Lend Lease Corporation Ltd. v. Federal Commissioner of Taxation

Judges:
Hill J

Court:
Federal Court

Judgment date: Judgment handed down 30 May 1990.

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Hill J.

Before the Court are three appeals brought by the applicant, Lend Lease Corporation Ltd. in respect of assessments made by the respondent Commissioner of Taxation for the years of income ended 30 June 1981, 1982 and 1983 respectively. By consent the appeals were heard together.

Although there were three appeals, there were two discrete issues for decision. The first, relevant only to the 1981 year of income, concerned the disallowance of a deduction of $127,600 claimed by the applicant pursuant to the provisions of sec. 82AAC of the Income Tax Assessment Act 1936 as amended (``the Act'') as being an amount which was set apart or paid in the year of income to two superannuation funds. The second issue concerned a claim that amounts derived by the applicant in the 1982 and 1983 years of income were exempt from income tax pursuant to the provisions of sec. 23J of the Act. If those amounts were not so exempt it was agreed between the parties that in the 1982 year of income the applicant had been assessed in respect of an amount of $717,375, which amount was not derived in that year of income, and that the assessment should be accordingly amended to that extent.

It is convenient to consider each of the two issues separately.

The claim for deduction under section 82AAC - 1981 year of income

The facts relevant to the applicant's claim to deduct the sum of $127,600 pursuant to the provisions of sec. 82AAC of the Act were not in dispute.

Prior to the year of income the applicant had established two superannuation schemes for the benefit of employees of the applicant or its subsidiary companies. One of such schemes was referred to as the Lend Lease Group Superannuation Scheme and the other the Lend Lease Wages Staff Superannuation Fund. There is for present purposes no material difference in the provisions of the trust deeds relating to each fund.

During the year of income there appears to have been five individual persons acting as trustees of the former fund, four of whom were elected by the members and one of whom was presumably appointed by the applicant and acted as chairman. At all times during the year of income Mr Conlon, who gave evidence before me, acted as secretary of the fund, he being also appointed as a Trustee at an election held in December 1980. Five different persons were trustees of the Lend Lease Wages Staff Superannuation Fund. Mr Conlon also acted as secretary of this fund.

Mr Conlon in an affidavit read in the proceedings without objection stated that as secretary of each of the funds and trustee of one of them he was responsible for all administration and communication relating to the funds. He said that he was ``answerable to the Chairman of Trustees and was acting on behalf of all the members''. It may be observed that this may well have been the de facto position. However, the provisions of each of

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ATC 4403

the trust deeds, as one would expect, placed the responsibility for the administration of the fund upon the trustees who had full power to order and manage the business and affairs of the fund. Decisions of the trustees taken at a meeting of them were authorised to be made by a majority of votes of trustees present at a meeting. The trustees nevertheless had power to appoint a company to hold in the name of the company, but on behalf of the trustees, investments. The deeds provided in each case that any such company could act in its own name but on behalf of the trustees in relation to such moneys, funds or investments and for such purposes as the trustees might from time to time direct or approve. It was this clause that authorised Tower Investments Pty. Ltd. to act as a custodian trustee. There was no evidence on behalf of the applicants, however, that the trustees had directed or approved Tower Investments Pty. Ltd. purchasing investments on behalf of the funds nor would it seem that Tower Investments Pty. Ltd. was authorised to obtain investments on credit.

In around the middle of 1980 the applicant determined upon an issue of shares, for the benefit of employees, to the trustees of each fund with a view to providing to each member who satisfied certain criteria of eligibility an entitlement to 100 shares in the capital of the applicant. The managing director of the applicant, who was also the Chairman of the Trustees of the Lend Lease Group Superannuation Scheme, probably had some discussions with Mr Conlon concerning the issue of the shares. The matter was never the subject of any discussion at a meeting of trustees and resolutions of the trustees of each fund which were in evidence before me contained no reference to the matter at any relevant time.

The managing director of the applicant announced to all employees of the company the proposal to obtain the approval of shareholders to the issue of the shares and in consequence Mr Conlon prepared and forwarded to management a memorandum advising the number of employees who would participate in the issue and requesting that the shares be issued to Tower Investments Pty. Ltd. It appears that Tower Investments Pty. Ltd. It appears that Tower Investments Pty. Ltd. was a wholly-owned subsidiary of the applicant, that its directors as at 8 May 1980 were Messrs Moore, Robins and Turner and that Mr Conlon was the secretary of that company. On 7 November 1980 Mr Robins resigned as a director and the board of the applicant approved the appointment of Mr McDonald as a director in his place. It will further be noted that Mr Moore was Chairman of Trustees of the Lend Lease Group Superannuation Scheme. Mr Robins had been a trustee of that scheme. Mr Turner was Chairman of Trustees of the Lend Lease Wages Staff Superannuation Fund and Mr McDonald was also a trustee of the Lend Lease Group Superannuation Scheme.

