Re Commissioner of Taxation of the Commonwealth of Australia v Graham Max Swift; Cavell Lorraine Swift and Henry Claude Swift [1989] FCA 413; 20 Atr 1434 - FCA 1989 case summary — Zoe

[28]

"APPLICATION OF SECTION 260 IN PRE-TAX COMPANY

PROFIT STRIPPING CASES

This advice has been prepared for the information

of taxpayers who were vendor-shareholders of

companies stripped of pre-tax profits. On the

basis of legal advice received following recent

High Court decisions, vendor-shareholders are being

assessed on the gross proceeds from the sale of

their shares in reliance on section 260 of the

Income tax (sic) Assessment Act.

Section 260 applies to make void as against the

Commissioner a contract, agreement or arrangement

made or entered into on or before 27 May 1981 to

the extent to which it has or purports to have the

effect of altering the incidence of income tax or

of relieving any person from liability to pay any

income tax.

The effect of section 260, in the context of

pre-tax company profit stripping, is that the

purported sale of the company shares is void as

against the Commissioner so that the gross proceeds

from the sale of shares are assessable as a

dividend. Notices of assessments and adjustment

sheets will reflect the inclusion of a dividend in

assessable income. Adjustment sheets will detail

the calculation of that dividend.

APPLICATION OF SECTION 260 AND TAXATION (UNPAID

COMPANY TAX) ASSESSMENT ACT

In many instances vendor-shareholders will have,

under the Taxation (Unpaid Company Tax) Assessment

Act, made tax payments reflective of the stripped

companies' liabilities for primary company tax and

undistributed profits tax (Division 7). The

section 260 assessments will call on

vendor-shareholders to pay tax on company profits

effectively distributed to them in the course of

the whole arrangement, without adjustment for

payments made under the Taxation (Unpaid Company

Tax) legislation. This aspect has previously been

brought to the Government's attention and it has

indicated that, as necessary, any "doubling up"

elements that might arise as a result of the

application of section 260 will be eliminated.

RECOVERY OF OUTSTANDING TAX

There are a number of cases awaiting hearing by the

Courts later this year which involve the issue of

assessments to vendor-shareholders of pre-tax

profit strip companies in reliance of section 260.

Pending the outcome of those cases, it is not

proposed to take legal recovery action in respect

of assessments that are now issuing. However,

additional tax for late payment will accrue from

the due date of each assessment."

[41]

"While this ruling has been prepared with former

owners of public companies in mind, the principles

that it expresses are also applicable in respect of

private companies."

"8. Apart from 'under $100' cases, the legislation

does not specify the circumstances in which the

particular subsections will apply. However, the

broad principle that emerges from the legislation

as a whole is that a person should be granted

relief where that person and closely associated

persons have not in any way benefited from the

evasion giving rise to the recoupment liability in

question. This will mean that the circumstances of

the particular cases will need to be examined to

ascertain whether a benefit was enjoyed.

9. The situations in which it may be possible to

establish that no benefit was enjoyed will vary

considerably. It is not practicable, therefore, to

lay down hard and fast rules as to the various

circumstances in which the relieving power will be

exercised. However, the examples outlined below

are illustrative of situations where the granting

of relief could be expected.

Example 1

A person acquired shares in a public company

through a stock exchange. Subsequently some of

the subsidiaries of that public company were

stripped of pre-tax profits. However, no

dividends or other benefits were thereafter

received from the company and the shares are now

worthless.

Example 2

A person, who held shares in a public company at

the time some of its subsidiaries were stripped

of pre-tax profits, has sold those shares at the

then ruling market price and, having enjoyed no

other benefits from the evasion in the meantime,

at a time when the market price did not reflect

any benefit in relation to the stripping of the

subsidiaries.

10. Generally speaking, it is accepted that where

shares have been sold shortly after the stripping

of the subsidiary the market price would not

reflect any benefit. Conversely, where shares have

been disposed of as a result of a takeover, and the

takeover price represents a valuation of the

company that has taken into account the benefit

which accrued to it from evasion of the tax

liabilities of the subsidiaries, exercise of the

relieving power ordinarily would not be

appropriate. In other words, the situation would

be one where a benefit from the evasion has flowed

to the vendor in the price received for the shares.

Between these two extremes the question of benefit

can only be determined by the facts of the case.

In forming an opinion, regard needs to be had to

such factors as movement in the market price of the

shares in question, movement in the share market

generally, public announcements, accounting records

and reports, issues of bonus shares and rights

issues, participation in the management of the

company, the level of dividends paid and the use

made by the company of its benefit from the

evasion."

