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[1981] HCA 26
respondent. Appeal dismissed with costs.
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A company that had made losses could not deduct them in a later year because its parent company's shareholder had made an arrangement about the parent's shares whose purpose was to let the loss-making company use those losses. Although the exact words of the tax law seemed to say the arrangement had to be about the parent's own losses, the High Court said that reading would produce senseless results. Looking at the whole tax-loss scheme, the Court decided the law was meant to stop such arrangements no matter which company's losses were targeted, so the deduction was refused and the Commissioner's assessment upheld.
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The appellant, Cooper Brookes (Wollongong) Pty Ltd, incurred losses totalling $44,077 in the income years ended 30 June 1964 and 30 June 1965. In its return for the year ended 30 June 1971 it claimed those losses as an allowable deduction under s.80 of the Income Tax Assessment Act 1936 (Cth) as then in force. At all material times the appellant was a subsidiary of Wellington Holdings Pty Ltd, a company in which no other company held a controlling interest. E.H. King held shares in Wellington Holdings that carried more than two-fifths of the voting power, dividend rights and capital distribution rights throughout the years of loss and the year of income.
In 1965 Wellington Holdings went into voluntary liquidation. In 1967 Mr and Mrs King entered an agreement with the liquidator and another trustee of a scheme of arrangement under which they agreed to transfer their shares in Wellington Holdings to "the purchaser of the tax losses" of the subsidiaries for $1,200. A deed executed in April 1968 between the trustees and Network Finance Ltd provided that, in consideration of a loan to implement the scheme, the trustees would deliver transfers of all issued shares in Wellington Holdings (save two retained by King) for $1,200. The deed contained covenants that the trustees would procure board changes and a reduction of capital in the form required by Network Finance Ltd. The fifth schedule to the deed made clear that the transfers related to the structure of Wellington Holdings so that its subsidiaries' tax losses could be utilised. King performed all acts necessary to complete the transfers. Network Finance Ltd and its nominee thereby became the beneficial owners of all but two shares in Wellington Holdings.
The Commissioner disallowed the deduction, stating that pursuant to s.80B(5) he treated the shares held by King in Wellington Holdings as not beneficially owned by him at any time during the 1971 year, with the consequence that he could not be satisfied of the matters required by s.80C(1)(b). The appellant objected, the objection was disallowed, and the appellant appealed to the Supreme Court of New South Wales. Woodward J. allowed that appeal, holding that s.80B(5) had no extended application to a subsidiary via s.80C(3) and that in any event no relevant arrangement existed. The Commissioner appealed to the Full Court of the Federal Court, which unanimously allowed the appeal and restored the assessment. The Federal Court held that s.80C(3) did extend s.80B(5) to the holding company and that an arrangement within s.80B(5)(b) and (c) had been made.
Special leave to appeal to the High Court was granted on condition that the appeal be confined to the correct construction of ss.80C(3) and 80B(5) in the form they took after the 1966 Act and before the 1973 Act. The High Court (Gibbs C.J., Stephen, Mason, Wilson and Aickin JJ.) by majority dismissed the appeal, holding that although a literal reading of s.80C(3) favoured the taxpayer, that reading produced a capricious and irrational result inconsistent with the legislative scheme. Aickin J. dissented, concluding that the literal meaning was clear, no gap existed, and the appeal should be allowed.
The majority (Gibbs C.J., Stephen J. and Mason and Wilson JJ.) began from the elementary principle that the object of the court is to ascertain the intention expressed by the words used, read in their full context (citing River Wear Commissioners v. Adamson (1877) 2 App. Cas. 743 at p. 763). They accepted that if the language is clear, unambiguous, consistent with the rest of the enactment and capable of intelligible application, it must be given its ordinary grammatical meaning even if the result appears inconvenient or unjust. However, they held that the words of s.80C(3) are not substantive provisions that of their own force apply to a holding company; rather they extend to a holding company provisions (ss.80B(3)–(8)) originally framed for the taxpayer subsidiary itself. That extension works cleanly for paragraphs (a) and (b) of s.80B(5) but produces an incongruous result for paragraph (c).
The majority emphasised the symmetry deliberately created by the legislature. Section 80A requires continuity of beneficial ownership in the shares of the company claiming the loss. Section 80C(1) imposes a parallel requirement for the shares of the holding company when a subsidiary claims the loss. Section 80B(5) equips the Commissioner with power to treat shares as not beneficially owned where an arrangement of the described kind exists. The evident purpose was that the anti-avoidance mechanism should operate uniformly whether the claimant is a standalone company or a subsidiary. A literal reading of s.80C(3) would require the purpose in s.80B(5)(c) to be a purpose of enabling the holding company to take into account a loss that the holding company had incurred. That would mean an arrangement aimed at the subsidiary's losses would fall outside the Commissioner's power, while an arrangement aimed at the holding company's losses (even if the holding company had none) would disqualify the subsidiary. Mason and Wilson JJ. described this as "capricious and irrational". Gibbs C.J. could see "no reason" why Parliament, when dealing with shares in the holding company whose only relevance was to the subsidiary's deduction, would intend to refer only to an arrangement enabling the holding company to obtain a deduction.
The history of the provisions reinforced the conclusion that a drafting oversight had occurred. When first enacted in 1964, s.80B(5) contained no purpose test; it dealt only with options. Section 80C(3) then operated without difficulty by simple substitution. The 1965 amendments introduced the purpose paragraph (c) and redefined "holding company" so that the reference to interposed companies in s.80C(3) became largely otiose, yet the subsection was left unamended. The majority viewed this as manifest inadvertence. On a full view of the Act, its scheme and manifest purpose (citing Drummond v. Collins [1915] A.C. 1011 at p. 1017), Parliament intended that the reference in paragraph (c) should be to the subsidiary company. The expression of that intention miscarried, but the court could correct it to avoid defeating the object of the legislation.
Aickin J. dissented on the basis that the words of s.80C(3) are not ambiguous. The subsection exists for the purposes of the application of ss.80C(1) and (2), which are concerned only with continuity of ownership in the holding company. To read words into s.80C(3) or s.80B(5)(c) would contradict the opening words of s.80C(3) and would not assist in applying those subsections. He considered the policy of tying the subsidiary's deduction to the holding company's ownership continuity to be rational, not unjust. Because the literal meaning was clear and the suggested gap was not demonstrated with the high degree of clarity required by authorities such as Magor and St. Mellons R.D.C. v. Newport Corporation [1952] A.C. 189, the court could not fill it.
The majority's conclusion was that the arrangement satisfied s.80B(5) as modified by s.80C(3), the Commissioner was entitled to treat King's shares as not beneficially owned by him, the s.80C(1) condition was not met, and the appeal must be dismissed.
Before the 1964 amendments the carry-forward of losses for private companies was governed by s.80(5) and (6), which required the Commissioner to be satisfied of 25 per cent continuity of voting power on the last day of the loss year and the income year. No separate holding-company rule existed. The 1964 Act (No. 110 of 1964) repealed those subsections, inserted ss.80A, 80B and 80C, raised the continuity threshold to two-fifths, and introduced the first version of s.80B(5) dealing with options. At that stage s.80C(3) operated harmoniously because there was no purpose test and the definition of holding company still permitted interposed companies to be treated as holding companies.
The 1965 Act (No. 103 of 1965) introduced the present form of s.80B(5), including the purpose test in paragraph (c), and redefined "holding company" in s.80C(1) as a company in which no other company had a controlling interest. It replaced s.80C(2) with a new partial-year provision and amended s.80C(3) to refer to both subsections (1) and (2) and to every company interposed at any relevant time. The draftsman therefore turned his mind to s.80C(3) but left unchanged the direction that every reference to "the company" in ss.80B(3)–(8) should be read as a reference to the holding company or interposed company. The majority regarded this as an anachronism that stultified the evident purpose. The legislature itself addressed the question in the Income Tax Assessment Act 1973, but that later amendment was irrelevant to the 1971 year.
After the High Court's decision the law was understood to require that, when s.80C(3) applies s.80B(5) to a holding company, the purpose paragraph is satisfied if the arrangement was made to enable the subsidiary to take its losses into account. The anti-avoidance rule therefore operates symmetrically with the rule applicable to non-subsidiary companies under s.80A and s.80B(5).
Gibbs C.J. stated: "It is an elementary and fundamental principle that the object of the court, in interpreting a statute, 'is to see what is the intention expressed by the words used'." In plain English this means a judge's job is to find what Parliament actually said in the statute, not to rewrite it to match what the judge thinks would have been fairer.
He continued: "if the language of a statutory provision is clear and unambiguous, and is consistent and harmonious with the other provisions of the enactment, and can be intelligibly applied to the subject matter with which it deals, it must be given its ordinary and grammatical meaning, even if it leads to a result that may seem inconvenient or unjust." Translation: if the words make sense when read with the rest of the Act and can be applied sensibly, the court must use them even if the outcome looks odd or harsh; judges cannot simply substitute their own ideas of justice.
Later he concluded: "On a full view of the Act, considering its scheme and its machinery and the manifest purpose of it I consider that when the Parliament applied s. 80B (5) to the case of a holding company, it intended that the reference to 'company' in par. (c) should apply to the subsidiary company, and that the expression of its intention miscarried." In plain English: when you stand back and look at how all the loss-carry-forward rules fit together, it is obvious Parliament wanted the purpose test to stop arrangements aimed at the subsidiary's losses; the draftsman simply failed to say that clearly when he copied the subsection across.
Mason and Wilson JJ. observed that the symmetry "suggests that sub-ss. (3) to (8) of s. 80B are to provide a common dictionary for both s. 80A and s. 80C." Translation: the anti-avoidance rules are meant to be a shared set of definitions that work the same way whether the company claiming the loss is a standalone company or a subsidiary; the literal reading destroys that shared dictionary.
They added: "the literal interpretation of s. 80C (3) results in an operation for s. 80B (5) (c) which in our opinion is capricious and irrational." Plain English: reading the section exactly as written would create arbitrary, nonsensical outcomes that cannot have been intended.
Stephen J. noted that a literal construction would mean s.80B(5) "will never apply to a subsidiary's losses, but only to the past losses of its holding company." He regarded the retention of the now-useless reference to interposed companies as "an indication of oversight". Translation: the fact that Parliament left in words that no longer made sense after the 1965 changes shows the draftsman did not realise the subsection had become mismatched; that supports reading it in a way that carries out the overall object rather than defeating it.
The precedent is triggered whenever a subsidiary company seeks to deduct losses incurred in a prior year within the seven-year period and the Commissioner identifies an arrangement of the kind described in s.80B(5)(b) that relates to shares in the holding company (or an interposed company) and that was entered into for a purpose that included enabling the subsidiary to take those losses into account. The arrangement need not be legally enforceable; the Federal Court found an arrangement between King and the trustees of the scheme even though the particular sale originally contemplated did not occur. The precedent applies even if the literal words of s.80B(5)(c) appear to require the purpose to relate to the holding company's losses. It also applies where the holding company itself has no losses; the irrationality of the literal reading is precisely why the court rejected it. The factual inquiry remains whether the Commissioner is satisfied that the continuity-of-ownership conditions in s.80C(1) are met once the shares are treated as not beneficially owned under s.80B(5) as modified. The 1968 share transfers and accompanying covenants to alter boards and capital were sufficient on the facts to engage the section. Any similar disposal, option, or agreement whose practical effect is to separate the economic benefit of the tax losses from the legal continuity of shareholding in the holding company will engage the rule.
