Commissioner of Taxation (Cth) v Casuarina Pty Ltd

It is, I think, convenient at this point to list the dramatis personae before explaining the parts they were called upon to play and played. To adhere for the moment to theatrical metaphor, the producer was a firm of accountants, Messrs. Wilson, Bishop and Henderson of Melbourne. The composition of this firm changed after the period with which this case is concerned, and they became known as Wilson, Bishop, Bowes and Craig: but, whoever were the members of the firm at relevant times, I shall in this judgment for convenience refer to them as "the accountants" or "the firm". Two senior employees of theirs were G. F. Sheehan and B. G. Jacobson. They gave evidence before me and in each case candidly and helpfully. Sheehan worked in the accountants' Melbourne office. Jacobson in 1967 worked in a branch or associated office at Burnie in Tasmania.

The first person who, in point of time, comes upon the scene is one Lex Sternberg. In 1967 he was engaged, and had been for some time theretofore engaged, in the selling of motor cars at Burnie. This business was carried on by a company, Lex Sternberg Motors Pty. Ltd., which I shall call "Lex Sternberg Motors". It was in 1967 a private company within the meaning of the Income Tax Assessment Act. The shares in it were held by members of the Sternberg family until April 1966 when another company, Hesso Pty. Ltd., was formed by Sternberg. It acquired from him a parcel of shares in Lex Sternberg Motors. The two companies were closely associated and in practice controlled by Sternberg and used by him for his purposes.

Casuarina is a proprietary company which was formed by the accountants and incorporated on 12th April 1967. It was on its inception entirely under the control of the accountants. It did not at once commence any business. It was simply "upon the shelf" in the firm's office, to use the expression that was used. It was there with other similar companies ready to be called into action if a client of the firm should require its services.

The next actor to come upon the scene is a company, Forum Holdings Ltd., which I shall call "Forum". It was incorporated on 17th February 1967, having been formed by the accountants. Its affairs were controlled by them. It was intended from its first conception in their minds that it would become a public company within the meaning of the Act by becoming a subsidiary of a public company. It was called into existence for the purpose of adopting as its own subsidiaries other companies involved in the tax-avoidance scheme and thereby conferring upon them its own character as a public company for the purposes of the Act. To enable it to acquire the status of a subsidiary in the statutory sense of a public company or public companies 4,995 shares in it were on 19th April 1967 allotted to a company, W. B. & H. Nominees Pty. Ltd., which I shall call "Nominees". This last-mentioned company was, as its name suggests, a company which acted as the nominee or agent of the accountants' firm as the holder of shares that were allotted to it to be held on terms they arranged. On 24th April 1967 Nominees transferred to each of Denton Hats Ltd., Nationwide Finance Ltd. and Victorian Broadcasting Network Ltd. 1,300 of its shares in Forum. Each of these three companies was a public company within the meaning of the Act at that time. Later the shares that Nationwide Finance Ltd. held in Forum were sold by it to another finance company, Cambridge Credits Ltd., but that was after the period with which this case is concerned. On 19th June 1968 Denton Hats Ltd. having gone into voluntary liquidation its 1,300 shares in Forum were transferred to F. T. Wimble & Co. Ltd., unquestionably a public company. The residue of the original parcel of 4,995 shares in Forum that had been allotted to Nominees, together with five original subscriber shares that it held, remained with Nominees, making its total holding 1,100. This then accounts for the whole of the issued capital, 5,000 shares, in Forum.

The acquisition by the three public companies, Victorian Broadcasting Network, Denton Hats and Nationwide Finance, of 1,300 shares in Forum was pursuant to an arrangement or understanding arrived at before Forum was incorporated. One of the partners in the firm of accountants, Mr. Davis, was at that time a director of each of the three companies. He knew what role Forum was to be called into existence to play. He took care that it had and retained the legal character necessary for it to fulfil its destiny. It was admitted by counsel for the Commissioner that each of the three above-mentioned companies that held shares in Forum on 30th June 1968 beneficially owned its shares. It is not questioned that two at least of these companies were at all relevant times public companies within the meaning of the Act. Any two of them together owned 2,600 out of 5,000 issued Forum shares with corresponding voting power. Without setting out further facts in detail or all relevant provisions of the constitution of Forum, I say at this point that I am satisfied that throughout the year of income in question, and at the end of that year, Forum was "a subsidiary of a public company" as defined by s. 103A (4) of the Act.

Having now described the actors on the stage, I proceed to narrate some of their doings. The Commissioner called no evidence. What occurred was made perfectly plain by the evidence given in examination and cross-examination of the witnesses called for the taxpayer and by voluminous contemporary documentary records. I do not think I need recount all of this. I shall merely state the conclusions of fact I have reached on such matters of fact as are critical in the case and relate these to the issues which arise under the relevant statutory provisions, ss. 103A and 260 of the Income Tax Assessment Act 1936-1968. Section 46 also made an appearance in the argument; but it recedes into the background in the view I take. I need not set out the sections in terms, as anyone concerned to read this judgment will I suppose be aware of the provisions of s. 103A, although he may not find these easy to comprehend at first sight.

The events begin some time early in 1967. Sternberg, a client of the Burnie office of the accountants, consulted Jacobson about taxation matters. His company, Lex Sternberg Motors, had a rapidly growing and profitable business. It was a private company for the purposes of Div. 7 of the Act. Sternberg and members of his family held its shares. He wanted to find a way by which the company could avoid, at least for a time, distributing its profits to its shareholders, his family, and at the same time avoid having to pay the additional tax which, pursuant to s. 104 of the Act, would become payable if it did not do so. Jacobson advised Sternberg that one course would be to so arrange affairs that a public company would derive the profits of his private company's business. Jacobson, called as a witness on behalf of the taxpayer, gave evidence-in-chief as follows:

I told him [Sternberg] that I knew of a public status company plan which was either implemented or would be implemented in the near future and I outlined it to him as I knew it and suggested to him that if he was interested I would get in contact with Mr. Sheehan of Wilson, Bishop & Henderson to get further information and see if such a company would be available to him and if it would be satisfactory for his particular needs.

Did you have the conversation that you anticipated you would with Mr. Sheehan? Yes, Mr. Sheehan recommended to me that Mr. Sternberg did follow the lines which I had suggested and become eligible for public status in some manner with his companies. He did suggest to me if Mr. Sternberg was interested there would be a company in the Melbourne office of Wilson, Bishop & Henderson which would qualify for public status purposes if certain requirements were carried out.

Did he explain to you how that company derived its status as a public company? He did.

How was that? Firstly there would be three public companies who would hold shares in another company which at that time I think was being referred to as the public status company or something of that name and which is now known as Forum Holdings and the company now known as Forum Holdings would hold a fifty-one per cent shareholding in a company owned by Sternberg now known as Casuarina. These would be redeemable preference shares which could be redeemed by the directors of Casuarina Pty. Ltd., who would be the Sternbergs, at any time by giving seven days' notice except for certain restrictions around 30th June.

Therefore by doing that Mr. and Mrs. Sternberg, as directors, would be able to control the affairs of Casuarina and at the same time enjoy the benefits of public status because Casuarina would then be a subsidiary of a public company and any dividends transferred from Lex Sternberg or Hesso could remain in Casuarina for the time being without being paid out - and therefore defer the incidence of transfer tax [sic] until such time as the Sternberg affairs were able to pay out these dividends to the shareholders.

Later: Was anything said between Mr. Sheehan and yourself about the distribution of dividends by Casuarina? Yes. Mr. Sheehan informed me that Forum Holdings, being the holder of the fifty-one preference shares, would require a dividend and the shareholders in Forum would require a reasonable dividend which would make them contented. I asked him what he considered that would be and he indicated they would probably be looking for something in the range of $200 to $300 per annum. I transmitted this information to Sternberg to give him an indication of what

Would you be more specific about precisely the information you conveyed to Sternberg? Yes. I went back to Sternberg and explained to him the whole system of the public status company

As you have just described it to his Honour? Yes. I informed Mr. and Mrs. Sternberg that they would have complete control of the Casuarina company because of the fact that they would be the directors, and they did have the power to redeem the redeemable preference shares if they were not satisfied with the plan in any way. By doing this he would attain public status. I also told them that Mr. Sheehan had informed me that Queen's counsel opinion had been obtained on this that it was completely within the income tax law; that is the opinion.

What was said between yourself and Mr. Sternberg about dividends? I had informed him that Casuarina would be expected to pay an annual dividend on the redeemable preference shares and that the amount of dividend would be between $200 and $300 per annum but that he and Mrs. Sternberg as directors had to decide what that figure was.

This plan was carried into execution as follows: Casuarina was taken off the shelf. Its only shareholders at that time were the original subscribers, Messrs. J. B. Hutchins and D. M. Hutchinson, accountants with the accountants' firm. They were also its directors until July 1967, when they resigned and Sternberg and Mrs. Sternberg took their places. The company's minute book records that on 24th April Hutchins and Hutchinson as directors resolved "that forty-seven ordinary shares be issued for cash to Alexander and Mary Sternberg as at this date", and that at the same meeting the transfer by Hutchinson of his one share to Sternberg was approved and the transfer by Hutchins of his one share to Mrs. Sternberg was approved. An application was signed by Hutchins in his capacity as a director of Forum that 51 redeemable preference shares in Casuarina be allotted to that company. This was accompanied by a cheque, apparently deposited in Casuarina's bank account on 24th April. The minute book records that on 15th May 1967 another directors' meeting was held, Hutchins and Hutchinson being still in office. The minute, signed by Hutchins in his capacity as chairman of that meeting, shews that he and Hutchinson resolved to allot 51 shares to Forum in accordance with the application he had signed on behalf of Forum. I should add that I accept the evidence that the shares that Forum got in Casuarina were, within the meaning of the Act, owned beneficially by Forum. It could in law exercise its voting rights as it thought fit.

