable result. With all due respect to Mr. Croker, who I have no doubt is an honest man, I consider that subsequent events have coloured his view of what his intentions and motives were, and I am not prepared to accept his evidence as given. Indeed, his subsequent actions do not support the alleged warm interest in the share market operation which he asserted. I will content myself with giving but a number of examples. The partnership deed by cl. 21 established a management committee to provide for management of the affairs of the partnership. The management committee was to consist of Mr. Croker, Mr. Poole and Mr. Deane, Junior. Not only did the management committee signally fail to discharge the duties imposed upon it by the partnership deed, it did not even have any meetings. Furthermore, I am considerably affected in the view that I take of the whole of this enterprise by the fact that someone at Love & Wallace thought it appropriate to bring into existence totally fictitious minutes of alleged meetings of the management committee. Furthermore, so far as this reflects on Mr. Croker's credit, I have to point out that copies of these fictitious minutes were forwarded to him, and evidently evoked no protest of any kind.

It will be necessary to deal later in this judgment with Mr. Deane's role in this transaction, but for the moment I will seek to trace the subsequent evolution of the activities of the syndicate. Following upon the formation of the syndicate, it entered into a number of transactions between 24th and 30th June. On 24th June 1977 2,000 shares were purchased in Bougainville Copper at a unit price of $1.18; 1,000 shares in Oakbridge at a unit price of $1.23; 1,000 shares in Queensland Mines at a price of $2.55 per share; and 6,000 shares in Woodside Petroleum at 33 cents. I attach considerable significance both to the fact and to the circumstances in which, on 27th June 1977, the 2,000 shares in Bougainville Copper were disposed of at a unit price of $1.17, thus realising a loss, quite apart from the brokerage involved, both in purchase and sale.

Before further adverting to the transaction relating to Bougainville Copper, it may be convenient to summarise the balance of the transactions. On 27th June 4,000 shares in Magnet, 4,000 shares in Selcast and 1,000 shares in Weeks were purchased. On 29th June 300 shares in Oakbridge were sold at a unit price of $1.26; and on 30th June 4,000 shares in Eastmet were bought, 2,000 shares in Magnet were sold at a unit price of 21 cents, and a further 500 shares in Oakbridge sold at $1.26. On the same day 200 shares in Queensland Mines were sold at $2.60. Even though some of the shares sold on 30th June yielded gross prices marginally in excess of those paid on the initial purchase a few days beforehand, by the time brokerage was taken into account, no profit was realised.

It is now appropriate that I should return to the transaction involving Bougainville Copper. Not surprisingly, counsel for the Commissioner cross-examined all witnesses relevantly to this topic. According to Mr. Croker, he asked Mr. Longhurst, a partner in Love & Wallace, the reason why, three days after purchase, the shares in Bougainville Copper were sold at a loss, and according to Mr. Croker he was informed that Mr. Longhurst had felt that Mr. Lowe, the stockbroker, had bought incorrectly. That does not find any reflection in Mr. Longhurst's evidence. In his affidavit Mr. Longhurst asserted that Mr. Lowe had told him, in the course of a telephone conversation on 27th June 1977, that in the light of the activities on the market that day, some of the shares purchased on Friday should be sold ``as soon as possible and that the profit be realised''.

(I interpolate to say that I do not understand what profit could possibly have been referred to.) Mr. Lowe is reported to have recommended that the syndicate sell the 2,000 shares in Bougainville Copper. In oral evidence Mr. Longhurst asserted that his recollection of the conversation was that Mr. Lowe said it was his intention to get out of the Bougainville Copper shares and get into some particular shares in which there might be a profit.

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ATC 4116

Mr. Lowe is in complete conflict with Mr. Longhurst on this question. He disclaimed, as one would expect, any suggestion that he, as a responsible stockbroker, would give advice to sell within three days of the purchase of shares. It was his recollection that he was told that the syndicate was overcommitted, and for that reason it was desired to sell the shares in Bougainville Copper.

I am most troubled by this conflict in the evidence, which is one of the matters which I have to evaluate in considering whether or not the syndicate did in truth become share traders at the time of entry into the transaction which is the focal point of the present dispute. I conclude, so far as this particular aspect of the matter is concerned, that I should accept Mr. Lowe's evidence and reject Mr. Longhurst. I particularly do so having regard to what I consider to be two significant answers given by Mr. Longhurst; he was asked. ``Q. You wanted to keep it stirring to show that there was trade, buying and selling? A. Yes. Q. And regardless of the loss? A. Yes.''