The judgment itself records that the Federal Court had already adopted a non-literal construction. Fisher J. (with whom Brennan and Deane JJ. agreed) held that s.80C(3) should be read as though the words "where necessary or appropriate" or "mutatis mutandis" were inserted. Brennan J. construed the reference to "company" in s.80B(5)(c) as applied by s.80C(3) as a reference to "the company which was to be enabled to take into account the loss referred to in that paragraph". Deane J. implied the qualification "where appropriate". The High Court majority affirmed that approach, albeit by slightly different reasoning that emphasised the manifest purpose of the Act as a whole and the drafting history rather than the insertion of words.
The judgment cites Kolotex Hosiery (Australia) Pty. Ltd. v. Federal Commissioner of Taxation (1973) 130 C.L.R. 64 and (1975) 132 C.L.R. 535 for the difficulties of construction presented by s.80C(3), but notes that it was not then necessary to decide how s.80B(5)(c) could be sensibly applied to a holding company when the subsidiary was claiming the deduction. The High Court thus treated Kolotex as identifying the problem but not resolving it, and proceeded to resolve it in the manner set out above. The majority also drew on earlier authorities such as Metropolitan Gas Co. v. Federated Gas Employees' Industrial Union (1925) 35 C.L.R. 449 and Vacher & Sons Ltd. v. London Society of Compositors [1913] A.C. 107 to support the proposition that even clear words may be read in context so as to avoid a result that defeats the legislative object. Aickin J.'s dissent, while not prevailing, underscores that the decision rests on a conclusion that the literal meaning produces absurdity of a high order rather than mere inconvenience. No subsequent legislative amendment is discussed; the judgment simply notes that the 1973 Act dealt with the question, leaving the 1971 year to be governed by the construction now settled.
The judgment leaves open the precise degree of "capriciousness" or "irrationality" required before a court may depart from literal language. Gibbs C.J. accepted that the result contended for by the appellant "could not be described as unjust, capricious or irrational" if viewed in isolation, yet the majority still departed from it because of the incongruity with the overall scheme. The boundary between an inconvenient but intended result and an unintended absurdity is therefore not exhaustively defined. Aickin J.'s dissent highlights that the policy of linking a subsidiary's loss utilisation to continuity in its holding company can be seen as rational; the limits of when commercial reality justifies overriding clear words remain unsettled.
The continued presence of the reference to "every company that was at any relevant time interposed between the holding company and the subsidiary company" in s.80C(3) is acknowledged by all judges as an anachronism after the 1965 redefinition of "holding company". Aickin J. noted that the words make no real difference in most cases because a holding company must in any event control each interposed company, but he left open whether in unusual share structures the reference could create difficulty. The majority did not need to decide the point because no interposed company existed on the facts.
Whether the same approach to construction would apply to other cross-referencing provisions in the Act that produce literal results at odds with symmetry is not addressed. The judgment is confined to ss.80B(5) and 80C(3). Finally, the exact evidentiary threshold for inferring an "arrangement" that "in any way, directly or indirectly, related to, affected, or depended for its operation on" the beneficial interest in shares is not explored, the grant of special leave having excluded that factual question. The decision therefore settles the construction point but leaves room for further litigation on the margins of both the interpretive principle and its application to complex group structures.
High Court of Australia Gibbs C.J. Stephen, Mason, Aickin and Wilson JJ. Cooper Brookes (Wollongong) Pty Ltd v Commissioner of Taxation [1981] HCA 26
This appeal is brought by special leave from a decision of the Federal Court of Australia allowing an appeal brought by the Commissioner of Taxation from a decision of the Supreme Court of New South Wales. The order of the Federal Court of Australia confirmed an assessment of the appellant company to income tax in respect of the year ended 30 June 1971. Special leave to appeal has been granted subject to a condition which confines the appeal to resolving the correct construction of ss. 80C (3) and 80B (5) of the Income Tax Assessment Act 1936 Cth, as amended, ("the Act"), in the form in which those sections stood in the relevant income year, i.e., after the passing of the Income Tax Assessment Act 1966 and before the passing of the Income Tax Assessment Act 1973.
The appellant company, which incurred losses in the years 1964 and 1965, claimed that those losses should be allowed as a deduction in the year ended 30 June 1971. The Act at the relevant time permitted losses incurred in the preceding seven years to be allowed as a deduction subject to certain provisions of the Act including, if the taxpayer was a company, those of ss. 80A to 80E. For present purposes it is enough to refer to the provisions of ss. 80A (1), 80B (5) and 80C (1) and (3). Section 80A (1) provided, inter alia, that losses of previous years should not be taken into account in the case of a private company unless the company satisfied the Commissioner that, at all times during the year of income, shares in the company carrying the right to exercise not less than two-fifths of the voting power in the company, the right to receive not less than two-fifths of any dividend that might be paid by the company, and the right to receive not less than two-fifths of any distribution of capital of the company in the event of the winding up, or of a reduction in the capital, of the company, were beneficially owned by persons who, at all times during the year in which the loss was incurred, beneficially owned shares in the company carrying rights of those kinds. It was not disputed that the appellant satisfied this condition, since at all relevant times the requisite shares in the appellant were held by another company, Wellington Holdings Pty. Ltd. ("Wellington Holdings"). However, to obtain the deduction, the appellant had to satisfy another condition, namely that imposed by s. 80C (1), which applied where a company in which no other company had a controlling interest ("the holding company") had a controlling interest in another company ("the subsidiary company") at any time during a year in which a loss was incurred by the subsidiary company. In those circumstances the loss could not be taken into account unless the Commissioner was satisfied that at all times during the year of income of the subsidiary company -
(a) the holding company had a controlling interest in the subsidiary company; and
(b) shares in the holding company carrying between them -
(i) the right to exercise not less than two-fifths of the voting power in the company;
(ii) the right to receive not less than two-fifths of any dividends that may be paid by the company; and
(iii) the right to receive not less than two-fifths of any distribution of capital of the company in the event of the winding-up, or of a reduction in the capital, of the company,
were beneficially owned by persons who, at all times during the year in which the loss was incurred by the subsidiary company, beneficially owned shares in the holding company carrying rights of those kinds.
It is agreed that if this provision had been unaffected by ss. 80B (5) and 80C (3) this condition also would have been satisfied, for one E. H. King owned shares in Wellington Holdings carrying the necessary rights at all times during the year of income and during the years in which the losses were incurred. However, the Commissioner claims that pursuant to ss. 80B (5) and 80C (3) he is entitled to treat the shares in the name of Mr. King as not having been beneficially owned by Mr. King at the relevant time. If he can so treat them, the condition laid down by s. 80C (1) will of course not have been satisfied.
(a) a person who beneficially owned any shares in the company at all times during the year in which the loss was incurred also beneficially owned shares in the company at any time (in this sub-section referred to as "the relevant time") during the year of income;
(b) before or during the year of income, that person entered into a contract, agreement or arrangement, or granted or was granted a right, power or option (including a contingent right, power or option), that, in any way, directly or indirectly, related to, affected, or depended for its operation on -
(i) the beneficial interest of that person in the last-mentioned shares, or the value of that interest;
(ii) the right of that person to sell, or otherwise dispose of, that interest, or any such sale or other disposition;
(iii) any rights carried by those shares, or the exercise of any such rights; or
(iv) any dividends that might be paid, or any distribution of capital that might be made, in respect of those shares, or the payment of any such dividends or the making of any such distribution of capital; and
(c) the contract, agreement or arrangement was entered into, or the right, power or option was granted, for the purpose, or for purposes that included the purpose, of enabling the company to take into account for the purposes of section eighty or section eighty aa of this Act a loss that the company had incurred in a year before the year in which the contract, agreement or arrangement was entered into or the right, power or option was granted or a loss that the company might incur in that last-mentioned year,
the Commissioner may, subject to the succeeding provisions of this section, treat those shares as not having been beneficially owned by that person at the relevant time. In the present case the Federal Court found (and under the condition on which special leave was granted its finding cannot be challenged) that Mr. King entered into an arrangement that related to his shares in Wellington Holdings, for the purpose of enabling the appellant to take into account for the purposes of s. 80 of the Act a loss that the appellant had incurred in a year before the year in which the arrangement was entered into. An arrangement of that kind would not come within s. 80B (5) if that provision stood alone. Section 80B (5) refers to an arrangement relating to shares held in the company which claims that the loss should be taken into account, and here the shares in question were held in Wellington Holdings, but it was the appellant that claimed a deduction for the losses. The Commissioner then relies on s. 80C (3) to render s. 80B (5) applicable to the present case. Section 80C (3) provided as follows: For the purposes of the application of either of the last two preceding sub-sections, the provisions of sub-sections (3) to (8), inclusive, of the last preceding section apply in relation to the holding company and in relation to every company that was at any relevant time interposed between the holding company and the subsidiary company as if references in those sub-sections to the company were references to the holding company or to the interposed company, as the case may be. Literally construed, this provision has the effect, in the present case, that for the purposes of the application of s. 80C (1), the provisions of s. 80D (5) apply in relation to Wellington Holdings as if references in that section to "the company" were references to Wellington Holdings. So construed, the provisions of pars. (a) and (b) of s. 80B (5) are satisfied, but those of par. (c) are not, because that paragraph would require that the arrangement was entered into for the purpose of enabling Wellington Holdings to take into account a loss that Wellington Holdings had incurred in one of the earlier years, whereas the purpose of the arrangement was to enable the appellant to take into account losses which the appellant had incurred. The question then is whether the words of s. 80C (3) must be given their literal meaning; if so, the appellant must succeed.
The difficulties of construction presented by s. 80C (3) were mentioned in Kolotex Hosiery (Australia) Pty. Ltd. v. Federal Commissioner of Taxation [3] , but it was not then necessary to determine whether, and if so how, s. 80B (5) (c) could be sensibly applied to the case of a holding company when it was the subsidiary company that was claiming the deduction. We must now attempt that task. The relevant provisions of the Act reveal that it was intended that a loss incurred by a subsidiary company in an earlier year should not be taken into account by that company in a later year unless a double condition was fulfilled. It was necessary that the requisite continuity of beneficial ownership should have existed not only in the shares of the subsidiary company (s. 80A) but also in the shares of the holding company (s. 80C (1)). However, the Commissioner was given power to treat shares as not having been beneficially owned at the relevant time when the beneficial owner had entered into an arrangement of the kind described in s. 80B (5). No doubt it was considered that where such an arrangement existed there was only a semblance of continuity of beneficial ownership of shares in the company, so that the conditions of deductibility would be fulfilled in form but not in substance. So far as the shares in the subsidiary (the taxpayer claiming the deduction) were concerned, it is clear that to answer the requisite description the arrangement must have had, as one of its purposes, the purpose of enabling the taxpayer to take into account a loss that it had earlier incurred: s. 80B (5) (c). So far as the shares in the holding company (which is not the taxpayer claiming the deduction) are concerned, the argument on behalf of the appellant is that the words of s. 80C (3) should be given their literal meaning, with the result that the purpose of the arrangement must be to enable the holding company to take into account a loss that it had earlier incurred, and that it would be irrelevant whether a purpose of the arrangement was or was not to enable either company to have the benefit of the loss whose deductibility is in question - the loss incurred by the subsidiary company.
