John v Commissioner of Taxation

A further problem attends an approach which would treat as void the arrangements made by Malindi in so far as they involved the original purchase of shares, the issue of bonus shares and the sale of its shares in the five Compinge companies. True it is that that would extinguish the loss or outgoing referable to the issue of the bonus shares, but it would also extinguish the assessable income produced by the sale of the shares. Section 260 does not extinguish assessable income which must be brought to taxable account.

There is another reason why we consider s. 260 cannot defeat the deductibility of the loss or outgoing claimed, at least on the approach that we have thus far taken. The approach that we have taken is to assume, as a matter of fact, that the amount of the dividends credited in payment of the bonus shares was the cost of their acquisition. That assumption having been made, the amount is the cost of the acquisition of trading stock that has in fact been sold. In that situation, albeit that in the present case it involves an assumption, s. 51 is operating by reference to past events which themselves determine deductibility and reveal the true taxable situation. That being so, there is no basis for resorting to s. 260, for the arrangements made by Malindi do not operate in any of the ways specified in pars. (a), (b), (c) and (d) of s. 260(1) of the Act.

It may be that, because the question of deductibility under s. 51 is always to be answered by the ascertainment of a past event (i.e. a loss or outgoing having been incurred), s. 260 cannot "apply to defeat or reduce any deduction otherwise truly allowable under s. 51", as was suggested in Cecil Bros. Pty. Ltd. v. Federal Commissioner of Taxation [29] ; but cf. Hooker-Rex Pty. Ltd. v. Federal Commissioner of Taxation [30] , per McTiernan J.;Franklin's Selfserve Pty. Ltd. v. Federal Commissioner of Taxation [31] per Menzies J. However, this is not a matter that need here be explored.

1. (1964) 111 C.L.R. 430, at p. 438. 2. (1970) 123 C.L.R. 71, at p. 86. 3. (1970) 125 C.L.R. 52, at p. 74.

The principle which has come to be known as "the principle of fiscal nullity" derives from the decisions of the House of Lords in W. T. Ramsay Ltd. v. Inland Revenue Commissioners [32] ; Inland Revenue Commissioners v. Burmah Oil Co. Ltd. [33] ; and Furniss v. Dawson [34] . The principle was stated in Furniss by Lord Brightman [35] :

First, there must be a pre-ordained series of transactions; or, if one likes, one single composite transaction. This composite transaction may or may not include the achievement of a legitimate commercial (i.e. business) end . Secondly, there must be steps inserted which have no commercial (business) purpose apart from the avoidance of a liability to tax - not "no business effect ". If those two ingredients exist, the inserted steps are to be disregarded for fiscal purposes. The court must then look at the end result. Precisely how the end result will be taxed will depend on the terms of the taxing statute sought to be applied. 1. [1982] A.C. 300. 2. (1981) 54 T.C. 200; [1982] S.T.C. 30. 3. [1984] A.C. 474. 4. [1984] A.C., at p. 527.

On behalf of the Commissioner it was argued that the principle expressed in Ramsay, Burmah Oil and Furniss is one of statutory construction, and, as such, applicable in the present case. In Craven v. White [36] Lord Goff so described the principle adding that it was "essentially a principle arising from the construction of the statute".

1. [1988] 3 W.L.R. 423, at p. 468; [1988] 3 All E.R. 495, at p. 531.

If any such or similar principle is to be applied in relation to the Act, it is one that must be capable of implication consonant with the general rules of statutory construction. One such general rule, expressed in the maxim expressum facit cessare tacitum, is that where there is specific statutory provision on a topic there is no room for implication of any further matter on that same topic. The Act, in s. 260 and now in Pt IVA, makes specific provision on the topic of what may be called tax minimization arrangements and thereby excludes any implication of a further limitation upon that which a taxpayer may or may not do for the purpose of obtaining a taxation advantage. We would respectfully adopt as correct that which was said by Gibbs J. in Patcorp [37] :

The presence of s. 260 makes it impossible to place upon other provisions of the Act a qualification which they do not express, for the purpose of inhibiting tax avoidance. See also Oakey Abattoir Pty. Ltd. v. Federal Commissioner of Taxation [38] ; W. & J. Investments Ltd. v. Federal Commissioner of Taxation [39] . 1. (1976) 140 C.L.R., at p. 292. 2. (1984) 55 A.L.R. 291; 15 A.T.R. 1059; 84 A.T.C. 4718. 3. (1987) 16 F.C.R. 314.

Notwithstanding the observations of Gibbs J. in Patcorp , it was argued on behalf of the Commissioner that the principle described by Lord Brightman in Furniss should be adopted in construction and application of s. 51 of the Act. By this we understand it to be argued that s. 51 should be construed so as to exclude therefrom a loss or outgoing that has been artificially contrived by a preordained series of transactions or a composite transaction into which there have been inserted steps which have no commercial purpose apart from the avoidance of a liability to tax. If that construction is to be reached as a matter of implication then, for the reasons already given, the presence of s. 260 precludes that approach. If it is advanced as a matter excluded by the plain meaning of s. 51, there is no occasion to resort to any new principle of construction. We should add that on ordinary principles of construction there is no warrant for limiting s. 51 by reference to the two quite specific ingredients identified by Lord Brightman in Furniss . We would thus reject the principle of fiscal nullity as one appropriate to be adopted in the construction of the Act generally, or one appropriate to be adopted in the construction and application of s. 51.