In my view it is legitimate to conclude, as I do, that all efforts were bent towards ensuring that there was erected at least a facade of activity as a share trader, irrespective of the intention of the parties. I might add that the foregoing approach to the matter of activity on the Stock Exchange was consistent with the explanation of the intended activity given by Mr. Stafford to intending syndicate members. (Transcript p. 66).

On 24th June 1977 the parties came to what may be described as the first leg of the transaction which is relied upon as founding the loss claimed. On that day Mr. Longhurst telephoned Mr. Croker and, according to Mr. Croker's affidavit, said, ``As you will remember from earlier discussions, by dealing in certain private company shares the partners of the syndicate might obtain significant tax advantages. An interesting opportunity has now arisen to purchase some shares in a private enterprise known as Hatfield Enterprises Pty. Limited. If we can arrange the purchase it would appear that the shares could be sold at a commercial profit before the end of this financial year and that in addition there could be significant tax losses for the partners.'' (My emphasis.)

If indeed the conversation occurred in the terms described, it was preserving the charade which the parties were in the process of erecting. As will be seen later, there was no question of the opportunity now arising; there was no question of ifs and buts; and there was no question of anything having to appear to anybody. This was a cut and dried scheme which was awaiting merely the assembling of the relevant actors so that the play could commence.

The evidence demonstrates beyond doubt or per adventure, and indeed Mr. Love, the architect, has conceded that the whole of the transaction, which I will describe, of purchase of shares in the company, their sale, their resale, the liquidation of the company, the arrangements for bank facility, were organised anteriorally to contact being made with members of the syndicate to be formed. Most significantly, it was also pre-arranged that there should be a small profit at various stages of the transaction by both sets of Love & Wallace clients. Mr. Croker agreed, as will be seen hereafter; so did the other members of the syndicate. All was now ready.

The scheme was implemented firstly by having a meeting of directors of the company. The minute at folio 110 of Exhibit V bears date ``28rd'' June, 1977. It is obvious, both from the alteration to the figure, which now looks like an eight, and the appearance of the letters ``rd'' that somebody had initially written a different date. One assumes, although this probably has no relevance, that initially the date was 23rd June. The only interesting feature of that is that it would pre-date the conversation with Mr. Croker.

It was resolved by the directors that transfers of shares as per the schedule attached should be approved. The transfers in question bear date 30th June 1977. By the transfers, there was transferred, inter alia, 1655 shares in the company to members of the Cropodean Syndicate; the purchase price was shown as $194,078.75. The shares in question represented 50% of the issued capital of the company. The other 50% of the shares was purchased by members of the Quillex syndicate, composed also of clients of Love & Wallace. The vendor in each case was B. & B. Barfield Pty. Limited (in

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ATC 4117

voluntary liquidation), which was the owner of the whole of the issued capital.

On the morning of 30th June 1977 the nominal capital of the company was $20,000, divided into 10,000 shares of $2 each. The issued capital was $6,620, being 3,310 shares. According to the minutes, at an extraordinary general meeting of members of the company held at 2.15 p.m. on 30th June, special resolutions were passed that the authorised capital of the company be increased to $395,000 by the creation of 187,500 new ordinary shares of $2; that the sum of $377,000 forming part of the undivided profits of the company and representing profits arising from the sale of assets not acquired for the purpose of re-sale at a profit and standing to credit of the realised capital gains reserve account be capitalised; and that the same be distributed amongst the members, and that the capitalised sum be applied in paying up in full 188,500 of the unissued ordinary shares of $2 each in the capital of the company, and that the same be distributed amongst the ordinary shareholders as fully paid ordinary shares of $2 each.

It is hardly surprising that the minutes record that the minutes were prepared prior to the conclusion of the meeting. I should add, for the sake of explanation, that the realised capital gains reserve account had, in addition to the sum of $127,734 which had been standing to its credit, also acquired the proceeds of sale by the company of its shares in Wandarrah Investments Pty. Limited. According to minutes of a meeting of directors held at 2.20 p.m. on 30th June 1977, allotments were made of the bonus shares conformably to the terms of the special resolution. If effective, the two minutes meant that each syndicate therefore held 94,250 new shares and 1,655 old shares, a total of 95,905 shares.