Holders of redeemable preference shares in Casuarina were entitled to receive a seven per cent fixed non-cumulative preferential dividend and also to share ratably with ordinary shareholders in other dividends. Ordinary and redeemable preference shares had equal voting rights. The company's articles provide that redeemable shares in Casuarina might be redeemed by the company at their par value on seven days' notice in writing, "provided that no such redemption shall be made between the 24th day of June and the 7th day of July (both days inclusive) in any year".

Forum in fact thus became a majority shareholder in Casuarina but took no part in its affairs. Forum's raison d'être was well understood by those in charge of it, who included Hutchinson as a director and Sheehan as secretary. They were satisfied to receive from Casuarina as dividends two amounts of $207.57 as contemplated in July 1967 and August 1968. These, with dividends received from other companies which had come for similar reasons under Forum's aegis, produced for it a revenue enabling it to pay an amount by way of dividend satisfactory to the three public companies whose shareholdings had enabled it to qualify as a subsidiary of a public company. Casuarina acquired shares in Lex Sternberg Motors. On 29th March 1968 that company declared a dividend of $6,560 in favour of Casuarina. This is the only item shewn in Casuarina's tax return for the period in question. It was reduced by $3 for expenses incurred, so that the taxable income of the company for the year in question was shewn in its return as $6,557. This amount was not actually received by Casuarina as, pursuant to arrangement, it allowed dividends declared in its favour to remain as loans without interest to Lex Sternberg Motors, except only for such amounts as were needed by Casuarina for its own outgoings including the sums it paid as dividends to Forum to enable Forum to make the necessary payments to the three obliging companies on whose public status its own status as a public company depended.

The Commissioner by notice of assessment dated 2nd July 1969 assessed Casuarina's tax as $983.55. This, as the adjustment sheet he sent shewed, was arrived at on the basis that Casuarina was a private company within the meaning of s. 103A of the Act: and the rebate under s. 46 was calculated in accordance with s. 46 (2). The company objected on numerous grounds by a notice of objection dated 23rd July 1969. For some reason which does not appear, the Commissioner gave no decision on the objection until 3rd November 1969 when he disallowed it. Thereupon Casuarina requested that, pursuant to s. 188, the matter be referred to this Court. Concurrently with the assessment of primary tax the Commissioner assessed a liability in $2,786.50 for additional tax under Div. 7 of the Act. This was on the basis that the company had not distributed $5,573, that being the difference between the $6,557 above mentioned and $984 (which, as stated above, is the amount of primary tax as assessed by the Commissioner). This assessment too was objected to and it now comes before this Court in the same way. Such of the objections taken by the taxpayer as were persisted in before me raise substantially the same question in regard to both these assessments. The basic question in each is whether Casuarina was to be considered for the purposes of tax as being, within the meaning of s. 103A, a public company or a private company. On top of this the Commissioner relies upon s. 260.

Section 103A (1) states that for the purposes of Div. 7 "a company is a private company in relation to the year of income if the company is not a public company in relation to the year of income". The first question thus becomes: was Casuarina a public company as defined? If it was not, it was a private company and the Commissioner's assessments must subject to s. 260 be upheld. The relevant part of the definition is s. 103A (2) (d) (v) which states that a company is a public company if it was "in relation to the year of income, a subsidiary of a public company". Its claim is that the accountants' scheme succeeded, that it at all relevant times was a subsidiary of Forum; and as stated above, Forum is itself a public company for the purposes of the Act because it is a subsidiary of a public company. The attributes that a company must have to be a subsidiary are set out in s. 103A (4). It is convenient to set out the section so far as is necessary for the appreciation of propositions advanced by counsel for the Commissioner.

(4) For the purposes of this section, a company is a subsidiary of a public company in relation to the year of income if, at the end of the year of income, one or more companies that are public companies

(a) beneficially owns or own shares representing more than one-half of the paid-up capital of the first-mentioned company;

(b) is or are, by reason of its or their beneficial ownership of shares in the first-mentioned company, capable of controlling or of obtaining control of more than one-half of the voting power in that company;

(c) would be beneficially entitled to receive more than one-half of any dividends paid by the first-mentioned company; and

(d) would be beneficially entitled to receive more than one-half of any distribution of capital of the first-mentioned company in the event of the winding up, or of a reduction in the capital, of that company.

There is no doubt that at the end of the year of income on 30th June 1968 Forum owned shares representing more than one-half of the paid-up capital of Casuarina. The first requirement is therefore satisfied unless Forum's shares ought not to be counted because they were redeemable preference shares. In respect of voting rights and participation in ordinary dividends they were in the same position as the ordinary shares. I see no reason for excluding them from the denotation of the word "shares" in s. 103A (4). When elsewhere in the Act (e.g. in s. 80B) the word "shares" is not to include redeemable shares they are expressly excluded. However, it was said for the Commissioner that assuming that the redeemable shares of Forum in Casuarina were shares within the meaning of s. 103A (4), nevertheless par. (b) of that sub-section was not satisfied. Forum, it was said, was not by reason of its ownership of its shares capable at the end of the year of income of controlling or obtaining control of more than one-half of the voting power of the company. It is I think true that if one asks whether a person had a capacity at a given time to do a stated thing the question assumes a hypothetical attempt to do that thing either then - or, other factors remaining the same, at some time thereafter. At 30th June 1968, and on the last moment of that day, Forum by reason of its shareholding held one-half of the voting power in Casuarina. If its shares were redeemed it would lose the control they gave. But a liability to lose control in the future does not contradict the present existence of a capacity to control. I do not think that the existence of a capacity in one person to exercise a control of voting power is nullified because another person may be capable of obtaining the control by some formal step readily available in the way discussed by Dixon J. inAvon Downs Pty. Ltd. v. Federal Commissioner of Taxation [1] . In other words, as I see the matter, a capacity to control. Furthermore, the expression "capable of controlling or of obtaining control" used in relation to the end of the year of income must, I consider, be read as meaning controllable as at 30th June 1968: and it is not insignificant that Forum's shares were never in fact redeemed and that they could not be redeemed between 24th June and 7th July in any year. Counsel for the Commissioner relied upon certain remarks in W. P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation [1] . But, properly understood, they do not I think support his contention. Moreover, they were made in reference to statutory provisions different from those I have to consider. For these reasons I am satisfied that Casuarina was for the purposes of the Act a subsidiary of Forum and that it was therefore a public company for the purposes of the Act. 1. (1949) 78 C.L.R. 353, at pp. 361-362. 2. (1957) 100 C.L.R. 66, at pp. 88-89.

I turn now to s. 260, which the Commissioner claimed availed him to support his assessments. The Act places the burden of proving that the assessments are excessive upon the taxpayer (s. 190). But this is not I think to be taken as meaning that the taxpayer must in his case displace s. 260 without knowing in what way it is said to operate in the particular case. I did not think that ominous rumbling references by the Commissioner to s. 260 were enough. The taxpayer was, I considered, entitled to know what was the case under s. 260 that it had to meet. And for myself, if I were to apply the section to the facts, I needed to be told precisely what was the contract, agreement or arrangement said to be absolutely void as against the Commissioner; who were the parties to or participants in it; and in what way exactly did it operate to alter the incidence of income tax, or relieve any person, and if so, what person, of liability to tax, or to defeat, evade or avoid any liability under the Act or prevent the operation of the Act. I therefore said that if the Commissioner intended to fall back upon s. 260 his case should be formulated and set out in writing. This was done. So that the document thus produced would remain part of the record in the event of an appeal, I had it marked as an exhibit. It is in two parts, described as "Commissioner's view A", and "Commissioner's view B", - "of arrangement under Section 260". The two versions were put forward as alternatives. Each alleges an arrangement made between Sternberg, Casuarina, the firm of accountants (through Jacobson) and Forum (through Jacobson). The arrangement alleged to have been thus made and then carried into effect was that transactions such as did take place would take place. The only substantial difference between the two versions of the arrangement is that "A" begins with steps by which Sternberg, his family and his companies became interested in Casuarina. Version "B" takes as the subject of the arrangement events commencing later, namely with the application by Forum for shares in Casuarina. I do not think it necessary to set out either statement here. Whichever be taken, the basic question is the same. Would such an arrangement as alleged, if carried out as alleged, be in whole, or as to any step in it, void as against the Commissioner? Counsel for the taxpayer did not concede that all the allegations in the documents were established. In particular he said that there was no evidence of one allegation: namely that it was arranged that Forum would not interfere in the management of Casuarina and would allow the management to be carried on for the benefit of the Sternberg family as directed by Sternberg. It is true that there was no evidence that this was explicitly arranged and agreed to by Forum. Certainly there was nothing which in law restricted Forum exercising whatever rights it had as beneficial owner of its shares in Casuarina. Had it not been in law free to do so, the scheme would have fallen to the ground. Nevertheless it was I think an element in the scheme, well understood by all concerned, that Forum would not in fact interfere in Casuarina's affairs provided it received by way of dividends the stipulated payments for taking Casuarina in as one of its subsidiaries. In fact Forum did not take any part in the internal affairs of Casuarina. I shall consider the application of s. 260 on the basis that it was understood that it would not do so. Where then do we get to?