The question of the proper application of s. 51 of the Act necessitates an analysis of Curran [40] . There the facts were relevantly indistinguishable from the present case. A taxpayer who was also a shareholder purchased shares in a company which had, at the time of purchase, substantial capital profits which represented the proceeds of the realization of assets not acquired for the purpose of resale at a profit. Shortly after the purchase of the shares the capital profits were credited in payment of bonus shares issued to the shareholders. By reason of the crediting of the capital profits in payment of the bonus shares it was held (Barwick C.J., Menzies and Gibbs JJ., Stephen J. dissenting) that on sale of his shareholding in the company the taxpayer suffered a deductible loss. In the view of Barwick C.J. [41] , the taxpayer paid for the shares "by means of the credit given him by the company". A similar view was expressed by Menzies J. [42] . On this view the amount credited is or is to be treated as the cost of the shares issued - a matter made explicit by Barwick C.J. [43] - and is either to be treated as an outgoing or taken into account in calculating profit or loss. A different view was taken by Gibbs J. [44] who considered that, because the taxpayer treated the bonus shares as trading stock, the only basis upon which a true result could be ascertained was by bringing the bonus shares to account as though they had been bought.

1. (1974) 131 C.L.R. 409. 2. (1974) 131 C.L.R., at p. 416. 3. (1974) 131 C.L.R., at p. 417. 4. (1974) 131 C.L.R., at p. 415. 5. (1974) 131 C.L.R., at p. 422.

The notion of cost is not restricted to expenditure in the sense of the price actually paid for or an outgoing actually incurred in an acquisition. It is apt to include that forgone in exchange for that which was acquired. In a sense it is correct to say that a shareholder who has had credited to him in payment of bonus shares an amount which might otherwise have been distributed as dividends has forgone that dividend distribution. But that is not to say that it has been forgone in exchange for the bonus shares. A person who acquires shares in a company ordinarily thereby acquires a right to participate in any distribution which may thereafter be made to shareholders of the surplus assets of the company. To the extent that those surplus assets are distributed in one manner, distribution in any other manner is precluded. But that simply means that the shareholder's right, acquired by virtue of and at the time of acquisition of his original shares, has been realized in one manner rather than another. Nothing which he had has been forgone in exchange for something else.

It follows that we are unable to accept that, merely by reason of an amount being credited in payment of bonus shares, the amount so credited is or is properly to be regarded as the cost of the same. That being so, it also follows that the mere crediting of the amount in payment for bonus shares is not and is not to be treated as an outgoing within s. 51(1) of the Act or brought to account for purposes of calculating the taxpayer's profit or loss.

The basis adopted by Gibbs J. in Curran for bringing the amount credited in payment of bonus shares to account was the necessity so to do in order to reveal a true account of the taxpayer's situation. His Honour [45] treated the appropriation of bonus shares to trading stock as analogous to the appropriation of a gift of shares to trading stock. It must be accepted that in some situations there is a cost involved in the appropriation of bonus shares to trading stock in the same way as there is a cost involved in the appropriation of a gift to trading stock, and that a value must be ascribed on appropriation if the taxpayer's accounts are to reveal a "substantially correct reflex of the taxpayer's true income": see Commissioner of Taxes (S.A.) v. Executor Trustee and Agency Co. of South Australia Ltd. [46] . An obvious example of such a situation is where the original shares were not trading stock but the bonus shares are appropriated to trading stock. It is not here necessary to identify all situations in which it will be necessary to ascribe a value to bonus shares appropriated to trading stock. It is necessary only to consider the circumstances relevant to the present case.

1. (1974) 131 C.L.R., at p. 421. 2. (1938) 63 C.L.R. 108, at pp. 154-156.

The view of Gibbs J. in Curran was, and the position contended for by the appellant in the present case is, that a value should be ascribed even though the original shares were trading stock and were brought to account at cost of purchase, they having been purchased at a time when the company already owned the assets which were later distributed to shareholders in the form of dividends credited in payment of bonus shares. We do not accept that in such a situation it is necessary to ascribe a value to the bonus shares in order to determine the real profit and loss situation. Rather, the ascription of a value to the bonus shares necessarily reveals a false situation unless a corresponding reduction is simultaneously made in relation to the value, i.e. cost price, entered against the original shares.

As pointed out above, when a shareholder acquires shares in a company he ordinarily acquires the right to participate in any distribution which may thereafter be made to shareholders of the surplus assets of the company. Where, as in Curran and as in the present case, the surplus assets are held by the company at the time of the acquisition of shares, the purchase price paid for the shares will ordinarily reflect the fact that those assets are then held by the company. The cost to a shareholder, who thereafter participates by the issue of bonus shares in a distribution of those assets, is the consequential diminution in value of the original shares. Certainly that was so in the present case, as is evidenced by the very substantial difference between the purchase price and the sale of the original shares. The diminution in value of the original shares is the result of a transfer of value from them to the bonus shares and it is not enough merely to bring to account the notional value accorded to the bonus shares. Unless the reduction in value of the original shares is brought to account a false picture is created. That was the view taken by Stephen J. in Curran and it is correct.

