Brian Hatch Timber Co (Sales) Pty Ltd v Commissioner of Taxation

The question is not whether I think that upon the facts placed before me the conditions of s. 80A (1) were satisfied, but whether the respondent's decision should be reviewed on the ground that it can be seen that he has failed to discharge properly his statutory function, according to law. I accept the statement of Dixon J. in Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation [10] as being an accurate exposition of the principles to be applied in dealing with the question which I have to decide. The examination of that question is complicated by the circumstance that very little evidence has been placed before me to show what was the material before the respondent when he made his decision. The company, through its counsel, has claimed that it was not practicable for it to produce that evidence. The respondent has chosen not to provide it. His contention is that there is no material before me upon which I can interfere with the respondent's decision and that, therefore, the company must fail.

I allowed evidence to be given, against objection, concerning the facts which preceded, accompanied and followed the acquisition, at a time within the relevant year of income, by Mr. Brian Hatch and his wife of three shares in the capital of the company, by which they became the holders and the beneficial owners of sixty per cent of the issued shares.

According to the contentions of the company that acquisition gave Mr. Hatch the practical control of the company but left two shares (that is to say, two-fifths of its issued shares) in the beneficial ownership in which they had always been, and those shares still carried, at all relevant times, all the rights to which s. 80A (1) refers. For the respondent it was contended that no evidence should be admitted of any facts not proved to have been known to the respondent when his decision was made. But I decided that in this case, in which there has been no suggestion of any deliberate concealment or misrepresentation of any facts, I should admit evidence of what actually happened concerning the change in the shareholding of the company and should determine afterwards to what extent that evidence could properly be considered in deciding the appeals, bearing in mind the limited scope of this Court's inquiry into the propriety of the respondent's decision. I think that it is convenient to set out in these reasons the facts disclosed by that evidence, without confining my statement of the facts to those which are actually proved to have been ascertained by the respondent when he was considering his decision.

The company was incorporated in 1961. Its name was then G. A. Cleary (N.S.W.) Pty. Ltd. At a general meeting held on 19th December 1966, it was resolved that its name be changed to its present name. Its memorandum of association was subscribed by Mrs. Lorna Cleary and Mr. C. Scutt. Mrs. Cleary is the wife of Mr. G. A. Cleary who was appointed, by the articles of association, to be governing director and was given control of the business and management of the company. Mr. Scutt was an accountant who acted as such for this company and for other companies controlled by Mr. Cleary. Mr. Scutt has never had any beneficial interest in his subscriber's share. He understood that he held it for the benefit of Mrs. Cleary but he could not say definitely whether he held it for her or for Mr. Cleary. It has not been suggested that Mrs. Cleary was not the beneficial owner of the other subscriber's share. No other shares were issued earlier than 19th December 1966.

The trading of the company was not successful. It incurred substantial losses and it became unable to pay its debts. It was placed under the management of an official manager, in accordance with s. 201 of the Companies Act, 1961 N.S.W.. Its creditors entered into an arrangement in accordance with s. 181 of that Act. Its terms are not in evidence, but it appears from documents which are in evidence that the existence of the tax losses of the company was seen to provide an opportunity for some money to be raised for the benefit of the creditors. It appears that a company called Berry Motors Pty. Ltd., of which a Mr. McMullen was the representative in these transactions, was active in procuring the said arrangement made by the creditors, the effect of which was, according to a letter tendered in evidence, that it "has crystallized the debts due to the creditors at a figure which will be paid and also stayed those debts to that figure". The provisions of the scheme (according to the said letter) were such as to make it incumbent upon the "scheme creditors" to assign their debts. Assignment were to be taken from those creditors by the Berry company which would pay to the trustee of the scheme the amount specified therein.

Thereupon discussions took place between McMullen and Brian Hatch. Mr. Hatch, through companies which he controlled, carried on a business which consisted mainly of the buying and selling of timber. That business was profitable. These discussions were followed by correspondence between solicitors acting for the parties, and resulted in the execution of a deed dated 19th December 1966. The parties to it were Berry Motors Pty. Ltd. (Berry) and Grecher Pty. Ltd. (Grecher), which was a company controlled by Mr. Hatch. A recital in the deed referred to the accumulated losses of the company, which were stated to be available to be recouped pursuant to s. 80 of the Income Tax Assessment Act 1936 Cth. A recital referred to the scheme of arrangement and to the termination of the official manager's appointment. There was another recital that Grecher wished to take up a shareholding in the company representing sixty per cent of its issued capital. There was a recital that it had been agreed that shares representing sixty per cent of the total issued capital of the company would be issued to Grecher, subject to its paying to Berry the sum of $11,251. The deed contained several warranties by Berry. In effect, although not in form, the first warranty was that there was no restriction upon the existing shareholders as to any rights of the kind described in s. 80A (1). Another warranty was that the Commissioner of Taxation had assessed the losses of the company, available to be recouped in terms of s. 80 of the Act, in the four tax years up to and including the year ending 30th June 1966, at amounts which were set out in the deed and totalled $67,506. There was a provision for a refund or a further payment, if the Commissioner reduced or increased "the losses available". Berry covenanted that it would arrange for the issue of three shares at par to Grecher or its nominee and would arrange a general meeting of the shareholders of the company, at which new directors would be appointed and the present directors would tender their resignations. It was agreed that on or before 15th July 1968, Berry would hand to Grecher a form of assignment executed by Berry whereby the debt owed to Berry by the company would be assigned to Grecher. Berry would engage Mr. McMullen to assist the company, "during the period in which the losses hereinbefore referred to are being recouped", as an accountant, without charge to the company or to Grecher. The general meeting of the company which was to be arranged by Berry would be attended by a person nominated by Grecher and upon the issue of shares representing sixty per cent of the issue capital, Grecher would pay to Berry by bank cheque the sum of $11,251.

No shareholder was a party to that agreement, nor was the company. No doubt Mr. McMullen felt it safe for his company to make the promises which the deed contained as to what would happen at a general meeting to be arranged, because proxies had been obtained from Mrs. Cleary and Mr. Scutt. Mrs. Cleary appointed McMullen as her proxy to vote for her and on her behalf at any ordinary or extraordinary general meeting of the company. At the same time she signed a request to the board of directors of the company to accept her resignation as director. Mr. Scutt appointed a Mr. Drever, who was a partner or associate of the official manager, as his proxy in similar terms. But it was not Mr. Drever who came in place of Mr. Scutt to the general meeting which was held on 19th December 1966. Drever signed a document appointing McMullen "as my proxy to vote for me and on my behalf at any Ordinary or Extra-Ordinary General Meeting of the Company". According to the minutes of the meeting of 19th December, McMullen was present as proxy for Mrs. Cleary and as proxy for Scutt. No one else was present, except Mr. Hatch and Mr. Levy (his accountant), who were present by invitation. The meeting, thus constituted solely by McMullen in his double capacity of agent for Mrs. Cleary and (as appears to have been supposed) agent for Scutt by force of his appointment as proxy made by Scutt's original agent Drever, proceeded to pass a number of resolutions. They included a resolution approving applications for the allotment of two shares to Brian Hatch and one share to Noela Hatch his wife. Mr. and Mrs. Hatch were appointed directors and it was thereafter resolved that "the present directors" of the company should continue in office for the ensuing year. Nothing was done concerning Mr. Cleary's position as governing director (as set out in the articles of association) and he does not appear ever to have formally resigned from his position. But it is evident that he did not take or seek to take any further part in the affairs of the company. Nor did Mrs. Cleary or Mr. Scutt. It should be added that at a general meeting, nearly a year later, those recorded as being present were Mr. Hatch and Mr. McMullen as proxy for Mrs. Cleary (but not as proxy for Mr. Scutt).