Mr. Priestley, for the appellant, submitted that even if this result might be regarded as surprising, it could not be described as unjust, capricious or irrational. He acknowledged that the construction for which the appellant contended would have the result that in some cases the subsidiary company would lose the deduction because a beneficial owner of shares in the holding company had entered into an arrangement designed to enable the holding company to take into account losses that it had incurred. However, he pointed out that where both the holding company and the subsidiary had incurred losses it was unlikely that the owner of shares in the holding company would distinguish between the respective losses - he would wish to be able to have the benefit of both, and an arrangement with regard to the losses in the holding company might very well affect in a practical sense the losses in the subsidiary company. It was therefore not unfair to deprive the subsidiary of its right to a deduction in such circumstances. On the other hand, if the holding company had no losses, the subsidiary would be entitled to the deduction notwithstanding that the beneficial owner of shares in the holding company had entered into an arrangement affecting the beneficial interest in his shares in the holding company for the purpose of enabling the subsidiary company to take its losses into account. Mr. Priestley conceded that this might be regarded as a gap in the legislation, but urged that the court had no right to fill it, especially since the legislature had itself dealt with the question in the Income Tax Assessment Act 1973.
It is an elementary and fundamental principle that the object of the court, in interpreting a statute, "is to see what is the intention expressed by the words used": River Wear Commissioners v. Adamson [4] . It is only by considering the meaning of the words used by the legislature that the court can ascertain its intention. And it is not unduly pedantic to begin with the assumption that words mean what they say: cf. Cody v. J. H. Nelson Pty. Ltd. [5] . Of course, no part of a statute can be considered in isolation from its context - the whole must be considered. If, when the section in question is read as part of the whole instrument, its meaning is clear and unambiguous, generally speaking "nothing remains but to give effect to the unqualified, words": Metropolitan Gas Co. v. Federated Gas Employees' Industrial Union [6] . There are cases where the result of giving words their ordinary meaning may be so irrational that the court is forced to the conclusion that the draftsman has made a mistake, and the canons of construction are not so rigid as to prevent a realistic solution in such a case: see per Lord Reid in Connaught Fur Trimmings Ltd. v. Cramas Properties Ltd. [7] . Examples of that sort of case may be found in Maxwell on the Interpretation of Statutes, 12th ed., (1969), at p. 228 et seq., and Craies on Statute Law, 7th ed., (1971), at p. 520 et seq. However, if the language of a statutory provision is clear and unambiguous, and is consistent and harmonious with the other provisions of the enactment, and can be intelligibly applied to the subject matter with which it deals, it must be given its ordinary and grammatical meaning, even if it leads to a result that may seem inconvenient or unjust. To say this is not to insist on too literal an interpretation, or to deny that the court should seek the real intention of the legislature. The danger that lies in departing from the ordinary meaning of unambiguous provisions is that "it may degrade into mere judicial criticism of the propriety of the acts of the Legislature", as Lord Moulton said in Vacher & Sons Ltd. v. London Society of Compositors [10] ; it may lead judges to put their own ideas of justice or social policy in place of the words of the statute. On the other hand, if two constructions are open, the court will obviously prefer that which will avoid what it considers to be inconvenience or injustice. Since language, read in its context, very often proves to be ambiguous, this last mentioned rule is one that not infrequently falls to be applied.
In the present case the words of the Act which give rise to the question of interpretation are not substantive provisions which of their own force apply to the case of a holding company. The difficulty is caused by the application to the case of a holding company which is not the taxpayer of a provision intended to apply to the case of a subsidiary company which is the taxpayer. The provisions of s. 80B (5) are given an extended application by s. 80C (3). Clearly some modification of the provisions of s. 80B (5) was necessary to enable those provisions to be applied to a situation with which they were by themselves not intended to deal. The modification made by s. 80C (3) was perfectly appropriate so far as pars. (a) and (b) of s. 80B (5) are concerned, but lead to an incongruous result when applied to par. (c). Sections 80A and 80C contain parallel requirements with regard to the subsidiary company and the holding company respectively, and the Commissioner is given power to treat those requirements as not having been satisfied if there was an arrangement of the kind described in s. 80B (5) in the former case, or of the kind described in s. 80B (5) as modified by s. 80C (3) in the latter case. Since the existence of the arrangement is relevant to the question whether the subsidiary company can obtain a deduction under s. 80, it is understandable that s. 80B should refer to an arrangement made for that purpose. No reason can be suggested why, when the legislature came to deal with an arrangement relating to the shares in the holding company, it should intend to refer to an arrangement made for the purpose of enabling the holding company to obtain a deduction under s. 80, since again the existence of the arrangement is relevant only to the question whether the subsidiary company should obtain a deduction. "On a full view of the Act, considering its scheme and its machinery and the manifest purpose of it" (to use the words of Earl Loreburn in Drummond v. Collins [11] . I consider that when the Parliament applied s. 80B (5) to the case of a holding company, it intended that the reference to "company"par. (c) should apply to the subsidiary company, and that the expression of its intention miscarried.
The history of ss. 80B (5) and 80C (3) explains how the mistake occurred. When s. 80B (5) was inserted by the Income Tax and Social Services Contribution Assessment Act (No. 3) 1964 it provided as follows:
Where, at any time during the year of income, a person, not being a person who had beneficially owned any shares in the company at all times during the year in which the loss was incurred, had an option by virtue of which he could, directly or indirectly, acquire shares in the company or cause shares in the company to be acquired by another person, whether the option was presently exercisable or not, the Commissioner may treat the shares to which the option related as having been beneficially owned at that time by the person, or any of the persons, for whose benefit or on whose behalf the option was exercisable. Section 80C (1), as inserted by that Act, referred to a company ("the holding company") which had a controlling interest in another company, and did not require the holding company to be a company in which no other company had a controlling interest. Section 80C (3) applied without difficulty in that state of the law. Section 80B (5) did not refer to the purpose of "enabling the company to take into account a loss that the company had incurred", and it was entirely appropriate to treat the references to "the company" in s. 80B (5), as applied by s. 80C (3), as references to the holding company. Moreover, there was scope for the reference in s. 80C (3) to an interposed company. The amendments made by the Income Tax Assessment Act 1965 created the difficulty, first, by including in s. 80B (5) (c) the words relating to purpose, and secondly by describing "the holding company" in s. 80C (1) as a company in which no other company had a controlling interest, thus making meaningless the reference to an "interposed" company in s. 80C (3). It is true that some amendments (immaterial for present purposes) were made to s. 80C (3), but the inadvertence of the draftsman is made manifest by the fact that he allowed the unnecessary reference to an interposed company to remain in the sub-section. It is a short step to conclude that in allowing s. 80C (3) to make every reference to the company in s. 80B (5) refer to the holding company the draftsman also acted by mistake.
The case is one of some difficulty, but for the reasons I have given I conclude that the intention of the legislature sufficiently appears when ss. 80A, 80B and 80C are read together and that it is permissible to depart from the literal meaning of the words of s. 80C (3) in order to give effect to that intention. For these reasons, the Federal Court was right in holding that the arrangement made by Mr. King came within s. 80B (5) as applied by s. 80C (3), and the Commissioner was entitled to treat the shares as not having been beneficially owned by Mr. King at the relevant time, so that the condition laid down by s. 80C (1) was not satisfied, and the claim to a deduction fails.
The taxpayer incurred losses of $44,077 in its 1964 and 1965 years of income and in its 1971 year of income sought to deduct those accumulated losses. The Commissioner disallowed the deduction. The taxpayer succeeded in its appeal to the Supreme Court of New South Wales but a further appeal by the Commissioner to the Federal Court led to the Commissioner's assessment being restored. The taxpayer then obtained special leave to appeal to this Court, its appeal being confined to the construction of ss. 80B (5) and 80C (3) of the Income Tax Assessment Act and their application to the facts of this case. References to the Act in this judgment disregard amendments made since 1971.
Throughout all relevant years the taxpayer was a subsidiary of Wellington Holdings Pty. Ltd. and it was because of circumstances affecting that company's share capital that the Commissioner disallowed the taxpayer's claimed deductions.
While s. 80 of the Act allows losses of the past seven years to be claimed as deductions, s. 80A stipulates that, in the case of companies, the beneficial ownership of share capital must be substantially the same both in the year of loss and the year of income. Under s. 80B (5), the Commissioner may treat shares as not having been continuously beneficially owned where, despite ostensible continuity of beneficial ownership, any one of a number of specified types of transactions affecting those shares has been entered into for the purpose of allowing the company to claim its past losses as deductions.
Section 80C then takes up the particular case of the deductibility of the past losses of subsidiary companies. It requires as a condition of deductibility that there must have existed in the share capital of the holding company that same substantial identity in the year of loss and the year of income of beneficial ownership which is required of companies generally by s. 80A. So far, so good; but the question then arises whether the Commissioner's power under s. 80B (5) is to apply to subsidiary companies in such a way that the Commissioner may disallow the deduction of their past losses, despite ostensible continuity of beneficial ownership of their holding company's share capital, if transactions of a type aimed at by s. 80B (5) have been entered into in relation to the share capital of the holding company. This turns upon the effect of s. 80C (3). The taxpayer denies that s. 80C (3) is effective for this purpose. If it be correct, its present appeal should succeed since, if s. 80B (5) does not apply to this subsidiary's losses, there will be no relevant lack of continuity of beneficial ownership. There is no dispute that the necessary continuity existed so far as concerns the shareholding in the taxpayer, held throughout by Wellington Holdings. While ostensible continuity also existed in relation to the share capital of Wellington Holdings, the Federal Court has held that there did, in relation to its share capital, exist a transaction of the type referred to in s. 80B (5) (b). If s. 80B (5) can be invoked in relation to that holding company's share capital and if, when so invoked, it has the effect of disqualifying the taxpayer's past losses from deductibility, the Commissioner's assessment will have been justified.
Whether the existence of such a transaction entitles the Commissioner under s. 80C to disallow the taxpayer's own past losses depends upon the meaning of s. 80C (3) in its operation upon s. 80B (5). Section 80C (3) is as follows:
For the purposes of the application of either of the last two preceding sub-sections, the provisions of sub-sections (3) to (8), inclusive, of the last preceding section apply in relation to the holding company and in relation to every company that was at any relevant time interposed between the holding company and the subsidiary company as if references in those sub-sections to the company were references to the holding company or to the interposed company, as the case may be. Section 80B (5) is as follows: Where -
(a) a person who beneficially owned any shares in the company at all times during the year in which the loss was incurred also beneficially owned shares in the company at any time (in this sub-section referred to as "the relevant time") during the year of income;
(b) before or during the year of income, that person entered into a contract, agreement or arrangement, or granted or was granted a right, power or option (including a contingent right, power or option), that, in any way, directly or indirectly, related to, affected, or depended for its operation on -
(i) the beneficial interest of that person in the last-mentioned shares, or the value of that interest;
(ii) the right of that person to sell, or otherwise dispose of, that interest, or any such sale or other disposition;
(iii) any rights carried by those shares, or the exercise of any such rights; or
(iv) any dividends that might be paid, or any distribution of capital that might be made, in respect of those shares, or the payment of any such dividends or the making of any such distribution of capital; and
(c) the contract, agreement or arrangement was entered into, or the right, power or option was granted, for the purpose, or for purposes that included the purpose, of enabling the company to take into account for the purposes of section eighty or section eighty aa of this Act a loss that the company had incurred in a year before the year in which the contract, agreement or arrangement was entered into or the right, power or option was granted or a loss that the company might incur in that last-mentioned year,
the Commissioner may, subject to the succeeding provisions of this section, treat those shares as not having been beneficially owned by that person at the relevant time.