In this case, as in Curran , counsel for the taxpayer advanced the supporting argument that, in a situation where the issue of bonus shares does not fall within s. 44(2)(b)(iii), a taxpayer would be assessable to income tax on the deemed dividend, without having the benefit of any offsetting expenditure, and that this would be productive of injustice. So, on a sale of bonus shares, a share trader would be assessable to the profit made on the sale of the shares without having the benefit of any allowance for offsetting expenditure against the issue of the shares, whilst being assessable also to income tax in respect of the dividend. In Curran Stephen J. rightly rejected "[t]his appeal to the alleged equity of the situation" by saying [47] that the purchase price of the original shares would take account of any liability to tax which the purchaser would have to bear if he were to obtain the benefit of the company's assets by way of payment of a dividend not falling within s. 44(2)(b)(iii). No doubt there are cases in which a company disappoints the expectations of the purchaser of shares by issuing bonus shares which do not fall, for some reason or other, within s. 44(2)(b)(iii). But the disappointed expectations of shareholders is not a ground for saying that Stephen J.'s view is inequitable in its results.

It follows that the reasoning adopted by the majority in Curran was defective. It remains to be considered whether that decision should continue to be regarded as correct and thus determinative of the present appeal in favour of the taxpayer.

There is no doubt that this Court has power to review and depart from its previous decisions. However, such a course is not lightly undertaken: see Queensland v. The Commonwealth [48] . Although there is, in the words of Dixon J. in Attorney-General (N.S.W.) v. Perpetual Trustee Co. (Ltd.) [49] , "no very definite rule as to the circumstances in which [the Court] will reconsider an earlier decision", in The Commonwealth v. Hospital Contribution Fund [50] , Gibbs C.J., with whom Stephen J. [1] and Aickin J. [2] agreed, specified four matters which in that case justified departure from earlier decisions. The first was that the earlier decisions did not rest upon a principle carefully worked out in a significant succession of cases. The second was a difference between the reasons of the justices constituting the majority in one of the earlier decisions. The third was that the earlier decisions had achieved no useful result but on the contrary had led to considerable inconvenience. The fourth was that the earlier decisions had not been independently acted on in a manner which militated against reconsideration, as had been the case in Queensland v. The Commonwealth [3] .

1. (1977) 139 C.L.R. 585, esp. at pp. 599, 602, 620. 2. (1952) 85 C.L.R. 237, at pp. 243-244. 3. (1982) 150 C.L.R. 49, at 56-58. 4. (1982) 150 C.L.R., at p. 59. 5. (1982) 150 C.L.R., at p. 66. 6. (1977) 139 C.L.R. 585.

The first consideration identified by Gibbs C.J. in Hospital Contribution Fund [4] is applicable to the decision in Curran [5] . It does not stand in a line of cases giving rise to recognized principle. The overruling of Curran would have no consequential effect on the authority of other dividend-stripping cases such as Rowdell Pty. Ltd. v. Federal Commissioner of Taxation [6] and Investment and Merchant Finance [7] . Each of those cases involved the payment to, and receipt by, shareholders of dividends in cash which the Act decreed were not to be brought to account as assessable income. In Curran the dividend was not paid to and received by the shareholder. In substance there was no more than a transfer of value from the original shares to the bonus shares. In our view, therefore, Curran stands alone.

1. (1982) 150 C.L.R. 49. 2. (1974) 131 C.L.R. 409. 3. (1963) 111 C.L.R. 106. 4. (1971) 125 C.L.R. 249.

The second consideration identified by Gibbs C.J. in Hospital Contribution Fund is also applicable to the decision in Curran . As we have seen, there was a difference in the reasoning of Barwick C.J. and Menzies J. on the one hand, and Gibbs J. on the other.

We do not think that the third consideration plays any part in the circumstances of the present case.

The fourth consideration is not present. As this case demonstrates, the decision in Curran has been acted upon by taxpayers as a basis for ordering their affairs. In addition, the Act has been amended with effect from June 1978 and makes quite specific provision as to the deductibility of amounts credited in payment of bonus shares allotted after 16 August 1977: s. 6BA. These are powerful reasons for following Curran in the present case. On the other hand, there are special considerations applicable to the doctrine of stare decisis in cases of statutory construction. Those considerations were adverted to in Babaniaris v. Lutony Fashions Pty. Ltd. [8] , although that case was not concerned with the question whether this Court should overrule its own earlier decision. In that case Mason J. said [9] :

The fundamental responsibility of a court when it interprets a statute is to give effect to the legislative intention as it is expressed in the statute. If an appellate court, particularly an ultimate appellate court, is convinced that a previous interpretation is plainly erroneous then it cannot allow previous error to stand in the way of declaring the true intent of the statute: Blair v. Curran [10] ; Platz v. Osborne [11] ; Concrete Constructions Pty. Ltd. v. Barnes [12] ; Lancashire & Yorkshire Railway Co. v. Mayor, &c., of Borough of Bury [13] . It is no part of a court's function to perpetuate error and to insist on an interpretation which, it is convinced, does not give effect to the legislative intention: Bourne v. Keane [14] . See also per Wilson and Dawson JJ. [15] . These comments are highlighted when the Court is called upon to consider an earlier decision in which there was a division of opinion among the justices of the Court constituting the majority and there was a persuasive dissent. This is not because such a decision is any the less a precedent; it is only that those circumstances point to a possibility that the decision may later be challenged as erroneous. But in the end the justification for not following an earlier decision construing a statute must be that in the view of the Court that earlier decision was wrong, that it was wrong in a significant respect, and that the Court should give effect to the intention of the Parliament. 1. (1987) 163 C.L.R. 1. 2. (1987) 163 C.L.R., at p. 13. 3. (1939) 62 C.L.R. 464, at pp. 495, 531. 4. (1943) 68 C.L.R. 133, at pp. 137, 146-147. 5. (1938) 61 C.L.R. 209, at p. 239. 6. (1889) 14 App. Cas. 417, at pp. 419-420. 7. [1919] A.C. 815, at p. 874. 8. (1987) 163 C.L.R., at p. 23.