Neither party has addressed any submissions to me as to the regularity or validity of any of those proceedings or as to the consequences for present purposes of any irregularities that took place. The appeals have been conducted on the basis that Mr. and Mrs. Hatch did validly acquire three shares in the company and became its directors. Of course, if they did not acquire those shares, the consequence would be that in the 1966-1967 tax year there was no change at all in the shareholding and, therefore, no reason why the company should not have been allowed deductions for losses to which it was entitled, prima facie, under s. 80. I do not think that I need concern myself with any oddities or deficiencies in the procedures which were adopted.

Thereafter Mr. Hatch ran the business affairs of the company, in conjunction with the affairs of his other companies. In his evidence, which was given frankly and which I accept completely, he acknowledged that he decided what parts of the available business would be transacted by the individual companies in his group and that he allocated to the company a substantial part of that business. His whole object in entering into the transaction with McMullen's company was to get the benefit of the accumulate losses. He could do that only by carrying on business profitably in the name of the company and using its profits to pay off the debts which by assignment had become or would become due to his company Grecher. The shares acquired in the company had no other value at the time when they were acquired. Mr. Hatch said that he left all formal matters in the administration of the company, such as the sending of notices of meetings, to the care of his accountant Mr. Levy, who has since died.

Before entering into the transaction with Berry, Hatch had received advice. He knew that two shares only had been issued. He was advised that an arrangement could be made for him to acquire sixty per cent of the shareholding and that, if any benefit was to be obtained from the losses, the holders of the other forty per cent of the shares must retain their complete interest and nothing must be done to restrict their rights in respect of those shares. He knew that this involved the risk that if they disposed of the shares his plan to use the company's losses must fail, but he thought this was a small risk and was willing to take it. He had no arrangement or understanding with Mrs. Cleary or Scutt before the meeting of 19th December 1966. He had not met them. Afterwards he did not make any request to them not to deal with the shares. He did not know whether any notices of meetings or other documents had been sent out to them. He left such matters to Levy. He would not agree that he considered them as having no longer any connexion with the company. He said that they were still shareholders and he was clearly aware of their position.

There was a subsequent transaction which I think has no direct bearing upon this case. Mrs. Cleary signed a form of transfer of shares. It was expressed to be in consideration of $25 paid by Brian Hatch and to be a transfer to him of two shares in the company. A receipt signed by Mrs. Cleary stated that the $25 was received from H. Levy. The transfer was expressed to be signed on 21st March 1968 but, most probably, it was signed somewhat later than that. On 21st March 1968 Mr. Levy wrote to Mr. Drever stating that Hatch was interested in acquiring the two shares held by Mrs. Cleary and was prepared to offer $25. He requested that if she were agreeable she should sign the enclosed transfer and receipt and return them. Mr. Hatch said in evidence that the letter was written without his knowledge. I accept that evidence. But he did adopt the transaction. At a meeting of directors on 11th April 1968, it was resolved that the transfer be approved of one share from L. M. Cleary to Brian Hatch and of one share from C. B. Scutt, as trustee for Mrs. Cleary, to Mrs. Hatch. That was an odd effect to give to a transfer from Mrs. Cleary to Brian Hatch of two shares. But I do not think this matters any more than the earlier oddities associated with the company's affairs. I do not think that this transaction provides any basis for an inference that it was the outcome of some earlier agreement or understanding concerning those two shares. The profits which the company had made under Hatch's control were absorbed in paying its earlier debts. There is nothing to show that the transfer of the shares at the price stated would not have been made by Mrs. Cleary, unless she had already divested herself of her beneficial ownership or had agreed to do so.

I must refer now to some evidence given by Mrs. Cleary and by Mr. Scutt. He ceased to have any interest in the company after the official manager was appointed. He did not recall whether he ever resigned from his position as a director. He had no recollection of having disposed of the share nominally held by him. He was fairly certain that he did not. He said that he thought that the proxy signed by him was given to "the liquidator", at his request. To the best of his knowledge he did not revoke the proxy. It seems plain that he did not make any agreement or arrangement with anyone relating to the disposition of the share or to the exercise of any rights associated with it.

Mrs. Cleary gave evidence that she signed the proxy at the request of Drever and McMullen. She did not sell the shares or get rid of them before March 1968. She said that until then they were still hers. She did not think that they were worth anything. She was cross-examined about an interview which she had in February 1968 with an officer of the Taxation Department. A report of that interview was subsequently tendered in evidence. Her husband was present at the interview. The report said that "the company was sold", with the approval of the Court, to Berry Motors. Neither of the Clearys was able to recall whether they received any payments in respect of the sale. The report said that "they were unable to recall whether they retained any interest in the company after the sale but said that for all purposes they lost all interest as they did not have any further dealings with the company or Berry Motors". They both denied any knowledge of any such company as "Brian Hatch Timber Co." or of Brian Hatch and Noela Hatch. Mrs. Cleary said that she had not had any correspondence in respect of Brian Hatch Timber Co. and that all contact with the company ceased on the sale to Berry Motors. The report ended with the following sentences:

In answer to my specific questions she denied having at any time entered into any arrangement, agreement or option to sell shares in Brian Hatch Timber Co. nor had she signed a blank share transfer in respect of that company. The reason given for these denials was her never having heard of Brian Hatch Timber Co. prior to the interview. Both the Clearys signed the report as correct, with the correction that they had had no discussion with Berry Motors.

In evidence Mrs. Cleary said that, so far as she understood at the time (that is, at the time of the sale described in the report as the sale of the company), she had ceased to have any interest in the company. Of course she was not referring in that evidence to a proprietary interest. Later, when the proposal was made to sell the shares for $25 she did not think they were worth anything. She did not know to whom they were being sold. She knew only that Mr. Drever suggested that she should sell them. She said that she did not know that Drever, on behalf of the creditors, had had a transaction with McMullen to get money from the tax losses. It was Drever who asked her to sign the proxy. She did not know that this was in relation to a sale of the tax losses. Everything that she did was in accordance with what her husband told her to do. She did not think she had ever received any notice of any meetings.

Mr. Cleary was called into the witness-box and gave his name and address and said that he was the husband of Lorna Cleary. Neither counsel asked him any further question.

On the evidence placed before this Court the material which is known positively to have been in the possession of the respondent when he considered the claim to deduct the losses was that which was contained in the income tax return and the documents which accompanied it and the report of his officer's interview with the Clearys. The matters to be considered by him under s. 80A (1) were: who had beneficially owned shares in the company, carrying the rights of the kind described in that provision, during the years when the losses were incurred and whether at all times during the year of income, shares carrying those rights were still beneficially owned by the same persons? The return showed that the name of the company had been changed. It showed that its issued capital was five ordinary shares of $2 each fully paid. It gave a list of the shareholders as at 30th June 1967. It showed Mrs. Cleary as holding one share and Scutt as holding one share. It showed that two shares were held by Mr. Hatch and one by Mrs. Hatch. It cannot be supposed that the respondent acted so irresponsibly that when he disallowed the claim to deduct the tax losses and afterwards disallowed the objection, he did not know and had taken no steps to find out how many shares there were in the loss years and who held them. It may, therefore, be assumed that he knew that at that time the only shares were the two held by Mrs. Cleary and Scutt. The question that remained was whether the beneficial ownership of those shares had continued as it was earlier or had changed. Section 80A (1) operated to prevent the losses being taken into account, unless the company satisfied the respondent that the beneficial ownership had remained unchanged. But the respondent could not reasonably fail to be so satisfied, in relation to shares which had continued to be held by the same persons, unless there was something before him to indicate that a change in the beneficial ownership had occurred. If it be supposed that he regarded the statements, which the Clearys were reported to have made to his officer, as being such an indication, the question arises whether the respondent could have held that view except as the result of some misconception of a kind which would require that his decision be reviewed. In my opinion the statements then made by the Clearys in the interview could not support a conclusion either that there had been, or that there might have been, a disposition by Mrs. Cleary (or by Mr. Cleary if he had been thought to have any beneficial interest in either of the shares) of the beneficial ownership or of any rights attached to them. If the statements that they had "lost all interest" in the company and that they could not recall whether they had retained any interest (in a different sense of that word) in it after the sale to Berry had stood alone, it might perhaps have been reasonable to infer that she (or they) had parted with the beneficial ownership of the shares or at least to suppose that this may have happened and therefore to refuse to be satisfied that it had not. But the Clearys denied any dealings by them with Berry. They denied any knowledge of Brian Hatch. Mrs. Cleary denied having entered into any arrangement, agreement or option to sell shares in Brian Hatch Timber Co. and having signed a blank share transfer in respect of that company.