A meeting of the Board of Directors of the applicant was held on 21 and 22 August 1980. At that meeting, inter alia, the following resolutions were passed:

``RESOLUTION No. 8094/-

THAT the approval of shareholders be sought at the 1980 annual general meeting for the directors to allot up to 628,100 ordinary shares in the capital of the company at not less than par directly or indirectly to employees of either the company or its subsidiaries, including directors in the full-time employment of the company and/or its subsidiaries which will enable such employees either directly or indirectly to participate as shareholders in the future of the company, the terms of the issue and the participants therein to be decided by the directors.

RESOLUTION No. 80100/96

THAT subject to the approval of shareholders at the 1980 annual general meeting of the allotment of 628,100 shares, the Board agreed to allot to the Staff and Wages Superannuation Funds as a special contribution in the terms of clause 5 of the relevant trust deeds, 100 shares in respect of full members of such funds at 30th September 1980. Such shares to be allotted on 31st October 1980 and, subject to Article 126, rank for all dividends declared after 31st October 1980 and for all other purposes to rank pari passu with the ordinary stock units already issued.''

Clause 5 of the Lend Lease Wages Staff Superannuation Fund provided as follows:

``The Company and each Associated Company may from time to time enter into an agreement with the Trustees to make such additional contributions to the Fund as

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ATC 4404

it shall think fit and shall notify the Trustees at the time of making such contribution as to whether that contribution is to be regarded as a contribution made pursuant to the provisions of this clause 5 and all such payments shall be divided equally amongst all members of the Fund as at the date stipulated in respect of any particular payment.''

Clause 5 of the Lend Lease Group Superannuation Scheme was in somewhat different terms but nothing turns upon that.

In due course, at the annual general meeting of members of the applicant held on 24 October 1980 there was passed, inter alia, the following resolution:

``ALLOTMENT TO EMPLOYEES:

RESOLVED: that the Directors be and are hereby authorised to allot up to 628,100 ordinary shares in the capital of the Company at not less than par, either directly or indirectly to such employees of either the Company or its subsidiaries (including directors in the full time employment of the company and/or its subsidiaries) as they may select on such terms and conditions as the Directors consider appropriate.''

On 12 November 1980, following certain discussions between Mr Conlon on the one hand and Mr Jones, the secretary of the applicant on the other, Mr Jones advised the share registry of the applicant of the resolution of shareholders to allot 628,100 shares to employees and of the proposal that 100 shares be allocated to each full member of the Superannuation Funds and requested that the registry arrange to allot to Tower Investments Pty. Ltd. 255,200 shares at 31 October 1980 to be held by that company on behalf of 2,552 employees. A share certificate dated 31 October 1980 was issued in due course showing Tower Investments Pty. Ltd. as the holder of 255,200 shares on which, according to the certificate, there is said to have been paid the sum of 50 cents. The allotment of shares is shown in the allotment journal of the applicant as bearing the date 31 October 1980.

Mr Jones deposed in an affidavit, that was read without objection, that it had been the ordinary practice of the applicant, when shares were allotted to the superannuation funds, to ``effect superannuation contributions, and the issue of shares to the trustee of the superannuation fund, by way of an exchange of cheques...''. That course however was not adopted in relation to the present allotment for reasons which are unclear. It may be inferred that there was an oversight. Instead, journal entries were made by the applicant in November of 1980 in the following terms:

      ``Posting Details             Dr               Cr
      255,200 shares            127,600
      Super Fund Cont
      255,200 shares                             127,600
      Issue of 255,200 LLC
      shares @ 50c per
      memo GC 7.11.80''
        

The effect of these entries was shown in the general ledger of the applicant in an account styled ``superannuation'' as if a contribution had been made of $127,600 and in the issued capital account in the general ledger there was shown as a liability the same amount under the heading ``super cont 255,200 shares''.

It would seem that in December 1980 when the accounts of the funds and the applicant for the half year were in the course of preparation it was discovered that there was a discrepancy between the accounts of Tower Investments Pty. Ltd. and the accounts of the applicant. That discrepancy was said to be due to the fact that the applicant had recorded the issue of shares to the funds but that the issue had not been taken up in the accounts of Tower Investments Pty. Ltd. Nor had it been taken up in the accounts of the superannuation funds. Accordingly an entry was made as at 31 December 1980 in the accounts of Tower Investments Pty. Ltd. recording by way of debit a receipt of a special allotment of 255,200 shares in the applicant at 50 cents each with corresponding credit entries, one to the Lend Lease Wages Staff Superannuation Scheme and the other to the Lend Lease Group Superannuation Scheme. Entries were also made in the accounts of the two funds recording as a debit the nominal value of the shares held by Tower Investments Pty. Ltd. as nominee of the scheme and as a credit entry the corresponding amount said to have been received by way of contribution from the applicant. At the same time an entry was made in the investment ledger of Tower Investments Pty. Ltd. recording the shares on hand.

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ATC 4405

It is not in dispute that the shares were validly issued to Tower Investments Pty. Ltd. and that that company held those shares as trustee for the trustees of the respective superannuation schemes. It is also agreed that at no time were any moneys or cheques paid by the applicant to the trustees of the schemes by way of superannuation contribution.

