Investment & Merchant Finance Corporation Ltd v Commissioner of Taxation

Investment & Merchant Finance Corporation Ltd v Commissioner of Taxation - [1970] HCA 1 - HCA 1970 case summary — Zoe

[6]

Dividend stripping is a term applied to a device by which a financial concern obtained control of a company having accumulated profits by purchase of the company's shares, arranged for these profits to be distributed to the concern by way of dividend, showed a loss on the subsequent sale of shares of the company, and obtained repayment of the tax deemed to have been deducted in arriving at the figure of profits distributed as dividend. So well known has the term become that the second edition of Fowler's Modern English Usage (1965) has a brief explanation, under the heading "Bond washing and dividend stripping", introduced by - Most of us are familiar with these terms, but few know much more about them than that they are devices for the legal avoidance of taxation. In the course of the duel provoked by them between the tax avoider and the legislature they have developed a protean variety of detail, but their essence remains the same. The duel has, in the United Kingdom, been a running fight in which taxpayers have adopted one ingenious and complicated tactic after another. These Parliament sought successively to counter in 1955, 1958 and 1960, and more recently, in the Finance Acts of 1965 (s. 65) and 1967 (par. 4 of Sched. XI). The course of the struggle is explained in Simon's Income Tax Law, vol. 2, p. 192 et seq. and vol. 2A, p. 679. In the result Lord Denning M.R. said last year: "The legislature has recently killed dividend-stripping but this is one of its death struggles": Lupton (Inspector of Taxes) v. F.A. & A.B. Ltd. [1] . The Australian Parliament has not retaliated in the same way. It has not so far found it necessary to do so. Here a way of escape is not available to taxpayers by exactly the same route as in England. The statutory provisions in the two countries are different. The provisions of s. 341 of the Income Tax Act, 1952 U.K., are not precisely matched here. However, the taxpayer claims that it can in this case get the benefit of a dividend-stripping operation in much the same way as used to be possible in the United Kingdom. It relies upon the operation of ss. 46, 51 and 52 of the Income Tax Assessment Act 1936-1965 Cth. 1. [1969] 1 W.L.R. 1627, at p. 1632; [1969] 3 All E.R. 1034, at p. 1037.

[11]

The taxpayer is a company that was incorporated in South Australia in 1949. It is resident in Australia carrying on business in Adelaide. It was incorporated in the name Devon Credits Limited. This name was changed to its present name in 1967. The business that, at all relevant times, the company has carried on, and which it has power to carry on, is described by it in its income tax return as that of a financier. It has engaged in money-lending, in underwriting, and in dealing in shares. It has held shares as investments. It has also dealt extensively in buying and selling shares with a view to profit. Share dealings have been throughout a substantial part of its activities. This case arises from an unusual transaction it carried out in 1963 and 1964 in relation to a private company incorporated in Victoria called Macgrenor Investments Pty. Limited. That company had an excess of assets (consisting mainly of moneys lent and shares in other companies) over liabilities of approximately £138,000. Of this amount about £122,000 represented accumulated profits available for distribution to ordinary shareholders by way of dividends. Only thirty ordinary shares in Macgrenor had been issued. As a result of negotiations, in which Mr. Lipman took a leading part on behalf of the taxpayer, it was arranged that the taxpayer should buy twenty-one of these shares for approximately £4,000 each, and that another company, The Investment Company of South Australia Limited, which was referred to as "Ticsal", should buy the remaining nine shares at the same price. "Ticsal" was a company whose undertaking was separate from that of the taxpayer, although they had some association and a connexion through Lipman who was a director of each. The price for each of the thirty Macgrenor shares was arrived at as representing one-thirtieth of the value of the Macgrenor assets available for distribution after allowing an amount for stamp duty and expenses attributable to the transaction. The amount which the taxpayer actually paid for its twenty-one Macgrenor shares was £86,180.17.0. It also paid the duty on the transfers. Its total outlay to get the shares was thus £86,504. In the result the shareholders in Macgrenor got about £120,000 in all for the thirty shares sold.

[24]

I do not doubt that a profit or loss made by buying and selling a thing can ordinarily be measured by simply setting the price realized against the price paid. But it seems to me that this simple method of calculation will not suffice when the thing that is sold differs radically and in its economic character from the thing that was bought, and when the difference, whether for better or for worse, has been produced by the one person, the person who has bought and sold. If he has improved the thing he bought so that he gets a better price for it than he paid for it, as for example if he has built upon vacant land, then the measure of his profit is reduced by the cost to him of improvements. If, on the other hand, he has taken something from it to diminish its value, so that he gets a less price for it than the price he paid, then, in measuring the result of the transaction in terms of profit and loss, the value to him of what he took away must be taken into account. If a man bought land with a crop ripe for harvest, and after harvesting the crop, sold the land bare for less than he paid for it under crop, the value of the crop to him must, in any rational economic calculation, be brought to account in arriving at his profit or loss of the whole enterprise of buying, harvesting and selling. Similarly if he bought a mine, extracted some of the mineral from it, and then sold the mine. Whether or not in cases of that sort the profit or loss would be a capital profit or loss or a profit or loss on revenue account depends upon further factors. But whether a profit or loss bears upon income or capital does not affect the basic question of what is to be taken into account in computing profit or loss. It may be thought a naive point of view: but I am unable to regard the purchase of a controlling interest in a company with large profits ready for distribution as different, in economic character, from the purchase of land with a crop ready for harvest, or of a mine with minerals that can be taken.

At a glance

Court

Decision date

Before

Source

Judgment (33 paragraphs)

Parties