Statutes - Interpretation - Literal interpretation producing anomalous result - Legislative intent clear - Common sense interpretation. The taxpayer was at all relevant times a subsidiary of Wellington Holdings Pty. Ltd. ("Wellington"). The principal shareholder in Wellington was Mr. E.H. King. Mr. King was beneficial owner of more than fifty per cent of the shares in Wellington during 1964 and 1965, when the taxpayer incurred losses, and during 1971, the year of income of the relevant assessment.

Wellington went into voluntary liquidation on 12th May, 1965. At that time the group, including the taxpayer, had no significant assets other than accumulated tax losses. On 7th June, 1965, winding-up orders were made in respect of the taxpayer and the other members of the Wellington group.

On 18th July, 1967, Mr. King and his wife entered into a written agreement with the liquidators, in their capacity as scheme trustees, to sell their shares in Wellington to a "purchaser of the tax losses" of the subsidiaries of Wellington, including the taxpayer. This agreement did not proceed. In 1968 the scheme trustees entered a deed with Network Finance Ltd. ("Network"). The deed provided that in consideration for certain loans by Network, the trustees would deliver to Network all of the issued shares of Wellington on the completion of the scheme. The amounts lent pursuant to the deed were calculated by reference to the value of tax losses confirmed by the Deputy Commissioner of Taxation.

Mr. King thereafter co-operated with the scheme trustees in a manner which was inconsistent with his own rights and interest as a shareholder in Wellington but which was necessary for the operation of the scheme.

The essence of the scheme was for Wellington to borrow from Network sufficient funds to enable it to subscribe to a new issue of shares in the taxpayer. The loan was repayable on demand, interest free, and secured by a mortgage over all of the shares in the taxpayer held by Wellington. Upon demand for repayment, Wellington would default, and Network would take a transfer of the shares.

The scheme was duly implemented. One day after the end of the year of income Network took a transfer of all Wellington's shares in the taxpayer. The following day the taxpayer declared a dividend which was credited exclusively to Network.

The taxpayer claimed a deduction for the 1964 and 1965 losses in its return for the year ending 30th June, 1971. The Commissioner disallowed the claim and disallowed the taxpayer's subsequent objection. In the Supreme Court of New South Wales Woodward J. allowed the taxpayer's appeal on the grounds that there was no arrangement between Mr. King and Network within the meaning of s. 80B (5) of the Income Tax Assessment Act, and that the application of s. 80B (5) to s. 80C (1) WAS limited by s. 80C (3).

Held: allowing the appeal - (1) The evidence supported the inference of the existence of an arrangement between Mr. King and the scheme trustees of a sort which was an arrangement contemplated by s. 80B (5).

(2) A literal interpretation of s. 80C (3) would produce anomalous results which were inconsistent with the obvious legislative intent. Accordingly s. 80C (3) should be read as qualified in such a way as to give effect to the legislative intent.

Sydney, 1978, October 19; 1979, August 15. 15:8:1979

Appeal from a decision of Woodward J. of the Supreme Court of New South Wales.

L.J. Priestley Q.C. and B. McKillop, for the respondent.

Solicitor for the appellant: Alan R. Neaves (Commonwealth Crown Solicitor).

Solicitors for the respondent: Arthur T. George & Co.

J.W.K. BURNSIDE

BRENNAN J. In this case, I have had the advantage of reading my brother Fisher's reasons for judgment. I agree that the appeal should be allowed, and I am content to follow in the steps which lead his Honour to that conclusion. I would, however, add briefly my reasons for holding that s. 80C (3) of the Income Tax Assessment Act 1936 (Cth.) does not have the effect of applying s. 80B (5) (C) to a case falling within s. 80C (1) as though the phrase "for the purpose of enabling the company to take into account a loss that the company has incurred" read "for the purpose of enabling the holding company to take into account a loss that the holding company has incurred". (at p278)

2. Section 80C(1) provides that, notwithstanding s. 80, 80AA and 80A "but subject to this section and to section eighty E" of the Act, a loss incurred by a subsidiary company shall not be taken into account for the purposes of s. 80 or s. 80AA unless the Commissioner is satisfied of two conditions referred to in the sub-section. The conditions are, first, that the holding company which had a controlling interest in the subsidiary company at any time during the year of loss also had a controlling interest in the subsidiary at all times during the relevant year of income; and, second, that shareholders who beneficially owned shares carrying not less than forty per cent of the voting, dividend and capital distribution rights in the holding company at all times during the year of loss, also beneficially owned shares carrying rights of those kinds in the holding company at all times during the relevant year of income. If the beneficial owners of shares in the holding company carrying rights of the kind referred to in s. 80C(1) during the whole of the year of income had not beneficially owned shares carrying those rights during the whole of the year in which the subsidiary incurred the relevant loss, s. 80C(2) empowers the Commissioner to take into account for the purposes of s. 80 or s. 80AA such part of the loss as he considers to have been incurred while they had beneficially owned shares carrying those rights. (at p279)

3. Subsections (1) and (2) of s. 80C each apply to a loss incurred by a subsidiary, and define the conditions upon which it is or may be allowed as a deduction in a subsequent year of income, pursuant to s. 80 or s. 80AA. Neither subsection applies to a loss incurred by a holding company before a particular year of income, for the deductibility of such a loss falls for consideration under s. 80A. But there is a legislative intention, too clear to mistake, common to s. 80A and s. 80C, as to the condition relating to continuity of beneficial ownership of shares upon which a company may be allowed a deduction: the condition is expressed in s. 80A(1) with respect to the taxpayer company in precisely the same terms as it is expressed in s. 80C(1) with respect to the holding company of the taxpayer company: and in s. 80A(2) it is expressed with respect to the taxpayer company in precisely the same terms as it is expressed in s. 80C(2) with respect to the holding company of the taxpayer company. Indeed, the only circumstance which takes the loss incurred by a taxpayer subsidiary company out of the application of s. 80A is that the taxpayer was a subsidiary at a time during the year of loss (s. 80C(1)). (at p279)

4. Subsections (3) to (8) of s. 80B have effect, as s. 80B(1) provides, "for the purposes of the application of (s.80A) in determining whether a loss incurred by a company . . . is to be taken into account . . .". Section 80C(3) applies the same subsections in relation to a holding company for the purposes of the application of s. 80C(1) OR S. 80C(2) - provisions which also relate to whether a loss incurred by a company is to be taken into account. The symmetry of the provisions suggests that subsections (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. (at p280)

5. Paragraph (c) of s. 80B(5) might therefore be expected to have a like operation with respect to the deductibility of a subsidiary's loss under s. 80C, to the operation which it has with respect to the deductibility of a company's loss under s. 80A. Paragraph (c) denies deductibility to a loss otherwise falling within s. 80A where a contract, agreement or arrangement, referred to in that subsection, was entered into for a purpose of obtaining a deduction for the loss. Prima facie, par. (c) should be construed in its application to a case under s. 80C as denying deductibility to a loss otherwise falling within that section - that is, a subsidiary company's loss - where a contract, etc., was entered into for a purpose of obtaining a deduction for the subsidiary company's loss. No doubt the contract, etc., referred to in par. (b) relates to the continuity of shareholding in the holding company, but the relevant purpose is connected with the deductibility of a loss falling within s. 80C - the subsidiary's loss. (at p280)

6. To hold otherwise would attribute an operation to s. 80C(3) and s. 80B(5) (c) which would be incongruous in comparison with the operation of s. 80B(1) and s. 80B(5) (c). Yet there is nothing to suggest any difference in legislative intention as to the respective applications of s. 80B(5) (c) by s. 80B(1) and by s. 80C(3), unless one fastens on the phrase in s. 80C(3) "as if references in those sub-sections to the company were references to the holding company . . .". 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. (at p280)

7. Accordingly, I concur in the judgment of Fisher J. The appeal should be allowed with costs. (at p280)

DEANE J. I have had the benefit of reading the judgment of Fisher J. I agree with the conclusions which he reaches and, subject to what is said hereunder, with the reasons which he advances for those conclusions. The one question upon which I would add some comments for myself concerns the construction of s. 80C(3) of the Income Tax Assessment Act 1936 (Cth.) ("the Act"). The subsection has since been repealed and references to it and to other provisions of the Act are to the relevant provision in the form applicable to the year of income ended 30th June, 1971. (at p281)

