Hancock v Federal Commissioner of Taxation

Of course that company would take a profit on the transaction and the profit would necessarily be one upon which Watson's company would pay tax, that is to say it would pay tax unless the profit were not wiped out by the results of some other transaction or transactions in the course of its business. The expected liability for £7,000 under Div. 7 would be avoided and the transaction would involve none of the parties in any other liability for income tax, that is of course unless the Commissioner invoked s. 260 and did so with success, as in the result he has done at all events up to this point.

The transaction was carried out substantially as suggested. When it had been completed the result was simple enough. The Hancocks held all the issued share capital in the Mulga Downs company. The Lefroys had sold their shares to Watson's company for a capital sum of £40,000, Watson's company had been temporarily the transferees of these and of the Hancocks' shares, the price on the sale to Watson's company being fixed at £23,500. Of the profits of Mulga Downs Pty. Ltd. £50,000 had been distributed by that company to Watson's company as a dividend or dividends on the shares temporarily held by it. Watson's company retained £7,500 as its profit: it paid £2,500 in money to the Hancocks as part of the price of their shares, and it paid in money £40,000 to the Lefroys. These amounts of course add up to £50,000 the amount of the distribution of accrued and accruing profits. All the issued shares were sold back to the Hancocks at £21,000 an amount which was met by set off with the balance of the price at which the Hancocks' shares were taken (£23,500 less £2,500 paid in money), no tax was paid or remained payable under Div. 7, no tax was paid or incurred by any party to the transaction except so far as tax became payable by Watson's company in respect of its profit of £7,500. That is of course on the hypothesis that the transaction is not void under s. 260.

Now although the plan was the product of Watson's ingenuity Hancock adopted it and he knew that an essential feature of it was the escape of the tax that must attach either to the company or to the shareholders if the profits were undistributed and alternatively of the tax which as shareholders they would pay if the profits were simply distributed as dividends. At the same time it was evident enough that he had no prospect of buying the shares of the Lefroys, except by the application of funds which he might obtain by a distribution of the profits of the company. There was no sense or purpose in selling the Hancocks' shares to Watson's company and then back to Hancock or in Watson's company's buying the Lefroys' shares from that family for the purpose of reselling them to Hancock in lieu of the Lefroys selling them directly to the Hancock family, except to ensure that the distribution of profit by Mulga Downs Pty. Ltd. would not be to the Hancocks or the Lefroys who would incur tax but would be to Watson's company, a company trading in securities; and the mechanics of the transaction were arranged wholly to ensure that the dealings otherwise were of a capital nature.

In these circumstances I think that there was an agreement or arrangement to avoid either a liability imposed by the Act on Mulga Downs Pty. Ltd. or upon the Hancocks and to prevent the operation of the Act in respect of the liberation of the company's profits. The liability imposed by the Act on Mulga Downs Pty. Ltd. was to pay tax under Div. 7 if there was not a sufficient distribution of income to satisfy s. 104. It may be said that the company did on any view distribute a sufficient amount of income and that is why liability under Div. 7 was avoided. In the end if you treat the distribution as valid, that is so. But if you look at the matter as at the time the arrangement was made, the parties were confronted with a dilemma, a liability under Div. 7 or a liability under or by reason of s. 44 (Div. 2 sub-div. D) and a purpose of the plan evolved was to avoid the dilemma. The expression "preventing the operation of the Act in any respect" is generally regarded as difficult, but I treat it as simply meaning the operation which the Act would have in a given case if it were not for the contract agreement or arrangement made for the purpose (or having the effect) of preventing it. It is the operation of the Act in relation to the distribution and taxability of the profits of a private company that in part the plan was designed to "prevent".

It appears to me that Watson and his company on the one side and Hancock and his son on the other side were the parties to the agreement or arrangement. I have purposely made compendious my statement of the making and carrying out of the plan because I think that the detailed steps by which, as it seems to me, the plan was reached and agreed have nothing but an evidentiary importance and otherwise tend to confuse the matter. It is sufficient that by steps the parties reached and carried out the arrangement and that it answered a description covered by s. 260.

It follows that as against the Commissioner the arrangement is void so far as it has or purports to have the purpose or effect of in any way, directly or indirectly avoiding a duty or liability imposed or preventing the operation of the Act in any respect. It is important to keep steadily in view the fact that no longer does the provision now contained in s. 260 make contracts agreements or arrangements void: they are only void as against the Commissioner or in regard to a proceeding under the Act. The result is to require a consideration of the Commissioner's rights and duties on the footing that the contract agreement or arrangement is notionally void. But this notional treatment of the agreement or arrangement as void extends to all the ancillary or subsidiary steps for carrying it out. "But it" (the arrangement), said Lord Denning for the Privy Council, "must in this section comprehend, not only the initial plan, but also all the transactions by which it is carried into effect - all the transactions, that is which have the effect of avoiding taxation, be they conveyances, transfers or anything else. It would be useless for the commissioner to avoid the arrangement and leave the transactions still standing.": Newton's Case [1] . What is the result in this peculiar case? The Commissioner can treat, as it seems to me, each and every step by which the ultimate situation of George Hancock, the appellant, was brought about as having no legal validity or efficacy or significance. What then does he proceed to tax? He is assessing George Hancock. Ex hypothesi nothing which has been done from the time the arrangement was reached between the Hancocks and Watson or Watson's company can stand in his way. The legal complexion which every step taken would otherwise bear cannot operate to impede him: for the step can have no legal validity in so far as it tends to do so. Again to quote the language of Lord Denning - "But the ignoring of the transactions - or the annihilation of them - does not itself create a liability to tax. In order to make the taxpayers liable, the commissioner must show that moneys have come into the hands of the taxpayers which the commissioner is entitled to treat as income derived by them" [2] . It is here that the difficulty of the case arises. The change or enhancement in the position of George Hancock, what had come into his hands, what he had derived, at the ultimate end of the transaction was his proportion of the shares of the Lefroys and his proportion of the £2,500. I do not think that when Lord Denning employed the word "moneys" in the passage last quoted he intended to distinguish between moneys and any other form of asset the receipt of which may constitute the derivation of income such as an immediately convertible security. But shares in a proprietary company may not be within that category. In the transaction £21,000 was put down as the price to be paid by the Hancocks for the acquisition from Watson's company of the whole of the shares in Mulga Downs Pty. Ltd., that is to say for the acquisition of the shares of the Lefroys and the reacquisition by the Hancocks of their own. One of the recommendations put forward for the proposal by Watson early in the piece was that "it would enable the Hancocks in due course to acquire all the issued capital of Mulga Downs without any cash outlay at all over and above their present resources". "Their present resources" is a phrase descriptive of their interest in the company as reflecting the funds of the company capable of manipulation; and of course the undistributed profits which had accrued in the period ending 30th April 1949 and were estimated as accruing profits of the next period represented such funds. When all the movements of credit are treated as over and the result simply (as distinguished from the movements or ostensible movements of credit and money by which the result was accomplished) is looked at and compared with the position from which it began, what has been effected is seen to be the acquisition by the Hancocks of the Lefroys' shares together with a sum of £2,500 added and the acquisition by Watson's company of £7,500, all done by the application of the Mulga Downs company's profit fund of £50,000. Indeed the point of the whole arrangement that has been considered void as against the Commissioner was to effect a liberation of the fund of profits without incurring tax and at the same time by means of the fund liberated to acquire the shares of the Lefroys. That was what was done. The Hancocks received £2,500 in addition; and as an incident Watson's company took £7,500 profit. In the distribution of the fund the proportion referable to the shares held at the beginning by the present appellant George Hancock would be as 6,730 is to 18,945, for of the issued capital of 18,945 shares George Hancock held 6,730. For myself I do not see why he should not be assessed on the basis of this fraction of the distributable profit forming part of his assessable income. Section 260 authorizes the Commissioner to disregard every step in an obnoxious plan which stands in the way of a lawful assessment. It must be remembered that, by s. 19, income is deemed to have been derived by a person although it is not actually paid over to him but is reinvested, accumulated, capitalized, carried to any reserve sinking fund, or otherwise dealt with on his behalf or as he directs. The critical object the scheme or plan had in view was to produce without tax the very result which subject to tax could have been obtained by applying, under his direction, George Hancock's share of the distributable fund less the £2,500 received in cash in or towards the acquisition of the Lefroy shares. Why should not all the intermediate steps be disregarded in pursuance of s. 260? That in fact seems to be what the Commissioner did when he increased the assessable income by £17,759. Perhaps some adjustments have taken place but if so what adjustment does not appear. I see no reason why any part of the profit taken by the Watson company should be considered as referable to the appellant's proportion of the profits.