The same considerations, in our view, apply with equal force if the issue is identified as one of the application of a statutory provision, rather than one of statutory construction in the strict sense.

Given the special considerations applicable in cases of statutory construction and application, and the other matters to which we have adverted in relation to the decision in Curran , in our view the Court ought not regard the decision in Curran as determinative of the present case, notwithstanding that the appellant taxpayer and other members of the Malindi partnership relied upon its authority as the basis for ordering their affairs.

Once the decision in Curran is put aside the issue becomes, in terms of s. 51(1) of the Act, whether there was a loss or outgoing incurred by Malindi referable to the issue of bonus shares in the five Compinge companies. The only expenditure incurred by Malindi was that incurred in the purchase of the original shares. The only cost associated with the acquisition of the bonus shares was the consequential diminution in value of the original shares. That cost is only properly brought to account if the corresponding reduction in the value of the original shares is also brought to account. That reduction not having been brought to account, there is no basis for ascribing a value to the bonus shares for the purpose of calculating the profit or loss referable to the Compinge transactions. The following statement by Stephen J. in Curran [16] is entirely apt to fit the present case:

If, then, the transaction resulting in the issue of bonus shares involved no receipt of income by the taxpayer but only a transfer of values there is no occasion for regarding the payment up of those shares as any payment by him, or as any outgoing or cost incurred by him. There was thus no loss or outgoing as shown in the books of Malindi and no share of such "loss" is deductible pursuant to s. 92(1) of the Act by the taxpayer in the calculation of her assessable income. 1. (1974) 131 C.L.R., at p. 426.

The Malindi Trading Co. ("Malindi") was formed on 14 April 1977 to carry on the business of "traders in shares, share rights and share options". There were twenty partners, each of whom contributed $5,000 to the capital of the partnership. Mrs. John, the appellant taxpayer, was one of them. Malindi's share trading activities, which Yeldham J. found to be "regular, extensive and systematic", were managed by a committee. In addition to transactions in the ordinary course of trading, there was a transaction involving shares in six companies in the Compinge group. The Compinge transaction was extraordinary in two respects. It was by far the largest financial transaction in which Malindi engaged, and entry into the Compinge transaction as a means of obtaining a tax advantage was the motive for the formation of Malindi. The promoters of Malindi saw the Compinge transaction as an indistinguishable copy of the transaction which, in Curran v. Federal Commissioner of Taxation [17] , resulted in the upholding of a taxpayer's claim for an allowable deduction in respect of the sum credited as paid up on bonus shares issued to and accepted by the taxpayer. In the Full Court of the Federal Court of Australia, the Compinge transaction was not regarded as part of Malindi's business of share trading and on that account Curran's Case was distinguished. The taxpayer failed in her claim to deduct from her assessable income her rateable proportion of the sum credited by the Compinge companies as paid up on the bonus shares issued to and accepted by Malindi.

The Compinge transaction consisted in six essential steps:

The purchase on 27 April 1977 by Malindi of one half of the issued share capital of each of six companies in the Compinge group for the total price of $2,894,250.96.

The registration by the respective companies in the Compinge group later on 27 April 1977 of transfers to Malindi of the shares purchased.

The passing of a special resolution by extraordinary general meetings of the respective companies in the Compinge group held on 28 April 1977 altering the articles of the company by inserting an additional article reading (in its material parts) as follows:

13. Any general meeting declaring a dividend may on the recommendation of the Board resolve that any moneys investments or other assets forming part of the undivided profits of the Company standing to the credit of a reserve account be capitalized and distributed amongst the members in accordance with their rights on the footing that they become entitled thereto as capital and that all or any part of such capitalized fund be applied on behalf of the members in paying up in full any unissued shares of the Company and that such unissued shares so fully paid be distributed accordingly amongst the members in the proportion in which they are entitled to receive dividends and be accepted by them in full satisfaction of their interests in the said capitalized sum.

The passing of a further special resolution by each of the extraordinary general meetings held on 28 April 1977 by which it was resolved: that [a specified sum] forming part of the undivided profits of the Company representing profits arising from the sale of assets not acquired for the purpose of re-sale at a profit and standing to the credit of the capital profits reserve account and [the specified sum] forming part of the undivided profits of the Company representing profits arising from the revaluation of assets not acquired for the purpose of re-sale at a profit and standing to the credit of the assets revaluation reserve account be capitalized and that the same be distributed and that the said capitalized sums be applied in paying up in full [a stated number] of the unissued ordinary shares of $2.00 each in the capital of the Company and that the same be distributed amongst the members aforesaid as fully paid ordinary shares of $2.00 each in satisfaction of the said capital sums and in proportion to the number of shares then held by them respectively.

And that the said shares shall rank in all respects equally with the existing ordinary shares of $2.00 as from 28th April, 1977.

The resolution, later on 28 April 1977, by the directors of each of the companies in the Compinge group to allot to the shareholders, including the Malindi partners, the number of the bonus shares to which they were respectively entitled under the special resolution of the extraordinary general meeting.

The sale on 29 April 1977 of the original and bonus shares held by Malindi in companies in the Compinge group to another party for the total price of $2,895,650.65.