According to the minutes of a meeting of directors allegedly held at 2.30 p.m. on 30th June, the two syndicates transferred their respective shareholdings, as to one share to W.J. Margison, and the balance to Monrica Pty. Limited. The shares theretofore held by the Cropodean Syndicate, according to the books of the company, were transferred in their entirety to Monrica Pty. Limited for a stated consideration of $194,687.15.

According to a further minute of meetings of the directors of the company held on 30th June 1977 at an unspecified time, it was resolved that an interim dividend absorbing the sum of $6,352 be declared from accumulated past profits.

According to a further minute of meeting of the directors held on the same day at 2.40 p.m., it was resolved that an extraordinary general meeting be convened for the same day, for the purpose of considering a special resolution that the company be wound up voluntarily. The appropriate consents to hold the meeting at short notice, signed by W.J. Margison and by a person on behalf of Monrica Pty. Limited, were, not surprisingly, apparently ready to hand, and are in the minute book.

According to minutes of an extraordinary general meeting of shareholders held at 2.45 p.m. on that day, the resolution for winding-up was duly passed. The liquidator thereupon and on the same day declared a first distribution equivalent to 199.953 cents per share in the paid up capital of the company, absorbing $383,529. Thereafter, at an unspecified time but still on the same date, the liquidator is recorded as having approved transfers of the entirety of the shareholding in the company to Mrs. Love and a Mr. Behrens, an employee of Love & Wallace, in equal shares. So concluded 30th June 1977.

To give effect to these various transactions, cheques passed from hand to hand in a manner which has now become known in commercial circles as a round robin. The original amount was obtained by means of overdraft accommodation from a bank. Never at any time during the whole of 30th June did any one person involved in any of these transactions have occasion to draw upon any funds other than those stemming from that bank accommodation. At the conclusion of the day, whilst some were richer and some were poorer perhaps on paper, the amount of actual cash that passed hands was minimal.

In its share trading account for the year ended 30th June 1977, the Cropodean Syndicate showed a loss of $187,828, arrived at as follows:

        
                                  $         $
      Purchases                206,499
      Bonus issue              188,500
                               -------
      Total                              394,999
      Less sales               198,975
      Shares on hand
      at lower of cost
      or market                  8,196
                               -------
      Total                              207,171
                                         -------
             Gross loss                  187,828
                                         -------
      

The only subsequent years for which I have figures are 1978, which showed a net loss of $1,352, and 1979, which showed a net profit of $1,360, although it should be noted that trading, so called, continued until at least February 1980.

It is appropriate that I return now to Mr. Deane's role in this scene. He also was contacted on 22nd June by Mr. Stafford, who suggested to him that he join the syndicate, together with members of his family and Mr. Poole, his general manager. Mr. Deane enjoyed two distinctions in this case. One was that he disclaimed - and I accept - having anything to do with the implementation of the scheme. He left all that to his general manager, Mr. Poole, and to some extent to his son, Mr. Deane, Junior. His other claim to distinction is that when he was asked, ``Did he also explain to you that you could receive the benefit of a large taxation loss?'', not only did he answer in the affirmative, but when asked a further question, ``and that was the purpose of this scheme?'', he once again assented to that.

I am quite satisfied that Mr. Deane's evidence represents the truth. The purpose of the transactions of 30th June was indubitably to get the benefit of a tax loss. The so-called ``small commercial profit'' was quite irrelevant to all concerned. Neither Mr. Croker nor Mr. Deane nor anyone else in the syndicate, so far as the evidence discloses, ever enquired as to the amount of this profit. It appears to have played no role in the decision-making. One also has to add to that the fact that the quantum of this small commercial profit was a figure quite arbitrarily determined by Mr. Love.

Further significant features of the transactions of 30th June were that they had to be completed by exchanges of cheques in the one day because that was the entirety of the period for which the bank facility was available. The transactions, as I have already mentioned, did not involve any member of the syndicate drawing on any of his own funds, but furthermore did not involve anyone having to provide any security of any kind to procure the bank facility. In ensuring that the transaction could be effected in the one day, there was complete and utter disregard of the pre-emptive provisions of the Articles of Association of the company.