The respondent did not put forward the report of the interview as being either the whole or part of the material upon which he acted and upon which he was justified in acting. As I have said, evidence has not been given identifying the material upon which his decision was based. I recognize the need to be on guard against treating the appeals as a rehearing of the facts. Nevertheless, I think that the limits which are placed by the nature of the appeal upon the review of the respondent's decision, important as these are, must not be allowed to be pressed so far as to make it impossible, in a practical sense, for an appellant to challenge it at all. If what the respondent learned from the interview with the Clearys was not part of the material which he used in making his decision, either because he did not consider it to be relevant or because he thought it to be of no assistance, the result is that there is no known explanation for his failing to be satisfied that the beneficial ownership of the two shares had remained unchanged.

It may be suggested that the respondent did not accept the statements made by the Clearys or did not accept all of them. But upon an examination of what they were reported to have said I do not think that his decision can be explained on the basis that a part of their statements was accepted by him and was regarded as making it doubtful that Mrs. Cleary had retained her beneficial ownership. Again, it may be suggested that the respondent may have had before him material of which I do not know and that it is, therefore, impossible for me to conclude that some misconception or some extraneous considerations entered into the decision. This is a matter which requires close consideration. In many cases in which the material before the respondent had not been proved, I think that an appellant would be precluded from succeeding upon a question in which the satisfaction of the respondent was the determining factor. I was disposed to the view that this is so in this case. But I consider that I am in a position to come to the conclusion that it is extremely unlikely that from any of the parties to the transactions by which Mr. and Mrs. Hatch acquired respondent obtained information (not disclosed to me) which could have helped him to conclude or to suspect that Mrs. Cleary had parted with her beneficial interest in the other shares or had agreed or arranged not to exercise any rights in relation to them. I say that because the evidence given by Hatch and by Mrs. Cleary did not reveal, in my opinion, any facts tending to such a conclusion or suspicion, and because I think there is no reason to believe that any relevant facts have been at any time concealed or misrepresented. I think that the theoretical possibility that this may have happened ought not to be held in the circumstances of this case, in which the respondent has called no evidence, to require a conclusion that his decision cannot be reviewed. In the circumstances, I am of opinion that I can have regard to the evidence of the actual facts of the transactions which have been outlined above. This evidence is relevant, although it is not my task to decide the facts of the case for myself, because it makes known to me the nature of the additional material which could have been available to the respondent, concerning the beneficial ownership of the two shares, as a result of inquiries from the people most directly concerned. If he had before him an account of the matter given by Hatch, I have no reason to doubt that it would have agreed with the account that he has given in evidence. It would have been to the effect that he had made no agreement or arrangement relating to the two existing shares and that he would have been anxious to avoid the making of any such agreement or arrangement. There is no ground for supposing in this case that the respondent has been supplied with information which, although it could be shown later to be not in accordance with the facts, could reasonably have been accepted and acted upon by him, as occurred in Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation [1] . Whilst it is theoretically possible that he had some erroneous information upon which he acted, I think that in the circumstances of this case it would not be right to treat that possibility as being of practical significance. I think that his decision may be examined, in the absence of any evidence to the contrary, on the supposition that he acted upon the actual facts or upon so much of them as had come to his knowledge.

The question, then, is whether there was anything to suggest that the beneficial ownership of the two shares had changed. In my opinion there was not. I think that a conclusion that it had changed or a belief that it might have changed could not reasonably have been formed, unless it had been based upon the circumstances that during the relevant period Mrs. Cleary (or her husband) had not exercised or sought to exercise any rights as shareholder and had not taken any actual interest in the affairs of the company and had no intention of doing so and that (probably) no notices of meetings or other correspondence had been sent to her by the company. But in my opinion those circumstances could not be found to have divested from her a proprietary right and could not have operated by way of estoppel or otherwise to preclude her from asserting that right if she had wished to do so at any time. If it be supposed that her right was divested, in my opinion the consequence must have been that it passed to somebody else. In Wood Preservation Ltd. v. Prior [2] , Lord Donovan said that it "is possible for property to lack any beneficial owner for a time". But although there may be special circumstances in which that is so, I have the same difficulty in thinking that it could be so in this case as Widgery L.J. had in the case cited [3] . To whom could the property have passed? Surely not to Berry, although the Clearys are said to have stated that "the company was sold" to it. It seems plain that Berry did not acquire any beneficial interest in the shares and it should be recalled that the Clearys said they had had no discussion with Berry. It seems equally clear that Mr. Hatch did not acquire, at the relevant time, any beneficial interest in the two shares in question. The Clearys knew nothing of him and had no dealing with him or his other companies, either directly or through agents. The signing of the proxies could not amount to a transfer or a surrender of any rights to the shares. So long as they remained unrevoked, they authorized the appointees to vote at any general meeting. It may be assumed that the authority given by the proxies enabled the appointees to vote in a way which would have an effect upon the existing shares, inasmuch as an issue of further shares would reduce them to a minority holding. But the proxies could not have conferred authority to deal with the rights which remained attached to the two shares themselves and the proxies were not used in a way which suggested that anybody thought they had conferred that authority.

1. [1969] 1 W.L.R. 1077, at p. 1096; [1969] 1 All E.R. 364, at p. 367. 2. [1969] 1 W.L.R., at p. 1097; [1969] 1 All E.R., at p. 368.

If Mrs. Cleary had heard of the meeting of the company arranged for 19th December 1966 or of any other general meeting of the company, prior to March 1968, and had attended it, I do no know upon what principle she could have been restrained by Mr. Hatch or by anyone else from exercising voting rights in respect of the share held by her. There is no need to consider whether or not she would have been precluded by any arrangement inferred to have been made earlier by her, from voting so as to prevent the issue of the three shares to Mr. and Mrs. Hatch. But there seems to be no legal or equitable ground upon which she sould have been precluded from exercising the rights attached to the share held by her or from controlling, for her own benefit, the exercise of the rights attached to the share held by Scutt.

In Federal Commissioner of Taxation v. Casuarina Pty. Ltd. [1] , the main question arose under s. 103A of the Act. Therefore the case is not directly in point here. But s. 103A (4), which contains the expressions "beneficially owns", "beneficial ownership" and "beneficially entitled", was considered. It was there said that the questions to be considered in relation to par. (b) of that provision was whether a shareholder, which was a public company, was capable of controlling more than one-half of the voting power in the taxpayer company and was not whether it was likely to control it or was likely to exercise its voting power in a particular way. Similarly, in relation to pars (c) and (d), the question was said to be a question as to the entitlement of the shareholder at a given point of time to a dividend, or to a distribution of capital assumed then to be paid or to take place. The question was not to be determined by considering the probabilities as to what the shareholder would receive in fact. Likewise in the present case, I am of opinion that it would be a misconception of the relevant statutory provision to treat the question to be decided as depending upon whether or not, during the relevant period, the rights described in s. 80A (1) were exercised or enjoyed in fact by the holders of the two shares or were expected to be exercised or enjoyed.