I do not doubt that what was done was pursuant to and in accordance with a concerted plan: that it was concerted between Sternberg and Jacobson and was carried out under the direction of its promoters, the accountants. And I do not doubt that the purpose of the plan and the effect of carrying it out was to alter the incidence of income tax that Sternberg's family companies or their shareholders would have had to pay and to relieve them of liability, for a time at all events, of some income tax. And I do not doubt that a scheme within s. 260 can be an elaborate affair involving several companies and various subsidiary agreements and carried into effect by a sequence of steps. If there were ever any doubt of that, the judgments in the Privy Council in Peate v. Commissioner of Taxation [1] would dispel them. But what the Commissioner seeks to avoid is not the scheme so far as it affected Sternberg, his family and his companies. They are not parties to this case. I therefore refrain from making any finding of what the position would be if the case related to an assessment of the liability of any of them. It does not: it concerns only the assessments of Casuarina's tax liability, and Casuarina was merely a pawn in the whole scheme, perhaps it were better to say a puppet. The case for the Commissioner seems to be that in the carrying out of the scheme for the benefit of Sternberg, Casuarina had to be a public company and not a private company and that its becoming a public company by issuing shares to Forum was therefore void as against him, the Commissioner, and that thus it is to be taxed as if it were a private company. This proposition is I think answered by Keighery's Case [1] , as referred to and followed by my brother Menzies in his judgment in Ellers Motor Sales Pty. Ltd. v. Commissioner of Taxation [1] . His Honour quoted, and I again quote, the following statement from the judgment of Dixon C.J., Kitto and Taylor JJ. in Keighery's Case [2] :

Whatever difficulties there may be in interpreting s. 260, one thing at least is clear: the section intends only to protect the general provisions of the Act from frustration, and not to deny to taxpayers any right of choice between alternatives which the Act itself lays open to them. It is therefore important to consider whether the result of treating the section as applying in a case such as the present would be to render ineffectual an attempt to defeat etc. a liability imposed by the Act or to render ineffectual an attempt to give a company an advantage which the Act intended that it might be given. That statement must be read as relating to the facts of the case in which it appears. It states a limit to the operation that the words of s. 260 might seem to have if they be considered apart from their place in the Act when the Act is read as a whole. That does not mean that words the Court used are to be read as if they were themselves the language of the statute. They are to be read as an exegesis of, not as a substitution for, that language. Nevertheless the passage I have quoted has, I consider, a direct bearing in the present case. It was sought for the Commissioner to cut this down by pointing to s. 103A (6), as contrasted with s. 105 in force at the time of Keighery's Case [1] but now repealed. Section 103A (6), it was said, shows that a taxpayer company has not an unrestricted right of choice to be either a public or a private company. That of course is so in a case to which s. 103A (6) applies. But it does not apply to this case. The voting rights of Forum as a shareholder could not have been abrogated. Casuarina could cancel Forum's shareholding altogether by redeeming its shares: but that is entirely different from affecting its rights while a shareholder. 1. [1967] 1 A.C. 308; (1957) 116 C.L.R. 38. 2. (1957) 100 C.L.R. 66. 3. (1969) 121 C.L.R. 665, at p. 678. 4. (1957) 100 C.L.R., at pp. 92-93. 5. (1957) 100 C.L.R. 66.

Counsel for the Commissioner, while reserving the right to contend hereafter that Keighery's Case [1] was wrongly decided, urged that it was distinguishable from the present case. Whatever view be taken of some aspects of that case, I would in this case follow the statement I have quoted above, even if I were not bound to do so. A person (individual or corporation) may by choosing one legal status rather than another affect his liability to tax. I cannot agree that s. 260 enables the Commissioner to assess him as if he had some other status. Two illustrations will shew what a strange consequence that would be. A taxpayer is entitled to a concessional deduction for his wife. But s. 260 does not enable the Commissioner to treat his marriage as a void arrangement. Similarly a taxpayer's liability depends in some cases upon whether or not he is a resident of Australia or in other cases is a resident in an isolated part of Australia. It cannot be said that if a man takes some employment abroad or in an isolated area, the Commissioner can treat his contract of employment as void because its performance by him would have the effect of relieving him of income tax.

I am not prepared to uphold the assessments on the supposition that Casuarina was not a public company. I do not think that s. 260, understood as decisions binding upon me have established that it should be understood, compels such a conclusion. It is a provision that operates to nullify, for the purposes of the Act, arrangements that are within its purview, not to create some new arrangement. And, as I understand the authorities, it operates to render void as against the Commissioner the entirety of any arrangement or scheme to which it applies. It does not, I think, enable the Commissioner to select part of a scheme - in this instance the allotment of shares in Casuarina to Forum - and treat that as a nullity while allowing other parts of the scheme - in this instance the receipt by Casuarina of dividends from Lex Sternberg Motors - to stand and exact tax upon that basis. It may be that the Commissioner could altogether disregard the existence of Casuarina. What he cannot do is to regard it as a taxpayer but give it a different character from that which it in fact has. When transactions are, by virtue of s. 260, absolutely void as against the Commissioner, what is meant is, as the Privy Council said in Peate's Case [1] , that "it [s. 260] only operates notionally to destroy, for the validity of the transactions is only affected so far as the Commissioner and proceedings under the Act are concerned". A company is in the eye of the law an entity, a person. Section 260 requires and enables the Commissioner to disregard this in certain circumstances when a company owes its existence to a tax-avoidance scheme. But that does not mean that the company is not in law an entity. It means only that the Commissioner may treat it as a nonentity. Professor Hart in his inaugural lecture, delivered in 1954, entitled "Definition and Theory in Jurisprudence", printed in the Law Quarterly Review, vol. 70, p. 37, said (at pp. 49-50) that "It is said by many that the juristic controversy over the nature of corporate personality is dead. If so we have a corpse and the opportunity to learn from its anatomy." In the course of his post-mortem he adverted to the mixed lot of beings to which what he called "the one-man tax-dodging company" belongs. Juristic controversies about corporate personality and its derivation may be dead. But they seem to me to be at times stirring in their graves. I adopt the metaphor because the whole topic is so replete with metaphors. Cardozo J. once said in the New York Court of Appeals:

The whole problem of the relation between parent and subsidiary corporations is one that is still enveloped in the mists of metaphor. Metaphors in law are to be narrowly watched, for starting as devices to liberate thought, they end often by enslaving it. We say at times that the corporate entity will be ignored when the parent corporation operates a business through a subsidiary which is characterized as an "alias" or a "dummy". All this is well enough if the picturesqueness of the epithets does not lead us to forget that the essential term to be defined is the act of operation. Dominion may be so complete, interference so obtrusive, that by the general rules of agency the parent will be a principal and the subsidiary an agent: Berkey v. Third Avenue Railway Co. [1] . I am indebted for a knowledge of this to Paton, Jurisprudence , 3rd ed. by Professor Derham, p. 377. It is referred to in the learned commentary there on jurisprudential theories as to the nature, for the purposes of our law, of corporations as legal persons. I mention that basic question as it seems to me to be inevitably involved in a consideration of the attitude the Commissioner has taken. I do so with some diffidence but undeterred by Professor Wedderburn's acid comment on judicial disregard of academic writings and adherence in this field to outmoded theories: see Modern Law Review (1965), vol. 28, p. 70. A proprietary company may well seem to be, in reality, merely the trade-name in which a man carries on some part of his affairs. But by a following of correct legal forms the name becomes in law a thing. Formalism produces a legal substance, and its "owner" can by careful book-keeping get all the advantages, be they limited liability, relief from taxation or other benefit, which the law annexes to his sedulous use of the corporate name. A company like Casuarina may be called prestigious in the proper sense of the word, and the accountants called prestigiators. This and other metaphorical descriptions, dummy, puppet, alias, alter ego and the like come readily to mind: but they remain descriptive not definitive of legal consequences. They suggest agency or instrumentality. That, a generalized concept of agency can I think provide in some cases a practical solution of theoretical difficulties. Of course I must entertain misgivings arising from the way in which basic doctrine is expressed in Salomon's Case [1] . But the strictness of that has been giving way somewhat in recent times. I alluded to this question in my judgment in Peate v. Federal Commissioner of Taxation [1] , and I referred to it too in what I said in Gorton v. Federal Commissioner of Taxation [2] . The latter was a dissenting judgment, but my observations on this matter were merely incidental. I need not go further into the topic here. A company which speaks with the voice of the person who controls it and which acts as he directs is not necessarily to be called a facade, nor its acts in the law called shams. Its existence as a legal person is not incompatible with its practical obedience to orders: and that it acts as a taxpayer directs may be a reason for relying upon s. 260 to ignore it in some cases. But in the present case the Commissioner does not seek to disregard the existence of Casuarina. On the contrary, he seeks to tax it. He invokes s. 260 not because of any arrangement it made to enable it to avoid taxation but because it assumed the character of a public company as part of a scheme to enable Lex Sternberg Motors to avoid taxation. Casuarina is a public company within the meaning of the Act: and the Commissioner, having elected to treat it as a taxpayer, cannot I think by turning to s. 260 treat it as having a different character in law from that which it actually has. I am not concerned with what would be the position if the Commissioner had chosen an entirely different course and the liability of Lex Sternberg Motors to taxation were the question. That does not arise any more than did the position of Aquila Steel Company Pty. Ltd. in Keighery's Case [1] . The Commissioner's attempt to treat the allotment to Forum of shares in Casuarina as a "contract, agreement or arrangement" void by s. 260 fails. 1. [1967] 1 A.C., at p. 331; (1967) 116 C.L.R. 38, at p. 44. 2. (1926) 244 N.Y. 84, at pp. 94-95. 3. [1897] A.C. 22. 4. (1964) 111 C.L.R. 443, at pp. 478 and 480. 5. (1965) 113 C.L.R. 604, at p. 627. 6. (1957) 100 C.L.R. 66.

I allow both appeals against the assessments and set both the assessments aside. I remit to the Commissioner the assessment of the primary tax as distinct from the additional tax under Div. 7, with liberty to him to issue an assessment of the tax payable by Casuarina as a public company in the year in question.

I have had the advantage in this case of reading the reasons for judgment prepared by my brother Walsh. I agree with his conclusions and with the reasons he gives for them. I should merely wish to say that there is, in my opinion, no room for the application of s. 260 where the taxpayer has become liable for the amount of tax appropriate under the terms of the Assessment Act to the state of affairs obtaining at the date made relevant by that Act for the ascertainment of the taxpayer's liability. Steps taken to bring about that state of affairs cannot, in my opinion, qualify as action under s. 260 to achieve any one of the four purposes or effects described in the section. In my opinion, Keighery v. Federal Commissioner of Taxation [8] was correctly decided and correctly applied in the instant case. The appeals should be dismissed.

1. (1957) 100 C.L.R. 66, at p. 68. McTiernan J.

These appeals are brought from the orders of Windeyer J. allowing the respondent's appeals against the disallowance of its objections to its assessments for the year of income ending 30th June 1968.