Section 80C (3) calls for the substitution in s. 80B (5) of reference to the subsidiary's holding company or an interposed company whenever s. 80B (5) refers to "the company". The mention of "interposed company" may for the moment be put to one side. This substitution is well enough so long as it is of share capital that s. 80B (5) speaks; for it is the relevant continuity of beneficial ownership of the holding company's share capital that is chiefly in issue. But the substitution does not stop there. Understood literally, every reference to "the company" in s. 80B (5) is to have substituted for it a reference to the holding company; and par. (c) of s. 80B (5), which deals with the purpose for which the specified transactions were entered into, speaks of the purpose of enabling "the company to take into account a loss that the company had incurred" in past years. If the process of substitution requires that this be understood to refer to a past loss of the holding company and not of the subsidiary, it means that s. 80B (5) will never apply to a subsidiary's losses, but only to the past losses of its holding company.
As Brennan J. pointed out in the course of his judgment in the Federal Court, the symmetry of the provisions suggests that sub-ss. (3) to (8) of s. 80B are to provide a common dictionary for both s. 80A and s. 80C. Section 80B (5) would then be expected, when invoked by s. 80C (3), to apply to losses claimed by a subsidiary just as it otherwise does to losses claimed by other companies. The only difference would be that its focus of concern would be upon the holding company's share capital rather than that of the subsidiary.
But this is not the literal meaning of the substitution provisions of s. 80C (3): if literal meaning is to be departed from, it must be clear beyond question both that literal meaning does not give effect to the intention of the legislature and that some departure from literal meaning will fulfil that intent.
Statute law, the direct product of the legislature, is perhaps the least appropriate field of all in which to indulge in judicial law-making. The corner of that field occupied by closely drafted statutes of high complexity should be particularly uninviting to the judicial law-maker. It provides the very antithesis of those occasional legislative measures which lay down only general principles and invite the courts to supply the details. It can never be enough to justify judicial intervention that what has been enacted may seem to a court to lead to an irrational result. As Lord Reid said in Cramas Properties Ltd. v. Connaught Fur Trimmings Ltd. [12] : "Of course we must go by the words of the Act and if they are only capable of one meaning then we must take that meaning however irrational the result." Moreover, in the present circumstances, while the bare outcome of the taxpayer's view of s. 80C (3) is certainly unexpected and out of harmony with the legislative pattern which seems otherwise to emerge from these sections, it may not qualify for the epithet of irrational.
Were this all that stood in the way of a literal construction, I would have difficulty in disregarding the clear meaning of the simple words which appear in s. 80C (3). However a close examination of that sub-section against the background of its legislative history and that of its neighbouring sections has satisfied me that the intent of its framers, which it reflected when it was originally enacted, has been stultified by amendments to other provisions, which for some reason have passed by s. 80C (3). That sub-section now stands as an anachronism; the failure to amend it to accord with those provisions upon which it operates and have themselves long since been amended, ensures that to give it its literal application will, in the words of Fry L.J., be to construe "the Act in order to defeat its object rather than with a view to carry its object into effect"; Curtis v. Stovin [13] . His Lordship, in common with Lord Esher M.R. and Bowen L.J., refused to adopt a literal interpretation which would have led to the result "that the plain intention of the legislation has entirely failed by reason of a slight inexactitude in the language of the section".
Just as in Curtis v. Stovin it was possible for the Court both to recognize the nature of the draftsman's error and to identify it as error (per Lord Esher M.R. [14] ), so here it is possible to trace the process by which s. 80C (3) has become the anachronism which it now is.
When first enacted by Act No. 110 of 1964, s. 80C (3) operated so as to apply to subsidiary companies the provisions of s. 80B (3) to (8) which that Act also introduced. Two features of the enactment are significant: first, s. 80B (5) was not then concerned, as it now is, with a variety of transactions whose disqualifying effect depended upon the purpose for which they were entered into. It was at that time thought sufficient to strike at only one type of transaction, the granting of options over shares in loss companies, the purpose of their grant being irrelevant. Accordingly, s. 80B (5) then contained no equivalent of the purposive provisions of its present par. (c), with its reference to enabling the losses of "the company", to be taken into account, the provision upon which the taxpayer now relies. It dealt solely with shares in "the company". Section 80C (3) was thus able to require a simple substitution of "holding company" for "company" whenever occurring without producing the consequence which the taxpayer submits that it now entails due to the subsequent amendment of s. 80B (5).
The second feature of the legislation of 1964 was that it dealt not only with subsidiary and holding companies but also with "interposed companies": hence the reference to interposed companies in s. 80C (3). Because s. 80C (1) did not then exclude from its definition of "holding company" those companies in which other companies had a controlling interest and because s. 80C (2) required that interposed companies be treated as holding companies for the purposes of s. 80C (1), it was material for the Commissioner to examine the shareholding of holding and interposed companies for the existence of options granted over share capital. Hence the need arose for reference in s. 80C (3) to "the holding company or to the interposed company, as the case may be". In 1965 this position was altered by omitting the substance of the original s. 80C (2) and by inserting in s. 80C (1) its present restriction of holding companies to those in which no other company had a controlling interest. With these amendments the need to scrutinize the beneficial ownership of the share capital of interposed companies disappeared. Yet despite this, s. 80C (3) went unamended in this respect: it continued to retain and to this day retains the now useless reference to interposed companies. This is in itself an indication of oversight in failing to amend s. 80C (3) so as to accord with changes in the section upon which it is intended to operate.
The effect of s. 80C (3) on s. 80B (5) when they were introduced in 1964 was clear. It permitted the Commissioner under s. 80B (5) to disallow claims by a subsidiary to deduct its own past losses if there had been an absence of substantial identity in the beneficial ownership of the share capital in the year of loss and the year of income of its holding company or of an interposed company. It had no concern with the past losses of the holding or interposed company, which were adequately dealt with by other provisions, but only with those of the subsidiary. Its concern with holding or interposed companies was confined to their share capital and, at that time, to the only kind of transaction affecting that share capital which might then disqualify the taxpayer from the right to deduct past losses, the existence of an option.
Section 80C (3) has remained in substantially the same form ever since, the only amendment (presently irrelevant) being necessitated by a change made in the character of s. 80C (2), that change requiring that sub-s. (2) should join sub-s. (1) in receiving mention in s. 80C (3).
Involved in the appellant's submissions must be the proposition that s. 80C (3) should, in 1965, abruptly have changed its character from that of a provision concerned exclusively with the deductibility of a subsidiary's losses to that of a provision concerned exclusively with the deductibility of the past losses of the subsidiary's holding company. That would be strange enough. That such a change should occur by a side wind, without any relevant amendment occurring in s. 80C (3) itself, would be stranger still. That, so transformed, the sub-section should be allowed to remain as an integral part of a section otherwise exclusively devoted to the case of subsidiary companies raises to a high level indeed the degree of improbability that such a change was the intention of the legislature.
These considerations have satisfied me that it cannot be right to adopt the literal interpretation urged by the taxpayer. They also satisfy me that the substitutional effect of s. 80C (3) was only intended to apply where, in s. 80B (5), beneficial ownership of share capital is referred to and not where it refers to losses of "the company".
This is a taxpayer's appeal by special leave from an order of the Full Court of the Federal Court unanimously upholding an appeal by the Commissioner from a judgment of the Supreme Court of New South Wales (Woodward J.) allowing the appellant's appeal against its assessment to income tax for the year ended 30 June 1971. In its return of income for that year the appellant claimed an allowable deduction in the sum of $44,077, being accumulated losses incurred by it in the years ended 30th June 1964 and 1965. In his assessment the Commissioner rejected this claim. In rejecting the claim he relied upon s. 80C of the Income Tax Assessment Act 1936, as amended to 1971 ("the Act"), stating that "In pursuance of section 80B (5) the shares held by E. H. King in Wellington Holdings Pty. Ltd. have been treated as shares not beneficially owned by him at any time during the year of income and the Commissioner, accordingly, cannot be satisfied in terms of section 80C (1) (b)". Wellington Holdings Pty. Ltd. ("Wellington") at all relevant times beneficially held more than 40 per cent of the issued capital of the taxpayer and was its holding company in terms of s. 80C (1).
From the date of Wellington's incorporation until 3 May 1968 the share capital of Wellington was held as follows: E. H. King - 1 class A share; 14,999 class B shares J. A. King (Mrs.) - 1 class A share; 4,999 class B shares D. J. McKay - 1 class B share A. J. De Montford - 1 class B share
On 3 May 1968 King transferred all but two of his class B shares to Network Finance Ltd. ("Network") for $899.82. On 8 May 1968 King and the other shareholders in Wellington transferred the balance of the issued shares (other than the two class B shares already retained by King) to Network or its nominees. Thereafter the 20,002 $1 issued shares in Wellington were held as follows: Network - 2 class A shares; 19,997 class B shares Network Management & Control Finance Pty. Limited - 1 class B share King - 2 class B shares
The appellant objected to the assessment and the Commissioner disallowed the objection.
The two main issues before the primary judge were: (1) whether by virtue of s. 80C (3), s. 80B (5) had an extended application to a taxpayer claiming the deduction of a loss incurred in previous years when the taxpayer was at all relevant times a subsidiary of some other company; and (2) whether there was evidence from which it was reasonable to infer a relevant arrangement between E. H. King, the continuing shareholder in Wellington, and Network, the company which acquired a large proportion of the share capital of Wellington after the years of loss but before the year of income. Woodward J. answered both questions in the negative.
The Federal Court answered the first question in the affirmative. The Federal Court did not disagree with the primary judge's finding on the second question, but it found, in accordance with an alternative submission presented by the Commissioner, that an arrangement should be inferred between King and the trustees of a scheme of arrangement which fell within s. 80B (5). As the grant of special leave limited the appellant to a challenge to the correctness of the Federal Court's answer to the first question, we need not concern ourselves with the details of the arrangement between King and the trustees of the scheme. A brief summary will suffice.
In the two years of loss King held more than 40 per cent of the share capital of Wellington. On 28 April 1965 Wellington went into voluntary liquidation and on 12 May 1965 Mr. C. K. Roberts was appointed liquidator. On 18 July 1967 Mr. and Mrs. King entered into an agreement with Roberts and his partner, C. H. R. Jackson, who had been appointed official liquidator by the Supreme Court of New South Wales of other companies in the Wellington group (including the appellant) against which a winding-up order had been made. Roberts and Jackson were appointed as trustees of a scheme of arrangement. By the agreement the Kings agreed to transfer their shares to the "purchaser of the tax losses" of the subsidiaries of Wellington for $1,200. The agreement recited that the trustees were selling the structure of Wellington to a company which was acquiring it for the benefit of the tax losses of certain subsidiaries of Wellington.
The particular sale contemplated by the parties to the agreement at the time of its execution did not eventuate. However, by a deed dated 19 April 1968 between the trustees and Network it was provided that, in consideration of a loan of moneys by Network to enable the scheme to be carried out, the trustees would on completion of the scheme deliver to Network a transfer of all the issued shares in Wellington for $1,200. Roberts as liquidator undertook to sanction the transfers. The trustees covenanted to apply to the Supreme Court for an order confirming a reduction of capital in such form as Network should require. The trustees further covenanted that contemporaneously with the completion of the scheme they would cause a board meeting to be held by each company in the group and cause all such resolutions to be passed and all such persons "appointed to or resigned from the Board" as Network might require. The fifth schedule to the deed stated that the shares to be transferred were not 60 per cent of Wellington's share capital as stated in the July agreement, nor all the issued shares of Wellington as stated in the body of the deed, but all the issued shares except for two shares held by King.