I have said that reference was made at the hearing to s. 80B (5). But I am of opinion that there is not, on any view of the facts proved before me (or of any part of those facts considered in isolation from the rest of the facts), any basis for a finding in relation to the two shares that Mrs. Cleary entered into a contract, agreement or arrangement or granted a right, power or option of the kind described in that provision.

It was the Commissioner whom the company had to satisfy as to the existence of the facts set out in s. 80A (1). The task of an appellant, who must show that his decision should be reviewed, is not an easy one. It has been suggested by counsel for the company that an attempt to produce evidence of the actual material upon which the respondent acted would probably have been frustrated by a successful claim of privilege against its production. I am not convinced that that is so, although it is true that the decision in O'Flaherty v. McBride [1] presents an obstacle to an appellant who wishes to take that course. So far as I am aware, that case has not been reconsidered by this Court in the light of the modern decisions in England on this type of privilege. Counsel for the respondent contended that the matter was one which could have been examined more satisfactorily by a Board of Review. But the company was entitled to come to this Court, if it chose to do that. The respondent called no evidence. That was within his rights. But it cannot prevent the Court from examining his decision and it leaves the Court without the benefit of evidence which might have provided an acceptable explanation of that decision. Upon the view I take of the case, I am not able to perceive a satisfactory explanation of it, other than that some mistake of law was made, or some extraneous factor was taken into account. I am disposed to think it likely that the respondent regarded the cessation of any actual connexion with or interest in the company's affairs on the part of the Clearys and their vagueness as to what had occurred as being sufficient grounds for failing to be satisfied that the beneficial ownership of the two shares had not been changed. If that was the basis of the decision I think that it was based upon a mistake of law. It may have had a different basis. But, if so, the fact that I do not know exactly what that basis was does not preclude me from holding that the decision ought not to stand. Dixon J. said in Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation [1] :

It is not necessary that you should be sure of the precise particular in which he has gone wrong. It is enough that you can see that in some way he must have failed in the discharge of his exact function according to law. I am of opinion that in the matter No. 3 of 1970 the appeal should be allowed with costs. The assessment of additional tax issued on 4th March 1969 should be set aside. In the matter No. 4 of 1970 the appeal should be allowed with costs. The assessment of primary tax issued on 4th March 1969 should be set aside and the matter should be remitted to the respondent for the assessment of income tax in accordance with this judgment. 1. (1920) 28 C.L.R. 283. 2. (1949) 78 C.L.R. 353, at p. 360.

The facts and circumstances giving rise to this appeal as well as the text of the statutory provisions relevant to its determination are to be found in the judgments of other members of the Court. The deduction for prior losses which the respondent taxpayer claimed to deduct from the assessable income of the tax year in question could only be allowed if the respondent taxpayer satisfied the appellant Commissioner of the continued beneficial ownership by Mrs. Cleary of the two shares beneficially owned by her in G. A. Cleary (N.S.W.) Pty. Ltd. in the year in which the losses in question were suffered.

The primary judge rightly regarded the Commissioner's lack of satisfaction as examinable by the Court but only for the limited purposes which are summarized by Dixon J. in Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation [1] . As others have observed the respondent taxpayer did not take the course of seeking from the appellant Commissioner an account of the material upon which he acted in rejecting the claim to the deduction. All that seems to have been known of the material that was before the Commissioner would suggest that he had the respondent's return and a record of interview, the text of which appears in the reasons for judgment prepared by my brother Menzies. However evidence was led by the respondent before the primary judge as to the circumstances in which further shares were issued in J. Cleary (N.S.W.) Pty. Ltd. and its name changed to the present name of the respondent. This evidence was subject to an objection by counsel for the appellant Commissioner on the ground that the evidence was irrelevant unless it was shown to have come to the knowledge of the Commissioner before his disallowance of the claim to the deduction. The objection was not upheld. Although this objection was made, it seems to me somewhat unsatisfactory that the Commissioner did not call any evidence of any matter which he had before him at the time he disallowed the claim. In the light of that circumstance I would myself be very loathe to think that the Commissioner had any substantial material at that time other than the return and the record of interview. As I read his Honour's judgment, he did not decide that the Commissioner ought not to have been dissatisfied as to the continued identity of the beneficial ownership of the shares in question because of the evidence produced before him and not shown to have been before the Commissioner when he rejected the claim to the deduction. His Honour held that, having no more than the return which showed the continued identity of the ownership of the two shares and the record of interview, a reasonable mind ought not to have been dissatisfied as to the continued identity of the beneficial ownership, therefore the Commissioner's dissatisfaction must have sprung from some undisclosed error. The case thus fell within the terms of Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation [2] .

1. (1949) 78 C.L.R. 353, at p. 360. 2. (1949) 78 C.L.R. 353.

I have found the appeal difficult of resolution but in the long run I have come to think that with due respect to the primary judge the statements contained in the record of interview were sufficient to raise such a doubt in the mind of a reasonable man as to whether or not Mrs. Cleary had throughout retained the beneficial ownership in the two shares in question as to justify a lack of satisfaction on the part of the appellant Commissioner. Of course if it were concluded that in all the circumstances it was reasonable to think that the Commissioner had other material before him when he disallowed the claim to the deduction quite clearly the respondent taxpayer would have failed to have shown that the lack of satisfaction on the part of the appellant Commissioner was due to error of one kind or another. But, assuming no more material than the return and the record of interview, I am unable to say that it was unreasonable for the Commissioner not to be satisfied.

In expressing this conclusion I would like to say that of course it is not for the Commissioner to entertain dissatisfaction in cases of this kind merely because the taxpayer has sought to produce a state of facts which when they exist entitle him under the statute to benefits in the assessment of income tax. The taxpayer is quite entitled to create such a state of affairs if he can. It is not for the Commissioner because he might regard the use of the statutory provisions in that fashion as detrimental to the interests of the revenue to show his disapproval in any manner whatsoever. But having reached the conclusion in this case that a reasonable man might well entertain a doubt as to whether the shares continued to be beneficially owned as required by the statute, I do not suggest that this is a case in which the Commissioner may have overstepped his function.

Consequently in my opinion the appeal should be allowed. I would desire to add that I have had the advantage of reading the reasons for judgment prepared by my brother Menzies and that I agree with his views and conclusions in relation to the provisions of s. 80B (5). In my opinion the grant of the proxy was the grant of a power which depended for its operation on the beneficial interest of Mrs. Cleary in the shares in question or upon rights carried by those shares.

The appellant taxpayer is a company which has, at all times material, been a private company. Until 19th December 1966 its name was G. A. Cleary (N.S.W.) Pty. Ltd. The Commissioner disallowed a deduction of $67,506 claimed by the taxpayer in its return of income for the year ended 30th June 1967. The claim was made under s. 80 of the Income Tax Assessment Act 1936-1967 Cth for losses in previous years. The Commissioner disallowed the deduction because the taxpayer had not satisfied him, as is required by s. 80A (1), that two of the five issued shares in the company throughout the year of income, i.e. 1966, were then beneficially owned by persons who, at all times during each year of loss, i.e. 1962, 1963, 1964 and 1965, were the beneficial owners of those shares.

In all the years of loss the company had but two issued shares. One was registered in the name of L. M. Cleary, the other in the name of C. B. J. Scutt. Mrs. Cleary was the beneficial owner of the first share; Mr. Scutt was not the beneficial owner of the second share. He held it either for Mrs. Cleary or for her husband, G. A. Cleary. Throughout the year of income the shareholding was as follows:

Mrs. Cleary : One share Mr. Scutt : One share Brian Hatch : Two shares Noela Irene Hatch : One share.