2. Section 80c (3) extended the primary operation of s. 80B (5) by providing that, in the specified circumstances, references to "the company" in the provisions of that subsection should be read as references to "the holding company or the interposed company as the case may be". If the provisions of s. 80C (3) are given their strict literal meaning, the present case does not fall within s. 80B (5), and the latter subsection does not destroy the continuity of beneficial ownership of shares which is necessary if the taxpayer in the present appeal is to be entitled to the benefit of the disputed deduction in respect of losses of previous years. On the other hand, if the direction embodied in s. 80C (3) to read references to "the company" in the manner indicated, is construed as subject to an implied qualification that they are to be so read "where appropriate", s. 80B (5), in its extended operation, has the effect of destroying that continuity of beneficial ownership. (at p281)

3. Ordinarily, I would be loath to attribute to the provisions of a taxing act a meaning different from their literal meaning where the literal meaning would not, and the attributed meaning would, deprive a taxpayer of a deduction to which he or it would otherwise be entitled. The legislative intent must be derived from the words which the legislature has seen fit to use. The fact that the literal interpretation of the words used by the legislature may seem to result in a more favourable result to a taxpayer than the legislature may have intended does not, in itself, constitute any warrant for a court disregarding the literal meaning of the words which the legislature has used and attributing to those words a qualified meaning which it is assumed the legislature intended to convey. In the present case however, as Fisher J. has illustrated, a literal reading of the words used in s. 80C (3) would result in taxpayers who were plainly not intended to be caught by the provision being deprived of the benefit of deductions to which they would otherwise be entitled. If the direction contained in the subsection is read as qualified by the words "where appropriate" that unintended result would be avoided. In these circumstances, it is plainly legitimate to regard the importance of the fact that such a qualification of the words used would have the result of depriving the taxpayer in the present appeal (and presumably other taxpayers) of the benefit of a deduction in respect of past losses to which they would otherwise be entitled, as discounted by the consideration that it is reasonably clear that it would be quite anomalous for the taxpayer and others in the same circumstances to enjoy the benefit of the deduction. (at p281)

4. The implication of words such as "where appropriate" in a legislative direction to substitute words in another legislative provision so as to apply that legislative provision to circumstances to which it would not otherwise be applicable does not involve doing violence to the words which the Parliament has used. Where, as in the present case, the direction to substitute the different words is given in respect of a variety of different legislative provisions, the implication can be made almost as readily as can the implication of the qualification "subject to a contrary intention" in a definition section. In my view, the qualification "where appropriate" should be implied in the provisions of s. 80C (3). (at p282)

5. The appeal to this Court should be allowed with costs. The orders made by the Supreme Court of New South Wales should be set aside and, in lieu thereof, it should be ordered that the appeal to that court be dismissed with costs. (at p282)

FISHER J. This is an appeal by the Commissioner of Taxation ("the Commissioner") from a decision of the Supreme Court of New South Wales in its Administrative Law Division. The Supreme Court upheld an appeal by Cooper Brookes (Wollongong) Pty. Ltd. ("the taxpayer") against an income tax asessment issued against the taxpayer in respect of the year of income ended 30th June, 1971. At issue in the appeal is the taxpayer's entitlement in the assessment of income for that year to a deduction of the amount of losses incurred by it in two prior years. (at p282)

2. The taxpayer in the years of income ending 30th June, 1964, and 30th June, 1965 ("the years of loss") accumulated losses totalling $44,077. In its return of income for the year ending 30th June, 1971, ("the year of income") it claimed to be entitled to an allowable deduction of the amount of these accumulated losses. The Commissioner in his assessment rejected this claim stating in the adjustment sheet that he relied upon s. 80C and in particular that "in pursuance of s. 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 s. 80C (1) (b)". Wellington Holdings Pty. Ltd. at all relevant times beneficially held all of the issued shares in the capital of the taxpayer. The taxpayer objected to the assessment and the Commissioner disallowed the objection. On appeal to the Supreme Court of New South Wales, Woodward J. found in favour of the taxpayer and allowed the appeal. (at p282)

3. Before the trial judge two substantial issues arose, namely: 1. Whether by virtue of s. 80C (3) of the Income Tax Assessment Act 1936 (Cth.) ("the Act") s. 80B (5) had an extended application to a case such as the present where the taxpayer claiming the benefit of a loss incurred in a previous year was, at all relevant times, a subsidiary of some other company. 2. Whether there was before him evidence upon which it was reasonable to infer a relevant arrangement between Mr. E. H. King, the continuing shareholder in the holding company Wellington Holdings Pty. Ltd. ("Wellington") and Network Finance Ltd. ("Network") the purchasing shareholder or any person on its behalf. His Honour also gave consideration to two subsidiary questions, namely whether s. 80A and s. 80C of the Act have a cumulative effect and whether the grant by Mr. King of a proxy on 24th May, 1968, came within s. 80B (5) (b) and (c) of the Act. It is agreed by counsel for both parties that the former subsidiary question does not arise for determination on this appeal. (at p283)

4. On the hearing before the trial judge, little prominence appears to have been given to an alternative contention upon which the Commissioner relied before this Court. That contention, which was clearly raised by the Commissioner's letter of particulars dated 4th May, 1977, was that there was a relevant arrangement between Mr. King and the scheme trustees ("the trustees"). In his judgment Woodward J. concentrated his attention almost exclusively upon the possible existence of the alleged arrangement between Mr. King and Network. On the hearing of the appeal counsel for the Commissioner put as his primary submission that there was evidence from which it was reasonable to infer an arrangement between Mr. King and the trustees. As in my opinion this submission should be upheld, it is necessary for me to traverse the evidence because, even though it is not in dispute, certain portions thereof assume a different significance when considered in relation to the alternative arrangement that was alleged. It was not suggested that this alternative submission was not properly open to the Commissioner on the appeal to this Court. (at p283)

5. It will be necessary from time to time to refer to particular sections of the Act as they were at the relevant time and it is appropriate to set them down at the outset. They are: (at p283)

6. "s. 80A (1) Notwithstanding sections eighty and eighty AA of this Act, but subject to the next succeeding sub-section and the next four succeeding sections, a loss incurred by a taxpayer, being a company, in a year before the year of income shall not be taken into account for the purposes of section eighty or section eighty AA of this Act unless - (at p283)

7. (a) the company satisfies the Commissioner; or (at p283)

8. (b) in the case of a company that is not a private company in relation to the year of income, the Commissioner is satisfied that it is reasonable to assume, (at p283)

9. that, at all times during the year of income, shares in the company carrying between them - (at p283)

10. (c) the right to exercise not less than two-fifths of the voting power in the company; (at p284)

11. (d) the right to receive not less than two-fifths of any dividends that may be paid by the company; and (at p284)

12. (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. s. 80B (5) Where - (at p284)

13. (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; (at p284)

14. (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 - (at p284)

15. (i) the beneficial interest of that person in the last-mentioned shares, or the value of that interest; (at p284)

16. (ii) the right of that person to sell, or otherwise dispose of, that interest or any such sale or other disposition; (at p284)

17. (iii) any rights carried by those shares, or the exercise of any such rights; or (at p284)

18. (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 (at p284)

19. (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. (at p284)

20. s. 80C (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 pany') 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 - (at p285)

21. (a) the holding company had a controlling interest in the subsidiary company; and (at p285)

22. (b) shares in the holding company carrying between them - (at p285)

23. (i) the right to exercise not less than two-fifths of the voting

24. (ii) the right to receive not less than two-fifths of any dividends that may be paid by the company; and (at p285)

25. (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. (at p285)

26. s. 80c (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." (at p285)