The facts proved before his Honour are in summary as follows.

In February 1967 Forum Holdings Ltd. (hereinafter called "Forum") was incorporated by a firm of accountants and on 12th April 1967 the respondent company, Casuarina Pty. Ltd. (hereinafter called "Casuarina"), was incorporated by the same firm of accountants. On its incorporation the respondent company did not carry on any business. On 19th April 1967 almost 80 per cent of the shares in Forum were allotted to W. B. and H. Nominees Pty. Ltd. The latter company transferred one-third of those shares to each of three companies. At all material times at least two of the transferee companies were public companies within the meaning of Div. 7 of Pt III of the Income Tax Assessment Act 1961-1968 Cth (hereinafter referred to as "the Act") and between them beneficially owned more than 50 per cent of Forum's shares. It was conceded that Forum was a subsidiary of a public company within the meaning of s. 103A (2) (d) (v) of the Act.

On 24th April 1967 one, Sternberg, and his wife acquired 49 shares in Casuarina, which at that time represented its entire issued capital. On 15th May 1967 Forum was allotted 51 redeemable preference shares in Casuarina. Soon afterwards Sternberg and his wife became sole directors of Casuarina which then acquired shares in Lex Sternberg Motors Pty. Ltd. (hereinafter called "Sternberg Motors"), a private company engaged in motor sales and controlled by Sternberg. On 29th March 1968 Sternberg Motors declared a dividend of $6,560 in favour of Casuarina, almost all of which sum remained with Sternberg Motors as an interest-free loan.

It appears to me that the question to be decided here is whether, as found by the learned trial judge, the Commissioner was in error in treating the respondent as a private company in relation to the above-mentioned year of income for the purposes of Div. 7 of Pt III of the Act.

The respondent claimed that it was not a private company in relation to the year of income in question for the purposes of Div. 7 because it was a subsidiary of a public company according to s. 103A (2) (d) (v) of the Act. The public company of which it claimed to be a subsidiary was Forum. In order to be a subsidiary of a public company a company must fulfil the conditions set forth in s. 103A (4) of the Act.

It seems that the Commissioner does not dispute that the requirements of par. (a) are satisfied.

The Commissioner contended however that the respondent did not fulfil the requirements of par. (b) on the ground that cl. 73 of Table A of the Companies Act, 1961 Vict., which Table was incorporated in Casuarina's articles by art. 1 of its articles of association, enabled the directors (the Sternbergs) to exercise any power of the company not required by the Act or Table A to be exercised by the company in general meeting. Such a power was the power given by art. 4, cl. 3a (d) which entitled the company to redeem all or part of the redeemable preference shares at any time on giving the holders not less than seven days' notice in writing provided that no such redemption should be made between 24th June and 7th July in any year. Article 10 provided that at least twenty-one days' notice must be given of a general meeting of the company.

It was argued that in these circumstances, where the shares of Forum could always be redeemed before a general meeting could be held, it may not be said that that company was capable of controlling or of obtaining control of more than one-half of the voting power in Casuarina.

The respondent submitted that the words "capable of controlling or of obtaining control of more than one-half of the voting power" must be related to the end of the year of income, that on 30th June 1968 Forum was capable of controlling more than one-half of the voting power in Casuarina as it existed then and that it did not matter that this capacity might be defeated at some stage in the future.

Although there is much force in the appellant's contention and there must be a point where the actual position as regards control may not be disregarded (see Dixon J. (as he then was) in Avon Downs Proprietary Ltd. v. The Federal Commissioner of Taxation [1] ), I am prepared to hold in this case that at the end of the year of income Forum was capable of controlling more than one-half of the voting power in Casuarina.

As regards pars. (c) and (d) the appellant contended that the word "would" imports an element of futurity so that the question asked at the end of the year of income is who is going to be beneficially entitled to receive more than one-half of any future dividends or more than one-half of any future distribution of capital in the event of a winding up or a reduction of capital. But in my opinion the section makes the end of the year of income the relevant time of consideration and at that time Casuarina fulfilled the requirements of (c) and (d).

The appellant relied in the alternative on s. 260 of the Act.

The appellant submitted that an arrangement within the meaning of the section was constituted by the allotment to Forum on 15th May 1967 of the 51 redeemable preference shares in Casuarina, which owned shares in Sternberg Motors and the directors of which Sternberg and his wife were to become at a later date, with an understanding by all concerned that, provided Forum received a dividend calculated not by reference to profits but by reference to a service fee for extending its status as a public company, it would not interfere in the control of Casuarina by exercising the votes attached to its shares. In fact it never exercised those votes.

The respondent contended that there was no agreement that Forum would not exercise the rights attached to its shares in Casuarina. However, I agree with respect with Windeyer J. in his judgment when he said:

Nevertheless it was I think an element in the scheme, well understood by all concerned, that Forum would not in fact interfere in Casuarina's affairs provided it received by way of dividends the stipulated payments for taking Casuarina in as one of its subsidiaries. [1] 1. Ante, at p. 73.

It must be borne in mind that both those companies were formed by the same firm of accountants and controlled by members of that firm (one of whom was a director of both companies) at the time of the allotment of shares in Casuarina to Forum.

In seeking to bring this arrangement within the words of s. 260 the appellant relied upon the passage in Newton v. Federal Commissioner of Taxation where their Lordships say [1] :

In order to bring the arrangement within the section you must be able to predicate - by looking at the overt acts by which it was implemented - that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge that the transactions are capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax, then the arrangement does not come within the section. 1. [1958] A.C. 450, at p. 466; (1958) 98 C.L.R. 1, at p. 8.

It was argued that to allot for $51.00 shares which carry rights to participate equally in dividends, in any reduction of capital and in the winding up of a company with assets of $12,200 (received from Sternberg Motors and another associated company) is not explicable by reference to ordinary commercial or family dealings.

The respondent cited the judgment of Dixon C.J. and Kitto and Taylor JJ. in W. P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation where their Honours said [2] :

The very purpose or policy of Div. 7 is to present the choice to a company between incurring the liability it provides and taking measures to enlarge the number capable of controlling its affairs. To choose the latter course cannot be to defeat evade or avoid a liability imposed on any person by the Act or to prevent the operation of the Act. 1. (1957) 100 C.L.R. 66, at pp. 93-94.

The respondent also cited Newton's Case where their Lordships said [1] :

Thus, no one, by looking at a transfer of shares cum dividend, can predicate that the transfer was made to avoid tax. Nor can anyone, by seeing a private company turned into a non-private company, predicate that it was done to avoid Div. 7 tax, see W. P. Keighery Pty. Ltd. v. Commissioner of Taxation [1] . Nor could anyone, on seeing a declaration of trust made by a father in favour of his wife and daughter, predicate that it was done to avoid tax, see Deputy Federal Commissioner of Taxation v. Purcell [2] . 1. [1958] A.C. 450, at p. 466; (1958) 98 C.L.R., at pp. 8-9. 2. (1957) 100 C.L.R. 66. 3. (1921) 29 C.L.R. 464.

In Hooker-Rex Pty. Ltd. v. Federal Commissioner of Taxation, I said [3] :

I believe that the test of "ordinary business dealing" propounded by Isaacs J. and Starke J. in Jaques' Case [4] , and adopted and expanded by the Privy Council in Newton's Case [5] must limit the application of the dicta quoted from Keighery's Case [1] and Cecil Bros.' Case [6] . In my opinion the intricate series of transactions carried out in this case have all the indicia of having been implemented in the way that they were in order to avoid a liability imposed by the Act. They do not appear to be capable of explanation by reference to ordinary business or family dealing. Although the liability had not accrued at the time of the transactions the section is nevertheless attracted: See Newton's Case where their Lordships say [7] : To "avoid a liability imposed" on you means to take steps to get out of reach of a liability which is about to fall on you. 1. (1970) 123 C.L.R. 71, at p. 86. 2. (1924) 34 C.L.R. 328. 3. [1958] A.C. 450; (1958) 98 C.L.R. 1. 4. (1957) 100 C.L.R. 66. 5. (1964) 111 C.L.R. 430. 6. [1958] A.C., at p. 464; (1958) 98 C.L.R., at p. 7.

I am not of the opinion that their Lordships in Newton's Case [5] intended to state that the transactions entailed in the conversion of a private company into a non-private company could never fall within the ambit of s. 260. It must be remembered that, notwithstanding their statement [1] , "Thus, no one, by looking at a transfer of shares cum dividend, can predicate that the transfer was made to avoid tax", the very act which was held to be struck down in Newton's Case [5] was a transfer of shares cum dividend. It is necessary to consider the whole arrangement to determine whether s. 260 is attracted.

1. [1958] A.C. 450; (1958) 98 C.L.R. 1. 2. [1958] A.C. 450, at p. 466; (1958) 98 C.L.R., at pp. 8-9. 3. [1958] A.C. 450; (1958) 98 C.L.R. 1.

The next question that arises is what is rendered void as against the Commissioner in this case by s. 260. In my opinion, a reading of the section, which states that the arrangement is rendered void only in so far as it has the effect of avoiding a liability imposed by the Act, indicates that it is the allotment of the shares in Casuarina to Forum which is rendered void as against the Commissioner. The result is that Casuarina remains a private company for the purposes of Div. 7 and so liable to taxation under s. 104 (1).

On the basis that Casuarina was a private company for the purposes of Div. 7 it was entitled to a rebate for each dollar of private company dividends included in its taxable income under s. 46 (2) (a). The respondent contended that if it were held to be a private company for the purposes of Div. 7 it was entitled to an additional rebate for each dollar of private company dividends included in its taxable income under s. 46 (3) (a).

The Commissioner disallowed this claim. The respondent submitted that, notwithstanding the word "may" in s. 46 (3), the Commissioner has no discretion to refuse a rebate if he is satisfied of the facts set out in par. (a). The respondent argued that par. (c) embodied a discretion and rendered any further discretion within s. 46 (3) redundant.