It is in this setting that I have to answer the questions calling for decision in this appeal, which naturally, in the light of what I have said, focus on the transactions involving the shares in the company. The decision of the High Court requires me to hold, in obedience to the dictates of precedent, that the syndicate expended a total of $382,549 in the acquisition of the Hatfield shares. $194,049 was devoted to the purchase of 1,655 so-called old shares, and $188,500 was applied in respect of the payment due on the new shares. The syndicate received on account of its interest - and I deliberately, in the light of the argument, use a somewhat generalised term - in the company a total of $194,687. The question thrown up for decision is whether the difference of $187,862 qualifies as a loss within the meaning of sec. 51.

The test of what falls within the first limb of sec. 51 has recently been examined by the Federal Court in a trilogy of cases. Unfortunately these decisions have not earned the attention of counsel. However, I have derived the utmost assistance and guidance, in coming to my decision, from the principles stated in them:
Magna Alloys and Research Pty. Limited v. F.C. of T. 80 ATC 4542;
Ure v. F.C. of T. 81 ATC 4100; and
F.C. of T. v. Ilbery 81 ATC 4661, are in my view the appropriate statements of general principle which should guide me in arriving at the result of these appeals.

The classical test as to the application of the first limb of sec. 51 was laid down by the Full Court of the High Court in
Ronpibon Tin N.L. and Tongkah Compound N.L. v. F.C. of T. (1949) 78 C.L.R. 47. There the Court said at p. 56:

``For expenditure to form an allowable deduction as an outgoing incurred in gaining or producing the assessable

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ATC 4119

income it must be incidental and relevant to that end. The words `incurred in gaining or producing the assessable income' mean in the course of gaining or producing such income. Their operation has been explained in cases decided under the provisions of the previous enactments: see particularly
Amalgamated Zinc (de Bavay's) Limited v. Federal Commissioner of Taxation ((1935) 54 C.L.R. 295 at pp. 303-304, 307, 309, 310) and
W. Nevill & Co. Limited v. Federal Commissioner of Taxation ((1937) 56 C.L.R., at pp. 300, 301, 305-306, 308).

Notwithstanding the differences in other respects in the present provision, the expression `incurred in gaining or producing the assessable income' has been left unchanged and bears the same meaning. In brief substance, to come within the initial part of the sub-section it is both sufficient and necessary that the occasion of the loss or outgoing should be found in whatever is productive of the assessable income or, if none be produced, would be expected to produce assessable income.''

In Magna Alloys (supra) Brennan J., then a member of the Federal Court, in particular made it clear that in a restricted fashion, purpose may be relevant in determining the applicability of the first limb. (See p. 4547 et seq.; also see joint judgment p. 4555 et seq.)

Ure's case involved consideration of a number of transactions in which the taxpayer, an employed solicitor, borrowed money at commercial rates of interest of over 10%, and on-lent them at 1% to his wife or family company. The taxpayer returned as income the 1% interest he received, and sought deductions of the interest payments made by him. The Commissioner apportioned the interest paid and allowed only a fraction of it. Both the Supreme Court and the Federal Court upheld the Commissioner's apportionment. Brennan J. said at p. 4104:

``In the present case, a question arises as to whether it can truly be said that the incurring of interest charges at rates of 7.5%, 8.5%, 10% and 12.5% per annum is incidental to the gaining of income by way of interest at the relevant rate of 1% per annum. The answer to that question does not turn directly upon the disparity in interest rates, but upon an examination of the purposes for which the money was laid out. The disparity in interest rates is itself eloquent to suggest the existence of purposes ulterior to the earning of interest at the rate of 1% per annum, and the evidence confirms the existence of further purposes... Those purposes do not depend upon the state of the taxpayer's mind, but upon what the taxpayer in the circumstances of the case is ascertained to have done in using and arranging for the use of the borrowed moneys.

The purposes for which money is laid out is an issue of fact turning upon the objective circumstances which human experience would judge to be relevant to the issue. (See Magna Alloys and Research Pty. Limited v. F.C. of T. 80 ATC 4542 at p. 4549.) In the present case, there is an air of unreality about the proposition that the borrowed moneys were laid out wholly for the purpose of earning a return of 1% per annum. Rather is it right to say that the purpose for which the borrowed moneys were laid out included all the purposes earlier mentioned, only one of which was to earn a return of 1% per annum.''

