Kolotex Hosiery (Australia) Pty Ltd v Commissioner of Taxation

Kolotex Hosiery (Australia) Pty Ltd v Commissioner of Taxation - [1975] HCA 5 - HCA 1975 case summary — Zoe

[20]

In the first place, what is the nature of the controlling interest to which these sections refer as part of the legislative insistence on a certain measure of continuity of control of the corporate taxpayer seeking to deduct prior losses from current income? In my opinion, the nature of the control with which the legislature has concerned itself is control by the exercise of voting power at a general meeting of shareholders. Thus the controlling interest required of the holding company by s. 80C (1) is a shareholding interest which, whether or not directly held in the taxpayer, enables control by the holding company of what is to occur at a general meeting of shareholders of the taxpayer. It is of course possible that a company may be controlled otherwise than by the exercise of voting power but, in my opinion, it is the control by means of voting power with which s. 80A and s. 80C are concerned. The control which the holding company must have in order to satisfy s. 80C (1) is to be by means of its interest in the subsidiary. That interest, it seems to me, is to be evidenced by and to inhere in the shareholding of the subsidiary controlled either directly or indirectly by the holding company through shareholding in intervening subsidiaries. Whilst a controlling interest in a company may not necessarily be manifested by the holding of shares in the controlled company and may be exerted through shareholding in intervening subsidiaries, it is in my opinion by means of shareholding that the interest is established. The control or controlling interest accepted in Mendes v. Commissioner of Probate Duties (Vict.) [6] , was a control or controlling interest by and inhering in shareholding. In concluding that that shareholding need not be held in the controlled company it was not said in that case that there can be a controlling interest divorced from and not exerciseable through shareholding and the voting power which it carries. It is, in my opinion, such an interest of which s. 80C (1) speaks. The inquiry whether any company had a controlling interest in the taxpayer at any time must be determined by examination of the control of a general meeting by the voting of shareholders of that company. Thus, if Mr. Howie's voting rights are exercisable without his being a shareholder, I do not think he could, in any case, be regarded as relevantly having himself a controlling interest in H. & J. or the taxpayer.

[49]

To fulfil the condition stated in s. 80A, Kolotex, being a private company, had to satisfy the Commissioner that at all times during the year of income shares in Kolotex carrying the specified rights (and particularly "the right to exercise not less than two-fifths of the voting power in the company") were "beneficially owned by persons who, at all times during the year in which the loss was incurred, beneficially owned shares" in Kolotex carrying rights of those kinds. Under s. 80C if in any year during which Kolotex incurred a loss Kolotex was a "subsidiary company" the loss will only be an allowable deduction if the Commissioner was satisfied that at all times during the year of income the "holding company" had a "controlling interest" in Kolotex and shares in the holding company carrying between them the rights specified (including the right to exercise not less than two-fifths of the voting power) were beneficially owned by persons who, at all times during the year in which the loss was incurred, beneficially owned shares in the holding company carrying rights of those kinds. Neither section makes the entitlement to a deduction depend upon the existence of a state of facts or of mixed law and fact, found by the court to which an appeal is brought. The condition is not fulfilled unless the Commissioner is satisfied of the requisite matters. However, a decision by the Commissioner that he is not satisfied is open to review. In the present case it was submitted on behalf of Kolotex that it should be held that the Commissioner was in fact satisfied of the matters stated in ss. 80A and 80C and alternatively that if he did not form the necessary satisfaction his decision should be reviewed. I am very doubtful whether the first of these submissions is open, having regard to s. 190 (a) of the Act. The notice of objection appears to have been drawn on the basis that the conditions laid down in ss. 80A and 80C are satisfied if the requisite matters exist in fact, whether or not the Commissioner was satisfied of their existence. However, it is unnecessary to dispose of the first argument on this narrow ground.

[74]

I find it impossible to accept these contentions. The conditions stated in ss. 80A and 80C are not fulfilled unless the Commissioner is actually satisfied. As Windeyer J. said in Federal Commissioner of Taxation v. Brian Hatch Timber Co. (Sales) Pty. Ltd. [7] : "Was the Commissioner duly satisfied in fact? That is the essential question; not was his dissatisfaction justified." Once the Commissioner is in fact satisfied he is bound to allow the deduction, although of course only to the extent allowed by the provisions of s. 80. If the Commissioner has in fact been satisfied he cannot subsequently refuse a deduction on the ground that he ought not to have been satisfied, unless in the circumstances he is entitled to amend the assessment under s. 170 of the Act. By the same reasoning, however, it cannot be said that if the Commissioner has not in fact been satisfied but ought to have been satisfied he is bound to allow the deduction, although such a case may be one in which the court on appeal will hold that the Commissioner's conclusion should be reviewed. Unless it is sought to review the conclusion of the Commissioner that he is not satisfied, it is not enough to say that he ought to have been satisfied, or that he would have been satisfied if he had not fallen into error. The court on appeal cannot purge the Commissioner's reasoning of its errors and then attribute to him a satisfaction which in fact he lacked. Moreover, when the Commissioner has been satisfied of the matters stated in s. 80C (1) (a) but has refused a deduction because he has not been satisfied of the matters stated in s. 80C (1) (b), he is not estopped thereafter from changing his mind and deciding that he is no longer satisfied of the former matters. Once the Commisssioner has been satisfied of all the matters mentioned in s. 80A or s. 80C, the condition of the section has been fulfilled and the obstacle which it raises to the allowance of a deduction has been overcome. However, if the Commissioner has failed to reach complete satisfaction as to all the requisite matters and his decision becomes open to review, he is not precluded from saying that he was wrong in expressing satisfaction as to some of the matters mentioned in the section.

