Finance Facilities Pty Ltd v Commissioner of Taxation

Finance Facilities Pty Ltd v Commissioner of Taxation - [1971] HCA 12 - HCA 1971 case summary — Zoe

[5]

Securities & Management was incorporated on 2nd January 1959 at the instance of a firm of accountants, Charles J. Berg & Associates. From its formation it was intended that it should be a public company and that it should provide taxation advantages for the clients of Charles J. Berg & Associates. By February 1961, 12,900 shares of 50c each fully paid had been issued in Securities & Management and were held by 79 shareholders each of whom held 100 or 200 (or in one case 300) shares. Clearly, Securities & Management was at this time a public company. However after the publication in June 1961 of the report of a committee under the chairmanship of Sir George Ligertwood which recommended certain changes in the income tax laws, it was thought desirable to alter the shareholding of the company to ensure that if the changes were made the company would continue to be a public company. Accordingly on 26th June 1962, 7,000 shares of 50c each were allotted to each of Development Underwriting Ltd. ("D.U.L.") and Stocks & Realty Corporation Ltd. ("Stocks & Realty"). Both D.U.L. and Stocks & Realty were public companies and as a result of these allotments they held between them more than half the issued shares of Securities & Management. Applications for these shares were made by D.U.L. and Stocks & Realty at the suggestion of Securities & Management and on the understanding that Securities & Management would pay dividends of twenty per cent per annum. At about the same time loans of $3,600 ($100 more than the amount payable for each parcel of shares) were made by Securities & Management (Nominees) Pty. Ltd. (a subsidiary of Securities & Management) to Mercantile Estates Pty. Ltd. (a subsidiary of Stocks & Realty) and to D.U.L. respectively. These loans carried interest at five per cent. The minutes of D.U.L. show that the loan to that company was repayable only in the event of a winding-up of Securities & Management; the relevant minutes of Mercantile Estates Pty. Ltd. were not produced but Mr. Graf, a director of Stocks & Realty, said in evidence that the loan was repayable on demand. In effect, D.U.L. and Stocks & Realty were promised a net return of fifteen per cent on an investment of $3,500 which they did not have to provide out of their own resources, as an inducement to become the controlling shareholders of Securities & Management. After the enactment of the Income Tax and Social Services Contribution Assessment Act (No. 3) 1964 Cth some further steps were taken to ensure that Securities & Management would remain a public company, although it seems that it was not necessary to take those steps to achieve that end. On 18th February 1966 Charles J. Berg & Associates sent a circular to all the shareholders in Securities & Management, except D.U.L. and Stocks & Realty, offering, on behalf of Eaton Investment Pty. Ltd., to buy all their shares at 70c per share. The circular stated that the flow of income to Securities & Management had dried up because all the companies in which it held investments in redeemable preference shares had redeemed their shares and that it would be in the best interests of all individual shareholders that they should dispose of their shares. This offer was accepted by all the shareholders to whom it was addressed, except the trustees of the estate of a deceased shareholder who held 200 shares, and on 5th May 1966 12,700 shares in Securities & Management were transferred to Eaton Investment Pty. Ltd. On 29th June 1966 Eaton Investment Pty. Ltd. transferred 4,000 shares to E. A. Greenwood Ltd., 4,000 shares to Epstein & Co. Ltd. and 4,700 shares to Kolotex Holdings Ltd., at a consideration of 75c per share. All these transferees were public companies, and each was induced to take up the shares by an arrangement similar to those made with D.U.L. and Stocks & Realty. In each case, at about the time the shares were transferred, Securities & Management made to a subsidiary of the transferee a loan bearing five per cent interest of a sum equal to the purchase price of the shares or thereabouts; however, according to the evidence of Mr. Borough, in 1966 there was no certainty that a dividend of twenty per cent would continue to be paid. On 6th November 1967 the 200 shares belonging to the deceased estate were transferred to Kolotex Holdings Ltd. On 19th March 1968 Epstein & Co. Ltd., which had fallen into financial difficulty, transferred its shares to Osti Holdings Ltd. The moneys lent to Epstein & Co. Ltd. were repaid and a similar loan was made to a subsidiary of Osti Holdings Ltd. Since that date the shareholders of Securities & Management have been D.U.L. (7,000 shares), Stocks & Realty (7,000 shares), Kolotex Holdings Ltd. (4,900 shares), E. A. Greenwood Ltd. (4,000 shares) and Osti Holdings Ltd. (4,000 shares). All of these companies, except Stocks & Realty, are now and have at all material times been public companies whose shares are listed on the stock exchange. Until 1965 the shares of Stocks & Realty were listed on the stock exchange but since that year Stocks & Realty has been a wholly-owned subsidiary of Stocks & Holdings Ltd. which was and is a public company whose shares are listed on the stock exchange.