The joint judgment of Deane and Sheppard J.J. is pregnant with the same considerations. At p. 4109 their Honours said:

``The question whether an outgoing should properly be seen as being wholly or in part `incidental and relevant' to the `end' of gaining or producing the assessable income and the question of whether the outgoing is wholly or in part of a private or domestic nature are both questions of characterization. Where liability to make the outgoing has been voluntarily incurred, those questions of characterization will ordinarily be determined by reference to `the object' which the taxpayer had in view (Latham C.J.,
W. Nevill & Co. Limited v. F.C. of T. (1937) 56 C.L.R. 290 at p. 301), the `result aimed at' by the taxpayer (per McTiernan J., ibid. at p. 308) or `the advantage which the expenditure was intended to gain, directly or indirectly, for the taxpayer.' (Per Gibbs J.,
F.C. of T. v. South Australian Battery Makers Pty. Limited 78 ATC 4412 at p. 4420; (1978) 140 C.L.R. 645 at p. 660.)

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ATC 4120

In the context of the relevant facts and circumstances. In the ordinary case where the income which is expected to flow from an outgoing offers an obvious commercial explanation for incurring it the relevant characterization can readily be determined by reference to the gaining or producing of that income. In the more complex case, however, where there is no such obvious commercial explanation, the solution of the problem of characterization must be derived from a weighing of the many aspects of the whole set of circumstances including direct and indirect objects and advantages which the taxpayer sought in making the outgoing. Some of those circumstances may point in one direction, some in the other. In such a case, as was said by the Privy Council in
B.P. Australia Limited v. F.C. of T. ((1965) 112 C.L.R. 386 at p. 397) in relation to the question whether a particular outgoing was of income or capital according to ordinary concepts, it is `a common sense appreciation of all the guiding features which must provide the ultimate answer.'''

Again in F.C. of T. v. Ilbery (supra) Toohey J. (in whose judgment the other two members of the Court agreed) said at p. 4667:

``As Brennan J. pointed out in Magna Alloys at p. 4547:

• Though purpose is not the test of deductibility or even a conception relevant to a loss involuntarily incurred, in cases where a connection between an outgoing and the taxpayer's undertaking or business is affected by the voluntary act of the taxpayer, the purpose of incurring that expenditure may constitute an element of its essential character, stamping it as expenditure of a business or income-earning kind. (at p. 4547).

Conversely, I would add purpose may stamp the outgoing as one having no relevant connection with the gaining or producing of assessable income.''

In my view, the appropriate characterization of the loss in question here is that it was incidental and relevant to one end only; that was to get a tax loss or advantage. As I have said, no one was in reality concerned with the ``small commercial profit''. That was a mere attempt at camouflage. If it was intended to lead the observer into thinking that this was a transaction with a profit motive, the evidence has dispelled that illusion. Insofar as any witness may have suggested that the transactions had more than one object or purpose, I reject their evidence. I am compelled to say that I was completely unimpressed by Mr. Stafford's evidence, and I reject it.

Insofar as the second limb of sec. 51 is concerned, for the self-same reasons I do not consider that the loss was incurred in the course of carrying on the business of share trading. In my view the syndicate and the members thereof were not carrying on that business. They were but a pale imitation of a share trader. The flurry of activity which took place in the last week of June is best characterized by the Bougainville Copper transaction which I have already described. Certainly it is true to say that, through their advisers, members of the syndicate sought to create the appearance of being share traders. I can only say that the application of warpaint to a person will not make one into a warrior.