The matters provided for in the deed were carried into effect, King performing all acts necessary to be undertaken by him in order to bring about that result. In the event, Network and its nominee became the beneficial owners of all but two shares in Wellington. The details of the transactions are set out in the judgment of Fisher J. in the Federal Court, particularly the matters on which his Honour relied to support the conclusion that King and the trustees entered into an arrangement which answered the description contained in pars. (b) and (c) of s. 80B (5).
It will be seen from this brief recital of the facts that, unless s. 80B (5) had an extended application, by virtue of s. 80C (3), to a taxpayer which is the subsidiary of some other company, then the appellant was entitled to the deduction which it claimed.
To appreciate how the question arises and why it was answered as it was by the Federal Court we must go to the relevant statutory provisions, commencing with s. 80. Generally speaking, sub-s. (2) of that section enabled a taxpayer to deduct from his income in a given year so much of the losses he had incurred in any of the preceding seven years as had not been allowed as a deduction in any of those years. This entitlement, to the extent to which it was enjoyed by a corporate taxpayer, was qualified by subsequent provisions, the first of which was s. 80A. As the marginal note to that section indicated, its broad effect was that losses of previous years sustained by a company could not be deducted unless there was a substantial continuity of the beneficial ownership of the share capital of the company in the year of loss and the year of income. The precise requirement in the case of a proprietary company was that the Commissioner should be satisfied that,
at all times during the year of income, shares in the company carrying between them -
(c) the right to exercise not less than two-fifths of the voting power in the company;
(d) the right to receive not less than two-fifths of any dividends that may be paid by the company; and
(e) the right to receive not less than two-fifths of any distribution of capital of the company in the event of the winding-up, or of a reduction in the capital, of the company,
were beneficially owned by persons who, at all times during the year in which the loss was incurred, beneficially owned shares in the company carrying rights of those kinds.
The requirement for substantial continuity of beneficial ownership of the share capital was strengthened by the inclusion in the Act of the provisions of s. 80B (5) the effect of which was, in the circumstances set out in the sub-section, to empower the Commissioner to treat shares as not having been beneficially owned by the person claiming so to own them at the relevant time. The sub-section confers this power on the Commissioner where
(a) a person who beneficially owned any shares in the company at all times during the year in which the loss was incurred also beneficially owned shares in the company at any time (in this sub-section referred to as "the relevant time") during the year of income;
(b) before or during the year of income, that person entered into a contract, agreement or arrangement, or granted or was granted a right, power or option (including a contingent right, power or option), that, in any way, directly or indirectly, related to, affected, or depended for its operation on -
(i) the beneficial interest of that person in the last-mentioned shares, or the value of that interest;
(ii) the right of that person to sell, or otherwise dispose of, that interest or any such sale or other disposition;
(iii) any rights carried by those shares, or the exercise of any such rights; or
(iv) any dividends that might be paid, or any distribution of capital that might be made, in respect of those shares, or the payment of any such dividends or the making of any such distribution of capital; and
(c) the contract, agreement or arrangement was entered into, or the right, power or option was granted, for the purpose, or for purposes that included the purpose, of enabling the company to take into account for the purposes of section eighty or section eighty aa of this Act a loss that the company had incurred in a year before the year in which the contract, agreement or arrangement was entered into or the right, power or option was granted or a loss that the company might incur in that last-mentioned year.
The provisions to which we have so far referred looked only at beneficial ownership of shares in the company which sustained the losses and was seeking to deduct them. If the provisions relating to continuity of ownership had stopped at this point there would have been nothing to prevent a purchaser desiring to take advantage of the tax losses of a subsidiary company from acquiring the entire share capital of the holding company without disturbing the holding company's beneficial ownership of shares in the subsidiary. Sections 80A and 80B had nothing to say on this topic.
Quite evidently s. 80C (3) was directed to this very situation. Section 80C (1) and (3) provided:
(1) Notwithstanding sections eighty and eighty aa and eighty a of this Act but subject to this section and to section eighty e of this Act, where a company in which no other company had a controlling interest (in this section referred to as "the holding company") had a controlling interest in another company (in this section referred to as "the subsidiary company") at any time during a year in which a loss was incurred by the subsidiary company, the loss shall not be taken into account for the purposes of section eighty or section eighty aa of this Act unless the Commissioner is satisfied that, at all times during the year of income of the subsidiary company -
(a) the holding company had a controlling interest in the subsidiary company; and
(b) shares in the holding company carrying between them -
(i) the right to exercise not less than two-fifths of the voting power in the company;
(ii) the right to receive not less than two-fifths of any dividends that may be paid by the company; and
(iii) the right to receive not less than two-fifths of any distribution of capital of the company in the event of the winding up, or of a reduction in the capital, of the company,
were beneficially owned by persons who, at all times during the year in which the loss was incurred by the subsidiary company, beneficially owned shares in the holding company carrying rights of those kinds.
(3) For the purposes of the application of either of the last two preceding sub-sections the provisions of sub-sections (3) to (8), inclusive, of the last preceding section apply in relation to the holding company and in relation to every company that was at any relevant time interposed between the holding company and the subsidiary company as if references in those sub-sections to the company were references to the holding company or to the interposed company, as the case may be.
The purpose of s. 80C (3) is to empower the Commissioner to treat shares in the holding company or an interposed company as not having been beneficially owned by the person claiming to own them at the relevant time. As s. 80B (5) (a) and (b) spoke of beneficial ownership of shares in the company which sustained the losses and sought the deduction, that is, the subsidiary company, it was understandable that s. 80C (3) should provide, as it did, that s. 80B (3) to (8) should apply in relation to the holding company as if references were to the holding company.
Whilst this provision was a solution to the problem posed by the application of s. 80B (5) (a) and (b) in the new setting, it is by no means apparent that it was an apt solution to the problem presented by the need to give par. (c) an operation in the new setting. That paragraph also referred to "the company" when it spoke of the purpose of the arrangement as being one which "enabled the company to take into account a loss that the company had incurred". Ex hypothesi the Parliament was concerned with a claim for a deduction made by a subsidiary for its losses in previous years. Consequently one would have thought that there was a need to relate the arrangement which is dealt with in par. (c) of s. 80B (5) to the purpose of enabling the subsidiary company to take into account a loss that it had incurred. Instead, if s. 80C (3) is to be given a literal construction, the draftsman related the arrangement to the purpose of enabling the holding company to take into account its past losses, a purpose which on the face of it seems to have little to do with a claim by the subsidiary to deduct its past losses.
It was in these circumstances that the Federal Court held tht s. 80C (3) should not receive a literal construction. Fisher J. (with whom Brennan and Deane JJ. agreed) thought that a literal construction would produce a capricious and unjust result by depriving a subsidiary of its claim to deduct its past losses "merely because there was in relation to the holding company an arrangement relating to the losses of the holding company". On the other hand, he considered that the purpose of s. 80C (3) was clear and that it was "to give the Commissioner when he is dealing with the losses of a subsidiary company the same discretion as he has when dealing with the beneficial ownership of shares in a company which was not a subsidiary company". Accordingly his Honour held that s. 80C (3) should be read as though the words "where necessary or appropriate" were inserted after the word "references" where secondly appearing and, alternatively, that the sub-section should be read as if the words "mutatis mutandis" were inserted after the word "apply".
Brennan J. came to the same conclusion. He said: "I would construe the reference to a "company" in s. 80B (5) (c) as applied by s. 80C (3) to be a reference to the company which was to be enabled to take into account the loss referred to in that paragraph." Deane J. thought that the same result could be achieved by implying the qualification "where appropriate" in s. 80C (3).
The appellant's case rests on two propositions: (1) that the court will not depart from the literal meaning of a statute when that meaning is clear; and (2) that the Federal Court was in error in thinking that, read literally, s. 80C (3) led to such a capricious and unjust result.
The literal construction rule has been expressed in various ways. In earlier times it was expressed more absolutely than it is today, possibly because the courts, anxious to distinguish between legislative and judicial functions, were at pains to emphasize that it is no part of the judicial function under the cloak of construction to amend statutes merely to overcome shortcomings in their operation. One of the strongest statements of the literal rule is to be found in the judgment of Higgins J. in Amalgamated Society of Engineers v. Adelaide Steamship Co. Ltd. [15] :
The fundamental rule of interpretation, to which all others are subordinate, is that a statute is to be expounded according to the intent of the Parliament that made it; and that intention has to be found by an examination of the language used in the statute as a whole. The question is, what does the language mean; and when we find what the language means, in its ordinary and natural sense, it is our duty to obey that meaning, even if we think the result to be inconvenient or impolitic or improbable. See also Nolan v. Clifford [16] . 1. (1920) 28 C.L.R. 129, at pp. 161-162. 2. (1904) 1 C.L.R. 429, at p. 453.
It would have been better had Higgins J. omitted the last clause of the last sentence from the passage which we have quoted. The last clause may be taken to suggest that the operation of a statute is not relevant to the ascertainment of its meaning and this is certainly not now the case, if it ever was. Generally speaking, mere inconvenience of result in itself is not a ground for departing from the natural and ordinary sense of the language read in its context. But there are cases in which inconvenience of result or improbability of result assists the court in concluding that an alternative construction which is reasonably open is to be preferred to the literal meaning because the alternative interpretation more closely conforms to the legislative intent discernible from other provisions in the statute.
There is a similar problem with the related so-called "golden rule" of construction. There are statements of the rule which would confine the courts to the ordinary grammatical sense of the words used unless that produces an absurdity or inconsistency. It is to be noted that Dixon J. in Broken Hill South Ltd. v. Commissioner of Taxation (N.S.W.) [17] observed that departure from the ordinary grammatical sense is not legitimate unless there is "some obscurity or some inconsistency", though it may be that "obscurity" was intended to be a reference to "absurdity". For the reason already given in the discussion of the literal rule, departure from the ordinary grammatical sense cannot be restricted to cases of absurdity and inconsistency.
In some cases in the past these rules of construction have been applied too rigidly. The fundamental object of statutory construction in every case is to ascertain the legislative intention by reference to the language of the instrument viewed as a whole. But in performing that task the courts look to the operation of the statute according to its terms and to legitimate aids to construction.
The rules, as D. C. Pearce says in Statutory Interpretation, p. 14, are no more than rules of common sense, designed to achieve this object. They are not rules of law. If the judge applies the literal rule it is because it gives emphasis to the factor which in the particular case he thinks is decisive. When he considers that the statute admits of no reasonable alternative construction it is because (a) the language is intractable or (b) although the language is not intractable, the operation of the statute, read literally, is not such as to indicate that it could not have been intended by the legislature.
On the other hand, when the judge labels the operation of the statute as "absurd", "extraordinary", "capricious", "irrational" or "obscure" he assigns a ground for concluding that the legislature could not have intended such an operation and that an alternative interpretation must be preferred. But the propriety of departing from the literal interpretation is not confined to situations described by these labels. It extends to any situation in which for good reason the operation of the statute on a literal reading does not conform to the legislative intent as ascertained from the provisions of the statute, including the policy which may be discerned from those provisions.
Quite obviously questions of degree arise. If the choice is between two strongly competing interpretations, as we have said, the advantage may lie with that which produces the fairer and more convenient operation so long as it conforms to the legislative intention. If, however, one interpretation has a powerful advantage in ordinary meaning and grammatical sense, it will only be displaced if its operation is perceived to be unintended.
In this case the choice with which the court is confronted is between a literal and comprehensive application of s. 80C (3) and the acceptance of an implication which would restrict its application in the manner already discussed. In one sense the function of s. 80C (3) is similar to that of a statutory definition. As such it is subject to any contrary intention, though this qualification is not expressed in s. 80C (3).