[54]

"4. That in exercising the discretion conferred by

s.5(4) of the Taxation (Unpaid Company Tax)

Assessment Act 1982 -

(a) The Tribunal erred in law in giving

weight to extraneous or irrelevant matter

namely:

(i) the respondent's age;

(ii) the respondent's condition in

life;

(iii) that the respondent was not a

person of commercial or fiscal

sophistication;

(iv) that the respondent was a person

who placed his trust in commercial

and fiscal matters in the hands of

a qualified chartered accountant

and that upon his advice he

consulted with and acted upon the

advice of a solicitor who arranged

for the sale of his shares in

Yallaroi in circumstances which

later exposed him to liability to

vendors recoupment tax;

(v) that the profit derived by

Yallaroi during the year ended 30

June 1980 had been exceptionally

high;

(vi) that the extent of the profit

generated by Yallaroi was a

consequence of the restructuring

of the affairs of the respondent's

family;

(vii) that the sale by the respondent of

his shares in Yallaroi was a

by-product of the re-organisation

of the affairs of the respondent's

family;

(viii) that the respondent did nothing to

bring about the situation whereby

Yallaroi was unable to pay its tax

when assessed;

(ix) that the respondent was not privy

to the "fraudulent" proposals of

the purchasers of the shares in

Yallaroi;

(x) that the financial benefit

received by the respondent from

the sale of the shares in Yallaroi

could only be realised over many

years;

(xi) that nothing was done by the

respondent to artificially enlarge

the profit derived by Yallaroi and

thereby increase the advantage to

him.

(b) The Tribunal erred in law in failing to

take into account as relevant matters the

following:

(a) the policy of the Taxation

(Unpaid Company Tax) Assessment

Act 1982 and the fiscal

consequences of what happened;

(b) that the respondents sold their

shares in circumstances to which

the Act applied; and

(c) that the respondents received a

tax benefit from the sale.

(c) The Tribunal erred in acting under a

wrong principle namely, that upon its

proper construction, the occasion for the

exercise of the Commissioner's discretion

is not limited to the case when a person

and closely associated persons have not

in any way benefitted from the evasion

giving rise to the recoupment tax

liability in question and instead should

have acted upon the principle that the

exercise of the discretion was so

limited."

[60]

That observation is subject to the caveat that decision-makers can be consistently wrong or consistently unjust and that consistency is safely sought by reference to policy only when the policy is appropriate and acceptable - Nevistic v Minister for Immigration and Ethnic Affairs (supra) at 646 (Deane J.). This does not involve the Tribunal in reviewing policy or deciding what policy a primary decision-maker should adopt - Re Aston (1985) 4 AAR 65, 76 (Davies J.). And, as in that case, which involved the exercise of a discretion to limit the terms of fishing licences under a national quota scheme, a policy which is developed in the political arena after consultation with the relevant industry ought generally to be given great weight. Taxation ruling IT2063 does not appear to be in that category. Nevertheless, the magnitude of the task involved in carrying out original decision-making and supervising and regulating the exercise of delegated authority under the taxation laws, is a powerful indicator that appropriate guidelines are essential for the avoidance of administrative chaos and for the achievement of reasonable consistency. The need to maintain the perception and reality of equal treatment is an important factor in the administration of all laws and not least in those relating to taxation. But such considerations go to the weight to be attributed to policy and that is ultimately a matter for the Tribunal - Nevistic v Minister for Immigration and Ethnic Affairs (supra) at 647 (Deane J.); Re Aston (supra) at 78 (Davies J.). It is said to be essential that the Tribunal be fully informed of reasons for any policy involved in a decision under review. Otherwise, instead of subjecting it to rational analysis and assisting in the development of principled yet flexible decision-making, the Tribunal may "intervene incongruously to disrupt the due course administration" - Commonwealth of Australia v El Hassan (1985) 62 ALR 305, 316 (Burchett J.). That I take to be an exhortation to the parties seeking to invoke the relevant policy rather than an indication that the Tribunal should initiate its own inquiry into policies affecting the decision under review.

[100]

36. The principal thrust of the Commissioner's attack upon the decision under review was that the Tribunal's exercise of the discretion under sub-s.5(4) was based upon a variety of irrelevant factors. Matters personal to the Swifts, their age, condition in life, lack of commercial sophistication and reliance upon professional advice, were said to have nothing to do with the dispensing power. But the Tribunal's reasons in relation to these matters should not be dealt with piecemeal. They must be read in a sensible and balanced way not taking some passages in isolation from others to which they relate - Politis v Federal Commissioner of Taxation (supra) at 5032. In particular the reference to personal factors cannot be disentangled from the consideration of their objectives in entering the transaction that they did and the nature of their participation in it. And if those latter matters, against the background of their personal attributes and history, contribute to some moral or normative element in the assessment, that these applicants do not "deserve" to be subjected to liability for vendors recoupment tax, it cannot be said that such a judgment falls outside the extraordinarily wide discretion under sub-s.5(4). It may well be that the assessment is, in the language of Higgins J. in R v Archdall (supra) not even a question of law, but rather "a question of general social standards". And, accepting the correctness of the findings of fact, it cannot be said that such considerations as the source of the "profit" for the year ended 30 June 1980, its derivation as a by-product of the restructuring of family affairs and the deferred realisation of financial benefits from the transaction, were irrelevant. Further, in my opinion, it is appropriate to take into account the fact that the applicants were not privy to any fraud and did nothing to bring about the situation whereby the company was unable to pay its tax when assessed. And while consideration of the possibility that the Swifts did not derive as great an advantage as they could have by selling the stock at above market value, might be of marginal importance it cannot be excluded from consideration on logical grounds. Taken in isolation any one of the matters to which I have referred might be open to the criticism that it is insufficient to support the exercise of the discretion. Taken together, they covered the bulk of the salient features of the case sufficient to leave open a judgment in favour of the dispensation.