Malindi thus made a small commercial profit. But Malindi's partnership return claimed, in reliance on Curran's Case [18] , that the Compinge transaction resulted in the partnership becoming entitled in its share trading account to an allowable deduction in the amount credited by the respective companies to the payment up of the capital represented by the bonus shares which it sold, the offsetting value of the bonus shares not being assessable income in virtue of the provisions of s. 44(2) of the Income Tax Assessment Act 1936 Cth as it stood at the end of the taxpayer's 1977 income year ("the Act"). It transpires that the profits applied to the payment up of the bonus shares issued by Compinge Pty Ltd., one of the companies in the Compinge group, was not paid wholly and exclusively out of profits which satisfied the requirements of s. 44(2) and the taxpayer's claim arising from the issue of bonus shares by that company has been discontinued. She seeks the benefit of Curran's Case in respect of the shares in the other five companies of the Compinge group which Malindi acquired and sold. As I understand the evidence, a share trading account in respect of these shares constructed in accordance with Curran's Case would read as follows: Price of Compinge group shares bought on 27 April $2,406,283.12 Amount credited to pay for bonus shares $2,098,806.00 $4,505,089.12 Proceeds of sale of shares bought on 27 April $4,652.09 Proceeds of sale of bonus shares $2,402,796.88 $2,407,448.97 Claimed loss on share trading $2,097,640.15 1. (1974) 131 C.L.R. 409.

The critical item in this account is "Amount credited to pay for bonus shares". Barwick C.J. in Curran's Case held that a share trader taxpayer was bound to "treat himself as having received income to the amount of the profits of the company applied to pay for the bonus shares and [to] be entitled to regard those shares as having cost him that amount of money" [19] . Similarly Menzies J. held that "a payment was made for those [bonus] shares out of a credit created in favour of the [taxpayer] by the declaration of the dividend" [20] . On their Honours' view, the amount credited to pay for bonus shares is an allowable deduction. Gibbs J. made a different analysis of the transaction. His Honour regarded the bonus shares acquired by the taxpayer to be trading stock to be brought into his share trading account "at an appropriate value as though they had been purchased which in the circumstances of the case must be their par value" [21] . For his Honour, the trading account would be properly constructed to reveal the true income of a trader if the original shares are taken in at cost and the bonus shares are taken in at their par value. It is necessary to examine each of these approaches which, as we shall see, proceed from different analyses of the operation of the Act upon the assessable income and allowable deductions of a share trader to whom bonus shares are allotted.

1. (1974) 131 C.L.R., at p. 415. 2. (1974) 131 C.L.R., at p. 417. 3. (1974) 131 C.L.R., at p. 421.

The capitalizing of profits and the distribution of bonus shares have been analysed in a series of cases under differing taxing statutes. When profits are capitalized, the assets which represent the profits and which have theretofore been available for distribution to shareholders as dividends cease to be available for distribution. The assets do not leave the company's hands. However, as bonus shares have to be paid for and as the company cannot pay for its own shares out of its own money, the amount applied to payment for bonus shares is treated as credited to the shareholders to whom the shares are allotted though the shareholders acquire no right to the credit anterior to or independent of the allotment of the bonus shares: Inland Revenue Commissioners v. Blott [22] ; James v. Federal Commissioner of Taxation [23] ; Commissioner of Taxes (Vict.) v. Nicholas [24] ; Nicholas v. Commissioner of Taxes (Vict.) [25] . Statute apart, a company which allots bonus shares to its shareholders distributes not income but capital: Blott's Case; Commissioner of Taxes (Vict.) v. Nicholas [26] . A succession of Income Tax Assessment Acts have sought to bring within the net of assessable income of a shareholder either the amount credited in payment for bonus shares or the face or paid-up value of bonus shares or both.

1. [1921] 2 A.C. 171, at pp. 187-188, 200. 2. (1924) 34 C.L.R. 404, at pp. 414-416, 418, 419. 3. (1938) 59 C.L.R. 230, at pp. 240, 242-243, 249. 4. (1940) 63 C.L.R. 191, at p. 199; [1940] A.C. 744, at p. 759. 5. (1938) 59 C.L.R., at pp. 240-241.

The Income Tax Assessment Act 1915 Cth included in the income of any person "dividends, interest, profits, or bonus credited or paid to any member, shareholder" etc. with an immaterial exception: s. 14(b). This provision was held to bring within the net of assessability the amount credited in payment for the bonus shares: James v. Federal Commissioner of Taxation [27] . In 1922 it was provided that the assessable income of a shareholder included the face value of shares distributed in consequence of capitalizing a company's assessable income: Income Tax Assessment Act 1922 Cth, s. 16(b)(ii)) and in 1924 that provision was amended so that the assessable income of a shareholder included the paid-up value of shares to the extent that that represented the capitalization of non-taxable or after-tax profits (Income Tax Assessment Act 1924 Cth, s. 4(h)): see Dickson v. Federal Commissioner of Taxation [28] . In 1936, the present statutory scheme was introduced. "Dividend" is defined by s. 6(1) to include:

(a) any distribution made by a company to any of its shareholders, whether in money or other property;

(b) any amount credited by a company to any of its shareholders as shareholders; and

(c) the paid-up value of shares issued by a company to any of its shareholders to the extent to which the paid-up value represents a capitalization of profits

subject to certain exceptions, presently immaterial. Section 44(1) in conjunction with the definition of "dividend" brings within a shareholder's assessable income amounts which would not otherwise be income of any kind: see per Dixon C.J. in Federal Commissioner of Taxation v. W. E. Fuller Pty. Ltd. [29] ; Gibb v. Federal Commissioner of Taxation [30] . But "dividends" which are not income according to ordinary concepts do not all become assessable income; only those which fall within s. 44(1) of the Act. Those which fall within s. 44(2) are not assessable income. In the present case although the "amount credited" or "the paid-up value" of bonus shares in the five Compinge companies is a "dividend", neither amount is a dividend falling within s. 44(1). Neither amount is income by ordinary concepts and neither amount becomes assessable income. 1. (1924) 34 C.L.R., at pp. 416-417, 418, 419. 2. (1940) 62 C.L.R. 687, at p. 714. 3. (1959) 101 C.L.R. 403, at p. 409. 4. (1966) 118 C.L.R. 628, at pp. 635, 638.