It is on the basis of these facts that the applicant claims to be entitled to a deduction under sec. 82AAC(1) of the Act which section provides:

``Where a taxpayer, for the purpose of making provision for superannuation benefits for, or for dependants of, an eligible employee, sets apart or pays in the year of income an amount or amounts as or to a fund or funds from which the benefits are to be provided, and the right of the employee or dependants to receive the benefits is fully secured, the amount or the sum of the amounts, as the case may be, so set apart or paid is, subject to the succeeding provisions of this Subdivision, an allowable deduction.''

The deduction allowable under sec. 82AAC is qualified by the terms of sec. 82AAE so that the deductible amount is not to exceed the greater of $400 or five per cent of the total remuneration paid to the employee by a taxpayer during the year of income of the employee unless the Commissioner is of the opinion that there are special circumstances justifying the allowance of a greater deduction. It is conceded by the respondent Commissioner that the discretion under sec. 82AAE(b) was not exercised nor indeed even considered because the Commissioner was of the view that the provisions of sec. 82AAC had not been complied with. Accordingly, if the applicant be successful in its contention that a deduction is available under sec. 82AAC then the matter would need to be remitted to the Commissioner to consider the question of exercise of discretion under sec. 82AAE assuming that (and this was not a matter upon which any evidence was called) the value of the shares exceeded the amounts referred to in sec. 82AAE(a) of the Act.

The only matter in dispute in the present appeal was whether in the year of income the applicant had set apart or paid any amount to the two schemes in relation to the allotment of shares; it being properly accepted that the mere allotment of the shares did not suffice to entitle the applicant to a deduction under sec. 82AAC.

For the applicant it was submitted that the circumstances of the case coupled with the book entries made to which I have already referred, constituted a setting apart of an amount to each of the funds. It was also submitted that the facts constituted a payment to the funds of an amount, although the primary reliance was placed upon that part of sec. 82AAC which related to an amount being set apart.

Counsel for the applicant, relying upon what was said by the Full Court of this Court in
F.C. of T. v. Top of the Cross Pty. Ltd. & Travel Holdings (Australia) Pty. Ltd. 81 ATC 4563 at p. 4571 (per Bowen C.J. and Ellicott J.) submitted that the purpose of sec. 82AAC was not to raise revenue but rather to encourage the taxpayer to enter into arrangements by way of contribution to superannuation funds for the benefit of employees. It was submitted that in interpreting the section therefore it was appropriate to adopt a benevolent construction promoting the purpose or objects underlying the section (Acts Interpretation Act 1901, sec. 15AA). It may be conceded that the purpose of sec. 82AAC and related sections is to encourage contributions to superannuation funds rather than to raise revenue (they being provisions permitting deductions) but the legislative purpose is clearly to encourage provision of superannuation benefits provided that there is actual compliance with the provisions of sec. 82AAC. To adopt a purposive approach to sec. 82AAC does not relieve the Court of its obligation of determining whether, in accordance with the meaning of the words of sec. 82AAC, there has been an amount set aside or paid in the year of income. Accordingly, it is necessary to consider whether in the events that happened the applicant did either pay or set aside any amount in a relevant sense.

Did the applicant make a payment?

In
F.C. of T. v. P. Iori & Sons Pty. Ltd. 87 ATC 4775 this Court considered, on quite different facts, the question whether a taxpayer company had paid or set aside an amount for the purposes of sec. 82AAC. In that case the taxpayer sought to claim a deduction for what was said to amount to a contribution by the

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ATC 4406

taxpayer to a fund and a loan back of the same amount to the taxpayer. The taxpayer claimed to be entitled to the deduction by virtue of book entries which recorded in the journal of the taxpayer a contribution to the fund and a loan back to the taxpayer of the same amount. Similar entries were made in the books of the trust fund. There was a complicating factor in that the provisions of the trust deed had been ignored. It was held that no amount had either been paid or set apart within the appropriate meaning of these expressions in sec. 82AAC.

In particular the Court rejected a submission that there had been a set-off within the principles established by
Re Harmony and Montague Tin and Copper Mining Company (Spargo's case) (1873) 8 Ch. App. 407. The principle in Spargo's case was explained by the High Court in
F.C. of T. v. Steeves Agnew & Co. (Vic.) Pty. Ltd. (1951) 82 C.L.R. 408 per Dixon J. at p. 421 as follows:

``But for the application of these principles there must be cross-liabilities and agreement, express, tacit or implied, and the cross-liabilities must be equal. If they are not equal payment of the residue must be effected by other means. A continuing account balanced at yearly intervals is not the same thing.''

As Fox J., with whose judgment Lockhart J. agreed, pointed out at p. 4780, for there to be a deemed payment within the principles in Spargo's case there must be an underlying liability or a mutuality of liabilities which the book entries are treated by the parties as settling. In the case of P. Iori and indeed in the present case there was no underlying liability because the taxpayer was under no liability to contribute anything. As his Honour said: ``The acceptance of its decision to do so in any year was not an agreement in the relevant sense''.