1. [1958] A.C. 450, at p. 465; (1958) 98 C.L.R., at pp. 7, 8. 2. [1958] A.C., at p. 467; (1958) 98 C.L.R., at p. 10.

The view I have expressed depends in no respect upon tracing the identity of moneys employed in the steps taken to reach the result. When the purpose is to assess a taxpayer who has reached a situation which but for a scheme swept away by s. 260 would or might spell liability to tax, it does not appear to me to be necessary to trace the identity of moneys as if one were seeking to identify in an investment trust funds that had been misapplied. Section 260 is directed against the validity of arrangements designed to avoid taxation where, but for the cover the arrangement would give, taxation would fall. The resource of ingenious minds to avoid revenue laws has always proved inexhaustible and for that reason it is neither possible nor safe to say in advance what must be found, after a scheme is struck down under s. 260, before a consequential assessment can be justified. But it seems to me that what matters must be the resulting financial situation, one of change if not invariably of betterment, and the factors which would but for the void scheme have made it taxable. These factors will depend on general conceptions of what is taxable as income, but seldom, I should have thought, would the actual tracing of moneys be the test of that liability. For example when Watson's company actually bought and paid for the Lefroy shares, to finance the payment it was necessary to use the proceeds of bonds which the company had "bought on credit" from Mulga Downs Pty. Ltd. for the purpose and resold for cash, and also to depend to some extent upon some moneys belonging to Watson's company. That does not seem to me to matter. It was all balanced out afterwards, of course, and was only part of the financial expedients for carrying that part of the plan through. It does not seem to me to matter at all what interim financial expedients were resorted to or which moneys or whose credit was used in the course of carrying out the transaction. It is the result that exposes the taxpayer to liability: a result necessarily involving the employment by the taxpayer of a distribution of the profit fund. The means, if otherwise they could be considered significant upon a question of ultimate liability, would be swept away like other parts of the "arrangement" and the steps by which it was carried into effect. In the present case the only difficulty, as it seems to me, lies in the form in which the appellant George Hancock derived in the end the greater part of benefit of the transaction, namely shares, the Lefroy shares. But for the reasons that I have given that should not be regarded as inconsistent with his having derived income, once the disguising elements of the "arrangement" are stripped away under s. 260.

Langley George Frederick Hancock v. Commissioner of Taxation.

I understand that this appeal is to abide the fate of the appeal by George Hancock against the decision by Fullagar J. dismissing the appeal of the latter from the amended assessment of the Commissioner of Taxation.

Accordingly the appeal in this case must be dismissed also.

The question for decision in this appeal requires consideration of s. 260 of the Income Tax Assessment Act 1936-1949 Cth in relation to a somewhat complicated set of facts. The material provision of the section is that every contract, agreement, or arrangement shall, so far as it has or purports to have the purpose or effect of defeating, evading, or avoiding any liability imposed on any person by the Act or preventing the operation of the Act in any respect, be absolutely void as against the Commissioner.

In this case the Commissioner relies upon the section to treat as void portion of what he says was an arrangement having or purporting to have the purpose or effect of avoiding a liability of the appellant to pay income tax. The notorious difficulties of the section have been the subject of a line of cases culminating in Newton v. Federal Commissioner of Taxation [1] . From what is said and implied in the reasons of the Privy Council in that case it is possible, I think, to work out some general propositions by reference to which the present case may be decided. (1) The word "arrangement" in s. 260 comprehends a plan made between two or more persons (whether it be legally enforceable or not) and all the transactions by which it is carried into effect. (2) An arrangement "has or purports to have the purpose or effect" referred to in the section if, and only if, the concerted action consisting of the making of the plan and the carrying out of the transactions by which it is given effect is properly to be characterized as a means to avoid income tax. (3) Whether it is to be so characterized is a question to be answered upon consideration of the overt acts by which the plan has been implemented. (4) If those acts are capable of explanation by reference to ordinary dealing, such as business or family dealing, without necessarily being labelled as a means to avoid tax, the arrangement does not come within the section. An example would be a simple sale or gift of shares, even though the motive of the seller or donor may have been to avoid receiving future dividends and incurring the liability to income tax which the receipt of them would have entailed. (5) But the overt acts will enable the arrangement to be characterized as a means for the avoidance of tax, if they have included a transfer of property from the taxpayer in consequence of which income from the property, instead of being received as such by the taxpayer, has followed either of two courses: (i) a course which has carried it through the hands of other persons to the taxpayer, but so as to reach him with the character of capital; or (ii) a course which has amounted in effect to an application of the moneys by the taxpayer, and so has been a practical equivalent of a receipt by him followed by an expenditure by him. (6) If an arrangement has been a means for the avoidance of tax, the fact (if it be a fact) that it has been a means to other ends as well does not prevent the application of s. 260. (7) Where an arrangement is found to be within the section because of a transfer having such a consequence as is mentioned in (5) above, the transfer is to be considered as void to the extent mentioned in the section. The result is that income which has followed either of the courses referred to in (5) is to be regarded as income to which the taxpayer was entitled. Consequently the receipt of the income by the transferee in pursuance of the arrangement is properly to be treated by the Commissioner as a derivation of it, as income, by the taxpayer.