In my judgment there is no justification for construing the word "may" in s. 46 (3) as "shall". Section 46 (2) is an example of the draftsman not granting any element of discretion to the Commissioner. There is no reason to presume that the Act did not intend to entrust a discretion to the Commissioner in s. 46 (3).

I would allow the appeals with costs and restore the assessments of the Commissioner.

I have had the advantage of reading the judgment prepared by my brother Walsh. I agree with his conclusions and the reasons for them.

In these two appeals the Commissioner of Taxation, herein called the appellant, seeks to have set aside the orders made by Windeyer J. in two appeals heard by him pursuant to s. 187 of the Income Tax Assessment Act 1936-1968 Cth (the Act). The present respondent, herein called Casuarina, succeeded before his Honour in its challenge to two assessments in respect of the year of income which ended on 30th June 1968. His Honour set aside those assessments which had been made on the basis that Casuarina was, in relation to that year of income, a private company for the purposes of Div. 7 of Pt III of the Act. He ordered in one of the appeals heard by him that the assessment be remitted to the appellant with liberty to him to issue an assessment of tax payable by Casuarina, on the basis that it was in the year in question a public company. The appellant seeks to have Casuarina's appeals from the disallowance of its objections dismissed and the assessments restored.

The facts are fully set out in the reasons for judgment given by Windeyer J. Although it has been submitted that in some respects his Honour's findings are not accurate or are incomplete, I am of opinion that it has not been shown, in relation to any question of fact upon which a decision in these appeals will depend, that the view taken by his Honour was not warranted by the evidence or was erroneous. Reference must be made later to some particular submissions made to this Court as to matters of fact, but at this point the following facts may be stated.

In and before the year 1967 a company called Lex Sternberg Motors Pty. Ltd., herein called Sternberg Motors, carried on the business of selling motor cars. It was controlled by Mr. Lex Sternberg, as was another company formed by him called Hesso Pty. Ltd., herein called Hesso, which became a shareholder in Sternberg Motors. Casuarina was formed by a firm of accountants in Melbourne and was incorporated on 12th April 1967. It was then entirely controlled by the accountants. A little earlier the accountants had formed a company called Forum Holdings Ltd., herein called Forum, which was incorporated on 17th February 1967. The accountants who controlled it intended that it would become a public company within the meaning of the Act, by becoming a subsidiary of a public company or companies. On 19th April 1967, 4,995 shares in Forum were allotted to W. B. & H. Nominees Pty. Ltd., herein called Nominees. A few days later Nominees transferred 1,300 of its shares in Forum to each of three other companies. Two of those other companies were, without doubt, public companies within the meaning of the Act. It is said that the evidence did not show whether or not the third of them was also a public company. But this is immaterial because, in any event, there were two public companies which between them held 2,600 out of the 5,000 issued shares in Forum. The residue of the 4,995 shares held by Nominees, together with five subscribers' shares held by it, remained with it, so that it had 1,100 shares in Forum.

His Honour found that the acquisition by the public companies of the shares in Forum was pursuant to an arrangement or understanding arrived at before Forum was incorporated. One of the partners in the firm of accountants was a director in each of the three companies which acquired shares from Nominees. His Honour did not state expressly by whom the arrangement or understanding that those companies should acquire shares in Forum was made. But he found that Forum was brought into existence in order that, having become a public company, it would be able to give that character to other companies which for tax purposes desired to obtain that character and which could do so (it was considered) by becoming subsidiaries of Forum. No doubt it was upon the suggestion and persuasion of the accountant, who was a director of the public companies, that they acquired shares in Forum. But it is not in dispute that each of them owned beneficially the shares acquired by it. It was disputed on behalf of the appellant that Forum was a public company within the meaning of Div. 7. But this was not on the ground that its shareholders were not beneficial owners of the shares held by them. It was on the ground that the directors of Forum had power at any time to allot additional shares and thus to bring about the result that the shares held by the public companies became less than one-half of the issued shares. That submission depends upon a construction of s. 103A (4) of the Act which will have to be considered later, in dealing with submissions that Casuarina itself was not within the meaning of that provision a subsidiary of a public company. It is sufficient at this point to say that I agree with the conclusion of Windeyer J. that throughout the year of income in question and at the end of that year Forum was a subsidiary of a public company, within the meaning of s. 103A (4).

His Honour said that the events relevant to the appeals began early in 1967 when Mr. Sternberg sought advice as to how Sternberg Motors could avoid, at least for a time, distributing its profits to its shareholders and could also avoid paying additional tax, under s. 104 of the Act. Counsel for the appellant has submitted that the relevant events began earlier. In 1966 Hesso was incorporated and it acquired Sternberg's shares in Sternberg Motors, which declared a dividend most of which went to Hesso. If the same procedure had been adopted in the following year, there would have been a serious tax problem affecting Hesso and it was that problem which Sternberg sought in 1967 to solve. But these facts do not, in my opinion, affect the determination of the questions raised by these appeals. I do not think it matters whether the tax problem was a problem as to tax falling upon Hesso or upon Sternberg Motors or upon Mr. Sternberg himself. A solution which was suggested was that affairs should be arranged so that a public company would derive profits coming from the motor sales business. The details of a plan by which this might be done were explained to Sternberg. These details were given in evidence which is quoted in the judgment of Windeyer J. [1] and need not now be repeated. It seems clear that at this time the parties to the discussion of this plan were Sternberg and the accountants and that it was discussed before Casuarina was incorporated. His Honour referred to evidence which described Casuarina as being "upon the shelf" in the office of the accountants who formed it. However, its stay on the shelf was very short. It was incorporated on 12th April 1967. As early as 24th April 1967, it was taking part in the events by which the tax plan was carried into execution. Its only shareholders at that time were the two original subscribers, who belonged to the accountants' firm. They were also its directors. On 24th April they resolved that 47 ordinary shares be issued to Sternberg and his wife and that transfers of the two subscribers' shares to them be approved. By this means Sternberg and his wife became the holders at that time of all the shares in Casuarina. One of the subscribers, who was also a director of Forum, signed on its behalf an application for the allotment by Casuarina to it of 51 redeemable preference shares. A cheque for the price of these shares was given and deposited in Casuarina's bank account.

At or about this same time some other events occurred which are not all set out in his Honour's reasons. On 24th April 1967 there were allotted to Casuarina ten redeemable preference shares of $2 each in Sternberg Motors and 20 preference shares of $1 each in Hesso. A few days later, on 28th April, dividends were declared on those shares by Sternberg Motors and by Hesso, by which Casuarina became entitled to a total amount of over $12,000. Counsel for the appellant has pointed out that this entitlement accrued to Casuarina before it resolved, on 15th May 1967, to allot the 51 shares to Forum and thus to make it a majority shareholder in Casuarina. It did this through its directors, who were still the two men from the accountants' firm. Although they had earlier transferred their subscriber shares, it was not until July 1967 that they resigned as directors and then the Sternbergs took their place. The articles of association provided that a director should not require any share qualification. The 51 preference shares thus acquired by Forum gave it, according to the articles of association of Casuarina, the right to receive a fixed preferential dividend and, in addition, to share ratably with the ordinary shareholders in any other dividend declared by the company. They gave it also the right on a winding up or on a reduction of capital to have capital distributed to them rateably with the holders of ordinary shares and the same rights as the holders of ordinary shares to receive notice of general meetings and to attend general meetings and there to vote in person or by proxy. It was provided also that the company should be entitled, subject to s. 61 of the Companies Act 1961 Vic., upon giving to holders of redeemable preference shares not less than seven days' previous notice in writing of its intention to do so, to redeem the shares at any time out of profits or moneys lawfully applicable for that purpose. It was provided that no such redemption should be made between 24th June and 7th July (both days inclusive) in any year.

Subsequently Forum did not take any part in Casuarina's affairs. It received in July 1967 and in August 1968 small dividends of about $200. In his reasons Windeyer J. said:

These, with dividends received from other companies which had come for similar reasons under Forum's aegis, produced for it a revenue enabling it to pay an amount by way of dividend satisfactory to the three public companies whose shareholdings had enabled it to qualify as a subsidiary of a public company. [1] 1. Ante, at p. 69.

On 29th March 1968 Sternberg Motors declared a dividend of $6,560 in favour of Casuarina. That was its only income for the year. Its taxable income for that year was shown in its return as $6,557. Most of that dividend was allowed to remain with Sternberg Motors as a loan without interest. Casuarina took actual payment only of so much as was necessary to provide for its own very small outgoings and for the dividend which it paid to Forum. As stated earlier, assessments of tax were made on the footing that Casuarina was a private company. One was for tax at the rate of 30 per cent of the taxable income but with the allowance of a rebate under s. 46 (2) of the Act. The other assessment was for additional tax under s. 104. Casuarina claims that it was not a private company. It relies upon par. (d) (v) of s. 103A (2) of the Act and it contends that within the meaning of sub-s. (4) of s. 103A it was a subsidiary of a public company. The appellant contends that Casuarina was not within the meaning of those provisions a private company. In the alternative he relies upon s. 260 of the Act.

The first question to be considered is whether or not the facts relating to Casuarina and to Forum were such that the requirements of sub-s. (4) of s. 103A were satisfied, so that Casuarina was "at the end of the year of income" a subsidiary of a public company, within the meaning of that provision. The sub-section provides:

(4) For the purposes of this section, a company is a subsidiary of a public company in relation to the year of income if, at the end of the year of income, one or more companies that are public companies for the purposes of sub-section (1) of this section in relation to the year of income but none of which is a company referred to in paragraph (c) of sub-section (2) of this section -

(a) beneficially owns or own shares representing more than one-half of the paid-up capital of the first-mentioned company;

(b) is or are, by reason of its or their beneficial ownership of shares in the first-mentioned company, capable of controlling or of obtaining control of more than one-half of the voting power in that company;

(c) would be beneficially entitled to receive more than one-half of any dividends paid by the first-mentioned company; and

(d) would be beneficially entitled to receive more than one-half of any distribution of capital of the first-mentioned company in the event of the winding up, or of a reduction in the capital, of that company.