It is one thing to describe as a dividend an amount which, but for s. 6(1), is not a dividend; it is another to treat the amount as though it is income actually received by or made available for disposition by the shareholder. Yet the proposition underlying the judgments of Barwick C.J. and Menzies J. in Curran's Case [31] , is that the shareholder is entitled to treat the amount credited by the company as though it had been paid by the shareholder as the purchase price of the bonus shares and that that payment must be taken into account in ascertaining the taxable income of the shareholder derived from share trading. With great respect, I am unable to accept that proposition. The fact is that the shareholder in Curran's Case did not incur expenditure (other than the original purchase price) in acquiring his bonus shares. As Gibbs J. pointed out [32] , the shareholder "was never entitled to receive in cash his proportion of the capitalized profits". It is only upon and by reason of the company's capitalizing of assets theretofore available for distribution that a shareholder acquires any entitlement to a benefit from the company and that benefit is not a right in respect of the assets capitalized but a right to the allotment of shares representing the increase in capital. The only dividend to which a shareholder thus becomes entitled is a dividend to be satisfied by the issue of shares. The shareholder's proportionate interest in the company's total assets remains unchanged, but some revenue assets become capital assets and the enlargement of capital is represented by a corresponding increase in issued shares. As a shareholder incurs no further expenditure in acquiring bonus shares, there is no reason to treat the amount credited in payment of the bonus shares as an allowable deduction. The only provision to which a claim for allowance of a deduction might be referred is s. 51 and that section has no application when there is no loss or outgoing in fact incurred by a taxpayer. With respect, I agree with the reasons of Stephen J. in dissent in Curran's Case [33] , to which the reasoning of Barwick C.J. and Menzies J. provides for me no satisfying answer. A proposition similar to that accepted by their Honours had been advanced and rejected by a unanimous court in McRae v. Federal Commissioner of Taxation [34] , in a case where the taxpayer's assessable income was said to include profit arising from the carrying out of a profit-making scheme.

1. (1974) 131 C.L.R. 409. 2. (1974) 131 C.L.R., at p. 420. 3. (1974) 131 C.L.R., at pp. 424-426. 4. (1969) 121 C.L.R. 266, at pp. 271-272.

The judgment of Gibbs J. in Curran's Case does not proceed on the footing that bonus shares are paid for by the shareholder. His Honour, seeking to construct a trading account which would give a substantially correct reflex of the taxpayer's true income [35] , thought it necessary to bring in the bonus shares at an appropriate value. He said [36] :

The appellant's trading account would not reveal the real situation if it brought in at no value shares which were in fact valuable, because the amount which it would then show as income would include the value which the shares possessed when they were first brought into stock. The case may be compared with that of a trader who takes into his trading stock articles which he received by way of gift or under a bequest. Cases of that kind not falling within s. 36 of the Act may be rare, but they can be envisaged. In such a case an account will not reveal the true result of the trading unless those articles are brought in at an appropriate value, e.g., market selling value. If the account showed that the articles cost nothing, the result would be to increase the amount of the trader's profit or decrease the amount of his loss by the value of the gift or bequest and in effect to make the trader pay income tax on the gift or bequest. The only practicable way of reaching a true result in a case of that kind would be to bring the articles into the account at an appropriate value as though they had been purchased, and there is no provision in the Act that would require any different approach. For the purpose of ascertaining taxable income, the trading account of a taxpayer who is carrying on a business must contain only items of assessable income and items of allowable deductions as those terms are defined in the Act. There are some provisions of the Act, notably s. 26(a) as it then stood, which require the ascertainment of a profit as a step towards determining assessable income. But, as Dixon J. pointed out in New Zealand Flax Investments Ltd. v. Federal Commissioner of Taxation [37] , in an observation that applies as well to the 1936 Act as to the 1922 Act, "generally speaking, the gross receipts on account of revenue must be taken into the assessable income and therefrom the deductions allowed by the Act must be made and no others". In the ordinary case, the commercial profit which emerges from the carrying on of a business corresponds with the difference between assessable income derived from the business and allowable deductions incurred in carrying it on, so that it produces no distortion of the taxpayer's true liability to treat the commercial profit as taxable income. But it is inconsistent with the scheme of the Act to construct an account containing unallowable deductions and to take the resultant profit or loss as a measure of the taxpayer's liability. A value of trading stock "as though [it] had been purchased" is not an allowable deduction. 1. (1974) 131 C.L.R., at p. 419. 2. (1974) 131 C.L.R., at p. 421. 3. (1938) 61 C.L.R. 179, at p. 206.