A word may be added in explanation of propositions (5) and (7). A clear example of income following the first of the courses mentioned is provided by Bell's Case [1] , where it was found possible to trace dividend moneys from a company to Bell, and show that although they had in fact reached Bell as capital they were the produce of shares formerly held by him and transferred under an arrangement which ensured that he would receive them, but receive them transformed into capital and so made free of income tax. The Privy Council regarded the bulk of the moneys in question in Newton's Case [1] as in the same category. The second of the courses described in (5) above is illustrated by the Privy Council's treatment of the moneys retained by Pactolus in Newton's Case [1] . It is easy to imagine other possible instances of it. One would be the case in which, by arrangement between A and B, A has transferred his shares to B, and B has applied dividend moneys therefrom in making a payment to C but really as a gift to C from A, or in paying for property to be transferred by C to A, or in securing some benefit or advantage for A, and then (making plain the tax-avoiding nature of the whole arrangement) B has retransferred the shares to A. The contrast with the case of an ordinary straight-out sale or gift by a taxpayer is clear. Such a sale or gift does result, it is true, in the future dividends going to the buyer or donee instead of to the taxpayer; but the diversion of the money from the taxpayer is neither to enable it to be received by him as capital instead of income and therefore free of income tax, nor to enable such an application of it to be made that there is achieved by a single step what, but for the arrangement, would have required the two steps of a receipt by the taxpayer (with consequential tax liability) and an expenditure by him.

1. (1953) 87 C.L.R. 548. 2. [1958] A.C. 450; (1958) 98 C.L.R. 1. 3. [1958] A.C. 450; (1958) 98 C.L.R. 1.

I turn to the facts of this case. It relates to the year of income ended 30th June 1949. By an amended assessment, the appellant was assessed to tax on the footing that in that year he derived as assessable income an amount of £17,759 over and above the amount which he had included in his return. This was done, and is now supported by the respondent Commissioner, on the ground that by the carrying out of an arrangement between the appellant and his son on one side and a company named Rowdell Pty. Limited (which I shall call Rowdell) on the other, dividend moneys to that amount, which would have been assessable income in the appellant's hands if he had received them from the company which declared the dividends, were paid instead to Rowdell, but the payment, because it was followed by steps which show that the arrangement was a means for the avoidance of a tax liability upon the appellant, should be treated, by an application of s. 260, as a payment of dividend moneys belonging to the appellant and therefore as derived by him so as to form part of his assessable income. An appeal against the amended assessment was dismissed by Fullagar J., who considered that an even higher sum, namely £18,283, was brought into the appellant's assessable income by the operation of s. 260. From his Honour's decision an appeal now comes before the Full Court.

That there was a plan, evolved between the appellant and his son on the one side and Rowdell on the other, there is no dispute. It had been worked out by 14th April 1949, on which day there was an interchange of letters and a concluding telephone conversation. The course of negotiations which had led up to it is traced in the judgment of Fullagar J., and need not be described again. The situation upon which the plan was to operate was this. The appellant held 6,730 and his son 1,000 shares in a grazing company called Mulga Downs Pty. Limited, which will be referred to as Mulga Downs. That company's issued capital consisted of 18,945 shares, all fully paid. Of the shares not held by the Hancocks, 11,210 were held by members of a family who may be called collectively the Lefroys. The remaining five shares were held by a Mrs. Hancock, who is not included in references in this judgment to the Hancocks. The plan provided for three main transactions. First, the Hancocks were to sell and Rowdell was to buy all but two of the Hancocks' shares in Mulga Downs, to be transferred at once, for the price of £23,500 payable as to £2,500 immediately (as a deposit) and as to the balance, £21,000, on or before 30th June 1949. The carrying out of this transaction was made binding upon the Hancocks and Rowdell by a deed which they executed on 30th April 1949. Secondly, Rowdell was to buy in the Lefroys's shares in Mulga Downs for £40,000, the Lefroys having already signified their willingness to sell at that price. Thus Rowdell would hold all but seven of the issued shares in Mulga Downs. Finally, after registration of the transfers to Rowdell, Mulga Downs was to distribute £50,000 by means of dividends, and Rowdell, having received its proportion, that is to say almost the whole, of the distributions thus made, was to re-sell all its shares in Mulga Downs.

Fullagar J. considered that the plan included two other points of great importance in connexion with the third of the planned transactions, namely, that the resale of the shares by Rowdell should be to the Hancocks, and that the price should be £21,000. In this respect his Honour's interpretation of the evidence has been challenged, but with an immaterial qualification as to the price it should clearly be accepted. The two points just mentioned were left in the realm of unenforceable arrangement it is true, but they were undoubtedly the subject of a definite understanding which was as much a part of the plan as the stipulations which were made contractually binding. The first concrete proposal which Rowdell made to the Hancocks, contained in a letter of 15th February 1949, included a statement that Rowdell, when it should be ready to sell the shares acquired from the Hancocks and the Lefroys, would be prepared to give the Hancocks the first right of refusal at £21,000, and indeed to give them a formal option at that figure. In the letter by which the general assent of the Hancocks to the plan was announced, namely a letter dated 14th April 1949 from the Hancocks' accountant to Rowdell, it was said that the sale by the Hancocks to Rowdell would be conditional upon the abovementioned option being given; but Rowdell in its reply of the same date expressed disinclination to give any binding option at any fixed price until after Mulga Downs should have held its annual meeting and paid out the contemplated dividends. The explanation offered was that there would then be no room for dispute as to the precise nature and extent of the assets and liabilities of Mulga Downs; and by way of example it was said that Rowdell might decide to take out a dividend of, say, only £40,000 instead of £50,000 in which case they would want a price of £31,000 instead of £21,000 (i.e. for the shares ex dividends). The Hancocks gave up the point. They agreed to the plan, and in particular they agreed to sell to Rowdell all their shares but two for £23,500, without receiving the option. But it is to be observed that at no time was it suggested by Rowdell that the resale might be made otherwise than to the Hancocks if the latter should wish to buy: it was only the price that was kept open for adjustment according to circumstances, and the inference was clear that otherwise the position would be as if the option had been given. Rowdell's managing director, Watson, had known from the time when he first turned his attention to the question of buying into Mulga Downs that the Hancocks had particular reasons which would probably make them desirous of buying all Rowdell's shares in Mulga Downs if they could find the money with which to do so when the time came. In evidence he said that he told the Hancocks at the time when agreement was reached that he would be a seller of the shares in June and that if they wanted them they could have them. When the time came to sell, Watson reported to a general meeting of his company that "as anticipated" the Hancocks desired to buy the shares for £21,000 and the sale was agreed to. It seems too clear for doubt that at every stage there was a clear understanding between the Hancocks and Rowdell, though resting only in good faith, that the Hancocks should be given the first opportunity to buy, and that the price should be £21,000, subject to adjustment to allow for any deviation from the intention that the distributions by means of dividends should amount in all to £50,000.