[16]

The evidence shows that a dividend of $200 was each year declared in favour of Securities & Management not only by Talford, Steed and Cargill, but also by the various other subsidiaries of Securities & Management which were used by other persons for tax purposes. There was no evidence that this was the result of any agreement. Mr. Tribe said that he knew of no arrangement between Securities & Management, on the one hand, and Talford or Steed, on the other, as to the beneficial ownership of the shares which were allotted by those companies to Securities & Management or as to the beneficial ownership of any dividends. He further said that he knew of no arrangement restricting the amount of any dividends which Talford or Steed might declare, although he said that his own understanding was that all that Securities & Management would receive was a dividend which was reasonable in terms of the service which it was providing. Mr. Tribe said that before the shares were allotted by Finance Facilities to Talford and Steed he had some discussions with Strasser but that there was no discussion as to the amount of the dividends which Talford and Steed might pay to Securities & Management. He thought that Mr. Borough (who was a member of Charles J. Berg & Associates) or Mr. Stanton might have handled matters of this kind. Mr. Borough said that he explained to a number of clients of the firm that the dividends payable to Securities & Management would be approximately $200 and that the dividends and share capital would be beneficially owned by Securities & Management However, so far as Finance Facilities was concerned, he thought that Mr. Strauss would probably have been the person who had the discussions with Mr. Strasser. Mr. Strauss, however, said that he did no more than arrange introductions between the parties. Mr. Stanton was not called as a witness. No person who represented the Yacobi interests in any discussions of this kind gave evidence; Strasser had left Australia for overseas a few weeks before the hearing (although it was suggested on behalf of the Commissioner that his visit might have been postponed in view of the importance of the case) and Yacobi lives in Spain. No evidence was given by any person who had represented the Hitter group in any discussions in relation to the formation of Cargill and no explanation was given of the failure to call any such person.

[24]