To our minds the decisive factor in making this choice is that the literal interpretation of s. 80C (3) results in an operation for s. 80B (5) (c) which in our opinion is capricious and irrational. It does not make good sense to relate the arrangement dealt with in s. 80B (5) to the purpose of enabling the holding company to take into account its past losses when what is in question is the deductibility of the past losses of the subsidiary. So read, s. 80C (3) would permit the subsidiary to deduct its past losses, notwithstanding the existence of an arrangement in relation to the beneficial ownership of shares in the holding company which had as its purpose the enabling of the subsidiary to take account of those losses. Conversely, and irrationally, it would prevent the subsidiary from deducting its past losses by reference to an arrangement which had as its purpose enabling the holding company to take account of its past losses, though it had no purpose relating to the subsidiary and its losses.
The appellant seeks to overcome this consequence by making the point that s. 80C (3), by applying s. 80B (5) to the holding company, recognizes the reality of commercial life in that ultimately for the purchaser it is the impact of the deductibility of the subsidiary's tax losses on the shares of the holding company that is all-important. No doubt this is true, but it does not make the operation of s. 80B (5) (c), on this hypothesis, the less capricious or irrational. Furthermore, the argument overlooks the fact that s. 80C (3) gives s. 80B (5) an operation not only in relation to a holding company but also in relation to an interposed company.
When we consider the legislative scheme contained in ss. 80, 80A, 80B and 80C we find that there is an exact correspondence between the provisions of s. 80A read with s. 80B as applied to the past losses of companies which are not subsidiaries and the provisions of s. 80C and s. 80B as applied to the past losses of subsidiaries, save that in the latter case we are looking at the beneficial ownership of shares in the holding company. As Brennan J. said [17a] ;
The symmetry of the provisions suggests that sub-ss. (3) to (8) of s. 80B are to provide a common dictionary for the operation of the condition relating to continuity of beneficial ownership of shares in the taxpayer company when s. 80A applies, or of shares in a holding company of a taxpayer company when s. 80C applies. 1. (1979) 41 F.L.R., at pp. 279-280; 25 A.L.R., at p. 514; 10 A.T.R., at p. 130; 79 A.T.C., at p. 4,401.
In this context it is impossible to resist the conclusion that par. (c) of s. 80B (5) was intended to have the same operation in relation to a subsidiary's loss under s. 80C as it had in relation to a company's loss under s. 80A. Section 80C (3) should therefore be read as referring in its application to s. 80B (5) (c) to the company which was to be enabled to take into account the loss. This unquestionably is what Deane and Fisher JJ. had in mind when they used the expression "where appropriate" and "mutatis mutandis".
This construction is justified on the footing that it is a necessary implication to be deduced from the legislative scheme considered as a whole. It may also be justified as an application of the "mischief rule". As Lord Reid said in Gartside v. Inland Revenue Commissioners [18] :
It is always proper to construe an ambiguous word or phrase in light of the mischief which the provision is obviously designed to prevent, and in light of the reasonableness of the consequences which follow from giving it a particular construction. Here, the entirety of the situation to which s. 80C (3) was directed was apparent from the legislative scheme viewed as a whole, as indeed was the purpose or object of the provision itself. It is evident that there was an oversight on the part of the draftsman. 1. [1968] A.C. 553, at p. 612.
The fact that the Act is a taxing statute does not make it immune to the general principles governing the interpretation of statutes. The courts are as much concerned in the interpretation of revenue statutes as in the case of other statutes to ascertain the legislative intention from the terms of the instrument viewed as a whole.
This appeal by special leave from the Full Court of the Federal Court raises for consideration the construction of an inter-relationship between ss. 80C (3) and 80B (5) of the Income Tax Assessment Act 1936, as amended to 1971. The facts so far as they are relevant to the question of construction are set out in the reasons for judgment of Mason and Wilson JJ. and I do not repeat them.
In its return for the year of income (the year ended 30 June 1971) Cooper Brookes (Wollongong) Pty. Ltd. ("the taxpayer") claimed as an allowable deduction the amount of losses which it incurred in the years ended 30 June 1964 and 30 June 1965 ("the years of loss"). The Commissioner disallowed each deduction in reliance on s. 80B (5) and s. 80C (3) of the Income Tax Assessment Act 1936 as amended to 30 June 1971. In the Full Court of the Federal Court it was held that there was an "arrangement" within the meaning of s. 80B (5) of the Act entered into by the shareholders in the taxpayer's parent company, Wellington Holdings Pty. Ltd. ("Wellington Holdings"), with respect to the losses of the taxpayer. It was therefore held that s. 80B (5) and s. 80C (3) operated to deny the taxpayer a deduction in respect of its earlier losses.
Both parties agreed that the literal meaning of s. 80C (3) as introduced in 1965 (which was applicable in the year of income) produced the result that the losses incurred by the taxpayer in the years of loss could be carried forward into the relevant year of income as allowable deductions. Each of the members of the Full Court of the Federal Court took the view that, notwithstanding the literal meaning of the words, it was nonetheless clear that the words did not convey the meaning which the draftsman had intended. Each thought that the true intention was to produce a result such that in the circumstances of this case the appellant could not deduct those losses from its assessable income in the year of income. Two of the members of the Court thought that some words had been omitted from s. 80C (3) and the third that some words in s. 80B (5) should be read as amplified by other words which should be inserted.
In order to understand the problem it is necessary to examine briefly the history of s. 80 of the Income Tax Assessment Act 1936 and to look in some detail at s. 80B and s. 80C and their predecessors.
Section 80 had its origin in s. 26 of the Income Tax Assessment Act 1922. A more elaborate version was inserted in the Income Tax Assessment Act 1936. A number of amendments were made from time to time thereafter. An early version of the sections now under consideration was introduced by the Income Tax Assessment Act 1944 (No. 3 of 1944) which added to s. 80 what was then sub-ss. (5) and (6). Sub-section (5) provided that in the case of a private company no prior loss should be an allowable deduction unless the Commissioner was satisfied that on the last day of the year of income shares carrying not less than 25 per cent of the voting power were beneficially held by persons who beneficially held shares in the company carrying not less than 25 per cent of the voting power on the last day of the year of loss. Sub-section (6) provided that in the case of a shareholder who had died there should be deemed continuity if the shares were held by his estate or a beneficiary therein. Other amendments were made from time to time thereafter reducing the area in which losses could be carried forward. The first which is material for present purposes is the Income Tax and Social Services Contribution Assessment Act (No. 3) 1964 (No. 110 of 1964). That Act repealed sub-ss. (5) and (6) of s. 80 and introduced ss. 80A, 80B and 80C. Section 80A (1) provided in effect that, except in the case of public companies, losses could not be carried forward unless the Commissioner was satisfied that at all times during the year of income shares carrying not less than two-fifths of the voting power and entitled to not less than two-fifths of any dividends and of any distribution of capital were beneficially owned by persons who at all times during the year of loss beneficially owned shares carrying those rights. In sub-s. (2) of that section an adjustment was provided in cases of continuity of shareholding in respect of part only of the year of loss. This section replaced and somewhat extended the previous s. 80 (5).
Section 80B, so far as is material, provided as follows: sub-s. (3) in substance reproduced the former sub-s. (6) of s. 80, and sub-s. (4) provided for deemed continuity of shareholding where shares had been transferred by a shareholder to a company which he controlled. Sub-section (5) enabled the Commissioner in certain cases to treat shares the subject of an option to purchase as being beneficially owned by the holder of the option. Sub-sections (6) and (7) were as follows:
(6) Where the Commissioner is satisfied that, by virtue of a provision in the constituent document of the company as in force at any time during the year of income or by virtue of an agreement or arrangement made before the end of the year of income between persons who at that time when the agreement or arrangement was made were, or since that time have become, beneficial owners of shares in the company, shares in the company that -
(a) were beneficially owned at any time during the year of income by persons who beneficially owned any shares in the company at all times during the year in which the loss was incurred; and
(b) carried any rights at all times during the year of income,
have ceased, or will or may cease, at any time after the end of the year of income, to carry those rights, the shares shall be deemed not to have carried those rights at any time during the year of income.
(7) Where the Commissioner is satisfied that, by virtue of a provision in the constituent document of the company as in force at any time during the year of income or by virtue of an agreement or arrangement made before the end of the year of income between persons who at the time when the agreement or arrangement was made were, or since that time have become, beneficial owners of shares in the company, shares in the company have commenced, or will or may commence, at any time after the end of the year of income, to carry rights that those shares did not carry at a time during the year of income -
(a) if the shares were not beneficially owned at any time during the year of income by persons who beneficially owned any shares in the company at all times during the year in which the loss was incurred - the shares shall be deemed to have carried those rights at all times during the year of income; and
(b) in any other case - the Commissioner may, if he considers that, having regard to all the circumstances, it is reasonable to do so, treat the shares as having carried those rights at all times during the year of income.
(1) Notwithstanding sections eighty and eighty A of this Act, where a company (in this section referred to as "the holding company") had a controlling interest in another company (in this section referred to as "the subsidiary company") at any time during a year in which a loss was incurred by the subsidiary company, the loss shall not be taken into account for the purposes of section eighty of this Act unless the Commissioner is satisfied that, at all times during the year of income, shares in the holding company carrying between them -
(a) the right to exercise not less than two-fifths of the voting power in the company;
(b) the right to receive not less than two-fifths of any dividends that may be paid by the company; and
(c) the right to receive not less than two-fifths of any distribution of capital of the company in the event of the winding up, or of a reduction in the capital, of the company,
were beneficially owned by persons who, at all times during the year in which the loss was incurred by the subsidiary company, beneficially owned shares in the holding company carrying rights of those kinds.
(2) Without prejudice to the operation of the last preceding sub-section in relation to the holding company, where a company was, or two or more companies were, interposed between the holding company and the subsidiary company at any time during the year in which the loss was incurred by the subsidiary company, that sub-section also has effect as if each interposed company had a controlling interest in the subsidiary company at that time.
(3) For the purposes of the application of sub-section (1) of this section in determining whether a loss incurred by the subsidiary company in a year before the year of income is to be taken into account, the provisions of sub-sections (3) to (8), inclusive, of the last preceding section apply in relation to the holding company and in relation to every interposed company referred to in the last preceding sub-section as if references in those sub-sections to the company were references to the holding company or the interposed company, as the case may be.
The presence of the references to interposed companies in s. 80C (2) suggests that the draftsman used the expression "a controlling interest in another company" so as to refer only to a direct subsidiary and not to a subsidiary of a subsidiary. The ordinary meaning of "controlling interest" in a company includes the interest of a holding company not only in its direct subsidiaries but in all companies in a chain of subsidiaries, however long. The same is true of each subsidiary in the chain in respect of all subsidiaries below it; see British American Tobacco Co. Ltd. v. Inland Revenue Commissioners [19] ; Barclays Bank Ltd. v. Inland Revenue Commissioners [20] ; Mendes v. Commissioner of Probate Duties (Vict.) [21] ;Kolotex Hosiery (Australia) Pty. Ltd. v. Federal Commissioner of Taxation [22] Although sub-s. (2) is expressed to be "Without prejudice to the operation of the last preceding sub-section in relation to the holding company", the remaining words of the sub-section would be redundant if the holding company and each interposed company were, as ordinarily it would be, regarded as having a controlling interest in all companies below it in the chain.