To understand the plan, it is not unimportant to see how the adjustable resale price of £21,000 was considered at the time to compare with the assets value of the shares to be resold by Rowdell. This appears from Exhibit D, which contains an approximate analysis by Watson of the affairs of Mulga Downs as at 14th April 1949, the day on which the sale of the Hancocks's shares to Rowdell was finally agreed to. Fixed assets were taken at £52,000 and current assets at £29,000, giving a total of £81,000. There were no external liabilities apart from taxes. Taxes were provided for as follows: £3,600 for taxes on 1947-1948 profit, £6,900 for income tax on an anticipated profit of £24,000 for the year ended 30th April 1949, and £7,000 for undistributed profits tax on the latter profits. These figures gave a net worth of £63,500 for the 18,945 issued shares. But if the proposed distribution of £50,000 were to be made, the £7,000 provision for undistributed profits tax on the 1948-1949 profits would not be required. Adding this back, the value from which the £50,000 would be taken becomes £70,500; so that after the distribution the assets value of the issued shares would be £20,500, of which nearly the whole would be the value of the shares resold.

The plan was carried into effect between 30th April 1949 and 3rd June 1949. Rowdell bought the Lefroys' shares for £40,000, which it paid in cash. Rowdell also bought all but two of the Hancocks' shares for £23,500, paying £2,500 in cash and agreeing by the deed of 30th April 1949 to pay the remaining £21,000 before 30th June 1949. When the transfers of the Lefroy and the Hancock shares had been duly effected, Mulga Downs declared and paid dividends totalling £50,000, of which Rowdell received its due proportion. Rowdell then offered all its shares in Mulga Downs to the Hancocks for £21,000, and the Hancocks accepted the offer. The price, as will have been noticed, was the same in amount as the deferred portion of the price payable by Rowdell to the Hancocks for the 7,728 shares which the latter between them had sold; and in fact the two amounts were paid by means of an exchange of cheques, on 3rd June 1949.

So, by the time all this was completed, the Hancocks, without having had to find a penny otherwise than from the carrying out of the plan, had come to hold the Lefroys' 11,210 shares as well as all those which they themselves had originally held, and had received £2,500 in cash. The Lefroys had received £40,000 in cash for their shares. Rowdell had emerged the richer by about £7,500. Mulga Downs, on the other hand, had distributed out of its profits £50,000, equal to the total of the three amounts of cash just mentioned. Of the profits distributed, £17,759 was in respect of the 6,729 shares which the appellant had transferred to Rowdell, for that is the figure which is obtained by applying the fraction 6,729 over 18,945 to £50,000.

Of course, Rowdell may be liable to be assessed to income tax on the footing that the dividend moneys it received from Mulga Downs formed part of its assessable income. If s. 260 applies in relation to the Hancocks so as to include in their assessable incomes a part of the same dividends, the result may seem odd since it would mean that dividend moneys from Mulga Downs are to be treated as if they had been derived as income twice, and by different taxpayers. But that would be because, by the express terms of the section, the avoidance which it produces is only as against the Commissioner, so that the Commissioner may treat transactions as void but no one else is enabled to do so.

In the course of the argument an attempt was made on behalf of the Commissioner to trace the whole of the dividend moneys received by Rowdell on the shares it bought from the Hancocks, with a view to showing that they reached the Hancocks in the end, in the form of £2,500 in money and the balance in the form of the Lefroy shares. Even assuming that a tracing into property other than money is relevant for the purpose of applying s. 260, the attempt that was made in this case could not succeed so far as it related to the excess over the £2,500. Still, it may help towards an understanding of the case as a whole if I describe what Rowdell did with the dividends it received and how it paid for shares it acquired.

The dates on which the dividends provided for in the plan were declared and paid by Mulga Downs were 30th April 1949 and 27th May 1949. On the former day there were two dividends, one of £3,500 out of the profits of the year ended 30th April 1948, and the other of £21,500 out of the profits of the year ended 30th April 1949. Rowdell received from these dividends a total sum of £24,990 14s. 11d., and paid the cheque into its bank account on the same day. It appears from the bank statement that Rowdell began the day with a credit balance of £18,627 8s. 8d. Of this sum, £1,840 11s. 2d. had come from sources irrelevant to this case, and £16,786 17s. 6d. consisted of the proceeds of sale of some bonds which Rowdell had bought from Mulga Downs on terms of deferred payment. The purpose of the bond transaction was to assist in financing the payment of £40,000 to the Lefroys for their shares in Mulga Downs. That payment is the next item appearing in the account, and it is followed immediately and on the same day by the deposit of the dividend moneys that have been mentioned. The result was that of the £40,000 that was paid to the Lefroys for their shares, £1,840 11s. 2d. came from Rowdell's original moneys, £16,786 17s. 6d. came from the proceeds of the bonds, and £21,372 11s. 4d. (i.e. £24,990 14s. 11d. less £3,618 3s. 7d.) came from the dividends of 30th April 1949. The credit balance then remaining in the account, namely £3,618 8s. 7d., consisted wholly of dividend moneys. Out of this credit balance the £2,500 was paid to the Hancocks as the deposit on their shares. The cheque for that amount did not go through the account until 2nd May 1949, but in the interval there had been no operation on the account. The £2,500 was therefore paid wholly out of the dividend moneys deposited on 30th April 1949. Of course it was a capital receipt in the hands of the Hancocks, being part of the purchase price of their shares; but if the sale and transfer of those shares had not been arranged and carried out there would have been nothing to give it the character of capital, and it would have retained the character of assessable income by reason of its being a distribution by a company to a shareholder: see s. 44 (1) and the definition of dividend in s. 6. The arrangement was therefore, to that extent at least, one for avoiding income tax on the Hancocks; and to that extent at least it must fail by force of s. 260.

Returning to Rowdell's bank account, it appears that between 2nd and 25th May 1949 the moneys remaining in the account were depleted by sundry debits, and with these we are not concerned. Until 27th May 1949 there were no payments into the account, so that on that day the credit balance, which then stood at £630 8s. 7d., consisted entirely of dividend moneys from Mulga Downs. Then on 27th May 1949 that company declared the second batch of dividends. One was a further dividend of £2,500 to be paid out of the profits of the year ended 30th April 1949, and the other was an interim dividend of £22,500 to be paid out of the profits of the year ending 30th April 1950, and, as to any deficiency in the amount of those profits, out of accumulated profits standing to the credit of profit and loss appropriation account. Rowdell received as its proportion of these two dividends £24,990 14s. 11d., which was paid into its bank account on 27th May 1949. On that day there was only one other operation on the account, namely a payment of £17,300 to Mulga Downs to meet a promissory note. This was the deferred payment for the bonds which Rowdell had bought from Mulga Downs and sold in order to finance the purchase of the Lefroy shares. The payment was made out of the combined dividend moneys, and it left a balance of £8,321 3s. 6d. Then, after a small payment of £47 which is irrelevant, there took place on 3rd June 1949 the exchange of cheques for £21,000 each, one cheque being that given by Rowdell for the balance owing by it on its purchase of the Hancock shares, and the other being the cheque given by the Hancocks for the purchase price of the former Hancock and Lefroy shares.