27. The taxpayer was incorporated on 20th October, 1961, under the name Ken Bridges Pty. Ltd. Subsequently, but prior to the relevant years, it changed its name to Cooper Brookes (Wollongong) Pty. Ltd. Shortly after its incorporation the taxpayer had an issued capital of $3,000 held as follows: A. J. De Montford 1; K. J. Bridges 150; J. K. Cranston 150; E. H. King 2,699. J. K. Cranston transferred his 150 shares on 22nd November, 1962, to Cooper Brookes Pty. Ltd. (at p285)

28. E. H. King Holdings Pty. Ltd. was incorporated on 30th April, 1962, and subsequently it changed its name to Wellington Holdings Pty. Ltd. ("Wellington"). On the day of its incorporation certain allotments of shares were made, which shares, together with the subscribers' shares, were held as follows:

Mr. King and Mrs. J. A. King were directors of Wellington until sometime in the month of May 1968. (at p285)

29. On 19th April, 1963, Mr. King transferred his holding of 2,699 shares in the taxpayer to Wellington, and the taxpayer remained a subsidiary of Wellington at all relevant times. Wellington had in addition to the taxpayer three further subsidiaries, Cooper Brookes Pty. Ltd., Cooper Brookes Trading Co. Pty. Ltd. and Cooper Brookes Industries Pty. Ltd. These five companies are, where appropriate, referred to compendiously as "the Wellington group". (at p286)

30. It would appear that in the years of the early sixties each of these companies incurred losses. The taxpayer incurred its relevant losses in the years of income ending 30th June, 1964, and 30th June, 1965. In each of these years it is accepted that Mr. King owned beneficially more than forty per cent of the issued shares in Wellington (in which no other company held a controlling interest) and that Wellington held beneficially more than forty per cent of the shares in the taxpayer and was its holding company in terms of s. 80c (1). (at p286)

31. At a meeting of directors of Wellington held on 28th April, 1965, Mr. and Mrs. King resolved to place that company into voluntary liquidation. On 12th May, 1965, Mr. C. K. Roberts a chartered accountant, was appointed liquidator of Wellington. On 7th June, 1965, a winding-up order was made by the Supreme Court of New South Wales in respect of each of the other four companies (inclusive of the taxpayer) in the Wellington group. Mr. C. H. R. Jackson, a chartered accountant and a partner of Mr. Roberts, was appointed official liquidator in each instance. The Wellington group had little in the way of assets other than their tax losses and nothing significant appears to have occurred in the ensuing two years. (at p286)

32. On 18th July, 1967, Mr. and Mrs. King entered into an agreement in writing with Mr. Roberts and Mr. Jackson (therein called "the scheme trustees") to which agreement I would attach some significance. It recited the holding by the Kings of, inter alia, 11,999 shares in Wellington, which is almost exactly sixty per cent of its issued shares and the fact that they were to transfer these shares to the "purchaser of the tax losses" of the subsidiaries of Wellington in consideration of the sum of $1,200. It further recites that the trustees were selling the structure of Wellington to a company which was acquiring the same for the benefit of the tax losses of certain of the subsidiaries of Wellington. The agreement further recited that the sum of $1,200 would be paid direct to the trustees who would dispose of the same in accordance with the terms of the scheme of arrangement. In the events that happened this sum was established as representing the fees of the trustees. By the covenants of the agreement the Kings acknowledged that they had no claim to the sum of $1,200 and that the trustees were entitled to deal with it in their absolute discretion subject only to the scheme of arrangement. Moreover the Kings covenanted that they would make no inquiry nor would they be entitled to inquire into the manner of administration of the scheme by the trustees. (at p287)

33. There is evidence that the particular transaction envisaged at the time of this agreement fell through. It is however significant that this is the only evidence (apart from the proxy) of any express authority having been given by the Kings or either of them to the trustees and there are some indications that the arrangements in this agreement at least in relation to the sum of $1,200 were carried through into the ultimate scheme. Certainly the trustees appear to have assumed that they had authority to enter into commitments on behalf of the Kings. (at p287)

34. The trial judge when commenting in his reasons on this agreement said that although the number of shares is different the transfer referred to in that agreement was probably the transfer set out in the fifth schedule to a subsequent agreement made by deed on 19th April, 1968, thereby no doubt linking together the two agreements. For my part I see further significance in the differing number of shares but will reserve my comments until I am considering the latter agreement. It is also noteworthy that the first agreement merely recites an obligation on the part of the Kings to transfer a certain number of shares, and does not indicate how many each is obliged to transfer. (at p287)

35. The next event to occur was the making on 19th April, 1968, of a deed between the trustees as scheme trustees and Network, described therein as the lender. This deed provided in consideration of the loan of certain moneys to enable the scheme to be carried out, and subject to other stated terms, the trustees would on completion of the scheme deliver to Network a transfer of all the issued shares in Wellington for the consideration set forth in the fifth schedule to the deed. Mr. Roberts as liquidator of Wellington undertook to sanction such transfers. The trustees covenanted to apply to the Supreme Court of New South Wales for an order staying the winding up of Wellington and also to apply to that court for an order confirming a reduction of capital of Wellington 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 of the companies in the Wellington group and cause all such resolutions to be passed and all such persons "appointed to or resigned from the board" as the lender might require. The fifth schedule to the deed set out the consideration to be paid as above mentioned to be again the sum of $1,200, but in this instance not merely in respect of sixty per cent of the shares, as under the previous agreement, and not in respect of all of the issued shares, as contemplated in the body of the deed, but in respect of all but two of the issued shares, which two were retained by Mr. King. (at p288)

36. The deed of 19th April, 1968, does not relate or recite the authority which the trustees had to arrange for the transfer of the shares for the stated consideration, or their authority to call board meetings and to have resolutions passed and appointments or resignations of board members effected. Rather it tends to assume that persons associated with Wellington, whether as directors or shareholders, would concur in whatever arrangements the trustees made. (at p288)

37. The deed is in the form of an agreement between the trustees as scheme trustees on the one hand and Network Finance Ltd., the lender, on the other part. In addition to the matters already referred to it recites the winding up of each of the companies in the group and the earlier appointment of the two trustees as official liquidator and liquidator respectively. It recites also the undertaking on the part of the trustees to seek the approval of the Equity Division of the Supreme Court of New South Wales to the provisions of a scheme of arrangement in respect of each of the four subsidiary companies. Each such scheme was set out in a schedule to the deed. Finally, the deed recites that, as above mentioned, the lender had agreed to lend to each of the subsidiaries a sum of money, which sum was in respect of each of the subsidiary companies other than the taxpayer as appears from the scheduled schemes, on the basis of twelve and a half cents for each dollar of losses confirmed by the Deputy Commissioner of Taxation as allowable by way of deduction under s. 80 of the Act. In the case of the taxpayer the calculation was at the rate of nine cents for each dollar of losses. (at p288)

38. The deed additionally provided that the sum of $1,200 would be refundable to the purchaser of the Wellington shares if the trustees were unable to comply with the provisions of the agreement embodied in it for any reason other than death of a shareholder. Somewhat surprisingly, in the event that the agreement could not be completed because of the death of a shareholder the sum of $1,200 was to be forfeited to the trustees to meet their costs and expenses. This perhaps indicates that the trustees were satisfied that the shareholders would concur in all arrangements made in effect on their behalf under the scheme and to that extent coincides with the clause concerning inquiry in the first agreement. The trustees were satisfied that it could be assumed that all would go according to their plan so long as the shareholders remained alive. (at p288)

39. There is also in the deed a similar provision in respect of a loan by Network to Cooper Brookes Pty. Ltd., namely that it was refundable in full to the lender in the event of the trustees being unable for any reason other than death to comply with the provisions of the scheme. In the latter event, namely the death of a shareholder, the amount of the loan was forfeited to the trustees to meet their costs and expenses. (at p289)