The question also arises whether, again putting aside s. 260, Talford, Steed and Cargill were subsidiaries of Securities & Management within s. 103 A(4). Ostensibly in each case all the conditions of s. 103A (4) were satisfied. However, the Commissioner submits that it should not be held that they were subsidiaries of Securities & Management within that sub-section, for two reasons. In the first place, the Commissioner relies on matters of fact. He submits that the evidence led for the taxpayers on this issue is quite unsatisfactory and that the burden which s. 190 (b) of the Act casts on a taxpayer of proving that the assessment is excessive has not been discharged. It is obvious that the fact that a dividend of $200 per annum was regularly paid to Securities & Management by all the companies concerned could not have been the result of mere coincidence. Theoretically, Securities & Management could have used its power to control Talford, Steed and Cargill by causing those companies to declare dividends large enough to absorb all their profits. Any such diversion of funds from the control of the Yacobi and Hitter interests respectively into other hands was, of course, no part of the arrangement between the parties, and in deciding whether or not to embark on the scheme the representatives of the Yacobis and the Hitters must have been concerned to ensure that there would be some limit on the size of the dividends that would be declared. In the circumstances, it cannot be believed that there was no discussion as to the amount of dividend that the subsidiaries of Securities & Management would declare. The failure of the taxpayers to call as a witness anyone who engaged in any discussion on the subject, or to account convincingly for the absence of any such witness, would be a circumstance in favour of drawing any inference adverse to the taxpayers which the facts given in evidence support: Jones v. Dunkel [1] . It is accordingly submitted on behalf of the Commissioner that it should be inferred that there was an agreement pursuant to which Securities & Management held the shares in Talford, Steed and Cargill for the benefit of others, and that the taxpayers have failed to discharge the burden that lies upon them of showing that Securities & Management was beneficially, as well as legally, entitled to the shares and to the rights which they conferred. However, the failure of the taxpayers to call any evidence of this kind does not justify me in drawing an inference which would be contrary to the weight of the evidence. It is undisputed that the purpose of the creation of Talford, Steed and Cargill, and of the acquisition by Securities & Management of all their issued shares, was to render them subsidiaries of Securities & Management for the purposes of s. 103A (4). The whole object of what was done would be frustrated if Securities & Management did not have the beneficial, as well as the legal, rights which the shares conferred, and there is no justification for inferring that this carefully prepared scheme contained an element which would have rendered it futile. The fact that debentures were given which enabled the debenture holders to obtain control of Talford, Steed and Cargill supports the view that until the power given by the debentures was exercised the control remained in Securities & Management. It is true that the powers given by the debentures might not have enabled the debenture holders to assume control in time to prevent a declaration of dividends in favour of Securities & Management, and this circumstance does afford a point of distinction from Federal Commissioner of Taxation v. Casuarina Pty. Ltd. [2] whose facts are otherwise similar. If Securities & Management had used its powers to cause its subsidiaries to declare dividends which were thought to be excessive, no doubt action would have been taken under the debentures, the scheme would have come to an end and the reputation of the members of Charles J. Berg & Associates would have suffered. It may well be that the clients of the accountants trusted them, and were content to rely on the fact that from a practical point of view it was most unlikely that the scheme would be abused. However, if they sought protection in a binding agreement, I find it impossible to infer that the agreement took the form of an undertaking that any dividends declared, or any capital distributed on a winding up or distribution of capital, would be held in trust. The representatives of the Yacobi and the Hitter interests would have been likely strongly to oppose any suggestion that dividends be declared in excess of the amount which it was intended that Securities & Management should retain, or that the companies should be wound up, or should have their capital reduced, while Securities & Management continued to hold all the issued shares. The probable inference is that there was either an agreement or an understanding that excessive dividends (i.e. dividends greater than an agreed amount, or an amount which could be regarded as representing reasonable remuneration for services rendered) would not be declared. There seems to me no reason to doubt that it was intended that Securities & Management should be beneficially entitled to receive whatever dividends were declared, and in fact the evidence shows that the dividends of $200 a year were received by Securities & Management and retained by it for its own purposes. Notwithstanding the legitimate criticism of the failure of the taxpayers to call knowledgeable witnesses, and notwithstanding the fact that the onus lies on the taxpayers of showing the assessments to be erroneous, I cannot infer that there was any arrangement that would have deprived Securities & Management of the beneficial interests in the shares held by that company in Talford, Steed and Cargill.

[26]

The second argument advanced on behalf of the Commissioner is that, even if it be accepted that the shares in Talford, Steed and Cargill were beneficially owned by Securities & Management, nevertheless the tests laid down by s. 103A(4) have not been satisfied. The Commissioner submits, rightly in my opinion, that s. 103A (4) requires one to look, not merely at the company's share register, but at all the circumstances, in determining whether the beneficial ownership and beneficial entitlement referred to in the subsection exists. He further submits that in the present case the existence of the debentures meant that it could not be said that Securities & Management answered the requirements of pars. (b), (c) and (d) of s. 103A (4). For convenience I shall deal with this argument in its relation to Talford, although what I say will also apply to Steed and Cargill. The Commissioner relies to some extent on the right given to Assets by cl. 13 of the debenture to have nominees on the board of Talford, but this seems to me an irrelevant matter. Clause 13 did not give Assets the capacity to obtain control of the voting power in Talford within par. (b) of s. 103A (4), which must mean the voting power attached to shares and not the voting power of directors. Stronger reliance is, however, placed on cl. 14 of the debenture under which Assets was entitled to require Talford to allot 9,750 shares in that company. When the allotment took effect, as it would no later than three days from the expiration of a notice given in accordance with cl. 14, Assets would, by reason of its beneficial ownership of those shares, have been capable of controlling Talford and would have been beneficially entitled to receive more than one-half of any dividends paid by that company and more than one-half of any distribution of capital in the event of the winding up, or of a reduction in the capital, of that company. However the fact that Assets was able to obtain control of Talford in the future did not mean that Securities & Management was not capable of controlling the voting power of Talford at the end of the year of income. Section 103A (4) requires the position to be considered at the end of the year of income and at that time Securities & Management, by reason of its beneficial ownership of shares in Talford, was capable of controlling the voting power in that company. The decision in Federal Commissioner of Taxation v. Casuarina Pty. Ltd. [1] is decisive against the Commissioner on this point. Similarly the existence of the debentures did not render pars. (c) and (d) inapplicable. Those paragraphs are expressed in the subjunctive mood, not in the future tense; they do not require the Court to consider who would be entitled to dividends or to a distribution of capital at some date in the future but whether the public company in question would be beneficially entitled, at the end of the year of income, to receive the dividends or the distribution of capital on the hypothesis that dividends were paid or capital was distributed at that time. Again, the decision in Federal Commissioner of Taxation v. Casuarina Pty. Ltd. [1] is fatal to the Commissioner's argument. If any dividends had been paid or any capital distributed at the end of the year of income in question, Securities & Management would have been beneficially entitled to it. It is not relevant to enquire whether or not it was likely that dividends would have been declared or a distribution of capital made.