Beaumont J. in the same case, with whose judgment Lockhart J. also agreed, said at pp. 4788-4789:

``In my opinion, the amounts now in question were not `paid' to a fund within the meaning of sec. 82AAC. It is accepted by the respondent, correctly I think, that a payment could be established only if the journal entries relied upon were under-pinned by a valid agreement to the effect that payment of its contributions be accepted by the trustees in a form other than by actual cash or by cheque... But, in my view, there was no valid agreement made in the present case. It is hardly necessary to add that it is not enough for the respondent to demonstrate its intention to make contributions to the fund. The respondent must go further and establish an actual agreement to the relevant effect: in a revenue context and otherwise, `the intention of a man cannot be considered as determining what it is that his acts amount to' (per Lord Buckmaster in
J. & R. O'Kane v. I.R. Commrs (1920) 12 T.C. 303 at p. 347).''

Beaumont J. pointed out that it could be possible to infer the making of an agreement between the trustees and the respondent that in lieu of payment by cash or cheque the amount of the respondent's contribution would be treated as if paid and as if lent back to the respondent by the trustees. However, such an agreement in the circumstances of that case would have been in breach of trust.

Beaumont J. did not, however, express any decided view on whether if such an agreement had not been in breach of trust it could have been inferred and would have fallen within the rule in Spargo's case. For my part, with respect to his Honour, I doubt whether it is possible to apply the rule in Spargo's case where there are no mutual liabilities but rather a liability on one hand and a voluntary payment on the other. The intention to make a voluntary payment does not constitute a binding obligation. But whether that is correct or not, the present is not a case where there was any agreement at all that could be inferred between the applicant on the one hand and the trustees on the other. The situation is merely one where the matter lay in intention on the part of the applicant and was never considered at all in accordance with the terms of the trust deed by the trustees. It is true that some of the trustees at least were aware of the matter by virtue of being either involved in the allotment itself or as being directors of Tower Investments Pty. Ltd. or in Mr Conlon's case as being trustee of one fund and secretary of both. There was on the facts, however, no agreement made by the trustees in accordance with the provisions of the trust deeds regulating the funds. They did not consider it in a meeting; they did not vote upon it by majority resolution and they did not, so far as the evidence shows, authorise any person on their behalf to enter into such an agreement.

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ATC 4407

Counsel for the applicant submitted that the case of P. Iori should be distinguished because it depended upon there being a breach of trust. It is true that the Court was assisted in reaching its conclusion that the book entries in that case neither constituted a payment nor a setting apart, inter alia, on the basis of the breach of trust. But at least in P. Iori the directors were both directors and trustees so that an argument could be raised that there was some form of agreement. That argument was regarded by Fox J. as being doubtful but was not pursued. In that case as in the present, there can be no escape from the fact that the taxpayer was not under any prior obligation to make a contribution and that the trustees of the trust funds took as volunteers. That, together with the lack of any evidence of any agreement on the part of the trustees, is sufficient in my view to permit the conclusion to be drawn that there was no payment in the relevant sense.

The argument of the applicant is made more difficult in the present case because on the proper legal analysis of the transactions, and assuming that no breach of trust was involved, the legal effect of the transaction was that Tower Investments Pty. Ltd., to whom the shares were allotted, became obliged to pay for them. Assuming no breach of trust, Tower Investments Pty. Ltd., being but a custodian trustee for the trustees of the fund, would be entitled to a full right of indemnity against the trustees as well as a lien over the shares:
Hardoon v. Belilios (1901) A.C. 118 at p. 123;
Octavo Investments Pty. Ltd. v. Knight & Anor (1979) 144 C.L.R. 360 at p. 367; cf.
Costa & Duppe Properties Pty. Ltd. v. Duppe & Ors (1986) V.R. 89. There was no direct liability between the trustees of the funds on the one part and the applicant on the other such as to constitute mutual liabilities for the purposes of the rule in Spargo's case.

Did the book entries amount to the setting apart of an amount?

If the words of sec. 82AAC of the Act are examined without the aid of authority, there is an initial question that arises. Do the words ``as or to a fund or funds'' govern each of the words ``set apart'' and ``paid'', or is the proper construction of sec. 82AAC that the words ``as a fund or funds'' apply to the words ``set apart'' and the words ``to a fund or funds'' apply only to the word ``paid''. Under the former construction four possibilities are envisaged (if the singular only is considered):

• (i) An amount is set apart as a fund.
• (ii) An amount is paid to a fund.
• (iii) An amount is paid as a fund.
• (iv) An amount is set apart to a fund.

Under the latter construction only two possibilities are envisaged:

• (i) An amount is set apart as a fund.
• (ii) An amount is paid to a fund.

Whichever construction is preferred it would seem the evident intention of Parliament was that a deduction be available where the act of setting apart or payment actually creates the superannuation fund and where the act of setting apart or payment results in there being a contribution to an existing fund. There may be thought to be a grammatical problem in the legislation speaking of an amount being set apart to a fund and in it speaking of an amount being paid as a fund which might suggest that the latter construction is to be preferred.

However, it is not necessary for the purposes of the present case to resolve the point. Such authority as there is appears to support the former construction and in any event, if the former construction be accepted, the two possibilities envisaged by the latter construction are included in the former.