40. Thereafter Mr. King played the part doubtless expected of him in the implementation of the scheme. On 3rd May, 1968, he transferred to Network all but two of his B class shares for a stated consideration of $899.82. There is evidence to the effect that he never received from the company a certificate for the two shares which thereafter he held. It would appear that during the month he resigned as a director of Wellington, as this fact was reported at a meeting of members of the company held on 31st May, 1968. In respect of this meeting Mr. King appointed Mr. Roberts or, failing him, P. A. Somerset (Mr. Robert's solicitor) as his proxy. The form of proxy is set out in the reasons of the trial judge but no evidence was called in respect of the giving of the proxy or the reasons therefor or in relation to any of the activities of Mr. King at this time. (at p289)

41. On 8th May, 1968, Mr. King and the other shareholders in Wellington transferred the balance of the issued shares (other than the two class B shares retained by Mr. King) to Network or its nominees. Thereafter the 20,002 issued shares in Wellington were held as follows:

Network 2 class A

19,997 class B

Network Management and Control (Finance)

Pty. Ltd. 1 class B

Mr. King 2 class B (at p289)

42. On 24th May, 1968, a meeting of creditors of Wellington was held for the purpose of approving the remuneration of Mr. Roberts, the liquidator. Messrs. Roberts and Jackson were the only persons present. They held proxies from a number of the creditors. The trustee of the superannuation funds of three of the subsidiary companies gave his proxy in favour of the chairman, Mr. Roberts, doubtless in reliance upon the fact that Mr. King had some weeks earlier confirmed that he and his wife had agreed to waive any claim they might have against the funds. Subsequent to that conversation this trustee executed a release of debt in favour of Wellington on behalf of each of the funds. The meeting of 24th May, 1968, approved the appropriation of the balance of the funds held in the liquidator's account to the remuneration of the liquidator. (at p289)

43. The proxy given by Mr. King in favour of Mr. Roberts, or failing him his solicitor P. A. Somerset, was in respect of an extraordinary general meeting of members of Wellington held on 31st May, 1968, and at any adjournment thereof. This meeting was attended by representatives of the two Network shareholders and Mr. Roberts as proxy for Mr. King. It was short and the minutes recorded as follows: "The chairman advised the meeting that the liquidation of the company had been stayed and the previous directors were no longer in office. All the shareholders of the company being present, it was therefore resolved that Peter Andrew Somerset and C. K. Roberts be appointed directors of the company." (at p290)

44. There is, as the trial judge states, no evidence that Mr. King was informed of the purpose of the meeting, or of the result it was intended to achieve. Nor was there any evidence of the reason why he gave a proxy for the meeting. Admittedly at the date of the meeting his shareholding in the company was negligible, but this meeting to appoint new directors was required under the scheme, an essential feature of which was the application to the Supreme Court of New South Wales to approve a reduction in the capital of Wellington. (at p290)

45. A meeting of the new directors of Wellington was held following the meeting of members. The minutes of this meeting at which Mr. Roberts presided contained the following statement: "The board noted the agreement by the liquidators of the company with Network Finance Ltd. for the sale of the structure of the subsidiaries to Network Finance Ltd. for the benefit of the tax losses available for recoupment in those companies, and that pursuant to the agreement it was necessary that the capital of this company (Wellington) be reduced to a small nominal amount for the scheme of arrangement with the creditors to be implemented." (at p290)

46. The meeting approved resolutions for presentation to an extraordinary general meeting of members fixed for 4th June, 1968, and directed that notices should be forthwith dispatched concerning the meeting. Two copies of the notice were sent to Mr. King, one envelope being addressed to North Ryde, and the other to North Baldwin (sic.) Victoria, doubtless intended as North Balwyn. Neither of these addresses coincides with Mr. King's address on the form of his proxy for the earlier meeting or his address in the share certificate for his two shares which was sealed on that day. There was no evidence that Mr. King received either of the notices and he did not attend the meeting. (at p290)

47. At the meeting two special resolutions were passed, one relating to the reduction of capital and the other sanctioning the arrangement under s. 273 of the Companies Act, 1962 (N.S.W.) ("the Companies Act") which had previously been approved by the creditors. (at p290)

48. The reduction of capital was confirmed by the Supreme Court on 17th June, 1968. The two class A shares and 19.995 class B shares held by Network were cancelled, leaving the capital comprising five class B shares, of which Mr. King held two, Network two and Network Management one. Mr. King was thus restored to the position of a substantial shareholder, holding the necessary forty per cent of the issued capital. (at p291)

49. On 17th October, 1968, shortly after the obtaining on 14th October, 1968, of the approval by the Supreme Court of the scheme of arrangement in so far as it related to the four subsidiary companies a meeting of directors of Wellington was held and four additional directors were appointed. Mr. Roberts and Mr. Somerset then resigned. One of the directors, W.E. Fisher was appointed secretary of Wellington and its representative pursuant to s. 140 of the Companies Act. (at p291)

50. Prior to the approval of the Supreme Court of the scheme of arrangement a meeting of creditors of the taxpayer was held pursuant to an order of that court. Messrs. Jackson and Roberts as proxies for the creditors, the bulk in value of whom were members of the subsidiaries of the Wellington group, were the only persons present. The minutes of the meeting record that Mr. Jackson reported as follows: "In addition he had entered into an agreement for the sale of the company structure of Cooper Brookes (Wollongong) Pty. Ltd. and those of several of the associated companies to a public company interested in acquiring them for the benefit of their recoupable tax losses. The terms of the sale provided that the buyer would make available further moneys for distribution to creditors in compromise settlement of their claims but completion of the sale was subject, inter alia, to the various Cooper Brookes companies involved entering into court-approved schemes of arrangement with their creditors. It was the scheme of arrangement applicable to Cooper Brookes (Wollongong) Pty. Ltd. (in liquidation) which was now before the present meeting of creditors." (at p291)

51. The scheme of arrangement was approved at the meeting, subject to any modifications the court might require. On 14th October, 1968, the court approved the scheme. (at p291)

52. On 30th June, 1970, the directors of Wellington declared a dividend of $130 and resolved that the same be paid to the holders of the class B ordinary shares as follows: Network $78; Mr. King $52. On 9th July, 1970, a cheque for $52 was forwarded by post to Mr. King at North Balwyn, and a certificate of posting was tendered in evidence. The letter was unclaimed and returned to Network. At this stage it was doubtless apparent that Wollongong had commenced to operate profitably and funds were becoming available for the payment of dividends. (at p291)

53. At about this time a further scheme was conceived which had the consequence as far as Mr. King was concerned of ensuring that he did not participate in any subsequent dividend declared by Wellington out of profits made by the taxpayer. It was essential of course that he retain his forty per cent shareholding during the ensuing year, but from the point of view of Network doubtless desirable that he was denied the right to participate in distribution thereafter of profits made in that year by the taxpayer. (at p292)

54. The scheme is described in detail by the trial judge and his finding on the scheme and the manner of its implementation were not subject to challenge before us. In essence the plan was for Wellington to borrow from Network sufficient funds to enable it to subscribe to a substantial new issue of capital by the taxpayer and to secure its borrowing by a charge in favour of Network over all of its shares in the taxpayer. At the appropriate time Network would make demand, Wellington would default and Network would foreclose, thus depriving Wellington of the totality of its interest in the taxpayer. (at p292)

55. For present purposes the details of the implementation of the scheme are not relevant, but what is significant is the manner in which it would appear that the interests of Mr. King as a substantial, albeit minority, shareholder were ignored. The plan was carried into effect in the period late December 1970 - early January 1971, and the annual general meeting of Wellington was held on 31st December, 1970. Mr. King was not present and there is no record of him having received or having been sent a notice of the meeting. There was no discussion at the meeting of the proposals which were then before the directors in respect of the borrowing and taking up of the additional shares in the taxpayer. (at p292)

56. The scheme worked according to plan. Throughout the year ending 30th June, 1971, Mr. King held his forty per cent interest in Wellington and thus indirectly a forty per cent interest in Wellington's shareholding in the taxpayer. On 1st July, 1971, Network made demand, and payment not being made, on that day purported to foreclose. On the same day a meeting of directors of Wellington noted the foreclosure. On the same day the directors of the taxpayer approved the transfer of the shares subject to the charge from Wellington to Network. (at p292)