[29]

The Commissioner, however, submits that in each case there was an arrangement which had the purpose of defeating, evading or avoiding a liability to income tax and that s. 260 renders those arrangements void with the result that in the circumstances that remain after the arrangements have been annihilated Talford, Steed and Cargill are seen to be private companies. It is submitted that s. 260 operates at two levels. In the first place, it is said that the allotments of the shares in Securities & Management to the five public companies were made in circumstances which cannot be explained by reference to ordinary business dealing, but were made for the purpose of avoiding tax, and that if those allotments are treated as void Securities & Management no longer answers the description of a public company. The circumstances certainly showed that Securities & Management was determined to do all it could to ensure that the public companies should take up the shares, but it is quite impossible to regard the steps taken on behalf of Securities & Management to preserve its status as a public company as a means to avoid tax. Secondly, it is said that the allotment of shares by Talford, Steed and Cargill to Securities & Management must similarly be treated as void so that those companies are not to be regarded as subsidiaries of Securities & Management and, therefore, not to be regarded as public companies. This argument is similar to that rejected in Federal Commissioner of Taxation v. Casuarina Pty. Ltd. [1] and, that decision, which was argued after the present appeals were heard, completely governs this question. The allotments of shares in Talford, Steed and Cargill were made in the exercise of a right of choice recognized by the Act, and, on the authority of W. P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation [2] , Federal Commissioner of Taxation v. Sidney Williams (Holdings) Ltd. [3] and Federal Commissioner of Taxation v. Casuarina Pty. Ltd. [1] , are not rendered void by s. 260.

[42]

The word "may", in its natural meaning, is permissive or enabling only, and it lies on those who assert that there is an obligation to exercise the power conferred to show, as a matter of construction of the Act as a whole, that this is so: see Julius v. Lord Bishop of Oxford [1] and Ward v. Williams [2] . Although the form of par. (c) does lend some force to the taxpayer's argument, it seems to me clear, upon the proper construction of s. 46, that the power given by s. 46 (3) is discretionary. Sub-section (3) deals only with private companies. By sub-s. (2) (a) a private company "is entitled" to a rebate obtained by reference to one-half of the private company dividends included in its assessable income. The Commissioner has no discretion to refuse to allow the rebate provided by that subsection. On the other hand, sub-s. (3) says that, in certain specified circumstances, the Commissioner "may allow" a private company a further rebate obtained by reference to one-half of the private company dividends included in its assessable income. The contrast between the words of the two sub-sections leads firmly to the conclusion that sub-s. (3) confers on the Commissioner a discretionary power to grant a rebate and does not impose on him a duty to allow it when the circumstances mentioned in the sub-section are satisfied. The Commissioner points to the facts that "the prescribed period" within which dividends must be paid to amount to "a sufficient distribution" within Div. 7, is defined by s. 103 (1) so as to include the ten months' period referred to in s. 46 (3), and that under s. 105AA the Commissioner is given power to extend the period in which a company may pay dividends for the purpose of making a sufficient distribution in relation to the year of income. It is said that if s. 46 (3) confers no discretion, a taxpayer to whom an extension of time had been granted under s. 105AA might obtain a rebate under s. 46 (3) (a) or (b) and yet make a distribution to a private company within the extended period and escape liability to additional tax under Div. 7, and that since s. 46 and Div. 7 are obviously complementary, this is an unlikely result, even though it might in some cases be avoided by administrative action. However, the words of s. 46 themselves make it clear that the power given by sub-s. (3) is discretionary, and it is unnecessary to support this conclusion by this further argument.

