Rowdell Pty Ltd v Commissioner of Taxation

Rowdell Pty Ltd v Commissioner of Taxation - [1963] HCA 61 - HCA 1963 case summary — Zoe

[5]

In the years of income ended 30th June 1947, 1948 and 1949 the appellant company proceeded on what appears to have been a plan with reference to other companies which had accumulated profits of a nature which upon distribution would involve either exemptions or rebates of tax under ss. 107, 46 and 44 (2) (b) (ii). Section 44 (2) (b) (ii) relates to profits accumulated before the repeal of the provision by Act No. 58 of 1941 (see sub-s. (2) of s. 7 of No. 58 of 1941, p. 135 of the 1941 volume of the statutes). The shares in these companies were acquired by the appellant company from the shareholders at a price representing the asset value less ten per cent or thereabouts. Some of the companies were, when the shares were purchased, already in liquidation; others it was expressly or tacitly arranged should be wound up; in either case it was intended that in the liquidation the appellant should receive the accumulated profits. In some cases it was intended that the appellant should after receiving dividends to exhaust the accumulated profits resell the shares for a very much lower sum than it paid for them. The shareholders of these various companies, so it was assumed, would receive the money, which in one sense represented the accumulated profits, as capital. The appellant company on its side assumed that rebates and exemptions under ss. 107, 46 and 44 (2) (b) (ii) would enure for its benefit. However confident may have been the assumption of the shareholders who sold their shares to the appellant company, the Commissioner of Taxation in fact invoked the aid of the provisions of s. 260 of the Act and assessed the shareholders of those companies for income tax on the basis that when the distributions were made they, rather than the appellant, had received distributions of profits; and, except one, these assessments apparently stood. See Hancock v. Federal Commissioner of Taxation [1] . The Commissioner of Taxation then adopted the view that inasmuch as under s. 260 the vendors had been treated as having gained not a capital return but an actual or notional distribution of dividends under the guise of purchase money for their share interests, it followed that s. 260 should be applied in reverse so as to treat the appellant company, Rowdell Pty. Limited, as having obtained not dividends but other income of a taxable character by these transactions. Kitto J. in his judgment in this case, which I have had the advantage of studying, has disposed completely of this contention on the part of the Commissioner of Taxation and I do not desire to add to the reasoning set out in his judgment on this question. After all, the basis of s. 260, as its structure shows, is that a contract, agreement or arrangement entered into, and that includes the carrying out of the contract, agreement or arrangement, shall not stand in the way of the Commissioner in so far as it has the qualities or is intended to have the qualities set out in the paragraphs of s. 260. It is not to stand in his way when he seeks to put in execution the positive commands of the Act. In the circumstances stated that means that he assessed what was in reality taxable income when s. 260 as interpreted had been applied to expose that each vendor shareholder received what in truth and substance were dividends or distributions although disguised as purchase money by the contract, agreement or arrangement which s. 260 avoided. But if you take any of the transactions in question in this case and turn them the other way round, s. 260 is not appropriate to give a taxable character to any profit to which the appellant became entitled, for in respect of such profits there is no contract, agreement or arrangement to disguise the taxable character of the moneys to which the appellant became entitled. The point in the present case lies elsewhere. It lies in the fact that among the things which were obtained by the appellant company were accumulated profits of the companies whose shares were purchased by the taxpayer company. These accumulations would represent in one case, when distributed, dividends which under s. 44 (2) (b) (ii) were exempt from tax; in other cases dividends entitling the shareholder to a rebate in his assessment of certain amounts calculated in accordance with s. 46; in still a third class of cases the exclusion of amounts representing a dividend or part of a dividend from certain sources set out in s. 107 (1). (For the sake of clearness it is perhaps desirable to add that the single case in which s. 44 (2) (b) (ii) applies is one where the dividends paid, credited or distributed were declared before 30th October 1941 or paid out of profits arising from the sale or compulsory resumption for public purposes of assets not acquired for the purpose of resale at a profit and that the sale or resumption took place prior to 30th October 1941. By reason of sub-s. (2) of s. 7 which omitted par. (a) of s. 44 of the Act, the amendment did not affect those dividends which otherwise were exempt. See s. 7 of the Income Tax Assessment Act 1941 (Act No. 58).)