57. On the following day 2nd July, 1971, the directors of the taxpayer declared a dividend of $38,000 out of the profits for the year ending 30th June, 1971, the same to be credited exclusively to the account of Network. The desired result was achieved, in that Mr. King received neither directly or in any way indirectly any benefit from the dividend paid. (at p292)

58. On 29th October, 1971, the taxpayer lodged its return claiming the losses as an allowable deduction. By letter dated 26th January, 1972, the Commissioner sought information for the purpose of determining compliance by the taxpayer with s. 80C of the Act. The taxpayer's advisors replied by letter dated 20th March, 1972, and set out information, much of which is already recorded in these reasons, and made certain submissions. They stated in particular that there never had been any communication with or contact by any representative of Network with Mr. King, and this fact is confirmed by the oral evidence at the hearing. They further stated that the only persons having any dealings with Mr. King were Messrs. Jackson and Roberts, chartered accountants of the firm of Hungerford Spooner & Co., who were scheme trustees for the creditors of the company for the purposes of the scheme of arrangement. They also disclosed as relevant the agreement of 18th July, 1967, and described it as relating to the appropriation of the consideration paid to Mr. King and his wife for the shares transferred by them. They acknowledged that this consideration was "in fact the amount required to pay the fees of the trustees in relation to the scheme of arrangement, and was arrived at accordingly as being required to be paid by the purchaser for the transfer of such shares". (at p293)

59. Subsequent to this correspondence with the Commissioner, Wellington made further efforts to pay Mr. King the dividend declared on 30th June, 1970. A cheque was forwarded to him in Bougainville on 17th April, 1972, which he acknowledged by letter dated 1st June, 1972. Wellington then for the first time corresponded with the Australian Post Office concerning nondelivery of mail to Mr. King and in December 1972 notice of an extraordinary general meeting was sent to him which this time he received. Notwithstanding Wellington's renewed interest in Mr. King, no mention was made to him of any events which had occurred in the intervening years and in particular of the fact that Wellington had been deprived of its interest in a profitable subsidiary, namely the taxpayer. (at p293)

60. By letter dated 4th May, 1977, the Commissioner set out the facts and circumstances "which were then accepted and taken into consideration by the Commissioner in determining, pursuant to s.80B(5) of the Income Tax Assessment Act 1936-1971, to treat the shares held by E. H. King in Wellington Holdings as not having been beneficially owned by him at all times during the year of income ended 30th June, 1971". Clause 21 sets out the Commissioner's case as to the existence of the alleged arrangement and is as follows: "21. That having regard to the above facts and circumstances there existed a contract, agreement or arrangement of the kind referred to in s.80B(5)(b) and (c) in that there existed a contract, agreement or arrangement entered into by Mr. E.H. King either personally or through the agency of Mr. C.K. Roberts and/or Mr. C.H.R. Jackson with persons acting on behalf of any one or more of Network Finance Ltd. and Network Management and Control (Finance) Pty. Ltd. and/or Messrs. Roberts and Jackson as trustees of the scheme of arrangement; the terms of the said contract, agreement or arrangement being that each party thereto would do all things necessary to ensure the continued availability to the taxpayer of the relevant losses and including the various relevant things referred to in the preceding paragraphs; the said contract, agreement or arrangement being one which directly or indirectly related to, affected or depended for its operation on the retention by Mr. King at all relevant times of a forty per cent beneficial shareholding interest in Wellington Holdings Pty. Ltd. and which directly or indirectly related to or affected the value of that interest, the purpose of all parties being to enable the taxpayer to take into account for the purposes of s.80 of the Act losses which the taxpayer had incurred in the said years of loss being years before the year in which the said contract, agreement or arrangement was entered into." (at p294)

61. It is to be noted that the parties to the arrangement are alternatively stated, inter alia, as Mr. King personally or through his agents on the one hand and Network or Messrs. Roberts and Jackson on the other. The trial judge concentrated his attention on Mr. King and Network as parties to the alleged arrangement, but on the hearing of the appeal counsel for the Commissioner, as has been mentioned, relied primarily on the parties being Mr. King and the trustees. (at p294)

62. At the hearing oral evidence was tendered on behalf of the taxpayer. Mr. Fisher as secretary of the taxpayer and also secretary of Network gave evidence both oral and on affidavit of the acquisition by Network of the Wellington group. He was the only witness called by the taxpayer, and in particular there was no explanation for the failure to call Mr. King or Messrs. Roberts and Jackson. The Commissioner called Colin Le Tet, the trustee of the three superannuation funds referred to above, who deposed by affidavit and orally to the waiving by the Kings of their claim under the superannuation funds of which he was the trustee. The trial judge commented in his reasons that he accepted the evidence of Mr. Fisher, particularly to the effect that there had been no contact between Mr. King and Network. It would appear that the trial judge substantially relied upon this evidence in reaching in his ultimate finding that there was no evidence from which it would be reasonable to infer a relevant arrangement between Mr. King and Network. (at p294)

63. The first crucial question is one of construction, namely whether the provisions of s.80B(5) have any application in the present circumstances. As to the question whether s.80A and s.80C have a cumulative effect it is one which counsel agree does not here arise for consideration. Additionally counsel for the Commissioner accepts that at all relevant times Mr. King had a beneficial interest in the shares in Wellington in his name. Thus, if s.80B(5) has application, the question is whether the Commissioner is entitled pursuant to the provisions of that subsection to treat the shares as not having been beneficially owned by Mr. King at the relevant time. A further question is whether Mr. King had, by the giving of the proxy for the meeting of 31st March, 1968, granted a right or power within the provisions of the said subsection. (at p295)

64. I will deal in the first instance with the question of construction, for my view is that if s. 80B (5) has no application in the present circumstances, the appeal must be dismissed. (at p295)

65. The threshold question of construction arises in applying in accordance with the direction in s. 80C (3), s. 80B (5) (c) to the circumstances of the present matter, namely where the loss which is sought to be deducted is a loss in the subsidiary company. Section 80C (3) directs that, inter alia, s. 80B (5) is to be applied as if the references in the latter subsection to the company were references to the holding company. The consequence is that the words in s. 80B (5) (c) "for the purpose of enabling the company to take into account a loss that the company had incurred" must be read in the situation of s. 80C as "for the purpose of enabling the holding company to take into account a loss that the holding company had incurred". It is common ground that this is the correct literal reading of the subsection. The consequence is that in the present circumstances s. 80B (5) cannot possibly be used by the Commissioner because the loss which is to be taken into account is the loss that the subsidiary company, the taxpayer, has incurred and not any loss which the holding company, Wellington, has incurred. (at p295)

66. Counsel for the Commissioner accepts the above as the appropriate literal construction, but contends that the terminology is not so intractable as to make it impossible for a court to give effect to what he submits is the clear intention of the legislature. He supports this approach by pointing to the capricious consequences of a literal application, namely that a subsidiary company might lose the benefit of its losses merely because there was in relation to the holding company an arrangement relating to the losses of the holding company. It would accord with authority, he contended, for the court to strain to avoid such an unjust result and referred to the dicta in Tickle Industries Pty. Ltd. v. Hann [1974] HCA 5; (1974) 130 CLR 321 where Barwick C.J. said: "It is, in my opinion, a sound rule of statutory construction that a meaning of the language employed by the legislature which would produce an unjust or capricious result is to be avoided. Unless the statutory language is intractable, an intention to produce by its legislation an unjust or capricious result should not be attributed to the legislature" (1974) 130 CLR, at p 331 . I would also refer to the comments in like vein of Lord Reid in Cramas Properties Ltd. v. Connaught Fur Trimmings Ltd. (1965) 1 WLR 892 : "It is true that on my interpretation of this provision this change of language can only be explained as a mistake on the part of the draftsman in failing to revise his draft so as to bring the language into line. Some attempt was made to advance reasons why the draftsman might have adopted this language deliberately although he intended that 'the tenant's business' should have its ordinary meaning: but I found those reasons quite unconvincing. This is an extremely complicated Act, and we do not know and cannot inquire what changes may have been made before it passed into law. Fortunately draftsmen do not often make mistakes, but I cannot suppose that every draftsman is entirely free from that ordinary human failing. I find it very much easier to infer such a mistake than to suppose that the draftsman deliberately sought to introduce a novel and irrational rule by means which no draftsman worthy of the name would adopt. The canons of construction are not so rigid as to prevent a realistic solution" (1965) 1 WLR, at p 899 . (at p296)

