It will be noted that, as then in force, s 108(1) was limited in its operation to payments, advances or loans to or on behalf of or for the individual benefit of a shareholder, rather than to an "associated person", and that it did not explicitly provide for the crediting of an amount on behalf of or for the benefit of a shareholder.
In Black (above), a company controlled by a taxpayer which maintained a loan account of monies advanced to the taxpayer from time to time forgave the indebtedness of the taxpayer. The Commissioner issued amended assessments increasing the taxpayer's assessable income in respect of the 1985 and 1986 financial years by $80,339, being the amount of the debt forgiven by the company. It was contended that the writing off or forgiving of the debt should be treated as an advance or loan by the company to enable the taxpayer to repay his debt to it, so that the $80,339 was deemed to be a dividend under s 108 of the Act. The Commissioner failed on that contention. Sweeney J said (at 280):
"In my opinion, it is not permissible to construe the deeming provisions of sec. 108(1) so as to embrace forgiveness of a debt, on the basis that it produced the same effect as would have flowed from a different transaction. If the Parliament had intended to produce such a result, it would have been easy to include in the section a reference to a debt being forgiven or an obligation released. It is not open to regard the forgiveness of the taxpayer's debt as a payment made by the company on behalf of, or for the individual benefit of, the taxpayer within the meaning of the section."
Nor did the definition of "dividend" assist the Commissioner. It provides:
" 'dividend' includes -
(a) any distribution made by a company to any of its shareholders, whether in money or other property;
(b) any amount credited by a company to any of its shareholders as shareholders; and".
There had been no distribution made by the company to the taxpayer, because there had been no dealing out or bestowal by reason of the foregoing of the receipt of payment from the taxpayer. Nor had there been any amount credited by the company to the taxpayer "as shareholder", that is in the capacity of shareholder as distinct from the capacity of debtor. Thus, his Honour did not need to consider and did not address whether the forgiveness of the debt constituted an amount credited to a shareholder in those circumstances.
Counsel for Lonsdale acknowledged that the decision was not directly on point. He contended, however, that consistent with the reasoning in that decision it is implicit from s 108(1) of the Act in its present form that the payment or crediting must be on behalf of or for the benefit of the associated person in that person's capacity as shareholder rather than as, for example, in that person's capacity as debtor. It was argued that this follows especially from the requirement that the Commissioner be satisfied that the payment or credit be "a distribution of profits". The definition of "dividend" has not altered since that decision.
Despite that submission, in my view, that decision does not assist in resolution of the present issue. It is clear that Sweeney J paid particular regard to the precise words then in the section. The absence of any words to encompass the forgiveness of a debt or the release of an obligation were significant. So too was the requirement that the payment be for or on behalf of a person as a shareholder. The introduction of the word "credited" may well increase the scope of operation of s 108 to encompass the present circumstances. It is designed clearly to broaden its reach. So, too, is the introduction of the concept of associated person. Whether that increased range does in fact extend to the present circumstances is the question now before me. Nor do I think the contention is consistent with the express terms of s 108(1) of the Act. It would be reading into that section words which are not there to support the argument. There is no reason why subclauses (a) and (b), in this respect, should be read differently. There is no mandate in subclause (a) to require the payment to an associated person to be in that person's capacity as shareholder. It is the character of the payment which attracts the operation of s 108 rather than the character of the recipient, beyond the recipient's eligibility to qualify as an associated person. If that be so, consistency dictates that subclause (b) be approached the same way. No reason was put forward, nor is it apparent to me, why that should not be the case in respect of s 108(1)(a) and (b). Furthermore, subclause (c) deems that the payment is to the associated person as a shareholder in the company. If it were a requirement of s 108(1)(a) and (b) that the benefit be given to a person in the capacity of shareholder, then subclause (c) would simply be redundant. I do not think there is any sufficient reason otherwise shown to regard that subclause as redundant. The use of the defined term "associated person" should simply be given its proper operation. It is accepted that Lonsdale is an associated person of Screenings.
The enactment of ss 108 and 109 in their present form in 1987 did not alter their purpose in ensuring that dividends disguised as taxable loans or advances were nevertheless treated as dividends subject to taxation as assessable income. Their repeal and re-enactment then was described as directed to curing "technical" deficiencies in their operation: Explanatory Memorandum, Taxation Law Amendment Bill (No 3) 1987, at 39.
It is plain, in my view, that s 108 is a provision to catch amounts somehow passed to an associated person of a private company which in fact make over profits or income of the company as, in substance, dividends which are paid or credited in a way which appears to represent a different transaction. The effect of such a payment, if it falls within s 108(1), is that for the purposes of the Act it is deemed to be a dividend paid by the company to the associated person as a shareholder in the company, out of profits derived by the company, and during a particular year of income. Section 44 of the Act provides for dividends to be included in assessable income. The effect of subclauses (c)-(d) of s 108(1) have the effect of making any amount caught within the net of the earlier part of s 108(1) being assessable income by reason of s 44.
