Commissioner of Taxation (Cth) v Casuarina Pty Ltd

Commissioner of Taxation (Cth) v Casuarina Pty Ltd - [1971] HCA 78 - HCA 1971 case summary — Zoe

[7]

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.

[30]

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.

[31]

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?

[35]

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:

[36]

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.

[78]

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.

[79]

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.

[116]

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.

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