When a taxpayer is carrying on a business of share trading, the sale price of shares sold out of his trading stock is assessable income and the purchase price he has paid is an allowable deduction. If such a taxpayer has stock on hand at the beginning and at the end of the year of income or at either of those times, s. 28 directs the value of the stock to be taken into account and provides for the difference between the value at the beginning and the value at the end of the year to be assessable income or an allowable deduction, as the case may be. Section 31 gives the taxpayer a choice as to the basis of valuation: cost price, market selling value or replacement cost. Apart from the provisions of Subdiv. B, Div. 2, Pt III of the Act - "Trading Stock" - there is nothing in the Act which either makes the value of a trader's trading stock assessable income or allows a deduction for its value. If s. 28 applies and cost price is the basis adopted for the purposes of that section, bonus shares, costing nothing, are brought in at nil value; if market selling value is the basis adopted, bonus shares are brought in at that value. There is no warrant for bringing into a trading account the value of bonus shares except in conformity with Subdiv. B and then only at a value fixed in accordance with one or other of the prescribed bases - not at par value. Accounting principle or practice cannot prevail over the provisions of Subdiv. B: per Mason J. in Federal Commissioner of Taxation v. St. Hubert's Island Pty. Ltd. (In liq.) [38] .

The object which Gibbs J. had in mind in bringing into the taxpayer's trading account the par value of bonus shares was the elimination of what his Honour saw as an inappropriate tax liability. His Honour envisaged a possible case where an item of trading stock, which had been acquired by gift otherwise than under s. 36, was sold and the trader's assessable income was increased by the proceeds of sale. Having regard to the definition of "trading stock", it is by no means clear that a tax liability arising from the sale of trading stock acquired without cost to the trader would be inappropriate. A supplier of trading stock who earns commercial goodwill by gratuitously providing a bonus item among the stock supplied can hardly be the source of a tax-free profit for the trader. However that may be, the Act contains no provision which would permit the value of the gift to be set off against the receipt of the sale price to arrive at taxable income derived from the carrying on of the business.

The method which must be adopted to ascertain the taxable income derived from the carrying on of a business is not necessarily the method which must be adopted to ascertain whether the assessable income of a person who has carried on or carried out a profit-making undertaking or scheme includes a profit arising from the undertaking or scheme. That question did not arise in Curran's Case [39] and it does not arise here. It may be that when an asset is realized in the carrying out of a profit-making undertaking or scheme, the profit is measured by taking into account the value of the asset at the time when the undertaking or scheme began or when the asset was committed to the undertaking or scheme: see Official Receiver v. Federal Commissioner of Taxation (Fox's Case) [40] . However, it should be noted that a submission that a profit made in carrying out a profit-making scheme should be ascertained by omitting the proceeds of sale of bonus shares was rejected in McRae v. Federal Commissioner of Taxation [41] .

1. (1974) 131 C.L.R. 409. 2. (1956) 96 C.L.R. 370. 3. (1969) 121 C.L.R. 266.

There is said to be an anomaly in leaving the value of bonus shares out of account in calculating the taxable income derived from a share trading business. Bonus shares which are trading stock and which are not paid for wholly and exclusively out of the profits mentioned in s. 44(2) attract the operation of s. 44(1), so that the par value of such bonus shares is assessable income. If those shares are sold, so the argument runs, the receipt of the purchase price is added to the trader's assessable income; if they are held at the end of the year of income, their value (ascertained under s. 31) is taken into account in calculating the trader's assessable income pursuant to s. 28. An anomaly is said to arise if tax is imposed on both the par value of the bonus shares and the sale price or end-of-year value. To avoid the supposed anomaly, counsel for the Commissioner submitted that, where the par value of bonus shares is assessable income, it is right to allow the amount credited in payment for them to be deducted. This would doubtless remove the supposed anomaly but I see no warrant for holding that the amount credited is a loss or outgoing when the dividend falls under s. 44(1) but not where it falls under s. 44(2). In neither case is there a loss or outgoing. Of course, as Stephen J. pointed out in Curran's Case, the supposed anomaly is theoretical rather than practical. Even if there be an anomaly, it is not appropriate to postulate a doctrine unsupported by the Act to avoid it. It is not necessary to demonstrate that the true construction of the Act does not produce anomalies. It would be surprising, in so complex a piece of legislation, to find that no anomalies were produced. If there be an anomaly, it arises because s. 44(1) brings into the net of assessability an amount - the par value of bonus shares - which is money's worth but not money and the sale of the bonus shares converts the money's worth into money. The source of the anomaly may indicate a solution, if there be a solution.

By definition (s. 6(1)), "assessable income" means "all the amounts which under the provisions of this Act are included in the assessable income". An amount may be included in assessable income under more than one provision of the Act, but assessable income is not calculated according to the number of provisions which include the amount in assessable income. If an item is brought into assessable income as money's worth by one provision and as money by another, it may be that, upon a true construction of the Act, only one of those amounts is included - the greater if there be a difference. That proposition depends, of course, on identification of the money (the proceeds of sale in the present context) with the money's worth (the par value of bonus shares). The same approach might be adopted with respect to the paid-up value of bonus shares at the time of their issue and the value attributed to them for the purposes of s. 28 if they should be on hand at the end of the income year. I would not decide these questions now, for they were not canvassed in argument and their resolution does no more than avoid a theoretical anomaly which might exist if Curran's Case is not followed. That is not a consideration which stands in the way of a correct construction of the Act.

For these reasons, I am respectfully unable to agree with the reasons for judgment of Gibbs J. in Curran's Case.