The Commissioner was not satisfied that the beneficial ownership of the shares, registered in the names of Mrs. Cleary and Mr. Scutt, had remained with the Clearys throughout the year 1966.

The taxpayer appealed and Walsh J. decided that the Commissioner's failure to be satisfied arose either because of some error of law or from taking some unidentified extraneous factor into account. His Honour's decision was, in substance, that, from the evidence before the Court, it could be seen that the Commissioner had failed to discharge properly his statutory function according to law. Accordingly, his Honour set aside two assessments, one of primary tax and one of additional tax. The allowance of the deduction in question meant that there could be no additional tax but that the taxpayer was still liable for some primary tax. Accordingly, the assessment of primary tax was remitted for reassessment in accordance with the judgment of the Court. There is no doubt that compliance with this direction would require the allowance of the deduction in the reassessment of primary tax.

One difficulty which the learned trial judge faced was in ascertaining what information the Commissioner had before him in disallowing the deduction claimed. He had, of course, the return which showed the shareholders in the company as at 30th June 1967. Presumably, he also had before him the record of an interview in February 1968 between an officer of the Taxation Department and Mr. and Mrs. Cleary. What else he had is a matter for conjecture.

Upon the hearing of the appeal the taxpayer provided a good deal of evidence relative to the circumstances in which a moribund company called G. A. Cleary (N.S.W.) Pty. Ltd. became a flourishing company called Brian Hatch Timber Co. (Sales) Pty. Ltd. The Commissioner, however, called no evidence; nor had the taxpayer sought from the Commissioner any statement about the matter. It is desirable, before setting out shortly the effect of the evidence, to refer to the record of interview with Mr. and Mrs. Cleary which has already been mentioned.

It was not very informative. After a reference to the original issue of shares, it proceeded as follows:

In 1962 the company got into financial difficulties and as far as either was able to remember the company went into voluntary liquidation in that year. The liquidator who was appointed was Mr. White, Public Accountant at Auburn. Sometime in 1963 the company was sold with the approval of Court, to Berry Motors of Rockdale and so far as Mr. Cleary remembers the purpose of the sale was to take advantage of tax losses. Neither Mr. nor Mrs. Cleary were able to recall whether they received any payments in respect of the sale, or if payment was received what happened to the payment. Also they were unable to recall whether they retained any interest in the company after the sale but said that for all purposes they lost all interest as they did not have any further dealings with the company or Berry Motors. The Clearys, moreover, said that they had no discussion with Berry Motors and they denied any knowledge of Brian Hatch Timber Co., or of Brian Hatch or Noela I. Hatch. The record ended as follows: Mrs. Cleary stated that she had not had any correspondence or other communication in respect of Brian Hatch Timber Co. and reiterated that all contact with this company ceased on sale to Berry Motors. In answer to my specific questions she denied having at any time entered into any arrangement, argeement or option to sell shares in Brian Hatch Timber Co. nor had she signed a blank share transfer in respect of that company. The reason given for these denials was her never having heard of Brian Hatch Timber Co. prior to the interview.

Upon the appeal it appeared that the reference in the Cleary interview to the sale of the company sometime in 1963 was to a transaction arranged by one McMullen on behalf of Berry Motors Pty. Ltd. of which no further information was given. McMullen was not a witness and Mrs. Cleary's evidence did not go much beyond what had been said at the interview. She said:

Q. Would you agree that in February 1968 when you had the interview with the officer from the Commissioner of Taxation you yourself were not sure exactly what had happened about the shares in the taxpayer company?

A. It had been such a long time ago and I was surprised to find I was called in about it.

Q. Would you agree that at that time your understanding was that the taxpayer company had been sold to some people who were prepared to buy it in terms of making use of the tax losses?

Q. And so far as you understood at that time, you had ceased to have any interest in the company?

She also said that, before 1968, the shares were still hers.

So far as appears, nothing of importance happened until 5th December 1966 when McMullen was given proxies from Mrs. Cleary directly and Mr. Scutt indirectly to vote at meetings of the company. On the same day Mrs. Cleary tendered her resignation as a director of the company.

The 19th December 1966 was an eventful day. An agreement was made between Berry Motors Pty. Ltd. and Grecher Pty. Ltd., which was a Brian Hatch company. Under that agreement Grecher Pty. Ltd. paid Berry Motors Pty. Ltd. the sum of $11,251, which was 3s. 4d. in the pound of the amount of the company's losses calculated to be deductible for income tax purposes. This sum was adjustable according to the amount actually allowed by the Commissioner as deductible. Clause 4 was as follows:

4. Prior to payment of the sum of $11,251 Berry will:

(a) Arrange for the issue of Three (3) shares at par to Grecher or its nominee

(b) Ensure that all necessary steps have been taken to terminate the Official Management of the Company

(c) Arrange a General Meeting of the shareholders of the Company at which Meeting:

(i) New Directors being nominees of Grecher will be appointed;

(ii) The present Directors will tender their resignations as Directors;

(iii) The present Secretary of the Company will retire.

Just how "Berry" would perform these undertakings was not revealed. The performance of (a) and (c), however, depended upon the Clearys. To this the Clearys did not refer.

It was also agreed that Berry Motors Pty. Ltd. would assign to Grecher Pty. Ltd. the debts originally owing by the company to creditors who, as parties to a deed of arrangement, had assigned their debts to either Berry Motors Pty. Ltd. or McMullen.

On 19th December there was also a meeting of the shareholders of the company at which the foregoing undertakings were substantially performed with the help of the Clearys. McMullen, as proxy for Mrs. Cleary and for Mr. Scutt, was there; Brian Hatch was there by invitation, as was his accountant, Harold Levy. Applications, as follows, for the allotment of shares were approved:

It was resolved that Brian Hatch and Noela Hatch be appointed directors of the company. Following the meeting notice was given to the Registrar of Companies that the company's name had, by special resolution, been changed to Brian Hatch Timber Co. (Sales) Pty. Ltd.

After the events of 19th December 1966 the Clearys apparently dropped out of the picture altogether until 21st March 1968 when the two original shares were irregularly transferred to Brian Hatch, and Mrs. Cleary, to her surprise, received $25 for the shares. I say the transfer was irregular because it appears that the transfer of the shares was signed by Mrs. Cleary alone. Mr. Scutt was not a transferor. In the meantime the Clearys received no notice of meetings, no accounts, no information whatever. They were not treated as shareholders; they were entirely disregarded. During the period between 19th December 1966 and 30th June 1967 the company carried on successfully as Brian Hatch Timber Co. (Sales) Pty. Ltd. and was run by, and on behalf of, the Brian Hatch interests. Its sales by 30th June 1967 had totalled $527,616.34. Of this successful trading it seems that neither Mr. nor Mrs. Cleary was told anything or knew anything.

In the course of his evidence upon the appeal Brian Hatch said:

Q. Your company paid $11,251 for the structure of the taxpayer and the assignment of debts owing by the taxpayer?

Q. And at the time you paid that money those debts, apart from what could be done to use the tax loss, were worthless?

A. Apart from what could be done to use the tax loss, yes.

Q. This is a company in which you were buying shares at the time you entered into this transaction which was simply a bare structure; it had no assets and it had liabilities which had been affected to some extent by a scheme of arrangement?

A. I had been advised, of course, that there was some advantage to me in acquiring this company structure because of the accumulated tax losses.