[45]

The Commissioner decided not to allow the further rebate provided for in s. 46 (3) because he was of the view that even if and upon the basis that the conditions set forth in pars. (a) or (b) were met he had a discretion to refuse to allow the further rebate and in the circumstances which are in evidence before the Court he was of the opinion that the further rebates should not be allowed and, in so far as the provisions of s. 46 (3) (c) were concerned, that it was not reasonable to allow it because, inter alia, the facts which are now before the Court disclose what was in his view a tax avoidance scheme aimed at avoiding liability to tax pursuant to the provisions of Div. 7 of the Act. The statement is somewhat ambiguously expressed, but it seems to me right to construe the concluding words as relating to the exercise of the discretion under pars. (a) and (b) as well as under (c). It is submitted on behalf of the taxpayer that s. 260 deals exclusively with the consequences of tax avoidance schemes and that, if an alleged scheme is not avoided by s. 260, the Commissioner is not entitled to consider its existence or base the exercise of his discretion under s. 46 (3) on the view he has formed about it. Of course, if the Commissioner does consider an extraneous matter in exercising his discretion, his decision is liable to review: see Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation [1] . However, I cannot accept that it was the intention of the legislature that s. 260 should operate as a fetter on the discretion given to the Commissioner by other sections of the Act, or that it should be wrong of the Commissioner in exercising his discretion to take into account the existence of a scheme to escape tax. In the present case the scheme was successful, and it is not right to call it "a tax avoidance scheme" if by that expression is meant a scheme within s. 260. However, it seems to me that the Commissioner is entitled to consider the fact that, although a case comes within the words of par. (a) or par. (b) of s. 46 (3), it only does so because the parties have implemented a scheme for the purpose of ensuring that Div. 7 tax is not attracted, and to form the view that although the scheme was lawful and proper it was nevertheless an artifice designed to take advantage of a loophole in the Act, and acting on that view to refuse to allow a further rebate which the Act leaves within his discretion to allow or withhold. Once this conclusion is reached I can find no ground for holding that the Commissioner did not make proper exercise of his discretion. 1. (1949) 78 C.L.R. 353, at p. 360.

[79]

In the present case condition (a) was fulfilled. Of that the Commissioner was in fact satisfied. He could not have been otherwise than satisfied. Condition (c) is thus irrelevant, except for such light as it throws upon the critical question in the case, which is, the Commissioner being satisfied of the matters set out as (a), must he allow the further rebate provided for in the sub-section or has he a discretion to refuse to do so? The case for the Commissioner is that, as the Act says that he "may allow a further rebate" he is not bound to do so notwithstanding that a condition precedent be met. The case for the taxpayer, the appellant, is that, if the condition be fulfilled to the satisfaction of the Commissioner, he must allow the rebate. "May", it was said, should be read as if it were "shall". The Commissioner's answer was that the word "may" prima facie imports a discretion to do or not to do. This, it was said, was reinforced by the contrast between the provision in sub-s. (2), by which the taxpayer "is entitled" to a rebate of a half, and that in sub-s. (3), by which the Commissioner "may allow" a rebate of a further half. I see the difference in words: but I do not think that much can be built upon it. The right of a taxpayer to a discount or rebate arising from facts objectively determinable is quite properly called an entitlement. A claim to a discount or rebate dependent upon the Commissioner being satisfied of certain fact is equally properly called an allowance, something to be allowed. In some contexts the word "allow" in the phrase "may allow" might enhance a discretion said to be embodied by the word "may". But not, I think, in this context. The Act is filled with provisions about allowable deductions which are mandatory. The contrast in language in s. 79B (1A) between what is allowable and what a taxpayer is "entitled to" is significant. The question, which comes back to the words "may allow", is not to be solved by concentrating on the word "may" apart from its context. Still less is the question answered by saying that "may" here means "shall". While Parliament uses the English language the word "may" in a statute means may. Used of a person having an official position, it is a word of permission, an authority to do something which otherwise he could not lawfully do. If the scope of the permission be not circumscribed by context or circumstances it enables the doing, or abstaining from doing, at discretion, of the thing so authorized. But the discretion must be exercised bona fide, having regard to the policy and purpose of the statute conferring the authority and the duties of the officer to whom it was given: it may not be exercised for the promotion of some end foreign to that policy and purpose or those duties. However, that general proposition is irrelevant in this case. Here the scope of the permission or power given is circumscribed. Conditions precedent for its exercise are specified as alternatives. The question then is, must the permitted power be exercised if one of those conditions be fulfilled?