Should Curran's Case be followed even though, in my respectful opinion, it was wrongly decided? There are powerful considerations against overruling Curran's Case which should be mentioned. First, many taxpayers - the partners in Malindi amongst them - have acted in reliance upon the correctness of that decision. However, if Curran's Case is now overruled, the Commissioner may not be able to reopen assessments to tax which were issued in reliance on that decision provided the taxpayer has made a full and true disclosure of all material facts: see s. 170(3) of the Act and as amended in 1986. Never the less the possibility of affecting some tax liabilities arising from transactions entered into in reliance on Curran's Case cannot be ruled out. If the case were overruled prospectively that possibility would be excluded. If this Court has jurisdiction to overrule past decisions prospectively that jurisdiction has not hitherto been exercised: the subject was mentioned by Mason J. in Babaniaris v. Lutony Fashions Pty. Ltd. [42] and by Toohey J. in Trident General Insurance Co. Ltd. v. McNiece Bros. Pty. Ltd. [43] . There was no argument upon that question in this case and it would not be right to assume the existence of such a jurisdiction. Next, the authority of Curran's Case was conceded in London Australia Investment Co. Ltd. v. Federal Commissioner of Taxation [44] , though it has not otherwise been adopted as a ground for decision in any case. It has been referred to, but distinguished, in similar cases in other courts: see, e.g., Insomnia (No. 2) Pty. Ltd. v. Commissioner of Taxation [45] and on appeal to the Full Federal Court (unreported, 17 February 1987). Again, the effect of the decision has been modified by the Parliament which, four years after the decision, enacted s. 6BA (see Income Tax Assessment Amendment Act 1978 Cth, s. 3) with effect from 16 August 1977. Section 6BA has been amended by a succession of later Acts. Acknowledging that this Court has not adopted any very definite rule to govern the exercise of its power to overrule earlier decisions, the considerations mentioned make the overruling of Curran's Case an option with undesirable consequences.

1. (1987) 163 C.L.R. 1, at p. 15. 2. (1988) 165 C.L.R. 107, at pp. 170-172. 3. (1977) 138 C.L.R. 106, at pp. 119, 132-133. 4. (1986) 84 F.L.R. 278.

The fact that Curran's Case was a majority decision reached on differing grounds and over a cogent dissenting judgment is not, in my opinion, something which diminishes its authority or denies weight to the considerations in favour of following Curran's Case. The authority of this Court's decisions and the reliance which can and must be placed upon them are not dependent on the constitution of the Court or on the cogency of dissenting reasons: see Baker v. Campbell [46] . If it were otherwise, the responsibility which rests on this Court to declare the law for future application would be lightened and the authority of the judgments of this Court would be sapped by speculation about their influence in future cases. That does not mean that a critical appreciation of the persuasiveness of judgments delivered in this Court by justices past or present may not affect the development of the law either here or elsewhere, but a decision of this Court has authority as a precedent precisely because it is the Court's decision, not because it is the decision of the participating justices or a majority of them. The overruling of a decision is in a sense a diminution of the Court's authority as well as an acknowledgment of Justices' past error. An overruling must therefore be an exceptional course to adopt.

However, when an overruling is necessary in order that the Court perform and be seen to perform its constitutional function of interpreting and applying the law enacted by the Parliament, that course must be adopted. Precedent is the best evidence of the law as enacted but it is not the enacted law. When the interpretation of a statute is dubious, it is the function of the Court to resolve the doubt and by its decision to declare what the Parliament has enacted. If a subsequent Court prefers another construction of the statute that mere preference is not sufficient to warrant an overruling of the prior decision: see Babaniaris v. Lutony Fashions Pty. Ltd. [47] . But if the later Court is satisfied that the interpretation placed on the statute by the earlier decision was erroneous in the sense that it is opposed to the undoubted intention of the Parliament as enacted in the statute, it cannot adhere to the earlier error and refuse to apply the law as enacted unless the Parliament has itself accepted or adopted the earlier error and enacted a further law on the assumption that the earlier decision was correct. If there are instances where the earlier error is de minimis and where the earlier decision can be allowed to stand without significant failure to apply the enacted law, this is not one of them.

Curran's Case, in my respectful opinion, does not reveal a mere error in the interpretation of a doubtful statutory provision. The error, as I perceive it to be, arises from the introduction of a concept which is not to be found in the Act and which, being introduced, profoundly alters the intended operation of the Act. The concept of a notional expenditure incurred by the shareholder and the concept (which has much the same effect) of deducting the par value of bonus shares from the assessable income in a share trading account strike at the integrity of the statutory scheme for ascertaining taxable income derived from the carrying on of a business; i.e., assessable income less allowable deductions: see the definition of taxable income in s. 6(1), and s. 17. Once that view is formed this Court has no option but to refuse to follow Curran's Case, though that course involves some undesirable consequences.

Section 6BA does not assume the correctness of Curran's Case. To the contrary, it abrogates the concept of a notional expenditure which Curran's Case introduced (see sub-s. (2)) and it modifies the valuation provision (s. 31(1)) for shares that are articles of trading stock: sub-s. (3). The overruling of Curran's Case and the statutory abrogation of the Curran concept operate consistently. Though the abrogation is qualified, the qualifications prescribe the circumstances in which sub-s. (2) does not apply. There is no statutory affirmation of the concept abrogated by sub-s. (2).

Curran's Case being overruled, it is not necessary to consider the grounds on which the Full Court of the Federal Court sought to distinguish it. The amount credited as paid up on the bonus shares issued by the companies in the Compinge group was not an allowable deduction. Section 92 of the Act did not confer on the taxpayer an entitlement to a share in the claimed deduction.