67. Counsel for the taxpayer submitted that on the question of intractability or flexibility of the language of s.80C(3) in its application to s.80B(5), the meaning of the words was so clear that the court had no option but to read them literally. He referred to the doubts expressed in Kolotex Hosiery (Australia) Pty. Ltd. v. Federal Commissioner of Taxation at first instance per Mason J. [1973] HCA 28; (1973) 130 CLR 64, at p 85 and, on appeal, per Barwick C.J. [1975] HCA 5; (1975) 132 CLR 535, at pp 540-547 and per Gibbs J. (1975) 132 CLR, at p 574 , as to the proper construction of the subsections, and acknowledge that the resolution of this question was left open. (at p296)

68. In my opinion the purpose of s.80C(3) is clear, namely 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. Section 80C(3) is not an enactment of substantive law imposing an obligation, but rather a machinery provision for introducing into the sections dealing with a particular situation, namely holding and subsidiary companies, provisions expressly enacted in respect of another situation. The draftsman was motivated by the commendable desire to abbreviate rather than again set out in full, inter alia, s.80B(5) with such adjustments as necessary to adapt it to a different situation. Frequently in such circumstances the words "mutatis mutandis" are inserted to indicate that changes may be necessary in points of detail when the incorporated provisions are operating in the new field. The use by the draftsman of the final words in s.80C(3), "as the case may be", is an example of a comparable drafting technique directing that such adaption as is appropriate in the particular circumstances of an interposed company should be performed. (at p297)

69. This view as to the effecting of the legislative intent is consistent with a statement of Mason J. (made in the context of an examination of s. 80B (5) (c) but, in my opinion, of more general application) in Federal Commissioner of Taxation v. Students World (Australia) Pty. Ltd. [1978] HCA 1; (1978) 138 CLR 251 . This statement is referred to with apparent approval though in the same context, in the joint judgment of Gibbs and Mason JJ. in Federal Commissioner of Taxation v. Lutovi Investments Pty. Ltd. [1978] HCA 55; (1978) 140 CLR 434 with which judgment Murphy J. expressed his agreement. The words of Mason J. in the Students World case are as follows: "Although the traditional rule has been that clear words are required to impose a tax, so that the taxpayer has the benefit of any doubts or ambiguities, a provision introduced by way of an attack on tax avoidance should be given the wide meaning evidently intended; it should not be cut down in the interest of precision (Greenberg v. Inland Revenue Commissioner (1972) AC 109, at p 137 ; Inland Revenue Commissioners v. Joiner (1975) 1 WLR 1701, at p 1706 )" (1978) 138 CLR, at p 265 . (at p297)

70. In circumstances such as in the present case, and particularly where the intention of the legislature is as clear as in my opinion it is, the terminology of the machinery provision is not so intractable as to deny a reasonable as opposed to a literal construction. In my opinion the words "reference in those subsections to the company were references to the holding company" in s. 80C (3) should be read as though the words "where necessary or appropriate" were inserted after the word "references" secondly appearing. Alternatively s. 80C (3) should be read as if the words "mutatis mutandis" were inserted after the word "apply". (at p297)

71. It follows that in my opinion s. 80C (5) is available to the Commissioner in this matter if the circumstances are otherwise such as to render its provisions applicable. (at p297)

72. On the question whether there was evidence to support an inference of a relevant arrangement, the trial judge confined himself exclusively to considering an arrangement as between Mr. King and Network or some person on behalf of Network. He said that he had been invited to make a finding as to whether or not there existed between Network and Mr. King an arrangement of the kind referred to in s. 80B (5). His ultimate conclusion on this topic was that there was no evidence from which it would be reasonable to infer that there existed a relevant arrangement between Mr. King and Network or any person on its behalf. He gave no indication of having given attention specifically or really at all to the possibility of an arrangement between Mr. King and the trustees. (at p298)

73. On the hearing before us counsel for the appellant put at the forefront of his submissions the contention that there was evidence from which it would be reasonable to infer an arrangement between Mr. King and the trustees. Such an approach was foreshadowed by the particulars given by the Commissioner by par. 21 of his letter of 4th May, 1977, set out above. The trial judge gave no consideration to this as an alternative view of the evidence. There is no dispute as to the objective facts, which, however, may assume a different significance if under consideration as supporting or denying the drawing of a different inference. (at p298)

74. In my opinion there are objective facts from which it is reasonable to infer the existence of a relevant arrangement between Mr. King and the trustees. In these circumstances counsel for the Commissioner contended that s. 190 of the Act places the onus on the taxpayer to establish that the assessment is excessive. He relied upon the words of Barwick C.J. in Gauci v. Federal Commissioner of Taxation [1975] HCA 54; (1975) 135 CLR 81 where he said: "If, on the other hand, the acquired property is resold within what may fairly be described as a time proximate to its acquisition, the requisite purpose may be inferred. Thereafter, the taxpayer must overcome the prima facie inference there drawn. Unless he does so, s. 190 will require the confirmation of the assessment. That was the situation in Pascoe v. Commissioner of Taxation (1956) 6 AITR 315 and in Jacob v. Commissioner of Taxation (1971) 45 ALJR 568 " (1975) 135 CLR, at p 87 . (at p298)

75. Gauci's case involved the question whether the acquisition of the property was "for the purpose of profit-making by sale" within the terms of s. 26 (a) and therefore formed part of the taxpayer's assessable income. Jacobs J. indicated his agreement with the Chief Justice on the issue of the application of s. 190 when he said: ". . . before s. 190 could operate there must have been something in the evidence from which an inference could have been drawn of an intention on their part to resell at a profit" (1975) 135 CLR, at p 90 . In my opinion it is not necessary for the Commissioner to rely upon what was said by the majority in Gauci's case to justify the making of the relevant finding as to an arrangement. Moreover the observations in the dissenting judgment of Mason J. appear to have commended themselves to the majority of the Full High Court in McCormack v. Federal Commissioner of Taxation [1979] HCA 18; (1979) 53 ALJR 436 . The taxpayer led no evidence to counter the drawing of the appropriate inference which fact, in my view, militates in favour of it being drawn. In the particular circumstances (to which I refer in detail later) the learned trial judge should have found that there was an arrangement between Mr. King and the trustees. (at p299)

76. The objective facts are primarily to be found in the documentary evidence tendered to the trial judge. There is the agreement of 18th July, 1967, between Mr. King and his wife and the trustees which recites that the trustees have agreed to sell the structure of Wellington to a company which was acquiring the same for the benefit of the tax losses of certain of its subsidiaries and the agreement of Mr. King and his wife to sell approximately sixty per cent of the shares of Wellington to the purchaser. Mr. King and his wife acknowledge that they have no claim to the consideration of $1,200 payable for these shares, which is to be applied in accordance with the terms of the scheme. Moreover they covenant that they will not inquire and not be entitled to inquire into the manner in which the trustees administer the scheme of arrangement. An essential feature of the scheme was the selling of "the structure" of Wellington Holdings, which must mean or at least include the selling of the shares though not necessarily all the shares in Wellington. Even though there is evidence that the particular sale in contemplation at this time was not concluded, there is evidence that the parties treated this agreement as remaining on foot, certainly in respect of the application of the proceeds of sale of shares. This evidence is to be found in the letter of Touche Ross & Co. to the Commissioner of 20th March, 1972, already referred to. (at p299)