Section 108(1) will apply to the transaction only if, on its clear terms, it does do so. Black (above) provides an illustration of that proposition. It is for the legislature to determine the circumstances in which the deeming of dividends should operate. It is necessary to determine whether the subject transaction is caught by the Act.
There is nothing to suggest that the word "credited" in s 108(1)(b) should be given any particular confined meaning. It is not separately defined in the Act. Its general meaning includes: "to enter upon the credit side of an account; give credit for or to; to give the benefit of such an entry to (a person, etc)" (The Macquarie Concise Dictionary, 2ed, at 218). As noted above, it is an expression which appears in the definition of "dividend" in the Act. It has been the subject of observations by the High Court, in relation to income tax legislation, in a number of cases.
In Webb v Federal Commissioner of Taxation (1922) 30 CLR 451, a company reconstruction led to the substantial undistributed profits of one company being applied to the issue of shares in a new company, which shares were allotted pro rata to the shareholders of the former company. The new company acquired the business and assets of the old company. The issue of the new shares did not involve "profits or bonus credited or paid" by the old company to its shareholders. Knox CJ, Gavan, Duffy and Starke JJ said (at 461):
"Nothing was either paid or credited to the shareholders, because they neither received any specific sum of money in currency, nor did they obtain the benefit of any such sum by way of credit entry, set-off, or other statement of account. Nor was the distribution of "profits" within the meaning of sec. 14(b). In our opinion the words "profits credited or paid" in that sub-section mean moneys detached from the assets of the company suitable for distribution to the shareholders. On distribution such moneys become their income in contradistinction to their interest in the remaining assets of the company which continue to be their capital. In this case there was no detachment."
Isaacs J (at 479) referred to the word "credited" as involving cases where, without actual payment, there has been credit in the company's books imputed to the shares held, and so somehow involving a debt by the company to the shareholder. His Honour observed that the distribution of surplus assets in winding up creates nothing in the nature of a debt by the company to anybody. The observations of Dixon J in Jolly v Federal Commissioner of Taxation (1933) 50 CLR 131 at 142, and 149-150, upheld by the Full Court in its very brief decision (at 153) are to similar effect. In his reasons (at 142) Dixon J said of the description - dividends, profits or bonus credited or paid to the taxpayer as a member of the company:
". . . the description was satisfied if the shareholder received a specific sum of money in currency or obtained the benefit of such a sum by way of credit entry, set-off or other statement of account".
In James v Federal Commissioner of Taxation (1924) 34 CLR 405 a company decided to capitalise accumulated profits and to issue the shares so generated as bonus shares to its members pro rata. The accumulated profits were declared as a bonus to the shareholders. Entries to reflect the implementation of that decision were made in the company's books, dealing separately with each shareholder. The Court found that there had been "credited" to the shareholders a bonus, so as to constitute assessable income. The bonus sum was in fact credited to the shareholders, and was then applied by the company on behalf of the shareholders to, and credited as payment pro tanto for, the liability created by the issue and acceptance of shares.
Finally, I refer to Commissioner of Taxes (Victoria) v Nicholas (1938) 59 CLR 230. In that case also, a capitalisation of reserves from the profits of a company was effected by an issue to shareholders of fully paid up bonus shares. It was held that that constituted "a profit or bonus credited" to the shareholders within the meaning of the applicable taxation legislation. Rich J said (at 244):
"When the Act of Parliament speaks of "crediting" it is not discussing book keeping, but the appropriation of profits to answer the purposes of the shareholder. If the shareholder obtains shares, stock, debentures, bonds or any other negotiable or transferable form of obligation of the company or interest in its assets, and the consideration which otherwise must be supplied by him consists in an appropriation by the company of profits to that end it would seem to me to be the very thing meant by "crediting" the profits."
As a matter of principle, I can see no reason why in appropriate circumstances the forgiveness of a debt may not fall within the operation of s 108(1)(b). If a company is owed money by a shareholder, and declares a dividend but satisfies its debt to the shareholder created by the declaration of the dividend by crediting that amount against the amount owing by the shareholder, there is no doubt that the credited amount would be assessable income in the hands of the shareholder. Section 108 is designed to confront circumstances where, in a less obvious way, there is in reality a disguised dividend to an associated person. The decisions referred to indicate that, at the least, there must be something in the nature of an allocation or appropriation of the company's resources to an individual shareholder or to the shareholders each individually. That, by the words of s 108, may extend to persons who are associates of the company. Once a separate transaction occurs (whether in favour of only one, or a number, or each shareholder in the sense that each gains an identifiable separate benefit from it), it is appropriate to look to the nature of the transaction to determine if it falls within s 108. There will be some circumstances where the making of an advance or loan may thus be caught. There will be circumstances where more complex transactions may thus be caught: cp. MacFarlane v Federal Commissioner of Taxation (1986) 13 FCR 356. There will be circumstances where the forgiveness of a debt will be caught. Whether that is so depends upon the existence of a particular transaction, and its substantive nature and effect. It will not, by any means, be every forgiveness of debt that will be caught. It will be caught, in my view, if the crediting of an amount against a shareholder's (or associate's) loan account is recorded in the books of the company and in substance constitutes an appropriation of the profits of the company for the benefit of the shareholder (or associate). There are, of course, circumstances in which debts may properly be forgiven or written off and which have no element of appropriation of funds from the profits of the company. Thus, the commercial circumstances in which the transaction occurs will be relevant. On the other hand, the wider commercial strategy being implemented may or may not involve as one of its elements precisely the sort of conduct which s 108 is designed to catch. That there is, in such circumstances, a legitimate commercial reason for undertaking the particular transaction said to be caught by s 108 will not of itself remove that particular transaction from the tentacles of s 108; cp. Kenneth A Summons Pty Ltd v Federal Commissioner of Taxation (1986) 86 ATC 4979.