[79]

Before I turn to consider further the meaning of ss. 80A and 80C, and whether their conditions were satisfied in the present case, I must discuss the rights of Mr. Howie in relation to the various companies, and particularly his right to exercise voting power, for it is upon that question that the decision of the appeal ultimately turns. Before 7th February 1962 Mr. Howie's shares in Kolotex, Levi & Hill and H. & J. carried no special voting rights. After that date, art. 17 of the articles of each of those companies purported to give Mr. Howie when present at any general meeting of the company "the right to as many votes in the case of an ordinary resolution as shall constitute a majority of the votes given on such resolution and in the case of an extraordinary or special resolution as shall constitute a three-fourths majority ". Before us two arguments were advanced in relation to this article that had not been canvassed before Mason J. First it was put that on its proper construction the article did not give Mr. Howie the right to enough votes to carry an ordinary or special resolution as the case may be, but only the right to a majority or a three-fourths majority of the total number of votes cast by the other shareholders. For example, if the other shareholders cast ten votes on an ordinary resolution, Mr. Howie would have the right to six votes, which would not be enough to decide the issue if the ten votes were all cast in opposition to his. This is not in my opinion the correct construction of the article, and would defeat its obvious purpose of giving Mr. Howie the power to carry or defeat any resolution. The effect of the article, if valid, is that on a resolution all votes, other than those to which Mr. Howie is given a right, must be counted and Mr. Howie must then be given so many votes as will give him a majority of all the votes cast, including his own, if the resolution is an ordinary one, and a three-fourths majority of all the votes if it is extraordinary or special.

[80]

The second argument submitted on behalf of Kolotex was that art. 17 conferred a voting right on Mr. Howie only in his capacity as a shareholder of the company. I agree that if Mr. Howie had not been a shareholder, he would have had no right to vote. As at present advised I am very doubtful whether a company could by amendment of its articles confer upon a person who is not a member a right to vote. Such an article would seem to me to be at variance with the provisions of the Companies Act, 1961 N.S.W. (as amended). Section 144 of that Act plainly enough indicates that only a member may effectively vote on a special resolution. There is no similar express provision in relation to an ordinary resolution, but the whole tenor of the Act, so far as it deals with notice of and voting at meetings, strongly suggests that any general meeting of a company is a meeting of its members, at which people who are not members or their proxies have no right to attend and vote. Moreover, it might be thought that the general principle that the articles do not constitute a contract between the company and an outsider would be an obstacle in the way of a non-member who sought to enforce an article which purported to give him a right to vote, assuming it to be otherwise valid. However, it seems to have been accepted, by the authors of textbooks of high authority, that the articles of a company may validly confer on non-members, or at least on such as are debenture holders, the right of voting, although their votes could not be taken into account for the purposes of a special resolution: Palmer's Company Precedents, 17th ed. (1956) Pt. 1, p. 498; Gore-Browne, Handbook on Joint Stock Companies, 41st ed. (1952), p. 432; Gower, Modern Company Law, 3rd ed. (1969), p. 355. The question does not seem to have been the subject of discussion in any reported case, and it is not necessary for present purposes to express a concluded view upon it. In fact Mr. Howie was a shareholder in all three companies when the article was amended. The article gives him the right to vote "when present in person or by proxy or attorney at any general meeting", and he can exercise that right "on a show of hands and on a poll". All these words suggest that the right conferred is one exercisable by a member of the company. It is doubtful whether he could attend a meeting without being a shareholder, and even more doubtful whether he could appoint a proxy if he were not a member of the company - see s. 141 of the Companies Act, 1961 N.S.W. (as amended). The right of voting given by art. 17 is intended to be exercisable on a special resolution as well as on an ordinary resolution, but as I have already pointed out, s. 144 of the Companies Act has the effect that the votes of a non-member are not counted to make up the three-fourths majority necessary for the purposes of a special resolution. These circumstances are sufficient to show that art. 17 intended to confer the right to vote upon Mr. Howie in his capacity as a shareholder. But even if that had not been the case, the fact that he was a member was enough to make the article capable of valid operation. If it be assumed that the right to vote in a company may not validly be conferred upon a person who is not a member, it does not follow that the articles, to be valid, must reveal an intention to confer the right only on a member; on that assumption the right may be exercised if the person upon whom it is conferred is in fact a member but not otherwise.