As to par. (a) it is not, in my opinion, seriously open to question that Forum beneficially owned shares representing more than one-half of the paid-up capital of Casuarina. I think that Windeyer J. was correct in holding that the term "shares" includes redeemable preference shares: see the definition of shares in s. 6 (1) of the Act and compare the special provision made in s. 80B (8) to give effect to an intention to exclude certain redeemable shares from consideration for the purposes with which that provision deals. His Honour was also correct, in my opinion, in finding that the shares were owned beneficially by Forum. There was no evidence of any agreement that they or any of the rights attached to them were to be held on behalf of some other person.

In relation to par. (b), the appellant's contention was that Forum was not capable of controlling or of obtaining control of more than one-half of the voting power in Casuarina, since the real capacity to control the voting power was in the hands of the Sternbergs. It was put that this was so for two reasons. The first was that there was an understanding that Forum would not interfere in the affairs of Casuarina. The second was that the right to redeem Forum's shares could always be used to prevent Forum from controlling the affairs of Casuarina at any general meeting of that company. Except with the consent of the Sternbergs, no general meeting could take place at such a time that it would not be within the power of the Sternbergs, as directors of Casuarina, to prevent any use by Forum at a general meeting of its voting power, by redeeming the shares held by it. I cannot accept either of these reasons as demonstrating that the fulfilment of the terms of par. (b) should be denied. I shall make some observations later in these reasons as to the meaning and effect of the statement made by Windeyer J. that it was:

an element in the scheme, well understood by all concerned, that Forum would not in fact interfere in Casuarina's affairs provided it received by way of dividends the stipulated payments for taking Casuarina in as one of its subsidiaries. [1] But at this point I state the opinion that that "understanding" did not detract from Forum's capability of controlling the voting power attached to its shares. In applying par. (b) of the provision (as well as its other paragraphs) attention must be directed to the facts existing at a particular time, that is, at the end of the year of income. The only question is whether or not at that point of time Forum was capable of controlling more than one-half of the voting power in Casuarina. The question is not whether it was likely to control it or was likely to exercise its voting power in a particular way. The question is whether it was capable of controlling the voting power. In my opinion the answer to that question must be "Yes". The shares were still held by Forum. They had not been redeemed and no notice had been given to redeem them. Without doubt it is true that in a practical sense there was no likelihood that Forum would exercise its voting power adversely to the interests or the wishes of the Sternbergs. It is true also that the right to redeem the shares was a powerful instrument in the hands of the Sternbergs for the thwarting of any threat by Forum to do so. But so long as the shares were not redeemed and Forum held 51 per cent of the shares, it was capable of controlling more than one-half of the voting power. As Windeyer J. said: If its (Forum's) shares were redeemed it would lose the control they gave. But a liability to lose control in the future does not contradict the present existence of a capacity to control. [1] 1. Ante, at p. 73. 2. Ante, at p. 71.

The appellant sought to rely in relation to this question on part of the reasons in the joint judgment of Dixon C.J., Kitto J. and Taylor J. in W. P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation [1] (which I shall call Keighery ). In my opinion that case does not assist the appellant on this point and, indeed, I think its reasoning is incompatible with the argument of the appellant. At first instance Williams J. [1] held in effect that because on the relevant day Mr. and Mrs. Keighery had vested in them a right, by virtue of which they could thereafter act so as to eliminate the preference shareholders by redeeming their shares before a general meeting could take place, the company was on that day "capable of being controlled" by Mr. and Mrs. Keighery. But this view was rejected by the majority in the Full Court. It was urged in the present case that in rejecting it their Honours indicated [2] that, but for the existence of certain contingencies which were regarded as affecting and limiting the power of Mr. and Mrs. Keighery to eliminate the other shareholders, their Honours would have accepted the view which had been taken by Williams J. But although their Honours referred to certain contingencies, by reason of which it could not have been affirmed on the relevant day that Mr. and Mrs. Keighery would certainly be the repositories of the power when it should become exercisable, or that the power would certainly become exercisable before the next general meeting, it is important to observe that their Honours contrasted a power exercisable at will to disqualify the votes of other shareholders with a power which on the relevant day "was incapable of immediate exercise" [3] ; and they concluded their reasons on this part of the case by saying: "The company was capable of being made controllable by them in certain eventualities; but that is not to say that the company was then capable of being controlled by them." [4]

1. (1957) 100 C.L.R. 66. 2. (1957) 100 C.L.R., at pp. 78 and 79. 3. (1957) 100 C.L.R., at pp. 88-89. 4. (1957) 100 C.L.R., at p. 88. 5. (1957) 100 C.L.R., at p. 89.

The question arising directly in the present case in relation to par. (b) is not the question whether the Sternbergs were at 30th June 1968 capable of controlling or obtaining control of more than half the voting power. It is whether Forum was capable of doing so. But to the extent that the argument for the appellant involves an attempt to deny the existence, on the relevant day, of the capacity which prima facie Forum clearly had as holder and beneficial owner of 51 per cent of the shares, by asserting that the right to redeem the shares which was vested in Casuarina and controlled by the Sternbergs nullified the capacity of Forum, I am of opinion that the argument fails to give due weight to the fact that the statutory criterion is related to a particular point of time, so that the requirement is fulfilled or not fulfilled according to the position then existing and is not dependent upon the probabilities, however strong these may appear to be, concerning the manner in which the voting power will continue to be controlled or will be actually exercised, at some subsequent point of time.

Next, it was contended for the appellant that neither the requirement set out in par. (c) nor that set out in par. (d) was satisfied. Windeyer J. did not deal in express terms with those paragraphs or make express findings concerning them. But on the view that I take of the case this is not of importance. Having reached the conclusion that at the relevant time the matters set out in pars. (a) and (b) could be predicated of Forum in its relation to Casuarina, I am of opinion that it follows that the matters set out in pars. (c) and (d) could also be predicated of it. This does not mean, of course, that there could never be a case in which pars. (a) and (b) were satisfied but par. (c) or par. (d) was not. It does not mean that pars. (c) and (d) have no significance. The beneficial entitlement to the receipt of dividends or of capital might be divested by some binding transaction from the beneficial owner or owners of shares and transferred to some other person or company, not being itself a public company. In such a case pars. (a) and (b) might be satisfied and par. (c) or par. (d) might not be satisfied. But there is no evidence in the present case upon which it could be found that Forum had so acted as to divest from itself its entitlement to receive dividends or to participate in a distribution of capital.

At one stage in the submissions for the appellant, it was said that if Forum had sought to exercise its rights so as to procure for itself a substantial dividend, it could have been restrained by injunction from so doing, upon the footing that this would be a breach of the understanding upon which Forum had acquired the shares. As I understood the argument, at a later stage the contention was not pressed that Casuarina had any legal or equitable right to prevent Forum from exercising its rights as shareholder, but it was then said that the Sternbergs could have obtained relief, as minority shareholders in Casuarina, against any attempt by Forum to exercise its rights to the detriment of the Sternbergs and, in particular, against any attempt by Forum to take for itself a large portion of the money which had come to Casuarina as a shareholder in the Sternberg companies. But I find no reason to disagree with the statement made by Windeyer J. that Forum could in law exercise its voting rights as it thought fit or with his statement that "there was nothing which in law restricted Forum exercising whatever rights it had as beneficial owner of its shares in Casuarina" [1] .

As I have said, I think that, since it is established that Forum beneficially owned shares representing more than one-half of the paid-up capital of Casuarina and was by reason of that beneficial ownership of shares capable of controlling more than one-half of the voting power of Casuarina, the consequence is that there is no reason for denying that Forum would be beneficially entitled to receive more than one-half of any dividends paid by Casuarina and to receive more than one-half of any distribution of capital, in the event of the winding up or of a reduction in capital of that company. In my opinion, in applying the terms of pars. (c) and (d) to the facts existing at the relevant time, that is, the end of the year of income, the supposition must be made that at that time a dividend is being paid or capital is being distributed. That supposition being made, the question to be answered, having regard to the facts existing at that time, is whether Forum would be entitled beneficially to receive more than one-half of the supposed dividend or of the supposed distributed capital. In my opinion, the question thus posed must be answered "Yes". Having regard to the articles of association of Casuarina, and in the absence of any act by which Forum had divested itself of its entitlement, no one else could be entitled to receive the dividend or the capital payable to Forum which was the beneficial owner of 51 per cent of the shares.

It was contended for the appellant that pars. (c) and (d), although they are concerned with rights existing at the end of the year of income and not at some other time, must nevertheless be interpreted and applied in a sense which looks forward to prospective payments of dividends and to prospective distributions of capital. It was argued that in order that the paragraphs may be satisfied one must be able to affirm, as at the relevant date, that the rights of the public company (or companies) owning shares are such that it (or they) cannot lose in the future the entitlement to dividends subsequently declared or to capital subsequently distributed, otherwise than as the result of some voluntary act, such as the sale of the shares. In my opinion, that construction of the provisions should not be accepted. In applying pars. (c) and (d), no less than in applying pars. (a) and (b), it is necessary in my opinion to look to what would be the entitlement, at the particular time which the provisions themselves designate as the relevant time, upon the hypothesis that a dividend or capital were then being paid out by the company in which the shares are held. The use of the words "would be", instead of the present tense used in pars. (a) and (b), was relied upon as supporting the argument for the appellant. But I do not think that it does so. The use of the words "would be" is apt, because the criteria stated in pars. (c) and (d) depend upon setting up a hypothetical situation and asking what would be the company's entitlement in that situation.

I have stated the view that neither the right of Casuarina to redeem the preference shares nor the understanding that Forum would not interfere in the affairs of Casuarina had the consequence that par. (b) was not satisfied. Likewise, I am of opinion that that right and that understanding did not have the consequence that par. (c) or par. (d) was not satisfied.