Section 80C (1) of the 1964 version required that the Commissioner must be satisfied as to continuity of shareholding in the holding company. On either view each interposed company would have a controlling interest in the ultimate subsidiary, with the consequence that each interposed company also had to comply with the continuity of shareholding requirements of sub-s. (1). The expression "at that time" must refer to the words "at any time during a year in which a loss was incurred" in sub-s. (1). In the end it does not seem to make any difference to the operation of s. 80C whether "controlling interest" is given its ordinary meaning, or a more restricted meaning; on the latter view sub-s. (2) completes the scheme of the section. It is clear that for a company to have a controlling interest in the ultimate subsidiary it would have to have such an interest in each interposed company.
Sub-section (3) of s. 80C provided that, in applying sub-s. (1) for the purpose of determining whether a loss by a subsidiary is to be taken into account, sub-ss. (3) to (8) of s. 80B must be applied to the holding company and to each interposed company "as if references in those sub-sections to the company were references to the holding company or the interposed company, as the case may be." The reference in sub-s. (3) to "every interposed company" was not in fact necessary because by virtue of sub-s. (2) each interposed company was deemed to be a "holding company" even if it did not already have that character, but it may perhaps have been added for purposes of clarity and emphasis. The term "interposed company" is not defined but in the context must mean a subsidiary of the holding company and each company down to the last in the chain above the subsidiary whose losses are sought to be deducted. Therefore the material provisions of s. 80B had to be satisfied in respect of the holding company and each interposed company but s. 80C said nothing as to the applicability of s. 80B to the subsidiary company the losses of which are in question. Indeed the scheme of the section did not require that it should; sub-s. (3) was concerned only with working out the requirements of sub-s. (1) in relation to a "holding company" as defined.
The purpose of s. 80C (3) was to control the application of sub-ss. (1) and (2). Sub-s. (2) was not directly relevant to this case but it was part of the general scheme. Accordingly the question posed by the 1964 version of s. 80C was whether continuity of shareholding existed in the holding company in the relevant years; i.e. the year of loss and the year of income of the subsidiary. The answer to that question was critical because it was upon satisfaction of that requirement in the holding company that an allowable deduction in respect of the subsidiary's prior losses depended. It would have lacked logic and have been a departure from the scheme of the sections to have used an unqualified form of "continuity" of beneficial ownership of shares in the holding company when there would have been applicable to the holding company in relation to its own prior losses the qualified form of continuity of beneficial ownership required by s. 80B (3) to (8). The holding company would in relation to its own losses have been entitled to the benefits of deemed continuity and the detriments of deemed lack of continuity which were there referred to.
When the purpose of s. 80C (1) is understood, sub-s. (3) logically operated to ensure that the use of the term "beneficially owned" in sub-s. (1) was subject to the qualifications introduced by s. 80B (3) to (8). The words used in sub-s. (3) were entirely appropriate to that purpose and the insertion of any reference to the subsidiary company entirely inappropriate. To read s. 80C (3) or s. 80B (5) as including a reference to the subsidiary company, as suggested by the Full Court of the Federal Court, would be contrary to the opening words of s. 80C (3) and would not assist at all in the application of sub-s. (1).
A simplified version of the manner in which the 1964 version of s. 80C (3) would have operated in a case where there was a holding company and a subsidiary but no interposed company may be illustrated by the following example. Suppose shareholders held 40 per cent of the shares in the holding company in the year of loss and in the year of income, and those shares carried the requisite rights, and that the Commissioner was satisfied that there was an agreement or arrangement falling within s. 80B (6) or (7) so that the shares were deemed not to carry such rights. In such a case the Commissioner could not be satisfied that there was the required continuity of shareholding and rights in the holding company as required by s. 80C (1). It would follow that the loss incurred by the subsidiary could not be taken into account. If there were an interposed company in respect of which the Commissioner was satisfied that there was an agreement or arrangement within s. 80B (6) or (7) the subsidiary would again be unable to satisfy the requirement of s. 80C (1) as to continuity of shareholding in a company which had a controlling interest in it. In each case therefore the ultimate subsidiary would lose its deduction of prior losses because the requirement of continuity of shareholding in the holding company or an interposed company would no longer be satisfied on account of the operation of s. 80B (6) or (7).
The existence of such an arrangement in the holding company would have prevented it from carrying forward to the year of income any losses which it may have incurred in the year of loss and the operation of s. 80C would have produced the same effect on the subsidiary company's losses because the Commissioner could not in those circumstances be satisfied as to the continuity of shareholding in the subsidiary. The same would of course be true of any interposed company. The evident policy of the 1964 version of s. 80C was to treat a holding company and its subsidiaries and sub-subsidiaries as a unit and to govern the right to carry forward losses in a subsidiary company from a year of loss to a year of income by the position of the holding company in those two years in relation to its continuity of shareholding as required by the relevant provisions of s. 80C (1) read with s. 80B (3) to (8).
Section 80C was repealed by Act No. 103 of 1965 and replaced by a substituted s. 80C ("the 1965 version"). Sections 80D and 80E were added but are not material to this case. The material provisions of the 1965 version of s. 80C were as follows:
(1) Notwithstanding sections eighty and eighty A of this Act but subject to this section and to section eighty E of this Act, where a company in which no other company had a controlling interest (in this section referred to as "the holding company") had a controlling interest in another company (in this section referred to as "the subsidiary company") at any time during a year in which a loss was incurred by the subsidiary company, the loss shall not be taken into account for the purposes of section eighty of this Act unless the Commissioner is satisfied that, at all times during the year of income of the subsidiary company -
(a) the holding company had a controlling interest in the subsidiary company; and
(b) shares in the holding company carrying between them -
(i) the right to exercise not less than two-fifths of the voting power in the company;
(ii) the right to receive not less than two-fifths of any dividends that may be paid by the company; and
(iii) the right to receive not less than two-fifths of any distribution of capital of the company in the event of the winding up, or of a reduction in the capital, of the company,
were beneficially owned by persons who, at all times during the year in which the loss was incurred by the subsidiary company, beneficially owned shares in the holding company carrying rights of those kinds.
(2) Where a loss incurred by the subsidiary company in a year before the year of income of the subsidiary company is not, by virtue of the last preceding sub-section, to be taken into account but the Commissioner is satisfied that, at all times during that year of income -
(a) the holding company had a controlling interest in the subsidiary company; and
(b) shares in the holding company carrying the rights referred to in that sub-section were beneficially owned by persons who, at all times during a part of the year in which the loss was incurred, beneficially owned shares in the holding company carrying rights of those kinds,
the Commissioner may take into account for the purposes of section eighty of this Act such part of the loss as he considers to be the amount of the loss that was incurred during that part of that year.
(3) For the purposes of the application of either of the last two preceding sub-sections, the provisions of sub-sections (3) to (8), inclusive, of the last preceding section apply in relation to the holding company and in relation to every company that was at any relevant time interposed between the holding company and the subsidiary company as if references in those sub-sections to the company were references to the holding company or to the interposed company, as the case may be.
The expression "the holding company" was given a new definition in the 1965 version of s. 80C (1), namely a company in which no other company had a controlling interest, and which had a controlling interest in another company, "the subsidiary company". The term "subsidiary company" was thus confined to companies the parent company of which was one in which no other company had a controlling interest. The result of these definitions is that an interposed company could not be a holding company and what would ordinarily be called a subsidiary of an interposed company could not be its subsidiary for the purposes of the section.
When the 1965 version of s. 80C (3) referred to "the holding company" and to "the subsidiary company" it was referring to companies as defined in sub-s. (1) and to companies having that status in the year of loss - seeKolotex Hosiery (Australia) Pty. Ltd. v. Federal Commissioner of Taxation [23] . The omission of the former sub-s. (2) is consistent with the new version of sub-s. (1) because an interposed company could not satisfy the new definition of "holding company", although it did satisfy the old definition.
The 1965 version of s. 80C recognized that the holding company was to be regarded as having a controlling interest not only in a direct subsidiary but also in all sub-subsidiaries however remote. It denied the status of holding company to a subsidiary which had a controlling interest in its own subsidiaries. However sub-s. (3) still referred to interposed companies but did not expressly equate them with holding companies for to do so would have been in contradiction of sub-s. (1). Some difficulty may be involved with respect to the operation of sub-s. (3) in relation to interposed companies, to which I refer below, but it is not directly relevant to the present case.
It will be observed that the 1965 version of sub-s. (3) differs from the 1964 version in three respects. First, the opening words were changed so as to refer to both sub-s. (1) and sub-s. (2). Secondly, the words "in determining whether a loss incurred by the subsidiary company in a year before the year of income is to be taken into account" were omitted. Thirdly, the words "and in relation to every interposed company referred to in the last preceding sub-section" were deleted and replaced by the words "and in relation to every company that was at any relevant time interposed between the holding company and the subsidiary company". The first of those changes is obviously consequential on the deletion of the old sub-s. (2) and its replacement by the new sub-s. (2) which deals with continuity of beneficial ownership in respect of part of a year of loss. The second was made because the words were not necessary as the new opening words conveyed the same meaning. The third was also consequential on the deletion of the old sub-s. (2).
The significant point is that the draftsman expressly directed his attention to s. 80C (3) and made what he no doubt regarded as necessary changes to its wording but retained the critical words of the sub-section. He did not make any changes having the effect suggested by the members of the Full Court of the Federal Court as being necessary to give effect to his presumed intention, a point to which I shall return below.
In the year of loss Wellington Holdings was a company in which no other company had a controlling interest and the taxpayer was a subsidiary of Wellington Holdings. The fact that Wellington Holdings had, by the year of income, become a subsidiary of Network Finance Ltd. is irrelevant to the operation of s. 80C. We have therefore a situation in the year of income in which the possible application of sub-ss. (3) to (8) of the 1965 version of s. 80B must be examined. It is only sub-s. (5) which is material but it must be observed that the effect of sub-ss. (3) to (8) is, in some cases, to deem continuity to exist where it does not, and in others to deem continuity not to exist in cases where in fact it does. The 1965 amendments resulted in the substance of what was formerly contained in sub-ss. (6) and (7) of the 1964 version of s. 80B being replaced by sub-s. (5) of the 1965 version. Section 80B (5) was as follows:
(a) a person who beneficially owned any shares in the company at all times during the year in which the loss was incurred also beneficially owned shares in the company at any time (in this sub-section referred to as "the relevant time") during the year of income;
(b) before or during the year of income, that person entered into a contract, agreement or arrangement, or granted or was granted a right, power or option (including a contingent right, power or option), that, in any way, directly or indirectly, related to, affected, or depended for its operation on -
(i) the beneficial interest of that person in the last-mentioned shares, or the value of that interest;
(ii) the right of that person to sell, or otherwise dispose of, that interest, or any such sale or other disposition;
(iii) any rights carried by those shares, or the exercise of any such rights; or
(iv) any dividends that might be paid, or any distribution of capital that might be made, in respect of those shares, or the payment of any such dividends or the making of any such distribution of capital; and
(c) the contract, agreement or arrangement was entered into, or the right, power or option was granted, for the purpose, or for purposes that included the purpose, of enabling the company to take into account for the purposes of section eighty of this Act a loss that the company had incurred in a year before the year in which the contract, agreement or arrangement was entered into or the right, power or option was granted or a loss that the company might incur in that last-mentioned year,
the Commissioner may, subject to the succeeding provisions of this section, treat those shares as not having been beneficially owned by that person at the relevant time.