[83]

Two questions of construction then arise. The first is what is the meaning of the words "the voting power in the company" which appear in s. 80A (1) (c) and s. 80C (1) (b) (i). On behalf of Kolotex it was submitted that these words refer only to the voting power of the members of the company, or (what is not the same thing) the voting power attached to shares. I have already expressed a doubt as to whether the voting power of a company could ever be found to reside outside its members, and am therefore disposed to agree that "the voting power in the company" is the voting power exercisable by members of the company, but that does not assist Kolotex, since Mr. Howie was a member of each company. However, I am unable to agree that the words are restricted in their meaning to voting power attached to or carried by shares. The words are quite general, and in their natural meaning would include all voting power that may be exercised in the company, however conferred. Indeed the change in language in the sections supports this view; first, reference is made to shares carrying rights, but then the sections go on to speak, not of the voting power carried by all of the shares in the company, but of the voting power in the company. It was suggested that the words "the voting power in the company" in ss. 80A and 80C were intended to bear a similar meaning to the words "a voting interest in a company" used in s. 80D, which, as the definition in s. 80D (5) shows, were intended to refer to a so-called interest possessed by the beneficial owner of shares carrying voting power. In my respectful opinion, the special definition, limited to the purposes of s. 80D, by which a particular meaning is given to the phrase "a voting interest in a company" in that section, throws no light on the meaning of the different words, "the voting power in the company", used in other sections. I conclude, therefore, that Mr. Howie, who had a right to vote at meetings of the company, and had that right because he was a member of the company, had a right to exercise a proportion of "the voting power of the company" within the meaning of those words in ss. 80A and 80C.

[86]

The Commissioner could only properly be satisfied, in accordance with s. 80C (1) (a), in respect of the years 1960 and 1961, if H. & J., the holding company which had a controlling interest in Kolotex at some time during both of those years of loss, had a controlling interest in Kolotex at all times during the year of income. I agree that a company which was the holding company of a subsidiary company during a year of loss within s. 80C does not cease to be "the holding company" within s. 80C (1) (a) simply because during the year of income it has ceased to be true that no other company has a controlling interest in the holding company. The fact that during the year of income Moomba had a controlling interest in H. & J. did not in itself prevent H. & J. from still being the holding company of Kolotex within s. 80C (1) (a). However, H. & J. did not have a controlling interest in Kolotex during the year of income, because Mr. Howie then had the controlling interest in Kolotex by virtue of art. 17 of the articles of that company. For the same reason Moomba, which was the holding company having a controlling interest in Kolotex during part of 1961 and part of 1962, did not have a controlling interest in 1967. Therefore the Commissioner could not be satisfied of the matter stated in s. 80C (1) (a) in respect of the claim to deduct the losses incurred during 1960, 1961 and 1962, and the losses incurred in those years are not deductible. Further, in respect of the claim to deduct the losses incurred in 1960 and 1961, the Commissioner could not have been satisfied as to the matters stated in s. 80C (1) (b), because, in spite of the attempt to satisfy that paragraph by the reintroduction into H. & J. of the six former shareholders, it is not possible to say that at all times during the year of income shares in H. & J. carrying the right to exercise not less than two-fifths of the voting power of that company were beneficially owned by persons who at all times during the years of loss beneficially owned shares in the company carrying that right. From 7th February 1962 until after 30th June 1967 no one but Mr. Howie had two-fifths or more of the voting power in H. & J. If it were necessary, he could command three-quarters of the total voting power, which of course meant that the shares of the other shareholders between them did not carry the right to exercise more than one-quarter of the voting power.

[97]

No doubt, attainment by the Commissioner of a state of satisfaction or his failure to attain that state of mind must, if it is to have any statutory significance, occur before notice of assessment issues to the taxpayer; I would regard as irrelevant to the correctness of the original assessment any state of mind existing after that time. But the present is, in any event, not such a case. Both before and after issue of the notice of assessment the Commissioner has remained unsatisfied. All that has happened is that he has discovered, as time has passed, what he regards as additional and alternative grounds for his failure to be satisfied and the significance of these new grounds is only this: before the court may review the Commissioner's failure to be satisfied it must detect some error of law affecting that conclusion or some other of the grounds for interference referred to by Dixon J. in Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation [16] . Here such grounds exist, they are provided by the errors affecting the Commissioner's course of reasoning which led him to his conclusion. But having entered upon a review of the Commissioner's conclusion the court must form its own opinion of what should have been the Commissioner's conclusion and must do so unaffected not only by those errors which led the Commissioner to his original conclusion unfavourable to the taxpayer but also unaffected by any other errors or oversights, whether or not favourable to the taxpayer, which may have affected the Commissioner's original conclusion. The court will therefore necessarily have to consider any new grounds urged by the Commissioner as justifying the assessment, not because they may support the Commissioner's already vitiated state of dissatisfaction of mind, but rather because they may assist the court in determining whether either a contrary conclusion should be substituted for the Commissioner's original failure to be satisfied, founded as it was upon reviewable error, the appeal therefore being allowed, or whether, on the contrary, the assessment should stand unaffected and the appeal be dismissed because, once all errors and oversights are rectified, the case is not seen to be one in which the Commissioner should have been satisfied in terms of the Act.

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