77. On 19th April, 1968, the trustees entered into an agreement with Network. Neither Mr. King nor his wife was a party to this agreement though their interests as shareholders in and as directors of Wellington were affected by it. The trustees purported to procure the transfer of all or alternatively all but two of the issued shares in Wellington to Network, and for the same consideration, $1,200, as nine months earlier was payable in respect of sixty per cent of the shares. Again the sum of $1,200 was to be dealt with in accordance with the scheme, and in a specified circumstance was expressly appropriated to the fees of the trustees. They also agreed to cause a meeting of the directors of Wellington (Mr. King and his wife) to be held at which all resolutions would be passed and all appointments and resignations obtained as required by Network. The conclusion is at least open that the trustees either had an arrangement with Mr. King that he would do everything asked of him to assist in bringing the scheme for sale of the tax losses to a successful conclusion or that they understood they would have no difficulty in obtaining his concurrence. That they already had such an arrangement receives support as the most likely conclusion not only from the existence of the agreement of 18th July, 1967, but also from certain terms of the arrangement with Network. If they had a pre-existing understanding with Mr. King, the trustees were justified in assuming that, subject to obtaining Supreme Court approval, the scheme would be carried to completion. However, if Mr. King died prior to completion the scheme could founder and so would their entitlement to the fees of $1,200. To cover this possibility, namely the arrangement with Mr. King being frustrated by his death, the scheme provides that the $1,200 should be forfeited to the scheme trustees to meet their fees and expenses. A similar provision preserving a further sum of $1,652 as fees of the trustees in the event of the death of Mr. King is to be found in the agreement in respect of a loan for that amount to one of the subsidiary companies. (at p300)

78. Further objective facts which are at least consistent with the existence of an arrangement are the transfer by Mr. King of more shares for a lesser consideration than originally contemplated, his resignation as a director other than at a meeting of directors, his release of any claim to superannuation fund benefits, his granting of a proxy to Mr. Roberts for the extraordinary general meeting which appointed the directors who were to implement the scheme and the failure of these directors (Mr. Roberts and his solicitor) to ensure he received notice of the meeting which approved the reduction in capital. Moreover the conduct of Network in ignoring Mr. King's interests as a shareholder, in failing to supply him with his share certificate, to notify him of meetings, and to make efforts until after the communications with the Commissioner to get to him his dividend and generally in relation to the divesting of Wellington's interest in the taxpayer one day prior to the declaration of a dividend is consistent with a belief by Network that Mr. King had no further interest in Wellington or its subsidiaries. Such a belief would only have been aroused by the trustees as Network had no contact with Mr. King. (at p300)

79. These are the objective facts from which in my opinion it is reasonably open to draw the conclusion that Mr. King and the trustees had arrived at an arrangement. (at p300)

80. It is therefore necessary to consider the nature of the arrangement and whether it is an arrangement within the provisions of s. 80B (5) (b). Counsel for the Commissioner submitted that the arrangement was to the effect that Mr. King would do everything that was asked of him by the trustees in relation to his interest in the Wellington shares and the Wellington group whether as a director, member or creditor and nothing that was not asked of him. With this as a formulation of the arrangement in the instant case I agree. (at p301)

81. The essential nature of "an arrangement" was the subject of a discussion in the course of the joint judgment of Gibbs and Mason JJ. in Lutovi's case [1978] HCA 55; (1978) 140 CLR 434 , delivered subsequent to argument in this matter, with which judgment, as I have said, Murphy J. expressed his agreement. Their Honours when addressing their minds to the arrangement referred to in s. 44 (2D) (b) of the Act said: "In the context of s. 260 an arrangement is something less than a binding contract or agreement, something in the nature of an understanding which may not be enforceable at law (Newton v. Federal Commissioner of Taxation [1958] UKPCHCA 1; (1958) 98 CLR 1 ). A similar view has been taken of an arrangement falling within s. 80B (5) (see Federal Commissioner of Taxation v. K. Porter & Co. Pty. Ltd. (1974) 22 FLR 344 ; Federal Commissioner of Taxation v. Students World (Australia) Pty. Ltd. [1978] HCA 1; (1978) 138 CLR 251 ). It is, however, necessary that an arrangement should be consensual, and that there should be some adoption of it. But in our view it is not essential that the parties are committed to it or are bound to support it. An arrangement may be informal as well as unenforceable and the parties may be free to withdraw from it or to act inconsistently with it, notwithstanding their adoption of it" (1978) 140 CLR, at p 444 . (at p301)

82. As to the term "arrangement" in s. 80B (5) (b) both parties referred without dissent to the reasoning of Mahoney J. in Federal Commissioner of Taxation v. K. Porter & Co. Pty. Ltd. cited in the preceding quotation from Lutovi's case. There his Honour discussed the possibility that an arrangement may follow from express statements or actual representations. He went on: "In the absence of such a statement or actual representation, the element of commitment to the course of conduct may be inferred or implied from the dealings between the parties" (1974) 22 FLR, at p 353 . This, I think, is the manner in which the drawing of an inference or an arrangement is open in the present case. (at p301)

83. In a like vein in the Full Court of the Federal Court of Australia in the Lutovi case [1978] FCA 26; (1978) 37 FLR 209 , Deane J. said in respect to the "adoption" of an arrangement under s. 44(2D) (b): "Section 44 (2D) (b) assumes that a relevant arrangement will be 'entered into' by the parties to it. It does not follow that it is necessary that there be a formal acceptance of, or committal to, such an arrangement by such parties. A plan can be propounded without prior arrangement and be constituted as an arrangement by acceptance of or adherence to it implicit in the performance of steps which it encompasses or the acceptance of benefits which result from its implementation" (1978) 37 FLR, at p 229 . (at p302)

84. It was also not suggested in argument before us that an arrangement between a continuing shareholder and trustees could not come within s. 80B (5) (b) and this implied concession was clearly in accord with authority. (at p302)

85. In the Students World case [1978] HCA 1; (1978) 138 CLR 251 Mason J. expressed the view that a clause in a scheme of arrangement, entered into between the shareholders of the taxpayer company and the trustee of the scheme (which clause provided for the possible transfer of portion of the shares of the shareholders at the discretion of the trustee) was an arrangement coming within s. 80B (5) (b). Jacobs and Aickin JJ. did not dissent from this view of Mason J., rather holding that the arrangement was not within s. 80B (5) (b) on a different ground. (at p302)

86. Section 80B (5) (b) provides that the arrangement must be one that in some way, directly or indirectly related to, affected or depended for its operation on the beneficial interest of Mr. King in his retained shares, his right to sell or otherwise dispose of such interest, or any rights carried by those shares or the exercise of any such rights. It seems to me that the inferred arrangement was clearly dependent for its operation upon, and clearly affected his beneficial interest in his retained shares, and counsel for the taxpayer did not contend to the contrary. Mr. King has accepted the position that he should neither sell nor otherwise dispose of his retained shares and should not exercise any of his rights as a shareholder unless in either instance requested to do so. (at p302)

87. Counsel for the respondent in the present case submitted that there was no evidence or at least an insufficiency of evidence to support the drawing of an inference that there was a relevant arrangement between Mr. King and the trustees. I am of opinion that there was sufficient evidence. Also even assuming there was an arrangement which affected the retained shares he submitted that the effect of this arrangement was spent by the time of the year of income and being so spent was not caught by s. 80B (5) (b). (at p302)

88. There seems to be no clear authority that if the effect of the arrangement was spent prior to the year of income, it is outside s. 80B (5) (b). Certainly there is some authority that it is not essential that the arrangement continue in operation during the year of income; cf. the K. Porter case in the High Court per the joint judgment of Stephen and Murphy JJ. (1977) 52 ALJR 41 though the discussion admittedly appears to be obiter, and the Students World case per Mason J. in dissent [1978] HCA 1; (1978) 138 CLR 251 . All three judges in the two cases pointed to the support for their view that they obtained from Menzies J. in Franklin's Selfserve Pty. Ltd. v. Federal Commissioner of Taxation [1970] HCA 33; (1970) 125 CLR 52 . (at p303)