When questioned about the risk he was taking in putting business into a company in which he would control but sixty per cent of the shareholding, he said that he recognised that there was some risk but until the company's debts, which had, in effect, become owing to him, were paid, the company would not be of value to others and that it was in the interests of Mrs. Cleary, as a debtor of the company, not to interfere with what he was doing. He also said that, although the two outstanding shares were purchased on his behalf in 1968 for $25, that was the work of his accountant of which he knew nothing. It occurred after he had fulfilled his purpose by obtaining payment of the debts out of successful trading and exhausting the loss deductions.

A comparison of the evidence upon the appeal with what it seems was known to the Commissioner reveals additional matter bearing both for and against a finding that the Cleary's beneficial interest in the two shares continued. The position of the company as a debtor of the Hatch interests unquestionably secured the position of those interests as against the minority shareholders and gave force to Mr. Hatch's contention that, in order to secure the advantage that he was seeking, he had to run but a small risk in not controlling those shares. The same was no doubt true of the fact that G. A. Cleary was, by the articles of association - which were not altered - governing director for life. On the other hand, Mr. Hatch acknowledged that he was paying $11,251 for the "structure of the company and the assignment of debts". It is not apparent what could have been meant by acquiring the structure of the company if the words did not cover the acquisition of the issued shares.

It is not, however, necessary to arrive at any conclusion about effect and weight of the evidence in relation to what was actually involved in the acquisition of the structure of the company. The evidence as a whole is important only insofar as it bears upon the question whether the Commissioner, in disallowing the deduction claimed, had failed to discharge his statutory function according to law. With regard to that problem the evidence seems to me to have but little significance.

I do regard it as unfortunate that the basis for the Commissioner's not being satisfied of what was requisite for allowing the deduction claimed was not revealed. It seems to me that a taxpayer, in the position of the appellant, might properly have inquired from the Commissioner why he was not so satisfied. Such an inquiry would no doubt have been answered. Here, however, there was nothing of that sort, so that the taxpayer's case must depend upon showing that, in not being satisfied, there was undisclosed error on the part of the Commissioner. This is the central problem which his Honour faced and which he answered in favour of the taxpayer, principally because of his conclusion that the statement of the Clearys "could not support a conclusion either that there had been, or that there might have been, a disposition by Mrs. Cleary (or by Mr. Cleary if he had been thought to have any beneficial interest in either of the shares) of the beneficial ownership or of any rights attached to them".

It is at this point that I have, with respect, reached a different conclusion. If the statement "that the company was sold" means that the shares were sold, that would end the matter, and for my part I have difficulty in attaching any other meaning to that statement, particularly in the light of the statement that they could not recall whether they had retained any interest in the company after the sale. Furthermore, the Clearys putting the "sale" in 1963, and their failure to remember whether they received any payment in respect of the sale, could inspire but little confidence in their reliability. Their insistence that they knew not Hatch seems to me unimportant. They were dealing with McMullen and, without knowing what was arranged with him, it would be difficult to form any positive conclusion about the vital transaction which they referred to as the sale of the company. The Commissioner, however, did not have to reach any positive conclusion, and, in particular, it was not necessary for him to come to any conclusion about what had happened to the beneficial ownership of the shares. It was for the taxpayer to satisfy the Commissioner and if, without error, he was left in doubt whether or not they had disposed of their beneficial interest the taxpayer failed. Doubt about the Clearys' transaction with McMullen would warrant misgiving about their continued beneficial ownership of the shares. In Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation [1] , Dixon J., after referring to circumstances which, it was claimed, would remove doubt, observed:

When the shoe was found to pinch, the commissioner was invited to adopt the contrary view and to do so on the faith of explanations which, however circumstantial, were necessarily ex parte. I do not know why he must be taken to have been filled with confidence in the later version, why he must be assumed to have entertained no doubt that the earlier version had no justification in the actual facts or why he must be taken to be reasonably satisfied that he had been told everything and there was no further fact which would show that before 30th June 1944 the position had become such that all parties would have been precluded from denying that the purchasers were "members". In the circumstances a commissioner can hardly be considered unreasonable if he fails to rid himself altogether of misgivings and refuses to be satisfied that the issue is established. In this case I am satisfied that the Commissioner could, on the Clearys' own statement, have, not improperly, failed to be satisfied that they had retained the beneficial interest in the two shares after the events of December 1966. In all the circumstances an attitude of wise scepticism was quite consistent with the performance of his statutory duty. 1. (1949) 78 C.L.R. 353, at p. 362.

Accordingly, the Commissioner's disallowance of the deduction claimed ought not, I think, to have been set aside.

Although this conclusion disposes of the appeal there was a further matter of law in issue at the hearing of the appeal to which I think I should refer. It concerns the meaning and application of s. 80B (5) of the Act.

It seems that, upon the appeal, the Commissioner relied upon this sub-section to support the assessment under challenge. As to this Walsh J. said [1] :

I have said that reference was made at the hearing to s. 80B (5). But I am of opinion that there is not, on any view of the facts proved before me (or of any part of those facts considered in isolation from the rest of the facts), any basis for a finding in relation to the two shares that Mrs. Cleary entered into a contract, agreement or arrangement or granted a right, power or option of the kind described in that provision. 1. ante., p. 42.

It seems to me that it is a condition of the Commissioner's power under s. 80B (5) that there is identity between beneficial ownership in the year of loss and beneficial ownership in the year of income as required by par. (a) thereof. That condition was not fulfilled here. The company failed to satisfy the Commissioner of that identity and he assessed on that basis. Accordingly, the power conferred by s. 80B (5) could not save the assessment for no more appeared than that, when assessing the Commissioner was not satisfied that such identity existed. If this had been due to error there would have had to be a reassessment.

It does seem to me, however, that a further point arises for, if the Commissioner were to be told by the Court that such identity did exist, it would, I think, be necessary to frame the order so as to give the Commissioner the opportunity, in reassessing, to treat the shares as not having been so beneficially owned if the other conditions warranting the exercise of that power exist. Here I set out sub-s. (5) of s. 80B:

(a) a person who beneficially owned any shares in the company at all times during the year in which the loss was incurred also beneficially owned shares in the company at any time (in this sub-section referred to as "the relevant time") during the year of income;

(b) before or during the year of income, that person entered into a contract, agreement or arrangement, or granted or was granted a right, power or option (including a contingent right, power or option), that, in any way, directly or indirectly, related to, affected, or depended for its operation on -

(i) the beneficial interest of that person in the last-mentioned shares, or the value of that interest;

(ii) the right of that person to sell, or otherwise dispose of, that interest, or any such sale or other disposition;

(iii) any rights carried by those shares, or the exercise of any such rights; or

(iv) any dividends that might be paid, or any distribution of capital that might be made, in respect of those shares, or the payment of any such dividends or the making of any such distribution of capital; and

(c) the contract, agreement or arrangement was entered into, or the right, power or option was granted, for the purpose, or for purposes that included the purpose, or for purposes that included the purpose, of enabling the company to take into account for the purposes of section eighty or section eighty aa of this Act a loss that the company had incurred in a year before the year in which the contract, agreement or arrangement was entered into or the right, power or option was granted or a loss that the company might incur in that last-mentioned year,

the Commissioner may, subject to the succeeding provisions of this section, treat those shares as not having been benefically owned by that person at the relevant time.

As I have said, (a) would be fulfilled if, in accordance with the direction of the Court, the Commissioner were to be satisfied of the identity of the beneficial ownership there referred to.