When the section refers to an amount being set apart as a fund, it appears to envisage a case where the act of ``setting apart'' either creates an existing fund or supplements an existing fund. In the case where the contributor/employer is also the trustee of the fund the act of setting apart will ordinarily have the consequence that the amount has become subjected to the trusts of a fund. But there may be envisaged a case where a fund may have been established without trustees at all but where the benefits funded may be the subject of covenant rather than subjected to trusts. Again it is unnecessary to decide that issue, depending as it does upon the meaning of the expression ``fund''; cf.
Allchin v. Coulthard (1942) 2 K.B. 228 and
Scott v. F.C. of T. (No. 2) (1966) 14 A.T.D. 333 at p. 351 where Windeyer J. said of the expression ``fund'' that it ``ordinarily means money (or investments) set aside and invested'' and that a superannuation fund could

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ATC 4408

only be said to have been established ``when property composing the fund is set aside and subjected to appropriate trusts''.

Having regard to the requirement in sec. 82AAC that the rights of employees or dependants to receive benefits be fully secured there is much to be said for the view that what is envisaged by sec. 82AAC is a trust fund to which contribution is made either by payment or by such an act of setting apart as subjects the amount of the contribution to trusts. That, however, would not seem to have been the view of Owen J. in
Winchombe Carson Ltd. v. C. of T. (N.S.W.) (1938) 5 A.T.D. 69.

The Income Tax (Management) Act 1936 (N.S.W.) provided by sec. 76 at the relevant time that a deduction was to be allowed of a sum:

``set apart or paid by the taxpayer in the year of income as or to a fund where the taxpayer was under a legal obligation to set aside or pay the sum and the rights of the employee to receive benefits were fully secured.''

Although the report of the case is not completely clear, it would seem, so far as the employee's contribution was concerned, that the employer covenanted with the employee to pay benefits related to a credit shown in an account in the employer's books to which account amounts of contributions were to be credited. In the years from 1914 to 1935 the employer credited amounts by way of contribution to the accounts in its books of employees, writing off these amounts (and an amount of ``interest'') against its profit and loss account of the year of ``contribution''. The question that arose for decision was whether deductions were allowable in the years in which the credit entries were made or in the 1935 year when the employer paid an amount representing the total credits made to the AMP Society on a reconstruction of the scheme. Owen J. upheld the submission of the Commissioner that the setting apart or payment took place in the earlier years and not in the 1935 year. In so concluding his Honour said at pp. 73-74:

``Mr Hardie for the company has argued that a company cannot set apart or pay money merely by making book entries such as were made here. He says that to constitute a `setting apart' of money there must be either a payment to a particular person as a trustee or some specified portion of the company's assets must be allocated for the purpose of creating a benefit fund. In connection with this latter point, it must be remembered that the section speaks of the setting apart of a `sum' and not of `assets'.

I do not agree with Mr Hardie's contention. The section does not require the creation of a trust, although the fact that a scheme does not make such a provision is no doubt material in considering whether the benefits under it have been fully secured. If his argument is sound it is not altogether easy to imagine circumstances in which a `setting apart' of a sum of money, as opposed to a payment of it, would not create a trust, yet payment is not the only means of contribution contemplated by the section and, if the Legislature had thought it necessary to require that sums set aside should be vested in a trustee, it would have been very easy to say so.

I think that in ordinary business parlance it is not only usual but proper to describe what was done by the company year by year as the setting apart of money as or to a benefit fund.''

Subsequently the Full Court of the High Court (Fullagar, Kitto and Menzies JJ.) in
F.C. of T. v. The Northern Timber & Hardware Co. Pty. Ltd. (1960) 12 A.T.D. 257; (1960) 103 C.L.R. 650 considered the provisions of sec. 66 of the Income Tax and Social Services Contribution Assessment Act 1936-1955 which is materially identical to sec. 82AAC. In that case the appellant claimed a deduction for a provision which it made in its books of account to meet its liabilities for long-service leave. The submission for the taxpayer was in effect that a mere book entry debiting annual profits with an amount called a ``contribution'' gave rise to a deduction. To this the High Court gave two answers at A.T.D. p. 259; C.L.R. p. 657, of which the second is relevant to the present case:

``It is that to make a book entry and no more does not come within the words `sets apart... a sum as or to a fund' from which pay for long service leave is to be provided. What the taxpayer did here had no legal effect whatever. The employer gave nothing and the employees gained nothing. There may in some cases be a question whether what an employer has done amounts to

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ATC 4409

setting aside a sum as and to a fund, but such a question will only arise when the employer has done something that is binding and confers some benefit upon employees.''

What is significant in this passage is the emphasis that their Honours place on the necessity for the act of setting apart to create something that is binding upon the contributor. No reference was made to the judgment of Owen J. in Winchombe Carson.

Counsel for the applicant in the present case sought to distinguish the Northern Timber case. It was said that here the act of setting apart did confer a benefit upon employees. But one may ask rhetorically how a benefit was conferred unless what was done amounted to a payment? The act of allotment of the shares was not relied upon as being itself the deductible contribution, although that may have benefited the employees. But the book entries, not amounting to a payment, had no effect in law and could not have benefited the employees, particularly where the transaction was not one resolved upon by the respective trustees.