It is said for the Commissioner that when you find that the £17,300 which Rowdell owed for the bonds was paid out of Mulga Downs dividends, you should deal with the case just as if the proceeds of the sale of the bonds had consisted of dividend moneys, and therefore as if the £40,000 which Rowdell paid for the Lefroy shares had been paid out of dividends except to the extent of £1,840 11s. 2d. only. If you take that step, it is said, the rest follows: the Lefroy shares ultimately got to the Hancocks, ergo so much of the dividends which those shares represented as was proportionate to the Hancock shares should be treated in the Hancocks' hands as dividends, and therefore as assessable income, once s. 260 has annihilated the sale and transfer of the Hancock shares to Rowdell.

This argument fails, I think, at two points. In the first place, there is no justification for treating the proceeds of the bonds which Rowdell sold as constituting dividend moneys. They were not, in fact, dividend moneys, and there is nothing in the Income Tax Assessment Act, or in any general legal principle, to give them that character retrospectively simply because Rowdell utilized dividend moneys, when they later came in, to pay for the bonds. All the steps taken in relation to the bonds were no doubt taken in execution of the overall plan, but no disregarding of any of those steps advances the Commissioner's case. Even if the sale of the bonds by Mulga Downs were to be disregarded, and consequently the £16,786 17s. 6d., which was the proceeds of their sale and formed part of the £40,000 paid to the Lefroys, be considered as having belonged all along to Mulga Downs, that would not make them dividend moneys distributed by Mulga Downs by way of advance payment in respect of the second batch of dividends. Nothing less than that would suffice to give the Commissioner a foothold for his contention that the Lefroy shares, when they reached the Hancocks, contained 1949 dividend moneys in a converted form. Secondly, the Lefroy shares were bought by and transferred to Rowdell before any of the dividends were declared. The bank statement correctly reflects the order of events on 30th April 1949: it was of the essence of the plan that the Lefroy shares should be, and in fact they were, bought and paid for and duly transferred before the dividend was declared. By contrast, the bank statement does not correctly reflect the order of events in relation to the dividends of 27th May, for the promissory note for £17,300 had of necessity to be met, for the most part, out of those dividends. There is, therefore, no justification for the view that the dividend moneys received by Rowdell were used, wholly or in part, to buy in the Lefroy shares.

But while the examination that has been made of the steps taken to carry out the arrangement shows, as I think, that the Commissioner cannot succeed in an endeavour to support the impugned assessment wholly by means of a process of tracing, it also puts beyond all question that the transfers which enabled Rowdell to receive so much of the £50,000 as was distributed by Mulga Downs in respect of the 7,728 Hancock shares formed part of an arrangement which was a means for producing to the Hancocks, first, a portion (£2,500) of the distributions, in cash but as capital instead of as income, and, secondly, the Lefroy shares. As regards the £2,500 the case is indistinguishable from Bell's Case [1] : the money followed a course of the first kind mentioned in proposition (5) above. As regards the rest of the distributions on the 7,728 shares, the money followed a course of the second kind: the Hancocks have never received the money, but they have received the Lefroy shares instead. I say instead, because the practical result which the carrying out of the arrangement achieved was an exchange by the Hancocks of the right to participate in the planned distributions of Mulga Downs for the Lefroy shares in the "milked" company. The effect was exactly that which, in the absence of an arrangement, could have been produced only by the Hancocks retaining their shares, receiving the dividend moneys in respect of them free of income tax, and applying all but £2,500 in purchasing the Lefroy shares after the dividends thereon had been paid. The arrangement was, therefore, a means for avoiding the income tax which the Hancocks would have been liable to pay if they had achieved the same results without an arrangement. One may accept without hesitation their stoutly-maintained assertion that in their minds the arrangement was predominantly a means for getting in the Lefroy shares. That was, no doubt, their long-standing ambition. It was that which drew them into the arrangement when it was proposed to them. But the stubborn fact remains that, for whatever else the arrangement was a means, it was a means for the avoidance of tax. The consequence which s. 260 produces is that the transfers of the 7,728 shares to Rowdell are to be treated as void, and Rowdell's receipt of the dividend moneys in respect of those shares is to be considered a receipt of the Hancocks' moneys by arrangement with them, and therefore as a derivation of those moneys by the Hancocks, with the character of company distributions still upon them.

In my opinion, the amended assessment was correct, and the appeal from the order of Fullagar J. should be dismissed.

Langley George Frederick Hancock v. Commissioner of Taxation.

It follows from my reasons for judgment in the appeal of George Hancock that in my opinion this appeal too should be dismissed.

At the beginning of the time with which we are concerned (i.e., the first half of 1949), the taxpayer, George Hancock, and his son, L. G. F. Hancock, were minority shareholders in Mulga Downs Pty. Ltd., a pastoral company owning and operating the Mulga Downs station near Wittenoom Gorge in Western Australia. The original majority shareholder was one Wittenoom, for whom the appellant George Hancock had in the first place managed the station, but upon the death of Wittenoom the majority shareholding passed to members of the Lefroy family. The paid up capital was 18,945 shares of one pound each, of which the Lefroys held 11,210, and the taxpayer 6,730, his son L. G. F. Hancock 1,000 and Mrs. L. Y. M. Hancock 5. These last can be disregarded, so that when I speak of the Hancocks I mean George and L. G. F. Hancock. The company was in a strong financial position and in February 1949 had, in addition to the station and stock, Commonwealth bonds to a face value of £17,500, a credit with Dalgety & Co. Ltd. of £5,400, and was owed £5,000 by the appellant. The profits for the year ending on 30th April 1949 were estimated at about £24,000, and it seems that its anticipated profits for the year to end on 30th April 1950 were of the same order.

It was in these circumstances that Mr. H. K. Watson, who is a chartered accountant and taxation consultant and who with his wife owned all the shares in a share-dealing company, Rowdell Pty. Ltd., asked L. G. F. Hancock, whom he knew socially, about the possibility of acquiring the Hancock shares in Mulga Downs and was told that the Hancocks would be much more interested in becoming the holders of all the shares in that company. Some time after this conversation, Rowdell, by a letter dated 15th February 1949, put forward to the Hancocks the proposition that it should purchase the Hancock shares for £23,000 and the Lefroy shares for £40,000 with a view to taking £50,000 out of Mulga Downs by way of dividends during May 1949 and then selling all the shares for £21,000, giving the Hancocks the first refusal to purchase. It was pointed out that this offer "would enable the Hancocks in due course to acquire all the issued capital of Mulga Downs without any cash outlay at all over and above their present resources. Indeed, at the conclusion of all the purchases and sales the Hancocks' cash position would be about £2,000 better off than it is today". It was also stressed that the sale to Rowdell Pty. Ltd. at the prices mentioned "would give the Lefroys and the Hancocks a substantial capital profit on which income tax would not be chargeable". It would also give Rowdell a profit of £8,000, although this was not adverted to.