89. Nevertheless the taxpayer's counsel in the case before us directed our attention to other authority. In the K. Porter case, in the High Court, Jacobs J. expressly reserved the point, namely, ". . . whether the effect of an agreement or arrangement under s. 80B (5) (b) must enure into the year of income" (1977) 52 ALJR, at p 46 . However, in the Students World case [1978] HCA 1; (1978) 138 CLR 251 Aickin J., who with Jacobs J. comprised the majority of the court (Mason J. dissenting), held that the arrangement between the continuing shareholders and the trustee was not caught by s. 80B (5) (b) for the following reason. Their Honours characterized the relevant arrangement as executory, giving a power which by its nature ceased as soon as it was exercised. In the case they were considering, the power had been exercised before the year of income so that as Aickin J. put it "the agreement or arrangement was therefore wholly spent". Jacobs J. continued to reserve his opinion on whether the effect of the agreement must enure into the year of income, being of opinion that the arrangement was incapable of doing any of the things described in s. 80B (5) (b). (at p303)

90. However, whatever the present state of the authorities, in this matter there is nothing in the evidence to suggest that the inferred arrangement did not remain on foot until such time as the purchaser had obtained the benefit of the tax losses. It was important to the purchaser that it should so remain as this was the reason for and the purpose of its purchase, and the trustees must have felt at least morally bound to ensure that if possible the purchaser obtained the benefit of its purchase. Moreover, the implementation of the loan and subsequent foreclosure plan at the end of the year of income, which at least indirectly prejudiced Mr. King as a substantial shareholder without any reference to or consideration of his interest, is consistent with the continued existence of the understanding. If the correct view of the law is that the arrangement must continue on foot into or throughout the year of income then, in my view, it is reasonable to infer that such was here the case. (at p303)

91. Finally, it is to be noted that s. 80B (5) (c) requires that the arrangement must have been entered into for the purpose of enabling the company (the taxpayer on my construction of the relevant subsection) to take into account a loss that the company had incurred in a year before the year in which the arrangement was entered into. It would appear that it is the subjective purpose of the continuing shareholder with which the section is concerned. In this regard it is clear that even if knowledge of the use which Network could make of the purchased companies should be imputed to Mr. King, it is at least suggested by the authorities that such knowledge without more is not sufficient. However, knowledge of the use which an ultimate purchaser proposes to make of the company, and the further knowledge that the trustees were selling the companies for use by the purchaser in this way, together with the fact that Mr. King entered into an agreement (the agreement of July 1967) which was a necessary step in the trustees implementing the scheme, are further significant facts. (at p304)

92. In the K. Porter case (1977) 52 ALJR 41 in the High Court, in the joint judgment of Stephen and Murphy JJ. their Honours relied on the following facts to hold that there was a "purpose" falling within s. 80B (5) (c) namely, awareness or knowledge on the part of the continuing shareholders of the purpose of the scheme involved combined with action by them necessary to the scheme's success. This was enough to make the purpose of the scheme's promoters, which was clear, their purpose. As their Honours said: ". . . whether 'purpose' in par. (c) be related to the arrangement, viewed as distinct from the parties to it, or to the parties themselves, the requirements of the paragraph are, in our view, satisfied" (1977) 52 ALJR, at pp 45-46 . (at p304)

93. In the Students World case [1978] HCA 1; (1978) 138 CLR 251 Mason J. followed a closely similar line: "The reference to purpose in par. (c) seems to have been understood by Menzies J. (with whom Barwick C.J. agreed) in Federal Commissioner of Taxation v. Brian Hatch Timber Co. (Sales) Pty. Ltd. [1972] HCA 73; (1972) 128 CLR 28 as a reference to the subjective intention of the continuing shareholder. . . . At first sight it seems odd that the purpose of the continuing shareholder should be singled out as a relevant or critical factor. It is the purchaser, rather than the continuing shareholder, who might ordinarily be expected to have the stated purpose in mind. However it is with the ownership of shares by the continuing shareholder that the sub-section is concerned. And in speaking of the purpose for which 'the right, power or option was granted' par. (c) seems to have in mind the purpose of the grantor. This in itself points to a subjective rather than objective, purpose, a notion which gains some support from the fact that in the case of a contract, agreement or arrangement it is the purpose for which it was entered into that is important, there being a prior reference in par. (b) to the continuing shareholder having entered into the contract, agreement or arrangement. This view of purpose in par. (c) has been taken not only by Barwick C.J. and Menzies J. in the Brian Hatch case, but also more recently by Stephen and Murphy JJ. in K. Porter & Co. Pty. Ltd. v. Federal Commissioner of Taxation" (1978) 138 CLR, at pp 266-267 . Mason J. concluded: "It was an arrangement entered into for the purpose stated in par. (c) because on the evidence which I have recounted the purpose of the purchaser was to gain control of the respondent so as to provide it with an income against which the losses could be deducted and this purpose was known to Mrs. MacPherson, the continuing shareholder. Indeed, entry into the arrangement by the purchaser was explicable only on the footing that by obtaining control of the respondent the purchaser would provide it with an income from which the past losses could be deducted. And the inference is irresistible that Mrs. MacPherson was aware that this was the intention of the purchaser, for on no other hypothesis could the purchase of the apparently worthless shares be explained" (1978) 138 CLR, at pp 267-268 . (at p305)

94. Aickin J. did not have to consider s. 80B (5) (c) for the reason that he had held there was no relevant arrangement within s. 80B (5) (b). However he did express his view (1978) 138 CLR, at p 274 that the relevant purpose was the subjective purpose of the continuing shareholder. (at p305)

95. Brief mention of the meaning of "purpose" in s. 80B (5) (c) was made in the Lutovi case, in the High Court, in the joint judgment of Gibbs and Mason JJ. (1978) 140 CLR, at pp 445-446 . They contrasted the objective purpose with which s. 44(2D) of the Act was concerned with the subjective purpose of s. 80B (5) (c) and referred to the Students World case [1978] HCA 1; (1978) 138 CLR 251 . They also compared s. 260 of the Act where "purpose and effect" is spoken of. (at p305)

96. In the present matter the whole basis of the alleged arrangement between Mr. King and the trustees was to assist the latter to sell the Wellington group companies to a purchaser who was to acquire them for the purpose of using the tax losses. It is my opinion that the proven facts comprise material on the basis of which it can be inferred that Mr. King, being aware of the purpose of Network and assisting to give effect to it, had the relevant purpose. It may not be that this inference is "irresistible" but it is certainly open on the facts. (at p305)

97. There is therefore evidence from which it can be inferred that there was an arrangement between Mr. King and the trustees which complied in its essential features with the requirements of s. 80B (5). In so far as it was alleged before the trial judge that the arrangement was between Mr. King and Network, I can accept that the taxpayer discharged its onus. It called Mr. Fisher who deposed to the fact that there was no contact at all between Mr. King and his companies or their officers. This evidence was accepted. However, in respect of the arrangement between Mr. King and the trustees, the taxpayer called no evidence by way of rebuttal. Mr. King, the trustees or Mr. Somerset the solicitor for the trustees, all probably could have deposed to matters relevant to the existence or otherwise of the arrangement. However none of them were called and the taxpayer did not tender any other evidence which might deny the drawing of this particular inference. (at p306)

98. The effect of this was discussed in the judgment of Woodward J. in the court below (1977) 8 ATR 5 . I would adopt what he says on the authorities, among them McQueen v. Great Western Railway Co. per Cockburn C.J. (1875) LR 10 QB 569, at p 574 and Jones v. Dunkel per Menzies J. [1959] HCA 8; (1959) 101 CLR 298, at p 312 , to which he refers in support of his conclusion to the effect that where a witness available to a party could have been called to counter the drawing of a relevant inference the fact that he was not called is a factor in favour of the drawing of the inference. (at p306)

99. In all the circumstances the trial judge should in my opinion have found that there was a relevant arrangement between Mr. King and the trustees. The taxpayer must therefore fail and the assessment will stand. (at p306)

100. A further issue raised was in respect of the grant of the proxy to Mr. Roberts for the meeting of Wellington on 31st May, 1968. It was contended that by the giving of the proxy Mr. King has, as contemplated by s. 80B(5), granted a right or power which in some way depended for its operation on his beneficial interest in the retained shares. In the light of my conclusions above, it is not necessary for me to give consideration to this submission. (at p306)

101. I would allow the appeal with costs. (at p306)