It is true, as counsel for the applicant submitted, that an important argument in the Northern Timber case was whether on the facts of that case there was a payment to or the setting apart of a real fund (see the argument of Dr Coppel Q.C. for the appellant Commissioner at p. 653). But the decision of the Court in respect of what was referred to as the ``second answer'' was expressed in more general terms and appears to turn upon the composite expression ``sets apart... a sum as or to a fund'' rather than on the narrower question of the existence of a fund.

This appears to have been the way the Northern Timber case was interpreted by the Full Court of this Court in P. Iori (supra). Beaumont J. (with whose reasons Lockhart J. agreed) after quoting from Winchombe Carson and Northern Timber and rejecting the taxpayer's arguments that there had been a payment, concluded that there had been no relevant setting apart. His Honour said at p. 4789:

``In Winchombe Carson, the employer bound itself to its employee by crediting an amount to his account in accordance with the provisions of the trust deed. But the transactions here relied on were carried out in breach of trust. As was pointed out in the Northern Timber case, supra, a `setting apart' will occur only when the employer has done something that is `binding and confers some benefit upon employees'. Not only were the transactions in breach of trust and thus not binding, but it is also at least doubtful whether, taken as a whole, they conferred a benefit upon employees. The loans were unsecured and, until 1979, did not carry interest.''

Fox J. did not deal separately with the question of ``setting aside'', presumably because the taxpayer in that case had relied upon the payment limb of the section rather than the ``setting aside'' limb.

Of course the factual matrix in the P. Iori case was quite different from the present case but I am not satisfied that the differences are of assistance to the taxpayer. As in that case, so here, what the taxpayer seeks to do is to rely upon a provision made in its accounts as constituting a setting aside, in circumstances where the trustees of the funds have not been shown on the evidence to have authorised the investment by Tower Investments Pty. Ltd. in the shares nor to have agreed that any liability they had to indemnify Tower Investments Pty. Ltd. could be extinguished by a three-way arrangement between the applicant, Tower Investments Pty. Ltd. and the trustees. In these circumstances it is my view that the applicant has shown no more than the mere making of a book entry in its books which does not amount to a payment or to the setting apart of an amount as or to a fund.

It follows in my view that the applicant's appeal in respect of the 1981 year must be dismissed and the applicant must pay the costs of it.

The claim for exemption under sec. 23J of the Act

The facts

As appears from the profit and loss accounts of the applicant which accompanied its returns of income for the years in question, the applicant carried on the business of a holding company for the group of companies known as the Lend Lease Group: cf.
F.C. of T. v. Total Holdings (Australia) Pty. Ltd. 79 ATC 4279. Its income comprised dividends, management fees received from subsidiaries and amounts described in its accounts as interest received

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ATC 4410

from subsidiaries and other external sources. Included among what the accounts described as interest were the profits arising from holding to maturity bills of exchange or other securities acquired at a discount.

It appears that the applicant took direct responsibility for the management of the surplus funds of the group of companies of which it was the holding company. It acted as the banker for the group. Funds in the bank accounts of the subsidiaries were made available to the applicant on a daily basis and from these funds the cash flow requirements of the various subsidiaries were made available and surplus cash not required was invested. The relevant policy adopted was stated by Mr Wareing who at all relevant times was Finance Director of the applicant as follows:

``As LLC (the applicant) was the central treasury for the group, deposits and borrowings by the subsidiary to the LLC funds were made by the subsidiaries on a daily basis. LLC was responsible for consolidating the liquidity projections and forecasting cashflow requirements of the group. There is a lumpiness to the cash flow requirements of Lend Lease [i.e. the group of companies] because transactions involve very large, discrete sums at irregular intervals. We needed to maintain a very strong control over our cash flow because it was quite possible during the day to day movements of Lend Lease that LLC received millions of dollars or paid out millions of dollars.''

On 28 September 1983 Mr Wareing wrote a memorandum to the Finance Committee of the Board of Directors of the applicant in which he summarised the principles of investment of surplus funds by the applicant and suggested certain new principles be adopted. Under the heading investment strategy, Mr Wareing said:

``Within the previously stated rules and constraints we do operate an investment strategy. This takes several forms as follows:

• (a) Within Australia our aim is to maintain about $10,000,000 on a 24 hour call basis. This is to cope with day to day cash requirements and, in this context, we accept the rates available on the days. This is the most volatile end of the investment market where rates from day to day, and even during a day, can vary from 2 per cent to 20 per cent.
• (b) For major identified cash needs (e.g. tax payments, dividends, land purchase) we place funds to maturities to match the timing of those needs. However we operate within a general rule of not placing such funds longer than 180 days. Within that six month period the pattern of placement can vary from 7 to 180 days according to the identified needs.
• (c) Where funds are surplus to (a) and (b) we place in a market according to the best available interest rates. These can vary from, say, 7 days to 180 days and will be selected according to rates on offer.
• (d) We also pre-plan the placement of forecast cash into the market. Where, for example, a contract settlement is due in, say, two months and the funds realised will be surplus to requirements we will selectively prebook a placement into the market for that time at an agreed rate. This consists of the purchase of interest rate futures which is an obligation to take delivery of Bank Accepted Bills at an agreed contract price. As an example, if interest rate futures are purchased at a price which yields 13 per cent then that rate of return is effectively `locked in' from the time you enter into the contract until the bank bills mature...
• (e) The preference for Bank Accepted/Endorsed Bills as security ensures that the investment is highly liquid and can be easily converted to cash if necessary.''