The proposition thus put forward was, after some negotiation and with minor adjustments, carried out, and on 30th April 1949 18,937 shares in Mulga Downs Pty Ltd. were transferred by the Hancocks and the Lefroys to Rowdell and one share to Watson, making the shareholding of the company as follows:

Rowdell Pty. Ltd. 18,937 shares. George Hancock 1 share. L. G. F. Hancock 1 share. Mrs. L. Y. M. Hancock 5 shares. H. K. Watson 1 share.

Payment for these shares was made as follows: (1) £40,000 by bank cheque obtained by Rowdell to A. L. B. Lefroy on 30th April in full payment for the Lefroy shares. (2) Rowdell's cheque for £2,500 of 30th April to the Hancocks in part payment for their shares. (3) Rowdell's cheque for £21,000 of 3rd June 1949 to the Hancocks in payment of the balance for their shares.

The financing of these payments was a work of art. On 22nd April, by arrangement with Rowdell, the Lefroy directors had retired and George Hancock, the only remaining director, appointed L. G. F. Hancock a member of the board. On 23rd April 1949 Mulga Downs sold its Commonwealth bonds to a face value of £17,500 to Rowdell for £17,300 payable on 27th May 1949 and a promissory note by Rowdell was given for this amount. Rowdell then sold these bonds to a face value of £17,000 for £16,786 17s. 6d., which was paid to the credit of its account. On 30th April 1949 Mulga Downs declared a dividend by a resolution of the directors as follows:

That after the registration of the aforesaid transfers in the Register of Members there be declared and paid to the members then standing in the Register, according to their respective rights and interests, a further dividend of £3,500 out of the profits of the year ended 30th April, 1948 and an interim dividend of £21,500 out of the profits of the year ended 30th April, 1949, viz: -

Member Number of Shares Dividend from 1947-48 Profits Dividend from 1948-49 Profits Rowdell Pty. Ltd. 18,937 3,498 10 6 21,490 18 - George Hancock 1 3 8 1 2 9 L. G. F. Hancock 1 3 8 1 2 9 Mrs. L. Y. G. Hancock 5 18 6 5 13 9 H. K. Watson 1 3 8 1 2 9 18,945 £3,500 0 0 £21,500 0 0

It is to be observed that of this dividend Rowdell received £24,990 14s. 11d., which it banked. As Rowdell's bank account was in credit to the extent of £1,845 11s. 2d. prior to the receipt of the foregoing amounts, the account was sufficiently in credit to meet the Lefroy cheque for £40,000 and the Hancock cheque for £2,500 and leave a credit balance of about £1,100, but there remained to be paid the promissory note for £17,300 and the £21,000 balance of purchase money for the Hancock shares. To enable these payments to be made, Mulga Downs on 27th May 1949 distributed £25,000 by way of dividends, of which Rowdell again received £24,990 14s. 11d. This distribution was as to £2,500 out of profits for the year ended on 30th April 1949 and as to £22,500 out of the anticipated profits for the year ending 30th April 1950. To complete the transaction, the Hancocks purchased 18,938 shares in Mulga Downs from Rowdell for £21,000. This occurred on 2nd June 1949 and about this purchase a further word must be said. The original proposal of 15th February was that the Hancocks should have the "first right of refusing our offer to sell all the shares at that figure of £21,000" and it was emphasized, as appears from the passage from the letter quoted earlier, that this would enable the Hancocks to obtain all the shares without any cash outlay. When the formal agreement between Rowdell Pty. Ltd. and the Hancocks was drawn up and executed, however, the option to purchase was omitted in accordance with the following explanation which Rowdell gave in a letter dated 14th April 1949 to R. A. Long, the Secretary of Mulga Downs: - "Moreover, since the position is rather complicated and uncertain at the moment, we are disinclined to give any binding option at any fixed price until after Mulga Downs has held its Annual Meeting and paid out its Dividends. The position will then have clarified so that there will then be no possible room for dispute as to the precise nature and extent of the assets and liabilities of the Company at the time when the option is granted. For example, we may finally decide to take out a dividend of, say, only £40,000 instead of the £50,000 as is our present intention. In such case the price we would want for our shares would then be £31,000 and not £21,000." Fullagar J., who heard the taxpayer's appeal and from whose decision this appeal is brought, decided nevertheless that "there was an understanding (perhaps a contract) that Rowdell would, after "milking" Mulga Downs of a further £25,000, sell the whole of the shares in that company to the Hancocks for £21,000". This was clearly the case, and at a general meeting of Rowdell on 2nd June 1949, the chairman reported that " as anticipated the Hancocks desired to buy the 18,938 £1 shares in Mulga Downs Pty. Ltd. for the sum of £21,000", and it was resolved "that the seal of the Company be affixed to the various transfers of shares aggregating 18,938 in Mulga Downs Pty. Ltd. for the sum of £21,000 to Messrs. G. Hancock and L. G. Hancock and Miss K. L. Hancock and Mrs. S. L. Sharpe". Miss K. L. Hancock and Mrs. S. L. Sharpe were daughters of George Hancock and he arranged for the transfers that were made to them.

From the foregoing account of the transactions, it is apparent that what had been proposed by Rowdell on 15th February 1949 was actually carried out with the minor adjustment that L. G. F. Hancock sold his shares for £3,500 instead of for the £3,000 that had originally been offered.

I now turn to the income tax aspects of the foregoing transactions. In 1949 and 1950, Mulga Downs was making large profits and, as it was a private company, it would, unless it made sufficient distributions within the times limited, be liable to pay undistributed profits tax. Furthermore, whatever Mulga Downs were to distribute by way of dividend would attract heavy income tax in the hands of its shareholders had they remained as they were in February 1949. That state of affairs was, however, radically changed when Rowdell became the shareholder to whom dividends were to be distributed, because it was a share-dealing company and against any dividends that it might receive (which in the event approximated £50,000) it could offset a loss of £42,500 if it were to sell for £21,000 shares which it had purchased for £63,500.