In deciding whether the condition in (b) could be fulfilled, it is necessary to examine the significance of the grant of proxies on 5th December 1966. The problem is whether the giving of a proxy by a holder of shares is the grant of a right or power that directly or indirectly related to "any rights carried by those shares or the exercise of any such rights". The proxies given here simply appoint McMullen "as my proxy to vote for me and on my behalf at the Ordinary or Extraordinary General Meetings of the Company". To vote is, of course, to exercise a right carried by shares. The question is whether appointing a proxy to vote is a granting of a power relating to the exercise of such a right. Voting by proxy is the privilege of a member, but, once a proxy is given and so long as it remains unrevoked, the person holding the proxy may speak at a meeting, demand a poll and vote upon a poll. By virtue of a proxy given to him a person has, therefore, powers in relation to the exercise of rights carried by the shares in respect of which the proxy has given been. This seems to me to be sufficient to bring the giving of a proxy to vote within s. 80B (5) (b) (iii).

It has next to be considered how the condition expressed in s. 80B (5) (c) may be fulfilled. This is a difficult provision. It seems to me that the usual way in which a company does take into account a loss that the company had incurred in a previous year is by making profits from which such a loss can be deducted. It is true that there is no right to a deduction unless there is substantial continuity of ownership of the shares in the company as required by s. 80A. However, an arrangement to secure conformity with the requirements of s. 80A (1) does not itself enable a company to take a previous loss into account. The simplest instance of such conformity would be that the beneficial ownership of all the shares remained unchanged. Here I do not doubt that the proxies were obtained to enable the company to become one of the Brian Hatch group of companies and to carry on business profitably. If it were to be assumed, as I think it must for the purposes of s. 80B (5), that the Clearys retained the beneficial ownership of the two original shares, then it could only be by the use of the proxies that the Brian Hatch interests could take control of the company. I would therefore be prepared to find that the proxies were taken for the purpose of enabling the company to use the tax losses. However, this is not the exact problem which s. 80B (5) (c) poses. The problem is whether the proxies were granted for that purpose. It does appear from their statements that the Clearys were aware that "the purpose of the sale was to take advantage of tax losses". The purpose of Mrs. Cleary and Mr. Scutt in giving the proxies may have been for the same purpose. If that were so the condition expressed in s. 80B (5) (c) would, I think, be fulfilled.

The result of this consideration of the meaning of s. 80B (5), and its possible application to the facts of this case, satisfies me that, in this case, it was necessary to allow the Commissioner, in reassessing, to consider the possible application of s. 80B (5). If it applied and the Commissioner exercised the discretion conferred upon him the loss would not be an allowable deduction notwithstanding the sufficient identity of the beneficial interests at the two times specified. Accordingly, had I been of the opinion that the Commissioner was in error in not being satisfied as provided by s. 80A (1), the order made for reassessment should have left open the possible application of s. 80B (5) and it would therefore have been going too far to direct the Commissioner, in reassessing, to allow the deduction claimed. Although the meaning and application of s. 80B (5) was argued, my earlier conclusion makes it unnecessary to come to a final conclusion upon the matters which I have just discussed. What I have said, therefore, about s. 80B (5), is tentative rather than final.

Because of my conclusion that the Commissioner was not shown to have been in error in not being satisfied as provided by s. 80A (1), I would allow the appeal and confirm the assessments.

I have read the judgment of my brother Owen. I agree in his Honour's conclusion and in his reasons. I add only a few quotations from judgments, which seem to me to emphasize that the question in cases such as this is not whether a discretion was properly exercised. The question is whether a fact existed. Did the company satisfy the Commissioner of beneficial ownership of shares as prescribed by s. 80A? Was the Commissioner duly satisfied in fact? That is the essential question: not was his dissatisfaction justified.

In Lloyd v. Wallach [1] - a case which turned on whether a Minister had "reason to believe" something as to a person - Isaacs J. said that the power of determining that question was conferred on the Minister; and that "laying aside possibilities so extreme as to be outside real consideration, the only means of disproving the essential fact in this case is the testimony of the Minister himself; and that is subject to the recognized rules of evidence" [1] . Higgins J. in the same case said [(2)] : "The material issue is not actual guilt or innocence, but the Minister's belief, and (perhaps) whether he has any reason which induces that belief."

1. (1915) 20 C.L.R. 299. 2. (1915) 20 C.L.R., at p. 309. 3. (1915) 20 C.L.R., at p. 313.

In Ex parte Walsh and Johnson; In re Yates [3] Knox C.J. said:

When the operation of a law is made conditional upon the opinion, as to certain matters, of some person named or described, or on proof of certain matters to his satisfaction, the question whether his opinion is justified, or whether he should have been satisfied on the materials before him, is not examinable by the courts. The only question which can be examined is whether, acting bona fide, he formed the opinion or was satisfied with the proof. This passage was quoted by Fullagar J. in Australian Communist Party v. The Commonwealth [4] . It is presently pertinent, although as a general statement it is now too far-reaching. It must be qualified in relation to a determination of the Commissioner of Taxation by what Dixon J. said in Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation [5] . His Honour, after pointing out that in a case such as the present one it was for the Commissioner, not for this Court on an appeal from him, to be satisfied of the relevant facts, went on: His decision, it is true, is not unexaminable. If he does not address himself to the question which the sub-section formulates, if his conclusion is affected by some mistake of law, if he takes some extraneous reason into consideration or excludes from consideration some factor which should affect his determination, on any of these grounds his conclusion is liable to review. Moreover, the fact that he has not made known the reasons why he was not satisfied will not prevent the review of his decision. The conclusion he has reached may, on a full consideration of the material that was before him, be found to be capable of explanation only on the ground of some such misconception. I add to these references the remarks of Starke J. in Boucaut Bay Co. Ltd. (in liquidation) v. The Commonwealth [6] - observing, however, that that was a case where a "belief" founded a discretion, whereas here a "satisfaction" is a condition of a right. I would emphasize that the passage from the judgment of Dixon J. that I have quoted seems to me to show that it is the material that was before the Commissioner that this Court has to consider, to see whether it can be said that in failing to be satisfied by that material he must have been moved by some misconception of it or by some extraneous consideration. It is not easy to see how that could be established without evidence from the Commissioner himself of what material was before him or perhaps from some one of his officers who had advised him in the particular matter. 1. (1925) 37 C.L.R. 36, at p. 67. 2. (1951) 83 C.L.R. 1, at p. 257. 3. (1949) 78 C.L.R. 353, at p. 360. 4. (1927) 40 C.L.R. 98, at p. 101.

In these two appeals the Commissioner of Taxation seeks to have set aside orders made by Walsh J. in appeals brought by the taxpayer, a private company, against assessments made by the Commissioner for the year ended 30th June 1967. In its return for the year in question the taxpayer claimed a deduction of $67,506 representing losses incurred in prior years during which it had carried on business under the name of G. A. Cleary (N.S.W.) Pty. Ltd. This claim was disallowed by the Commissioner and the adjustment sheet stated that the deduction claimed "was not allowed in terms of s. 80A (1) of the Income Tax Assessment Act ". In the result the taxpayer was assessed on a taxable income of $67,836. The second assessment was for an amount of $12,209 representing tax assessed on undistributed profits under Div. 7 of the Act, the amount of those undistributed profits being determined after the disallowance of the deduction claimed for past losses.

On the appeal against the assessment to primary tax, Walsh J. upheld the appeal, set aside the assessment and remitted the matter to the Commissioner so that tax might be re-assessed on the basis that the taxpayer was entitled to be allowed the deduction of $67,506 claimed by it. His Honour also upheld the appeal against the assessment of undistributed profits tax since the result of allowing the deduction on the first appeal was that no undistributed profits tax would be payable.

I go now to matters arising before us on the appeal to us against his Honour's decision on the taxpayer's claim that it should have been allowed the deduction of $67,506.