In pursuance of this policy the applicant invested moneys at interest and also purchased, at a discount, bills and other corporate securities. From May 1982 the implementation of the policy was under the control of a Mr Dodson who at that time was responsible for money market investments on behalf of the applicant. In the time in which Mr Dodson was involved in the relevant tax years, the applicant did not sell, in the ordinary sense of that word, discounted securities. Mr Dodson produced a summary of all transactions involving securities entered into by the applicant in the relevant period, with, in most cases, supporting documentation. In most of the material

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ATC 4411

presented by Mr Dodson it was clear that discounted securities had been held until maturity. There were however four transactions which were the subject of cross-examination. The first involved a bill of exchange for a face value of $500,000 from Westpac Banking Corporation Ltd. which had been purchased for $498,599.14 and for which $500,000 was received from Westpac. A contemporaneous hand-written note referred to that bill as having been ``sold on 27.11.81 for face value''. However, it was clear that the bill in question matured on 27 November 1981 and that the amount deposited on 27 November 1981 came directly from Westpac and not from a third person. Hence it is clear enough that the contemporaneous note was inaccurate in describing the transaction as a sale rather than as a redemption at face value on maturity.

The second transaction, the subject of cross-examination, was more perplexing. On 11 December 1981 the applicant received $500,000 which it banked to the credit of its account. The deposit slip indicates that the banking was of a cheque drawn by Wardley Australia Pty. Ltd. for that amount. The transaction related to a promissory note from H.C. Sleigh Ltd. having a face value of $500,000 which had been acquired for $495,792.55. The promissory note matured on 11 December 1981. A contemporaneous record referred to the promissory note as having been ``sold to Wardley Aust. on 11.12.81''. The details of this transaction were unclear. Mr Dodson gave evidence that, in his extensive experience of money market transactions, discounted securities could not be sold on the date of maturity to any purchaser at face value because there would be no profit to the purchaser if the sale took place at the face value of the security. That is self-evident. There are a number of possible explanations for the transaction. One, no doubt, is that the applicant authorised Wardley Australia Pty. Ltd., in whose name the deposit may have been, to collect the proceeds on maturity. I do not think that I should infer from the evidence put before me that this transaction was a transaction of sale made in the course of the applicant's business in the light of the evidence given by Mr Dodson.

Two further transactions were discussed in cross-examination. The first dealt with some shares in a subsidiary company that were sold. It seems unlikely that this transaction was a transaction on revenue account. Mr Dodson was unable to explain why this particular transaction appeared in the money market transactions with which he was concerned. It would seem that it did so by mistake. The second to which cross-examination was directed concerned the circumstances in which two promissory notes were purchased. Westpac promissory note due on 27 November 1981 and the H.C. Sleigh promissory notes due on 27 December 1981 had apparently both been purchased at a discount from General Property Trust, a unit trust with which the applicant was associated but the precise nature of the transaction of purchase was not known to Mr Dodson.

With some obvious reluctance, counsel for the applicant conceded that in the circumstances where the applicant acted as a financier for its group of companies and purchased at a discount securities and where it held those securities until maturity, the proceeds on redemption were income in ordinary concepts derived from the carrying on by it of a business of investment whether that business be seen as a separate business or as ancillary to the financing business. This concession is clearly correct. Cf.
London Australia Investment Co. Ltd. v. F.C. of T. 77 ATC 4398; (1977) 138 C.L.R. 106.

It was conceded in cross-examination that in the event of a subsidiary needing funds the applicant would have been prepared to sell securities on the market prior to maturity. However, the evidence made it clear that this did not occur because there were always sufficient liquid funds to provide for the needs of subsidiaries. Mr Dodson conceded that at a later time the applicant had purchased government paper and discounted securities (the authority so to purchase existed from the outset) but denied that this had happened in the relevant period. It had happened recently, Mr Dodson said, and it was clear that there were no records of any purchases and a fortiori sales of government paper in the period in question. At a later time, which could have been up to four years later than the last year of income here in question, government paper was purchased and sold.

On the facts before me I find that at no time during the years of income did the applicant

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ATC 4412

purchase and sell any securities, nor did it contemplate so doing, and that the business of the applicant, so far as it related to the acquisition of securities, was the acquisition of those securities for the purpose of holding them until maturity and making a profit, being the difference between the discounted acquisition price and the face value of the security. I find that that business did not include the acquisition of securities (with or without a discount) and the sale of those securities.

In these circumstances the applicant submitted that the profits on redemption of discounted securities were excluded from assessable income by virtue of the provisions of sec. 23J of the Act which section provides as follows:

``23J(1) Subject to this section, no part of an amount received by a person upon the sale or redemption of eligible securities purchased or otherwise acquired at a discount on or before 30 June 1982, other than any part of that amount received as accrued interest, shall, for any purpose of this Act, be taken to be income derived by the person.