It was said that the provisions of Div. 7 in force at the relevant time differed materially from the provisions for which they were substituted. In the earlier provisions, it was said, the criteria by which the character of a company as a private company was determined, were concerned mainly with the state of its share register, whereas in the later provisions there may be seen a legislative intention to attach more importance to external criteria and to the question whether or not it appears that a company has really and genuinely a public character. But in my opinion there is no basis in the later legislation for deciding whether a company is or is not a private company for the purposes of Div. 7 by reference to any broad concept as to what is "genuinely" a public company. The matter can be decided only by applying the precise terms of the statutory descriptions to the facts of the case.

It is necessary now to consider the appellant's submissions based on s. 260 of the Act. Before Windeyer J., the appellant put forward two alternative versions of the arrangement which was said to have attracted the operation of that section. I need not refer to the details of those formulations. The case for the appellant in relation to the application of s. 260, according to the submissions made to us, may be stated shortly as follows. There was an "arrangement" within the meaning of the section, having the purposes or at least one of the purposes described in it, that a plan would be carried out in order to avoid the substantial tax liabilities which would be incurred if the profits made by Sternberg's private companies were distributed to the Sternbergs or alternatively if those profits were not distributed. It was a necessary step in that plan that the allotment of 51 preference shares should be made by Casuarina to Forum. It was that step which, on the assumption made for the purpose of this argument, brought about the result that Casuarina became for the purposes of the Act a private company and it was that step which altered the taxation liabilities which would have existed if it had not been taken. This was the critical step for the purpose of tax avoidance. Section 260 as applied to these circumstances renders void as against the appellant that allotment of shares. The section has no effect on other steps which formed part of the arrangement or plan, such as the incorporation of Casuarina and the declaration in its favour of dividends by the Sternberg companies. According to the argument, the taking of those steps did not have any relevant taxation consequences.

These submissions give rise to certain questions which I think are not free from difficulty but upon which for the purpose of the present appeals I assume that answers favourable to the appellant are given. I take that course because I am of opinion that upon those assumptions it should still be held that s. 260 has no operation. One such question is whether or not it is open to the appellant to say that one part of the scheme, namely the allotment of shares, was void, whilst at the same time treating other parts of it as valid and exacting tax on the basis that they were valid. Windeyer J. thought that it was not open to the appellant to do this. But if it were necessary to decide this point, close consideration would need to be given to the observations made in Newton v. Federal Commissioner of Taxation [1] , and to the manner in which, in the circumstances of this case, one ought to apply the principle that s. 260 operates to avoid a transaction only so far as the transaction has the purpose or effect of avoiding tax and does not affect a transaction which in itself, although it has a place in a scheme of tax avoidance, does nothing to avoid tax. I shall assume that this principle enables the appellant, for the purposes of the assessments now in question, to treat the transactions prior to the allotment of shares as valid but to treat that allotment as void. This means that for present purposes (whatever might be the position if the liability to tax of the Sternberg companies or of the Sternbergs themselves was in question) the incorporation of Casuarina, the transfer to it of the shares of the Sternbergs in Sternberg Motors and in Hesso and the declaration by those companies of dividends in its favour are all to be taken as valid. The only thing which according to the appellant is affected by s. 260 is the allotment of shares which constituted the method by which Casuarina was transformed from being a private company to being a public company.

1. [1958] A.C. 450, at pp. 468-469; (1958) 98 C.L.R. 1, at pp. 10-11.

Another question upon which there was some debate at the hearing of these appeals was whether it was shown by the evidence that Casuarina itself was a party to or a participant in the scheme or plan upon which the appellant relied. Windeyer J. said that it was an element in the scheme which was "well understood by all concerned" that Forum would not interfere in Casuarina's affairs. His Honour said that he would consider the case on the basis that this was understood. But a plan or scheme was already in existence before Casuarina was incorporated and it did not afterwards record in any formal way any decision by which it agreed to participate in the scheme or plan. It was described by his Honour as being a pawn or a puppet in the whole scheme. But I am disposed to doubt that, in considering whether s. 260 operated in relation to the assessment of tax payable by Casuarina, the whole matter may be resolved simply by saying that, whatever arrangement may have been made by the Sternbergs with Forum and with the accountants, Casuarina was not a party to it and for that reason s. 260 could have no operation. It may be thought that it would be proper to infer, from what Casuarina did and from the circumstances in which it acted, that it adopted the scheme or plan and made itself a participant in it. Whether that be so or not, it may be that an act done by it, even if only as "a puppet" in a tax avoidance scheme formulated by others, could be held to be avoided by s. 260, if that act had the effect of avoiding a tax liability imposed on Casuarina by the Act. But in my opinion I need not resolve these questions. I assume in favour of the appellant that Casuarina did participate in a plan which had been formulated in order to bring about the result that at the relevant time Casuarina would be a public company within the meaning of the Act and to produce by that method a more advantageous tax situation than that which would have existed if this had not been done.

Before proceeding to consider the matter on the assumptions which I have stated, some further observations need to be made concerning the "understanding" between the Sternbergs and Forum that Forum would be content with a small return by way of dividend and would not, so long as it obtained this, interfere in the affairs of Casuarina. Windeyer J. thought that no arrangement of this kind had been made which was legally binding. With this view I agree. But there is authority for the view that s. 260 may operate in regard to an "arrangement" which falls short of being legally binding or which includes elements which are not legally binding: see Newton's Case [1] . But the understanding concerning Forum's non-interference in the affairs of Casuarina was not in my opinion an element in the scheme which had very much real significance in relation to the question of the applicability of s. 260 in the circumstances of this case. The Sternbergs did not have to rely on any such understanding to protect themselves against the taking of actual control by Forum or by the companies which were shareholders in Forum. This protection was provided by the right of redemption of Forum's shares, given by the articles of association to Casuarina and did not rest simply upon an unenforceable understanding.

1. [1958] A.C. 450, at p. 465; (1958) 98 C.L.R., at p. 7.

The argument which must now be considered, upon the stated assumptions made in favour of the appellant, is that s. 260 operated to produce the result, for tax purposes, that Casuarina remained a private company. In my opinion the argument should be rejected. We were referred to all the principal cases in which s. 260 has been considered. Only a few of them need be mentioned. In Keighery [1] , which has already been mentioned, it was decided that reliance could not be placed upon s. 260, in order to avoid the allotments of preference shares as a result of which the appellant in that case ceased to be a private company for the purposes of Div. 7 of the Act. From the reasons given in the joint judgment of three members of the Court I quote some passages. Their Honours said [2] :

Whenever, as the end of a year of income approaches, it is found that facts exist in relation to a company which will make it a "private company" if they persist on the last day of the year, the persons interested in the company are presented by the Act itself with an opportunity to decide whether the consequences of its being a "private company" will be incurred or a sufficient change will be made to prevent its being incurred.

If they so alter the relevant facts that, when the last day of the year of income arrives, the company will not be a "private company", their action cannot be regarded as tending to defeat a liability imposed by the Act; it is one which the Act contemplates and allows.

Later they said [3] : The very purpose or policy of Div. 7 is to present the choice to a company between incurring the liability it provides and taking measures to enlarge the number capable of controlling its affairs. To choose the latter course cannot be to defeat evade or avoid a liability imposed on any person by the Act or to prevent the operation of the Act. In another judgment published on the same day as was the judgment in Keighery , the same Justices, in their joint judgment in Federal Commissioner of Taxation v. Sidney Williams (Holdings) Ltd. [1] said this: Williams J. held that the case was untouched by anything in s. 260. His Honour considered that it was the scheme of the Act to give companies a choice of being taxed as non-private companies or as private companies, and to impose no liability to Div. 7 tax on a company not in fact falling within the descriptions of a private company in s. 105 (1). Accordingly he held that a company was not relieved from any liability under the Act if it preferred to become a non-private company and to be taxed as such than to remain a private company. "Whichever it may be," his Honour said, "it pays the full tax for companies in that category". [1]

Reasons have been given in the case of W. P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation [2] for adopting a similar view. To hold that s. 260 applies in this case would be to give it an operation, not to effectuate an intention appearing from the Act to impose a liability, but to defeat an intention appearing from the Act to impose alternative liabilities according as the persons interested in a company elect to have or not to have a certain state of facts existing on the last day of a year of income. The appellant's contention based on s. 260 must therefore be overruled.

1. (1957) 100 C.L.R. 66.
   1. (1957) 100 C.L.R. 66.
   2. (1957) 100 C.L.R., at p. 93.
   3. (1957) 100 C.L.R., at pp. 93-94.
   4. (1957) 100 C.L.R. 95, at pp. 113-114.
   5. (1957) 100 C.L.R., at p. 104.
   6. (1957) 100 C.L.R. 66.

As has already been stated, the only effect of s. 260 for which the appellant contended in the present case was that it rendered void the allotment of the shares to Forum, with the result that Casuarina must be deemed to have remained a private company and to have incurred the tax liability appropriate to companies in that category. This is precisely the effect which, according to the cases I have cited, is not to be given to s. 260, notwithstanding that the reason for the steps which have taken the company out of the one category and placed it in the other has been to produce a tax advantage. In Keighery their Honours said that [3] :

all concerned must have realized that they were participating in a course of action which had no substantial practical significance apart from its effect on income tax (and possibly, as Mr. Keighery suggested in cross-examination, on probate duties). It was not there stated that there was any explicit "understanding" of the kind to which Windeyer J. referred in the present case but the review of the facts which their Honours made [4] shows that it must have been taken for granted that Mr. Keighery's friends and acquaintances, who took up the redeemable shares, would not interfere in the company's affairs; but the real protection against interference was given in that case as in this by the right to redeem the shares. In my opinion the principle stated in the cases cited should be accepted and applied in this case. But it is proper to refer to some particular reasons advanced against that view. 1. (1957) 100 C.L.R., at p. 92. 2. (1957) 100 C.L.R., at pp. 90-92.