Additionally, I accept the submission for the Commissioner, if it be necessary, that the transaction in the Hatfield shares was outside the mainstream of transactions. Whilst it is true to say that it was the raison d'être of all that happened in the last week of June 1977, the whole of the circumstances demonstrate that from beginning to end the ownership of shares in the company was but the incident and not the object of the transaction. In saying this, I am not to be thought as being unmindful of all that fell from members of the High Court in
Investment & Merchant Finance Corporation Ltd. v. F.C. of T. 71 ATC 4140; (1971) 125 C.L.R. 249. In particular, the Chief Justice at ATC p. 4142; C.L.R. p. 254 said:

``The Commissioner sought to avoid this consequence by asserting that the purchase and sale of these shares was outside the scope of the appellant's share trading business and ought to be regarded as an isolated transaction. I am unable to agree with this proposition. It is based apparently upon the supposition that

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ATC 4121

because the appellant saw fiscal advantages in buying the shares cum-dividend and disposing of them exdividend at a diminished price the transaction could not be regarded as a transaction of share dealing in the course of its business as a dealer in shares; but quite clearly, neither the attainment of profit nor the expectation of it is essential for a particular commercial transaction to form part of the business of dealing in the commodity purchased.''

(My emphasis.)

Similarly, Menzies J. at ATC p. 4146; C.L.R. p. 262 said:

``In advancing the first proposition the learned Solicitor-General did not deny that the taxpayer was a share dealer; his contention was rather that this particular transaction was outside its business as a share dealer and was of a capital nature. Of course, a dealer may enter into a transaction that does fall outside his income-producing business. Thus a company, which buys and sells land, might buy a building to occupy as its principal office so that the purchase price paid for it would be an outgoing of a capital nature. I have, however, found no basis here for excluding this transaction from the taxpayer's share dealing transactions. The learned trial judge clearly regarded it as falling within that business. In doing so he was, I think, correct. The taxpayer bought the shares intending to take the dividend and to sell the shares at their then market price. It was undoubtedly true that the attraction of the transaction lay in the concurrence of three features, namely, that the purchase price would be deductible from assessable income; that the dividend to be received would be rebatable; and that the sale of the shares would result in a loss which would, it was expected, be deductible from other income of the year in which the loss was made. It seems to me, however, that this transaction was a transaction of a trading character.''

See also Walsh J. at ATC p. 4150; C.L.R. at p. 270.

However, that is a far cry, in my view, from having a transaction which - and I do not intend to use the term offensively - was pre-rigged to produce a loss. The other facet of it was ancillary, including the alleged profit. That, to my mind, signally lacks every quality of a trading transaction. In so saying, I am not losing sight of the fact that in
Mullens & Ors. v. F.C. of T. 76 ATC 4288; (1975-1976) 135 C.L.R. 290, it was made clear that the mere fact that there may be a pre-existing offer to purchase does not, per se, disqualify the transaction from being a trading transaction.

My conclusions therefore make it unnecessary to consider another point which was argued on behalf of the Commissioner. It was submitted that the special resolution increasing the nominal capital was ineffective and therefore there was and there could be no valid allotment of the bonus shares. That submission was based on the company's failure to comply with the requirements of sec. 21 of the Companies Act 1961. That section provides as follows:

``21 (1) The memorandum of a company may be altered to the extent and in the manner provided by this Act but not otherwise.

(2) In addition to observing and subject to any other provision of this Act requiring the lodging with the Commission of any resolution of a company or order of the Court or other document affecting the memorandum of a company, the company shall within fourteen days after the passing of any such resolution or the making of any such order lodge with the Commission a copy of such resolution or other document or an office copy of such order together with (unless the Commission dispenses therewith) a printed copy of the memorandum as altered, and if default is made in complying with this subsection the company and every officer of the company who is in default shall be guilty of an offence against this Act.

Penalty: One hundred dollars. Default penalty.

(3) The Commission shall register every resolution order or other document lodged with the Commission under this Act that affects the memorandum of a company and shall certify the registration of every such order, and on such registration and not before, the alteration of the memorandum shall take effect.

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ATC 4122

(4) The certificate of the Commission shall be conclusive evidence that the requirements of this Act with respect to the alteration and any confirmation thereof have been complied with.

(5) Notice of the registration shall be published in such manner (if any) as the Court or the Commission directs.

(6) The Commission shall where appropriate issue a certificate of incorporation in accordance with the alteration made to the memorandum.''

Here a copy of the resolution was not lodged until well after 30th June 1977. It is unnecessary for present purposes to consider the competing arguments which have been advanced by the parties as to what flows from this failure to comply with the provision, because the conclusion I have reached in regard to the application of sec. 51 is sufficient to dispose of these appeals. Accordingly, the appeals are dismissed and I order the appellants to pay the respondent's costs. Exhibits may be handed out, unless a notice of appeal is filed within 21 days.