When s. 80B (5) is read as required by the 1965 version of s. 80C (3) it will be seen that the word "company" is to be read as referring to the holding company or (if there were one) the interposed company, as the case may be. There was no interposed company and, according to the words of s. 80C (3), those sub-sections of s. 80B mentioned were to apply as if the word "company" used therein referred to Wellington Holdings. In this respect it makes no change in the law as prescribed by the 1964 version. The 1965 amendments thus preserved the legislative policy to which I have referred above.
With due respect to those members of the Full Court of the Federal Court who took the view that some error in drafting had occurred which could be cured by inserting in s. 80C (3) additional words in order to convey what they regarded as the intended meaning, I am unable to see how the suggested insertions could produce the result sought. Fisher J. concluded that the words "references in those sub-sections to the company were references to the holding company" in s. 80C (3) should be read as if the words "where necessary or appropriate" were inserted after "references" where secondly appearing. As an alternative, his Honour decided that if the words "mutatis mutandis" were inserted after the word "apply" in sub-s. (3) the same result would be achieved. On the other hand Deane J., who agreed generally with the reasons and conclusions of Fisher J., was of the opinion that the phrase "where appropriate" should be implied in the provisions of s. 80C (3). However it is still necessary to consider whether, notwithstanding the words, there was an intention to produce a different result so as to warrant the insertion of some words.
Brennan J. expressed his conclusion somewhat differently. After examining ss. 80A. 80B and 80C he observed [23a] ;
But s. 80C (3) applies the whole of the operation of sub-ss. (3) to (8) to cases falling within s. 80C, and the quoted phrase may be construed as interpretative, requiring references to a company to be references to the holding company, when that interpretation does in truth apply the whole of the operation of sub-ss. (3) to (8) to the condition relating to continuity of shareholding in a holding company under s. 80C. To fulfil that legislative intent of s. 80C (3), as ascertained from its context, I would construe the reference to "company" in s. 80B (5) (c) as applied by s. 80C (3) to be a reference to the company which was to be enabled to take into account the loss referred to in that paragraph. It will be noted that he did not attribute this meaning to the word "company" in pars. (a) and (b) of that sub-section. 1. (1979) 41 F.L.R., at p. 280; 25 A.L.R., at p. 514; 10 A.T.R., at p. 131; 79 A.T.C., at p. 4,401.
With respect I am unable to regard this reasoning as satisfactory. It overlooks the express purpose of s. 80C (3), namely that it is for the "purposes of the application of either of the last two preceding sub-sections". Sub-sections (1) and (2) require the taxpayer to show, to the Commissioner's satisfaction, that the required continuity of "beneficial ownership" existed in respect of shares in the holding company. It is for that reason that sub-ss. (3) to (8) of s. 80B were required to be applied to the holding company. The cross-reference in sub-s. (3) of s. 80C was necessary and appropriate to achieve the stated purpose. To use s. 80C (3) to read words into s. 80B (5) (c) is to mistake the purpose of s. 80C (3) for to do so does not assist in and is irrelevant to the application of sub-ss. (1) and (2) of s. 80C.
In my opinion the history of the legislation, the place of s. 80C (3) in its operation and its policy demonstrate that there is no basis for inferring that the draftsman failed to express his intention properly by the words he used.
As I have already said the object of s. 80C both in its 1964 and its 1965 version was to make the fate of the subsidiary company's claim to deduct prior losses depend on continuity of shareholding in its holding company rather than on the subsidiary's own position. Section 80B (5) where applicable qualifies the requirements as to beneficial ownership in s. 80C (1) by denying continuity in certain cases which would otherwise satisfy that requirement and by deeming continuity to exist in some cases where in fact it does not. In the ordinary case the requirement of continuity of shareholding in the holding company would ensure continuity in a company in which it had a controlling interest. If that continuity failed in the holding company that would automatically disqualify the subsidiary from carrying forward its losses because it could not satisfy the requirements of s. 80C (1).
It was argued on behalf of the Commissioner that for the sections to operate in this way involved an "injustice" or was "unfair" to the subsidiary company. That view overlooks the evident purpose of the legislation. If one asks who will gain from the allowance of a deduction for prior losses, and who will lose by its disallowance, the answer is in each case the holding company, either wholly or to a greater extent than anyone else. The policy of treating a subsidiary company for the purpose of carry-forward losses in the same manner as its parent is a rational and understandable policy, though it is not the only possible policy for the legislature to adopt.
I said above that there may be some problem in applying the words "interposed company" in the 1965 version of s. 80C (3). The material words direct that in applying s. 80C (1) and (2), s. 80B (3) to (8) are to apply in relation to the holding company and "in relation to every company that was at any relevant time interposed between the holding company and the subsidiary company". The difficulty is that sub-ss. (1) and (2) involved no reference to interposed companies and imposed no requirement with respect to them. However it appears that the insertion of these words makes no real difference to the operation of the section. For a holding company to have a "controlling interest" in a subsidiary separated from it by an interposed company, it must have a controlling interest in the interposed company. Save perhaps in cases involving an unusual share structure, that controlling interest would necessarily involve the holding of a beneficial interest in more than 50 per cent of the shares which carry votes, i.e. a greater proportion of the shares in the interposed company than that required by sub-s. (1) for continuity in the holding company. If the reference to interposed companies involves some mistake or misunderstanding by the draftsman, as to which I do not need to express a view, it is certainly not the mistake attributed to him by the members of the Full Court of the Federal Court and is one which could not produce the result at which they arrived. Moreover it could have no effect in a case such as the present where there is no relevant interposed company.
The view which I have taken of the meaning and operation of s. 80C (3) would ordinarily make it unnecessary for me to consider the question of whether the reading of words into that sub-section or into s. 80B (5) was permissible according to accepted principles of construction. However it is desirable that I should do so since that was the basis of the decision of the Full Court of the Federal Court.
It is I think established that before words can be read into a statute by a court the omission, and how it should be remedied, must be very clear indeed. The authorities to which I refer below demonstrate this to be the governing principle. In the present case the relevant words remain as they were in the 1964 version though the draftsman had in 1965 substantially reconstructed the sub-section. I am unable to accept that an omission which the draftsman himself did not observe when making substantial drafting changes to the earlier parts of the sub-section can be regarded as so clear as to warrant a court filling the gap alleged to exist. Moreover the sub-section thereafter remained unchanged until repealed by s. 10 of the Income Tax Assessment Act 1973 (No. 51 of 1973). This strongly suggests that the gap or omission now asserted did not exist. It is to be remembered that the restriction of the right to carry forward losses of previous years has been a gradual process and steps which hindsight might reveal as perhaps natural or logical extensions of the earlier versions would not necessarily have appeared so at the time of the making of earlier amendments.
The present case does not have any of the characteristics which have been regarded in the more recent authorities as sufficient to warrant filling a gap or apparent gap. No doubt the courts in recent years have taken a somewhat less strict view of reading words into statutes where the words actually used produce, for instance, an absurd result. It is however not permissible to rely on a supposed failure to express the real intention by reliance on what the reader thinks the Parliament or the draftsman should have intended or should have said.
This case is not one of ambiguity which a court may resolve by reference to the general purpose of the legislation, the "mischief aimed at" or some apparent logical scheme. Section 80C is not ambiguous or uncertain. The parties agreed that on the "literal" meaning of the words the result would be that the taxpayer could carry forward the earlier losses which would then be available as deductions in the year of income.
There are a number of authorities which deal with the "filling of gaps" or altering words in statutes. A recent statement of the general principle in this Court is to be found in the reasons for judgment of Stephen J. in Marshall v. Watson [24] where he said:
Granted that there may seem to be lacking in the legislation powers which it might be thought the Legislature would have done well to include, it is no power [? part] of the judicial function to fill gaps disclosed in legislation; as Lord Simonds said in Magor and St. Mellons R.D.C. v. Newport Corporation [25] , "If a gap is disclosed, the remedy lies in an amending Act" and not in a "usurpation of the legislative function under the thin disguise of interpretation". 1. (1972) 124 C.L.R. 640, at p. 649. 2. [1952] A.C. 189, at p. 191.
In Stock v. Frank Jones (Tipton) Ltd. [26] , five members of the House of Lords dealt with this question and although their speeches differ in emphasis they were united in declining to read words into the Act there in question. Viscount Dilhorne, with whom Lord Fraser of Tullybelton agreed, said [27] :
It is now fashionable to talk of a purposive construction of a statute, but it has been recognised since the 17th century that it is the task of the judiciary in interpreting an Act to seek to interpret it "according to the intent of them that made it" (Coke 4 Inst. 330).
If it were the case that it appeared that an Act might have been better drafted, or that amendment to it might be less productive of anomalies, it is not open to the court to remedy the defect. That must be left to the Legislature.
The appellants contend that in view of the anomalies which they say would result from the interpretation the respondent seeks to have placed on the paragraph, to have paragraph 8 (2) read as if it said: "who also took part and at the date of the dismissal were taking part in that action." As Stephenson L.J. said in the Court of Appeal, the paragraph does not so provide.
"It is a strong thing to read into an Act of Parliament words which are not there, and in the absence of clear necessity it is a wrong thing to do" said Lord Mersey in Thompson v. Goold & Co. [28] . " we are not entitled to read words into an Act of Parliament unless clear reason for it is to be found within the four corners of the Act itself" said Lord Loreburn L.C. in Vickers, Sons & Maxim Ltd. v. Evans [29] .
It is not enough that the words, though clear, lead to a "manifest absurdity": per Lord Esher M.R. in Reg. v. Judge of the City of London Court [35] . Lord Atkinson put the point starkly in Vacher & Sons Ltd. v. London Society of Compositors [36] : "If the language of a statute be plain, admitting of only one meaning, the legislature must be taken to have meant and intended what it has plainly expressed, and whatever it has in clear terms enacted must be enforced though it should lead to absurd or mischievous results."
The reason for the rule was given by Lord Tenterden C.J. in Brandling v. Barrington [37] in a passage in which he was considering the so-called "equity of a statute": he commented "that it is much safer and better to rely on and abide by the plain words, although the legislature might possibly have provided for other cases had their attention been directed to them."
As Lord Moulton said in Vacher's Case [50] : "The argument ab inconvenienti is one which requires to be used with great caution. There is a danger that it may degrade into mere judicial criticism of the propriety of the acts of the legislature."
If the words used by Parliament are plain, there is no room for the "anomalies" test, unless the consequences are so absurd that, without going outside the statute, one can see that Parliament must have made a drafting mistake. If words "have been inadvertently used", it is legitimate for the court to substitute what is apt to avoid the intention of the legislature being defeated: per MacKinnon L.J. in Sutherland Publishing Co. Ltd. v. Caxton Publishing Co. Ltd. [51] . This is an acceptable exception to the general rule that plain language excludes a consideration of anomalies, i.e. mischievous or absurd consequences. If a study of the statute as a whole leads inexorably to the conclusion that Parliament has erred in its choice of words, e.g. used "and" when "or" was clearly intended, the courts can, and must, eliminate the error by interpretation. But mere "manifest absurdity" is not enough: it must be an error (of commission or omission) which in its context defeats the intention of the Act.
Lord Scarman's formulation of the principles may perhaps be thought to go somewhat further than the views of the others but there is no fundamental difference as to the governing principle. Even if one applies Lord Scarman's formulation to the present case it is clear from the considerations to which I have referred that it would not warrant reading the words of the legislation as the members of the Full Court of the Federal Court read them. This is not a case of "manifest absurdity" and even that in his Lordship's view is not in itself enough.
I am therefore of opinion that this appeal should be allowed.
Cooper Brookes (Wollongong) Pty Ltd
Commissioner of Taxation
Appeal dismissed with costs.