Jaques v Federal Commissioner of Taxation [1924] HCA 60

Jaques v Federal Commissioner of Taxation [1924] HCA 60 - HCA 1924 case summary — Zoe

[95]

assets, namely, its cement works, limestone deposits, rope-way, water supply, unsold freehold land, book debts, including balances due on sold land and uncalled capital, and also its liabilities, to be trans- ferred to Kandos Cement Co. Ltd.; (e) the consideration payable to this company by Kandos Cement Co. Ltd. to be the sum of £400,000, such consideration to be satisfied by allotment to the shareholders of this company of one fully paid share in the new company of £1 each for every share now held in this company on terms which are fully set out in the reconstruction agreement which will be read at the meeting; (f) Kandos Collieries Ltd. to have a capital of £225,000 divided into 225,000 shares of £1 each; (g) the principal object of Kandos Collieries Ltd. to be the acquisition of this company's coal lands, collieries, colliery plant, equipment, coal railways sidings, and also its holding of fully paid shares in the Newcastle Slag Cement Co. Ltd. and West Australian Portland Cement Co. Ltd. ; (h) the consideration payable to be the sum of £200,000 to be satisfied by allotment to the present shareholders of this company of 200,000 fully paid ' A' shares of £1 each on terms which are fully set out in the reconstruction agreement above referred to (par. (e) ); (i) Kandos Cement Co. Ltd. will acquire for cash 1,000 paid-up ' B" shares of £1 each; (j) the 1,000 ' B' shares in Kandos Collieries Ltd. will carry special voting rights so as to assure the permanent control of the coal company being vested in the new cement company ; (k) the reconstruction to be carried out under sec. 261 of the Companies Act of 1899, and accordingly the existing company to go into voluntary liquidation and to authorize the liquidator to carry out the reconstruction immediately so that there may be no interruption of the business. - The general effect of the carrying through of these proposals will be to provide the shareholders in this company with share for share in Kandos Cement Co. Ltd. and one free share in Kandos Collier shares held in this company. It is contemplated that Kandos Cement Co. Ltd. will shortly after incorporation offer 100,000 shares (contributing) at par to the shareholders of this company in such

[127]

thus clearly indicating, as the fact was, that the object of the resolution was to enable a sale to be made by the liquidator in consideration of allotment of shares in the new companies. The recital of clause 1 of the resolutions omits the words "that it is desirable to reconstruct the old company and accordingly." The effect of these omissions is to make it appear that there was no question of reconstruction, that the old company had simply gone into liquidation, and that the liquidator was proceeding to sell certain specified assets of the old company for cash. This impression is confirmed by the omission of any reference to the business or undertaking or goodwill of the old company as being included in the assets sold. The agreement with the Cement Company provides, by clause 7, that the new company should collect on behalf of the old company and its liquidator and at his direction such of the book debts, &c., of the old company as might be sufficient to satisfy the liabilities of the old company including the costs of liquidation, and that the sum so collected should be applied by the liquidator in discharge of such liabilities and costs. The natural inference from this clause is that the book debts, &c., of the old company were not included in the assets agreed to be sold to the new company, whereas in fact they were specifically included in the assets to be transferred and taken over under the agreement of 23rd June, and it appears from the evidence that in the result they were taken over by the new company and that the new company also took over the liabilities of the old company. On its face each agreement purports to be an unconditional agreement for the sale of certain specified assets of the old company in consideration of a cash payment by the new company, and contains no indication that that was not the whole agreement between the parties. Neither agreement refers expressly or by implication to the fact that an agreement between the same parties for the sale of (inter alia) all the assets included in the later agreement had been executed some months before.

[148]

In my opinion the appellant has failed to establish that either the alleged sale for cash to the new companies or the alleged payments by and to those companies were genuine bona fide transactions intended to create real rights and obligations. I think the proper conclusion to be drawn from the facts to which I have referred is that the transactions which began with the resolution of 25th August: 1920 and ended with the belated resolution of 27th January 1921 were in no sense real genuine transactions, but were devised and carried out in order to conceal the true nature of the real agree- ments between the parties, namely, the agreement of 23rd June 1920, which provided for the issue to the members of the old company without any payment being made by them to the new companies of fully paid shares in those companies, and to enable the members of the old company to escape wholly or in part from their liability to pay income tax on their true taxable income by obtaining a deduction under sec. 18 (1) (4) of the Income Tax Assessment Act to which they were not on the real facts entitled. These transactions, on which the appellant's claim to a deduction is rested, constitute in my opinion an arrangement having the purpose of relieving the appellant, in common with other members of the old company, from liability to pay income tax which on the true facts he was liable to pay, and so fall within sec. 53 of the Income Tax Assessment Act 1915-1918. Ifthe agreement of 23rd June 1920 had been carried into effect in the ordinary course, the appellant would have had fully paid-up shares in the new companies, and would not have been entitled to any deduction under sec. 18 (1) (7) of the Act. That agreement has in truth been carried into effect, and sec. 53 of the Act prevents the appellant from availing himself of the devious methods employed for the purpose of enabling him, in common with other members of the old company, to claim a deduction in respect of calls alleged to have been paid by him to the new companies.

At a glance

Court

Decision date

Before

Source

Judgment (188 paragraphs)

H.C. or A 1923-1924.