[6]

The true point of the present case is whether a deduction to which the appellant is entitled should be thrown against these dividends. As has been stated already, the appellant company carried on the business of dealing in stocks and shares and securities. When the appellant company bought the shares in a company from its shareholders what it paid to the shareholders, although calculated at, e.g. assets value less ten per cent (that is without regard to or apart from any possible operation of s. 260), came to the shareholders as capital and was therefore free of tax. But the taxpayer company paid for the shares a sum of money which would form an outgoing under s. 51 in its business of trafficking in stocks and shares. If it received a dividend prima facie taxable and did so subsequent to the operation of s. 44 (2) (b) (ii), s. 46 or s. 107 as the case might be, any balance forming a taxable income would prima facie be subject to rebates or exemption. It must be remembered that in speaking of dividends there must be included for the purpose of this case distributions to shareholders of a company by a liquidator in the course of winding up the company to the extent to which they represent income derived by the company whether before or during liquidation, that is, apart from income required to replace the loss of paid up capital: see s. 47. Now in making these purchases, whether of shares in a liquidation or of shares in a company not yet the subject of a winding up order or resolution, the appellant company may be taken to have contemplated incurring a loss consisting of the excess of the amount paid to the shareholders of the companies over the amount eventually received as capital for the shares, but by reason of its purchases the appellant would also receive dividends which it was expected would not be taxable at all in the case falling under s. 44 (2) (b) (ii) and would be subject to rebates in the other cases under ss. 46 or 107 as the case might be. When one speaks of the appellant company contemplating the incurring of a loss no more can be meant than that the outlay for the purposes of s. 51 was for the purpose of obtaining assets to yield dividends, together with further sums representing the capital of the shares, and it was known that these further sums would be insufficient to recoup the outgoing; but it is still an outgoing. It therefore seems correct to regard each payment of the purchase price of shares as an outgoing within s. 51 and as a debit in a company trading in shares etc., appropriate to be taken into what may be called the profit and loss account. Dividends would be credits resulting wherever there is an assessment for tax in a rebate under ss. 46 or 107, and of course an exemption from tax in the case under s. 44 (2) (b) (ii). The Commissioner, however, if he had his way, would reduce the appellant's exempt and rebateable dividends by apportioning the one outgoing, viz. the cost of the shares or the loss, pro rata against the dividends. For this there is no justification.

[15]

This was a result for which neither Rowdell nor the Commissioner had contended in argument before the Board. Indeed the Commissioner had informed Rowdell by letter before the hearing that he did not intend to argue in favour of it. Before this Court it has been submitted on behalf of Rowdell that the Board had no power to do as it did, because there was no contest before it as to the incorrectness of what the Commissioner had done in 1951. The argument, if I correctly apprehended it, was that the authority of the Board, under ss. 187, 188, 192 and 193, was limited to reviewing the decision of the Commissioner so far as it overruled Rowdell's objection, and that as a decision to adhere to the amendments of 1953 necessarily involved upholding so much of the objection as was directed to the steps taken in 1951 the Board's function was only to choose between the principle of the 1948 and 1949 assessments on the one hand and the 1953 amendments on the other. In my opinion there is nothing in this contention. The Commissioner's decision which the Board had the power and duty of reviewing was a decision upon the whole of Rowdell's objection. That was an objection to what the Commissioner had done in 1951 and also to what he had done in 1953. They were two mutually inconsistent things, and a decision that one of them was right meant that the other was wrong. But the power given to the Board to review the decision was necessarily a power to give whatever decision the Commissioner should have given when considering whether either of the things done in 1951 and 1953 was correct. The Commissioner's decision to adhere to the 1953 amendments and therefore to abandon what he had done in 1951 was a single decision, and the reference to the Board could not be less than a reference of the whole decision. In the notice of appeal to this Court a contention was foreshadowed that because the Commissioner had abandoned before the Board the principle upon which he had proceeded in 1951, and because upon his doing that Rowdell had not been fully heard in opposition to that principle, the Board by upholding the principle had denied Rowdell natural justice and exceeded its own competence. This is not a contention which has any relevance in the appeal. The appeal - it must be called that because the Act so describes it - is a proceeeding in the original jurisdiction of the Court, in which the Court must give its own decision upon the questions that were before the Board. Any arguments which Rowdell may wish to submit may be fully presented here, whether they were heard by the Board or no, so long as they fall within the grounds of objection. Accordingly, the question asked in the case stated, whether having regard to the Commissioner's letter and to the basis upon which the reference to the Board was conducted it was competent and proper for the Board to decide as it did, is a question which does not arise in the appeal, and no answer to it should be given.