In these circumstances it seems to me that what was done was done pursuant to an arrangement between Rowdell, Mulga Downs and the Hancocks, which had the following purposes and effects: (1) that by distributing £50,000 by way of dividends, Mulga Downs should make a sufficient distribution for the purposes of Div. 7 of Pt III of the Income Tax and Social Services Contribution Assessment Act so that no undistributed profits tax would be payable in respect of the years 1948 to 1950; (2) that substantially the whole of the dividends should be paid to Rowdell; (3) that instead of receiving the proportion of the dividends to which they would have been entitled had they not sold their shares to Rowdell, i.e., £20,400 approximately, the Hancocks should receive £2,500 in cash and the shares (after dividends) which had belonged to the Lefroys; (4) that what the Hancocks received should be capital, not income.

Although it seems that the Hancocks did not realize that because Rowdell was a share-dealer, it would be able to set off its loss on the purchase and sale of the shares in Mulga Downs against the dividends it received from the company, it was an essential part of the arrangement that Rowdell should receive the dividends and that it should sell to the Hancocks for £21,000 the shares which it was purchasing for £63,500.

The conclusion of Fullagar J. that there was an arrangement which had the purpose and effect of avoiding the Hancocks' liability for tax is one with which I agree. Instead of receiving dividends as shareholders it was arranged that the Hancocks should receive capital.

It was argued, however, that arrangement that the Hancocks should get the Lefroy shares after dividends plus £2,500 from Rowdell instead of receiving dividends from Mulga Downs upon their own original shares (which is the true purpose and effect of the arrangement so far as the Hancocks were concerned) avoided no tax because what the Hancocks received was not income and so attracted no tax, but one of the points decided by Newton v. Federal Commissioner of Taxation [1] was that in an appropriate case s. 260 applies to an arrangement to avoid receiving dividends. It is true, as was stressed for the appellant, that the Hancocks were not only concerned to avoid receiving taxable dividends; they wanted to become the holders of all the shares in Mulga Downs and, provided that the price was right, it did not matter to them that the company in which they became the only shareholders was a company from which the liquid assets had been withdrawn. It still owned the station and the stock which was what the Hancocks were particularly concerned to get. Again, however, Newton's Case [1] decided that the section can apply if to avoid the receipt of taxable dividends is only part of the purpose and effect of the arrangement. I agree, therefore, with Fullagar J. that s. 260 applies, and as against the Commissioner that section avoided so much of the arrangement as had the purpose and effect of avoiding the Hancocks' liability to tax on the dividends that Mulga Downs was due to distribute. What was made void, therefore, as was the case in Newton v. Federal Commissioner of Taxation [1] and Bell v. Federal Commissioner of Taxation [2] , were the transfers by the Hancocks to Rowdell, with the consequence that for taxation purposes the Hancocks must be treated as having remained the holders of 7,730 shares in Mulga Downs.

1. [1958] A.C. 450; (1958) 98 C.L.R. 1. 2. [1958] A.C. 450; (1958) 98 C.L.R. 1. 3. [1958] A.C. 450; (1958) 98 C.L.R. 1. 4. (1953) 87 C.L.R. 548.

Section 260, however, does not impose tax liability; what it does is to enable the taxpayer's liability to tax to be determined without regard to so much of what has been done as is void against the Commissioner. As in this case I do not think that goes beyond the transfers from the Hancocks to Rowdell of the 7,730 shares in Mulga Downs, it is necessary, in order to determine their tax liability, to find out whether the Hancocks received anything which would be taxable income if, instead of having transferred their shares to Rowdell, they had retained them.

In the first place, they received £2,500 in cash. This, it seems to me, came to them through Rowdell from the profits distributed by Mulga Downs, and in accordance with the decision in Newton's Case [1] and Bell's Case [2] that £2,500 is taxable. Its taxability does not depend upon exactly tracing the sum received through the account of Rowdell back to the dividend cheque; it is sufficient that, in substance, the receipt was derived from the company's distribution of profits.

1. [1958] A.C. 450; (1958) 98 C.L.R. 1. 2. (1953) 87 C.L.R. 548.

The Commissioner, however, seeks to go further. First, it is contended for him that the Hancocks should be regarded as having received the whole of the dividends which Rowdell received in respect of the shares which ex hypothesi belonged to the Hancocks, i.e., £17,759 in the case of the taxpayer. In support of this contention, reliance was placed upon that part of the decision in Newton's Case [1] which decided that the taxpayers there must be regarded as having received that which Pactolus retained. As to this, the Privy Council said: - "He (i.e., the Commissioner) cannot trace the balance of £102,414 actually into their hands. It remained in the pocket of Pactolus Limited. It was ostensibly the profit of Pactolus on buying the shares. But when the transfer is ignored, that profit is seen to be nothing more nor less than remuneration which the original shareholders allowed Pactolus to retain for services rendered. The position is the same as if the shareholders had received it as part of the special dividend and then returned it to Pactolus as remuneration. The commissioner can therefore treat this £102,414 also as income derived by the shareholders" [1] . I think, however, it would be going far beyond that part of the decision, which was reached in the very special circumstances of that case, to regard the Hancocks as having received approximately £18,000 of the dividends which Rowdell received and either retained or used to pay the Lefroys. Here the difference between £20,400 and £2,500 was clearly not remuneration for Rowdell's services. The fact is, of course, that the Hancocks forewent any cash benefit beyond £2,500 in order to get the Lefroy shares, and it would be to depart from the facts to disregard what they did receive and to regard them as having received something else. Furthermore, I can find no satisfactory justification for treating Rowdell as having acquired the Lefroy shares for the Hancocks by an application, with the authority of the Hancocks, of part of the dividends paid upon the Hancock shares. The Lefroy shares were bought by Rowdell, cum. div., for £40,000 by a transaction which is not void against the Commissioner or at all; the same shares were sold, ex. div., by Rowdell to the Hancocks, together with the Hancock shares, again by a transaction which so far as it concerned the Lefroy shares was not void against the Commissioner or at all. The avoidance as against the Commissioner of the sale of shares by the Hancocks to Rowdell does not enable me to say that Rowdell, with the authority of the Hancocks, applied dividends upon the Hancock shares as purchase money to buy the Lefroy shares for the Hancocks. Had there been an arrangement whereby the Hancocks allowed Rowdell to receive and retain or use all but £2,500 of the dividends upon their shares in return for the transfer of the Lefroy shares, ex. div., I would have no doubt that the Hancocks would have been taxable upon the dividends that Rowdell received without the aid of s. 260, but I do not think that the application of s. 260 to the arrangement that was made produces that result. Although void against the Commissioner, the transfers from the Hancocks to Rowdell were valid as between the parties and as between them. Rowdell without more was entitled to the dividends it received upon the Hancock shares. It was by virtue of valid transfers inter partes and not by virtue of any authority from the Hancocks that Rowdell received the dividends that it did and to infer an application authorized by the Hancocks of their dividends is to infer something which did not take place and could not have taken place in the circumstances that as between them and so far as Mulga Downs Pty. Ltd. was concerned the shares belonged to Rowdell, not the Hancocks. It is not sufficient for the Commissioner's purposes to point to the fact that so far as he is concerned the Hancocks were entitled to the dividends that went to Rowdell; he must show upon the actual facts that they received them or dealt with them; and a dealing with them is not to be inferred merely from the fact of their entitlement in the eyes of the Commissioner when as between the parties, and as between the parties and the company, Rowdell got nothing that it was not entitled to receive as a matter of right. Section 260 does not authorize the Court to make implications contrary to the facts to reconcile the actual state of affairs with the state of affairs vis-à-vis the Commissioner and the taxpayer resulting from its application. Notwithstanding the application of s. 260, the Hancocks obtained the Lefroy shares from Rowdell by purchasing them at an agreed price, which it can fairly be inferred was based upon asset backing.