It was said that since the decision in Keighery [1] , a new approach to the interpretation and application of s. 260 has been made and that upon that new approach s. 260 should be held in this case to have operated. It was argued that in Newton v. Federal Commissioner of Taxation [1] , a test was enunciated which when applied to this case requires a result favourable to the appellant. The test was stated in this way:

In order to bring the arrangement within the section you must be able to predicate - by looking at the overt acts by which it was implemented - that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge that the transactions are capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax, then the arrangement does not come within the section. [2] The difficulty about this argument from the appellant's point of view is that immediately after the passage just quoted and by way of illustration and explanation of it, their Lordships said [3] : Nor can anyone, by seeing a private company turned into a non-private company, predicate that it was done to avoid Div. 7 tax, see W. P. Keighery Pty. Ltd. v. Commissioner of Taxation [1] . Later, on the same page, their Lordships, after referring to the purposes of the arrangement found to have been made in that case, said this: (It is to be noticed that - in so far as it was the purpose of the transaction to let the motor companies escape from the additional tax under Div. 7 - this could have been effected by turning the motor companies into non-private companies.) [3] Counsel for the appellant seeks to explain those passages as meaning that if no more be known than the bare fact that a private company has been turned into a non-private company, it cannot be predicated that this was done as a means of avoiding tax, but if, upon looking in a particular case at the overt acts by which the transformation was made, you are not able to regard the transaction as capable of explanation "by reference to ordinary business or family dealing" then you treat it as caught by s. 260. But their Lordships invited attention specifically to Keighery [1] , which was not a case in which no more was known than the bare fact that a private company had become a non-private company. The facts and the circumstances in which this had occurred were set out in the report of the case. It is to be observed also that in relation to the transaction which is relevant in the present case, the allotment of shares to Forum, there was in my opinion no "overt act", done in the course of implementing the allotment, to which one may look in order to decide whether it was "implemented in that particular way" so as to avoid tax. The test stated in Newton's Case [1] , which I have quoted above, appears to me to have been regarded by their Lordships as incapable of being applied so as to avoid a transaction, consisting simply of an allotment of shares having the effect of depriving the allotting company of its "private" character. 1. (1957) 100 C.L.R. 66. 2. [1958] A.C. 450; (1958) 98 C.L.R. 1. 3. [1958] A.C., at p. 466; (1958) 98 C.L.R., at p. 8. 4. [1958] A.C., at p. 466; (1958) 98 C.L.R., at p. 9. 5. (1957) 100 C.L.R. 66. 6. [1958] A.C., at p. 466; (1958) 98 C.L.R., at p. 9. 7. (1957) 100 C.L.R. 66. 8. [1958] A.C., at p. 466; (1958) 98 C.L.R., at p. 8.

It was said for the appellant that the "new approach" taken in Newton's Case [2] has since been followed in this Court in cases such as Hancock v. Federal Commissioner of Taxation [3] and Peate v. Federal Commissioner of Taxation [4] . In those cases Newton's Case was considered, and in Hancock's Case [5] , Kitto J. formulated some general propositions based upon his view of what was said and implied in the reasons of the Privy Council in Newton's Case. But neither Hancock's Case nor Peate's Case was concerned with the particular question which arose in relation to s. 260 in Keighery. No reference to that case is made in the later cases. It is impossible to treat those later cases as authorities for the view that the principles stated in the joint judgment in Keighery have been rejected.

1. [1958] A.C. 450; (1958) 98 C.L.R. 1. 2. (1961) 108 C.L.R. 258. 3. (1964) 111 C.L.R. 443. 4. (1961) 108 C.L.R., at p. 283.

It was submitted that as a result of changes made in the Act after Keighery was decided, a different view is now required as to the operation of s. 260 in relation to the transformation of a company from the private to the public category. It was submitted that the only basis, consistent with the later cases, upon which what was said in Keighery an be supported is that the provisions of Div. 7, as they stood at that time, required that an implication should be made that s. 260 should not operate so as to preclude the making of the choice which Div. 7 was regarded as giving to a taxpayer company. But according to the argument, there is no basis for any such implication in the relevant provisions of Div. 7 in the form in which since 1964 they have appeared in the Act. In my opinion there is no substance in this argument. The changes made were considerable and they may have rendered it more difficult in a practical sense to achieve a satisfactory solution of a tax problem by the method of transforming a private company into a public company. But they did nothing to alter the situation that if certain facts should exist at a particular time, a company would be liable to be taxed on the basis that it was a private company and if it could arrange matters so that those facts were changed in such a way that it was taken out of that category, it would be liable on a different basis. Both before and after the changes, there were "alternative liabilities" under which a company would come according to the category to which it belonged. In the sense in which reference is made in Keighery to a "choice", it still remained open to a company or to those who controlled it, after the change in the legislation, to make a choice between incurring the liability for which Div. 7 provides, and altering the relevant facts so that Div. 7 would not apply.

It was said that in so far as Keighery [1] , when properly understood, should be taken to negate the operation of s. 260 in the present case, we should refuse to follow it. But it is my respectful opinion that there is no ground for dissenting from the reasoning in Keighery and, as I have already indicated, I am of opinion that its authority has not been weakened by the decision or the reasons in Newton v. Federal Commissioner of Taxation [1] , or by the later cases in this Court.

1. (1957) 100 C.L.R. 66. 2. [1958] A.C. 450; (1958) 98 C.L.R. 1.

I am of opinion that the submissions on behalf of the appellant should not be accepted. It is therefore unnecessary for me to consider a question which was raised concerning the construction and effect of s. 46 of the Act. Counsel for Casuarina argued that the company was entitled, under the provisions of s. 46 (3), to a further rebate in addition to that which the appellant allowed. But this question would be material only if the company was, as the appellant claimed, a private company for tax purposes. Since in my opinion it was not, the question under s. 46 does not arise.

In my opinion the appeals should be dismissed with costs.

I have had the advantage of reading the reasons for judgment prepared by my brother Walsh and agree with those reasons and with his conclusions. I would, however, add a few remarks.

I have given much consideration to the suggested application of s. 260 of the Income Tax Assessment Act 1936-1968 Cth ("the Act") to the present case, because it seems so clear that "reluctant taxpayers and their ingenious advisers" (as my brother Menzies described the class in Peate v. Federal Commissioner of Taxation [1] ) have found that the provisions of s. 103A (2) (d) (v) and s. 103A (4) of the Act offer a way of escape from a liability to tax that would otherwise have fallen upon them or upon the companies they control and, in those circumstances, it might at first be thought that the general provisions against tax avoidance contained in s. 260 would render the attempt to escape ineffectual. However, W. P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation [1] and Federal Commissioner of Taxation v. Sidney Williams (Holdings) Ltd. [2] , establish that where the Act itself imposes different tax liabilities on public companies on the one hand and private companies on the other, the conversion of a private into a public company is not, so far as the company is concerned, rendered void as against the Commissioner by s. 260, notwithstanding that it will entail a reduced liability to tax. In such a case no liability to tax imposed by the Act on the company is avoided for whatever tax is appropriate to its situation remains payable. The same result follows in other cases in which the Act imposes different liabilities according as the taxpayer answers one description or another, and some examples of such cases were given by my brother Windeyer in his judgment in the present case. No doubt the formation of a public company may form part of an arrangement which has the purpose or effect of avoiding a liability imposed by the Act on some other person but the application of s. 260 does not result from the mere fact that the company has become a public instead of a private company.

1. (1964) 111 C.L.R. 443, at p. 445. 2. (1957) 100 C.L.R. 66. 3. (1957) 100 C.L.R. 95.

The facts in Newton v. Federal Commissioner of Taxation [3] , are quite distinguishable from those of W. P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation [1] and Federal Commissioner of Taxation v. Sidney Williams (Holdings) Ltd. [2] , and it is clear from what their Lordships said in the former case [4] that they had no intention of overruling those two decisions, but on the contrary recognized them as correct. I must confess, with great respect, that I do find some difficulty in their Lordships' remark [4] :

Nor can anyone, by seeing a private company turned into a non-private company, predicate that it was done to avoid Div. 7 tax, see W. P. Keighery Pty. Ltd. v. Commissioner of Taxation. In W. P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation [1] , Mr. Keighery had candidly admitted in evidence, and the Court in effect predicated, that the substantial object of turning the private company into a public company was so that the company would not be required to pay Div. 7 tax [1] . It can be predicated that the redeemable preference shares in Casuarina Pty. Ltd. were issued to Forum Holdings Ltd. in the present case with a similar purpose. For myself I would prefer to say that although one can predicate that the conversion of a private into a public company was done to escape Div. 7 tax, this does not mean that the purpose or effect of the arrangement was to avoid a liability imposed on the company by the Act, since the Act itself imposes the additional tax payable under Div. 7 only on private companies, and contemplates that companies will, and lawfully may, choose to become public companies within the description of s. 103A and so escape liability to pay the tax. It seems to me that the authority of W. P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation [1] and Federal Commissioner of Taxation v. Sidney Williams (Holdings) Ltd. [2] has not been affected by Newton v. Federal Commissioner of Taxation [3] or by any subsequent decision. 1. [1958] A.C. 450; (1958) 98 C.L.R. 1. 2. (1957) 100 C.L.R. 66. 3. (1957) 100 C.L.R. 95. 4. [1958] A.C., at p. 466; (1958) 98 C.L.R., at p. 9. 5. [1958] A.C., at p. 466; (1958) 98 C.L.R., at p. 9. 6. (1957) 100 C.L.R. 66. 7. (1957) 100 C.L.R., at p. 92. 8. (1957) 100 C.L.R. 66. 9. (1957) 100 C.L.R. 95. 10. [1958] A.C. 450; (1958) 98 C.L.R. 1.

I hold, therefore, that s. 260 does not close the gap that has been found in the provisions of Div. 7. It is entirely a matter for the legislature, if it considers that the gap ought to be stopped, to enact appropriate legislation.

In the view that I share with my brother Walsh, it is, as he has said, unnecessary to consider the question raised as to the effect of s. 46 of the Act. However, I have found it necessary to decide that question in Finance Facilities Pty. Ltd. v. Federal Commissioner of Taxation [4] and, for the reasons that I shall give in that case, I am in agreement with the conclusions of my brother McTiernan in the present case that the word "may" in s. 46 (3) entrusts a discretion to the Commissioner.