23J(2) Sub-section (1) does not apply in relation to an amount received by a person by virtue of a transaction that is part of, or is incidental to, the carrying on by the person of a business that includes buying and selling eligible securities of any kind.

23J(3) Sub-section (1) does not affect the operation of section 25A, 26AAA or 26C.''

In
R.A.C. Insurance Pty. Ltd. v. F.C. of T. 89 ATC 4780 Lee J. considered a somewhat similar issue and the construction of sec. 23J(4). The taxpayer in that case was an insurance company. His Honour found that in the course of its insurance business the taxpayer purchased eligible securities at a discount and held them until maturity. The Commissioner included in the assessable income of the taxpayer the profits of the securities on maturity. It was held that the profits in question were exempt from tax under sec. 23J(1). The expression ``eligible securities'' is defined in sec. 23J(4) to mean:

``(a) bonds, debentures, stock or other securities; and

(b) any other document evidencing or acknowledging the indebtedness of a person, whether or not the debt is secured.''

Although the R.A.C. case is presently on appeal to the Full Court of this Court, I was advised from the bar table that the Commissioner had not sought to cross-appeal from so much of the decision of Lee J. as concerned the question of sec. 23J.

In holding for the taxpayer Lee J. held that the provisions of sec. 23J(2) did not preclude the application of the exemption, notwithstanding that the gains from redemption of the eligible securities were received by virtue of transactions that were incidental to the carrying on of the insurance business of the taxpayer. His Honour said at p. 4791:

``With regard to subsec. 23J(2) it may be said that the amounts received as gains from the redemption of eligible securities were received by virtue of transactions that were incidental to the carrying on of the insurance business of the taxpayer, but it cannot be said that that business of the taxpayer included the buying and selling of such eligible securities in the years of income... The conduct of the taxpayer's business of insurance involved investing in eligible securities to be held until redemption as part of a spread of investments retained for the purpose of the taxpayer's business.

No part of that business involved the buying and selling of eligible securities. Subsection 23J(1) makes separate reference to redemption and sale and it would be a strange result to conclude that words of the immediately following subsection, which do not refer to redemption but only to the `buying and selling' of eligible securities, were intended to extend to circumstances which contained no element of dealing or trading.

If it was intended that subsec. 23J(2) should catch any income derived by virtue of a transaction incidental to the carrying on of a business, then the final words of the paragraph occurring after the word `business' were superfluous.''

To my mind the present case is indistinguishable from the R.A.C. case and, as a matter of comity sitting as a single judge of this Court, I should follow it unless I were of

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ATC 4413

the view, which I am not, that it was clearly wrong.

Counsel for the Commissioner submitted that the R.A.C. case was distinguishable. He referred to the fact that the Automobile Club in that case carried on one business so that the proceeds of investment were merely incidental to that business and not part of its main business. However, the same can be said of the present case. The applicant carries on one business, namely the business of a holding company. It is not a correct characterisation to describe the applicant as carrying on a series of discrete businesses. But even if it were, I am not of the view that it would make any difference.

Counsel for the Commissioner also sought to persuade me that the facts of the transactions, the subject of cross-examination to which I have referred, revealed that the applicant carried on a business of buying and selling discounted securities. As I have already indicated I do not find this to be correct as a matter of fact.

Counsel for the Commissioner also argued that sec. 23J would only apply where it is correct to say that the business yielding the gain could be described as one that includes buying and selling. The buying and selling aspects, it was submitted, did not have to occur in the year of income. It was said that it was sufficient if there was one transaction of sale and that that transaction need not be in the year of income. As I have already indicated, I do not think that it is correct to say that there is any transaction of sale that occurred on the present facts of any eligible security, at least that was properly to be characterised as part of the applicant's business. Accordingly, the submission need not be further considered.

Counsel for the Commissioner further submitted that the decision of Lee J. was wrong and that the expression ``buying and selling'' should not be seen as a composite expression. It was said that the exemption would be excluded if the business of a taxpayer included buying or selling. Since I propose to follow the decision of Lee J. on the question of construction of the section, it is strictly unnecessary to consider this submission. Suffice it, however, to say that it is difficult to conceive of a business of buying alone or a business of selling alone without buying, but the answer to the submission lies in the use of the word ``and''. While perhaps in an appropriate context the word ``and'' may be construed as ``or'' (cf.
Associated Newspapers Ltd. v. Wavish (1956) 96 C.L.R. 526), the present is not such a case.

It might be said that it is somewhat difficult to conceive of why the legislature intended to give the benefit of sec. 23J to a company whose business included buying and holding eligible securities until maturity but to exclude from the ambit of the section a taxpayer whose business included buying and selling eligible securities. One answer may well be that it was unclear as a matter of law at the time when sec. 23J was inserted into the Act whether the profit on holding securities purchased at a discount until maturity could be income in ordinary concepts. Whether this was the case need not be, however, considered. The words of the section appear quite clear and unambiguous.

It follows that I would allow the applicant's appeals against the assessments for the years ended 1982 and 1983 and direct that the respondent Commissioner pay the applicant's costs of them.