1. [1958] A.C. 450; (1958) 98 C.L.R. 1. 2. [1958] A.C., at p. 468; (1958) 98 C.L.R., at p. 11.

There are, however, two other ways in which what the Hancocks received over and above the £2,500 might be regarded as taxable income. The first depends upon treating the arrangement as covering the acquisition by the Hancocks of the shares that were originally owned by the Lefroys and regarding the acquisition of the Lefroy shares as the receipt of a dividend. To do this would again seem to me to disregard the facts. Mulga Downs did not distribute the Lefroy shares and the Hancocks did not receive them as shareholders in Mulga Downs; the transfers by the Lefroys to Rowdell stand, as do the transfers from Rowdell to the Hancocks. Accordingly, I cannot accept this contention.

This leaves for consideration the possibility of treating the £21,000 which the Hancocks received as the balance of purchase price upon the sale of their shares to Rowdell as in part dividends which Mulga Downs distributed to Rowdell in respect of the Hancock shares. Upon an examination of what occurred, it does not seem to me possible to infer that the £21,000 which Rowdell paid to the Hancocks on 3rd June was part of the company's profits. The payments that Rowdell made for shares totalled £63,500 and that company made a profit of approximately £7,500, so that there had to be a fund of £71,000. This was provided from £50,000 (approximately) dividends from Mulga Downs, and £21,000 from the Hancocks for the purchase of the Mulga Downs shares. Upon the whole I am disposed to think that the substantial identity that can be established is that the dividends were used to pay the £40,000 paid to the Lefroys, the initial £2,500 paid to the Hancocks, and to provide the Rowdell profit, so that the £21,000 which the Hancocks received on 3rd June really came from the money which they paid to Rowdell for the Mulga Downs shares. This would have appeared more obviously had the purchase price been £30,000 so that the Hancocks would have had to provide money of their own. Even as it happened, however, it should not be overlooked that the £21,000 exceeded so much of the dividends paid as could be attributed to the Hancock shares.

Fullagar J. did not find that the initial £2,500 paid to the Hancocks came out of the company's profits, but I regard the dealing with the company's Commonwealth bonds as doing no more than providing an advance against the dividend declared on 28th April so that it is a correct inference that the £40,000 paid to the Lefroys and the £2,500 paid to the Hancocks did come from the company's profits. His Honour did, however, find that the £21,000 paid by Rowdell to the Hancocks on 3rd June did come from Mulga Downs profits, but I have already explained what I think happened to those profits and I add that if the Commonwealth bonds transactions are to be treated independently of the payment of dividends, then it was the promissory note for £17,300 that part of the second dividend was used to pay.

In the result I think the appeal should be allowed, that the amended assessment appealed from should be reduced by substituting for the £17,759 added thereby the proportion of the £2,500 paid by Rowdell Pty. Ltd. to the Hancocks on 30th April, to which the taxpayer was entitled as between himself and L. G. F. Hancock. I calculate this at £2,177.

Langley George Frederick Hancock v. Commissioner of Taxation.

For the reasons given in the earlier appeal I consider that this appeal should be allowed except as to £323.

I agree in the reasons and the conclusions of the Chief Justice. I doubt whether it is possible to formulate mechanistic criteria for determining when s. 260 operates, for much must depend upon the circumstances of each case. But Kitto J. has shown that there are present in this case features that, in other cases, have been held to make plain a purpose or effect struck at by the section. I agree too that the effect of the section's operation is not to be ascertained by a tracing of particular moneys; but rather by looking at what is left when all the transactions that as against the Commissioner have to be swept away have been swept away. To use a phrase used by Viscount Simonds in another context, one must look to "the design and the result of the arrangement" (Commissioner of Stamp Duties of New South Wales v. Permanent Trustee Co. of New South Wales [1] . Devious and circuitous routes taken pursuant to an arrangement may be indications that the arrangement is one to which s. 260 applies; but the section does not demand a following of particular moneys through each step of a devious and circuitous accounting.

1. [1956] A.C., at p. 525; (1956) 95 C.L.R., at p. 9.

In a case under s. 260 one starts with the position that the arrangement that is void as against the Commissioner is valid as between the parties - that is to say that it is a legal reality and not a sham; because, if it were a sham, it would fall in any event, and without the aid of s. 260. But subordinate steps taken in the carrying out of an arrangement that is within s. 260 may, it seems to me, be shams. Indeed one of the indications that an arrangement is vulnerable under the section may be that it was to be carried into effect by fictitious procedures. Those who devise methods for enabling taxpayers to order their affairs so as to attract the least possible amount of tax do not always appreciate that, quite apart from s. 260, the taxpayer must enter into a real not a pretended transaction to effect his purpose. "It is now well settled that the substance, in law, of a transaction can be determined only by ascertaining what the transaction really was. If the ostensible transaction is a sham, a mere facade concealing a different transaction, it must be disregarded, and legal rights and liabilities determined according to the real transaction": per Jordan C.J. in In The Estate of William Vicars Deceased [2] ; and see the remarks by the same learned judge in Perpetual Trustee Co. Ltd. v. Bligh [3] and Boydell v. James [4] . It is one thing to say that the substance and nature of a genuine transaction are determined by the form in which it is cast. It is quite another to suppose that going through a form makes a pretended transaction real. An ostensible gift that was made only so that the subject of the gift might be at once given back may not, it seems to me, really cause a change of ownership even momentarily. And, in some cases, probably the same might be said of an exchange of cheques. But whether in a particular case a subsidiary and ancillary transaction, which is involved in carrying out an arrangement void under s. 260, falls with the demolition of the arrangement by the section or falls because of its own inherent instability, the Commissioner, I am inclined to think, cannot, while treating the arrangement as void under s. 260, treat such subsidiary and ancillary transaction as if it had taken effect and levy taxation accordingly. I doubt, therefore, whether he could in this case treat the dividends that Rowdell received in respect of the shares it acquired from the Hancocks as part of its assessable income. That question, however, does not arise for decision here and I do not express a concluded view on it.

1. (1944) 45 S.R. (N.S.W.) 85, at p. 93. 2. (1940) 41 S.R. (N.S.W.) 33, at p. 39. 3. (1936) 36 S.R. (N.S.W.) 620, at p. 627.