[83]

The Commissioner's contention, that he can in his discretion refuse a further rebate notwithstanding that he is satisfied that the conditions for allowing it exist, leads on to a consideration of the grounds on which he claims he might legitimately do so. In the present case he gave as his reasons that the appellant was a participant in a tax avoidance scheme. But that a taxpayer company is able to avoid a liability which if the law or the facts were different it would incur, cannot be a ground for denying it a rebate that the Commissioner, being satisfied of the relevant facts for allowing it, is empowered to allow. I can well understand that Gibbs J. described the arrangement in which the appellant played a part as an artifice. It was an ingenious and elaborate expedient to avoid taxation. But it was not dishonest. Its legal character was not disguised or recondite. Having regard to recent decisions of this Court, it cannot be said that a taxpayer company by availing itself of a choice that the law allows puts itself within the reach of s. 260. I say nothing as to whether the very incorporation of a company which is called into existence simply to do the bidding of a taxpayer and thereby to enable him to avoid taxation, and which has no other reason for existence and carries on no business, is a matter that can fall within s. 260. That is not this case. The Commissioner does not seek to treat the appellant or any of the other companies whose affairs were linked with it, as if they were not really in existence as entities in law. Such companies may be seen by some people as merely noms de guerre of a taxpayer in his warfare with the Commissioner of Taxation. But the decision in Salomon v. Salomon & Co.; Salomon & Co. v. Salomon [1] , and the logic built upon it, require us as lawyers to treat them as separate warriors duly enlisted. The Commissioner does not claim that s. 260 would permit him to ignore their existence. What he here seeks to do is, while recognizing the existence of the appellant, to deny it the rebate that the Act, as I read it, requires him in the circumstances to allow it.

[100]

it is necessary to bear steadily in mind that it is the real intention of the legislature that must be ascertained and that in ascertaining it you begin with the prima facie presumption that permissive or facultative expressions operate according to their ordinary natural meaning. "The authorities clearly indicate that it lies on those who assert that the word "may" has a compulsory meaning to show, as a matter of construction of the Act, taken as a whole, that the word was intended to have such a meaning" - per Cussen J.: Re Gleeson [2] . "The meaning of such words is the same, whether there is or is not a duty or obligation to use the power which they confer. They are potential, and never (in themselves) significant of any obligation. The question whether a Judge, or a public officer, to whom a power is given by such words, is bound to use it upon any particular occasion, or in any particular manner, must be solved aliunde, and, in general, it is to be solved from the context, from the particular provisions, or from the general scope and objects, of the enactment conferring the power" - per Lord Selborne: Julius v. Bishop of Oxford [1] . One situation in which the conclusion is justified that a duty to exercise the power or authority falls upon the officer on whom it is conferred is described by Lord Cairns in his speech in the same case. His Lordship spoke of certain cases and said of them "[they] appear to decide nothing more than this: that where a power is deposited with a public officer for the purpose of being used for the benefit of persons who are specifically pointed out, and with regard to whom a definition is supplied by the legislature of the conditions upon which they are entitled to call for its exercise, that power ought to be exercised, and the Court will require it to be exercised". [2] Section 46 (3) does, I think, give rise to a "situation in which the conclusion is justified that a duty to exercise the power or authority falls upon the officer on whom it is conferred" and I am therefore of opinion that the appeal should be allowed. 1. (1955) 92 C.L.R. 496, at pp. 505-506. 2. [1907] V.L.R. 368, at p. 373. 3. (1880) L.R. 5 A.C. 214, at p. 235. 4. (1880) L.R. 5 A.C., at p. 225.

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Judgment (101 paragraphs)

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