In my view, the present transaction was in substance the crediting of an amount by Screenings on behalf of, and for the individual benefit of, Lonsdale. That was the substantive nature of that part of the transaction. The journal entries reflect that. The minutes reflect that. That there was a wider, and sensible, commercial reason for doing so, namely to structure Lonsdale so that the sale of shares in Lonsdale, and the price to be paid for them, was effected and calculated respectively after intercompany debts had been forgiven, does not diminish that conclusion. It is not simply a matter of the accounting entries, but having regard to the substantive transaction itself which they both evidence and reflect. There is no suggestion that the forgiveness of the debt was prompted by any other consideration, eg. that it was not recoverable. There is no reason to think that Lonsdale did not have available to it revenue or profits to meet any payment of money to Screenings. Indeed the evidence indicates that it did. It also indicates that the written off debt reduced Screenings' profit in that year, presumably impacting upon its taxation liability. Let it be supposed that Screenings had gifted to Lonsdale, and paid directly to it, moneys sufficient to repay Screenings the loan. Gifting would have been necessary to enable Lonsdale to have funds to clear the intercompany loan accounts. I have little doubt that that would, in the circumstances, attract s 108. In my view, the actual process adopted in substance by forgiveness of the debt was a crediting for Lonsdale in circumstances where the Commissioner legitimately regarded it as representing a distribution of profits.
It was also contended on this aspect of the case that s 108(1)(b) requires the payment of credit to be given to or on behalf of a third party rather than to the associated person. It is not apparent to me why that should be so. Subclause (a) certainly is limited to an amount paid to an associated person by way of advance or loan. The expression "pays or credits" in subclause (b) is clearly designed to have a wider range of operation. Although it may be that its scope may extend to payments or credits in favour of a third party rather than to the associated person, I see no reason why that is necessarily so. The contention, if correct, would not serve the apparent purpose of the section. It would leave an irrational gap in its area of operation. A 'crediting' transaction does not necessarily involve a third party at all. It may be on behalf or for the individual benefit of the associated person, without a third party being involved at all. It would be illogical to construe subclause (b) to limit its operation to circumstances where the payment or credit involves a third party where it is made on behalf of or for the individual benefit of the associated person.
Finally, on this aspect, it was argued that it was not Lonsdale which in reality received the distribution of profits from Screenings, but Southern Quarries, as Lonsdale ceased to be a debtor of Southern Quarries and Screenings became a debtor of Southern Quarries. However, as a result of the overall transaction, Southern Quarries' position has not changed, except that the identity of its debtor is Screenings rather than Lonsdale and perhaps the capacity of Screenings to repay that debt may be better than that of Lonsdale. But overall its assets or liabilities have not altered. Screenings' position has altered. It has reduced its current assets and its net assets by $296,486. It has done so because it has released the debt to Lonsdale. That reduction in its current assets and its net assets is reflected by the release of Lonsdale's debt. The beneficiary was Lonsdale. Lonsdale, as its records illustrate, also increased its net assets by the amount of the forgiven indebtedness. Accordingly, I reject that contention.
ADEQUACY OF CONSIDERATION
The contention is that there has been no binding release of the debt, and so no crediting of any amount which falls under s 108(1). Lonsdale argues that it still owes Screenings $294,486 in addition to any other loans. It is a little curious that Lonsdale would want to assert the existence of a debt of $294,486 so as to avoid a liability to the Commissioner of somewhat less than half the debt.
Reliance was placed upon Case W115 of 1989 (1989) 89 ATC 899. That was the Administrative Appeals Tribunal decision from which the appeal to Sweeney J in Black (above) was brought. The Tribunal found (at 913) that the resolution to "forego" the debt by the company and the entry in its books of account to give effect to that resolution was "nothing more than a unilateral act on the part" of the company, so that although the company was substantially controlled by the taxpayer:
". . . it was not done in such a way so as to confer any right upon (the taxpayer) against the company such as would have entitled him to resist a claim for payment of the debt. There is no basis in the evidence before me for (the taxpayer) to contend that he was released, whether by deed under seal or by any agreement which consideration was given, or that he so acted in consequence of the company's representations as to be entitled to allege an estoppel. Once that is recognised, it follows that nothing has passed to (the taxpayer). His liability to the company remains as it was."