Parties

Applicant/Plaintiff:

# Re Commissioner of Taxation of the Commonwealth of Australia

Respondent/Defendant:

Graham Max Swift; Cavell Lorraine Swift and Henry Claude Swift \[1989\] FCA 413; 20 Atr 1434

Legislation Cited (48)

Taxation (Unpai Company Tax) Assessment Act 1982

TUCTA Act 1982

Appeals Tribunal Act 1975

(Unpaid Company Tax) Assessment Act 1982

Tax Assessment Act 1936

Boards of Review (Transfer of Jurisdiction) Act 1986

(Taxation Offences) Act 1980

Taxation (Unpaid Company > > Tax) Assessment Act 1982

Taxation (Unpaid > > Company Tax - Vendors) Act 1982

Taxation (Unpaid Company Tax > > \- Vendors) Act 1982

Taxation (Unpaid Company Tax) Assessement Act 1982

Assessment Act 1982

Taxation (Unpai Company Tax) Assessment Act 1982

TUCTA Act 1982

Appeals Tribunal Act 1975

(Unpaid Company Tax) Assessment Act 1982

Tax Assessment Act 1936

Boards of Review (Transfer of Jurisdiction) Act 1986

(Taxation Offences) Act 1980

Taxation (Unpaid Company > > Tax) Assessment Act 1982

Taxation (Unpaid > > Company Tax - Vendors) Act 1982

Taxation (Unpaid Company Tax > > \- Vendors) Act 1982

Taxation (Unpaid Company Tax) Assessement Act 1982

Assessment Act 1982

Taxation (Unpai Company Tax) Assessment Act 1982

TUCTA Act 1982

Appeals Tribunal Act 1975

(Unpaid Company Tax) Assessment Act 1982

Tax Assessment Act 1936

Boards of Review (Transfer of Jurisdiction) Act 1986

(Taxation Offences) Act 1980

Taxation (Unpaid Company > > Tax) Assessment Act 1982

Taxation (Unpaid > > Company Tax - Vendors) Act 1982

Taxation (Unpaid Company Tax > > \- Vendors) Act 1982

Taxation (Unpaid Company Tax) Assessement Act 1982

Assessment Act 1982

Taxation (Unpai Company Tax) Assessment Act 1982

TUCTA Act 1982

Appeals Tribunal Act 1975

(Unpaid Company Tax) Assessment Act 1982

Tax Assessment Act 1936

Boards of Review (Transfer of Jurisdiction) Act 1986

(Taxation Offences) Act 1980

Taxation (Unpaid Company > > Tax) Assessment Act 1982

Taxation (Unpaid > > Company Tax - Vendors) Act 1982

Taxation (Unpaid Company Tax > > \- Vendors) Act 1982

Taxation (Unpaid Company Tax) Assessement Act 1982

Assessment Act 1982

Cases Cited (40)

Re Commissioner of Taxation of the Commonwealth of Australia v Graham Max Swift; Cavell Lorraine Swift and Henry Claude Swift [1989] FCA 413; 20 Atr 1434 (3 October 1989)

MacCormick v Federal Commissioner of Taxation [1984] HCA 20; (1985) 158 CLR 622

Nevistic v Minister for Immigration and Ethnic Affairs [1981] FCA 41; (1981) 34 ALR 639

Freeman v Secretary of Department of Social Security [1988] FCA 294; (1988) 15 ALD 671

Re Commissioner of Taxation of the Commonwealth of Australia v Graham Max Swift; Cavell Lorraine Swift and Henry Claude Swift [1989] FCA 413; 20 Atr 1434

At a glance

Court

Decision date

Before

Source

Judgment (105 paragraphs)

Parties

Legislation Cited (48)

Cases Cited (40)

Re Commissioner of Taxation of the Commonwealth of Australia v Graham Max Swift; Cavell Lorraine Swift and Henry Claude Swift [1989] FCA 413; 20 Atr 1434 (3 October 1989)