Section 80A (1), so far as material, provides that losses of previous years are not, in the case of a company, to be taken into account for the purposes of s. 80 unless

that, at all times during the year of income, shares in the company carrying between them -

(c) the right to exercise not less than two-fifths of the voting power in the company;

(d) the right to receive not less than two-fifths of any dividends that may be paid by the company; and

(e) the right to receive not less than two-fifths of any distribution of capital of the company in the event of the winding up, or of a reduction in the capital, of the company,

were beneficially owned by persons who, at all times during the year in which the loss was incurred, beneficially owned shares in the company carrying rights of those kinds. Having regard to the fact that the adjustment sheet showed that the Commissioner had disallowed the taxpayer's claim to deduct previous years' losses which had "not been allowed in terms of s. 80A", it appears that it had failed to satisfy the Commissioner that at all times during the year of income ended 30th June 1967 shares in the company carrying between them the rights set out in pars. (c), (d) and (e) of sub-s. (1) of the section "were beneficially owned by persons who, at all times during the year in which the loss was incurred, beneficially owned shares in the company carrying rights of those kinds". It was not disputed that at all times during the four years up to and including the year ended 30th June 1966 during which the losses were incurred by the taxpayer (then carrying on business as G. A. Cleary (N.S.W.) Pty. Ltd.), two shares only had been issued. One of them stood in the name of a Mrs. Cleary and one in the name of a Mr. Scutt. From the taxpayer's tax return for the year ended 30th June 1967 it appeared that during that year three additional shares had been issued, two of them standing in the name of a Mr. Hatch and one in the name of Noela Hatch.

On the appeal to Walsh J., it was for the taxpayer to show that the assessment was wrong and the onus lay upon it to establish that, on the material before the Commissioner, he had failed to address himself to the question which the subsection formulates or had made some mistake of law, or taken some extraneous reason into consideration or had excluded from consideration some factor which should have affected his determination (Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation [1] per Dixon J. (as he then was). The taxpayer could, of course, have appealed to the Board of Review. Had he done so it would have been for the Board to decide whether on the material placed before it, it was satisfied that the taxpayer was entitled to the deduction claimed. The taxpayer, however, did not take that course nor does it appear to have taken any steps to ascertain what material was before the Commissioner in making his assessment or to inquire from him what matters he had considered in disallowing the deduction claimed or why he had failed to be satisfied about the state of the shareholding at the relevant times. Had this been done I have no reason to think that the Commissioner would not have paid due regard to a passage in the judgment of Barwick C.J. in Giris Pty. Ltd. v. Federal Commissioner of Taxation in which his Honour said [1] :

the Commissioner is under a duty in each case to form an opinion and the taxpayer is entitled to be informed of it, and upon the taxpayer's request, the Commissioner should inform the taxpayer of the facts he has taken into account in reaching his conclusion. That statement was made in the course of dealing with s. 99A of the Act but it is, I think, equally applicable in cases arising under s. 80A. Again, the taxpayer might have called the Commissioner or his appropriate officer as a witness in an endeavour to ascertain what matters he took into consideration in performing the task which s. 80A places upon him or to produce to the Court the material which was before him when he made his assessment. None of these courses was adopted. Instead the taxpayer placed before Walsh J. oral and documentary evidence to show that at all material times not less than two-fifths of the issued shares in the taxpayer were in the same beneficial ownership. The only portion of this material, however, which was shown to have been before the Commissioner was the taxpayer's income tax return for the year in question and, I would assume, its earlier returns, and a report of an interview between Mr. and Mrs. Cleary and an officer of the Taxation Department, which had taken place in February 1968. That report was in the following terms: Mr. and Mrs. Cleary attended the office on 1st February for an interview on the matters raised by Sydney Office.

With regard to G. A. Cleary (N.S.W.) Pty. Ltd. they advised that there were only two shares issued. These were £1 fully paid shares and were issued one to Mrs. Lorna Myra Cleary and one to C.B.J. Scutt in trust for Lorna Myra Cleary. There was only the one class of share issued and each share had equal rights with respect to voting, dividend entitlement and return of capital.

In 1962 the company got into financial difficulties and as far as either was able to remember the company went into voluntary liquidation in that year. The liquidator who was appointed was Mr. White, Public Accountant at Auburn. Sometime in 1963 the company was sold with the approval of Court, to Berry Motors of Rockdale and so far as Mr. Cleary remembers the purpose of the sale was to take advantage of tax losses. Neither Mr. nor Mrs. Cleary were able to recall whether they received any payments in respect of the sale, or if payment was received what happened to the payment. Also they were unable to recall whether they retained any interest in the company after the sale but said that for all purposes they lost all interest as they did not have any further dealings with the company or Berry Motors.

They advised that the books of the company were held by Mr. C. B. J. Scutt of Elizabeth Street, Sydney and that so far as they were aware he still had the records.

The interview was then directed to Brian Hatch Timber Co. and at this point both Mr. and Mrs. Cleary denied any knowledge of any such company. They also denied any knowledge of Brian Hatch and Noela I. Hatch.

Mrs. Cleary stated that she had not had any correspondence or other communication in respect of Brian Hatch Timber Co. and reiterated that all contact with this company ceased on sale to Berry Motors. In answer to my specific questions she denied having at any time entered into any arrangement, agreement or option to sell shares in Brian Hatch Timber Co. nor had she signed a blank share transfer in respect of that company. The reason given for these denials was her never having heard of Brian Hatch Timber Co. prior to the interview. The report is correct with the following correction

G. A. Cleary L. M. Cleary J. Morgan 1.03. 21.2.1968.

It should be added that no evidence was called on behalf of the Commissioner. 1. (1949) 78 C.L.R. 353, at p. 360. 2. (1969) 119 C.L.R. 365, at p. 373.

Walsh J. recognized, of course, that the question for him was not whether, upon the evidence before him, he was satisfied that the necessary continuity of ownership of the required proporation of shares had existed throughout the relevant periods but to decide whether it had been shown that, on the material that was before the Commissioner, the latter "had failed to discharge properly his statutory function according to law". His Honour was of opinion that there was nothing in the report of the interview with Mr. and Mrs. Cleary which I have earlier set out which could properly have caused the Commissioner's lack of satisfaction, and considered also that if the evidence given before him on the appeal had been before the Commissioner when he made his assessment, he could not properly have disallowed the deduction claimed. In these circumstances, his Honour took the view that in the absence of any evidence to the contrary, he should examine the Commissioner's decision "on the supposition that he had acted on the actual facts" - that is the facts proved before his Honour - "or upon so much of them as had come to his knowledge". In the result his Honour concluded that the Commissioner's lack of satisfaction could be satisfactorily expalined only upon the assumption that some mistake of law had been made or some extraneous matter had been taken into account.

With all respects to his Honour, I am unable to agree with this conclusion. No doubt the Commissioner had before him material - perhaps much material - in addition to the taxpayer's income tax returns and the record of interview to which I have already referred. But it is impossible to say what that additional material may have disclosed or whether or not it covered the same ground as did the evidence before his Honour and in these circumstances I think, with respect, that his Honour erred in concluding that the Commissioner must have made some mistake of law or taken some extraneous matter into account.

Further, I am of opinion that some of the statements made by the Clearys in their interview with the taxation officer in February 1968 might reasonably have raised doubts in the Commissioner's mind whether at all relevant times after what they described as the "sale" of the company they, to use their phrase, "retained any interest in the company".

For these reasons I would allow the appeal against the assessment of primary tax (No. 45 of 1971), set aside his Honour's order and in lieu thereof order that the appeal to him be dismissed with costs. I think it follows that the same order should be made in the second appeal from his Honour (No. 46 of 1971). In the result the taxpayer's claim to be allowed a deduction of $67,506 fails, as does its objection to the assessment of Div. 7 tax.