[21]

In making the 1953 amendments to Rowdell's assessment, however, the Commissioner went a step beyond this. He treated the dividends which Rowdell received in each of the ten transactions as having been derived by Rowdell, but not as dividends and therefore not as qualifying for the exemption and rebates provided for by ss. 44 (1), 46 and 107. The view upon which he acted was that since each of the relevant transactions had been planned and executed by Rowdell as an entire, self-contained scheme for making a profit in the course of the general carrying on of a share-dealing business, only the profit which the transaction produced should be considered in relation to the sections mentioned, and that the sections did not apply to that profit because it did not partake of the character of dividends. In other words, the dividends were not brought into assessable income as dividends, by s. 44 (1); it was the profit from the transactions that was brought into assessable income, and that came in as profit and nothing else, by force of s. 25 and par. (a) of s. 26. It is clear enough that Rowdell's purpose in each transaction was indeed to derive a profit from the transaction as a whole; but when the facts of the transactions are fully considered the proper conclusion, in my opinion, is that in each case the essence of the plan was that Rowdell should pay for the shares a sum that would be partly recouped to it, but only partly, by receipts from distributions of the relevant companies' capital or from sales of the shares, and that the unrecouped portion (the loss, as the Commissioner calls it) should be in the nature of a price paid for the dividends. (Of course I am speaking of dividends in the broad sense required by s. 47.) The profit, then, which Rowdell sought from each transaction, and in the event obtained, must be recognized, in my opinion, as consisting of dividends. The nature of the transactions does not justify an assessment on the basis that there are no dividends to be considered under ss. 44 (2), 46 and 107. But the Commissioner's principal reason for making the 1953 amendments on the footing that there were no dividends in respect of which those sections could apply was not a reason depending on the actual nature of the ten transactions. It depended on a notional complexion which he considered that s. 260 imparted to the profits, namely the complexion of remuneration earned by the rendering of a service to the vendor-shareholders. For this he relied upon Lord Denning's description of the corresponding moneys in Newton's Case [1] as "nothing more nor less than remuneration which the original shareholders allowed Pactolus to retain for services rendered" [2] . But, as the majority of the Board of Review has pointed out in the present case, his Lordship was not considering the proper characterization of the moneys from Pactolus's point of view. He was simply making the point that, on the hypothesis supplied by the operation of s. 260 for the purposes of the original shareholders' assessment - the hypothesis that Pactolus's receipt of dividend moneys was a receipt of dividends belonging to the original shareholders - the receipt and the retention of part of those moneys by Pactolus with the original shareholders' assent amounted to a derivation of income by the original shareholders followed by an application of it by them for a purpose of their own. There is, I think, a short answer to the Commissioner's reliance upon s. 260 in the present case, and that is that it overlooks the limited extent of the voiding effect of the section. For many purposes the operation of s. 260 in relation to the vendor-shareholders may be described quite satisfactorily by saying that as against the Commissioner the section renders void inter alia the transfers from the shareholders to Rowdell; but the statement is not completely accurate. What is accurate is that as against the Commissioner the transfers cannot be relied upon for the purpose of contesting an assessment of tax which has been made against the shareholders on the footing that the dividends were derived by them. The section cannot be treated as having an operation extending beyond its expressly delineated function of defeating the purpose of tax-avoidance by the shareholders which it was the overtly manifested nature of the arrangement to achieve: (see the language of Lord Denning in Newton's Case [1] ). To grasp that s. 260 defeats as against the Commissioner the tax-avoiding efficacy of an arrangement, and not any part of the arrangement itself or anything done under it, is to see at once that it cannot support an assessment made against Rowdell on the footing that any of the transfers of shares to it were void - unless, of course, the arrangement was a means of tax-avoidance by Rowdell itself.

[25]

Whether this was correct depends upon the true construction of the sections referred to. The provision in s. 44 (2) is that "the assessable income of a shareholder shall not include dividends" falling within certain descriptions relating to the funds or moneys out of which they are paid. The argument submitted on behalf of Rowdell on this point may be put very shortly. It is that s. 44 (2) is a qualification upon s. 44 (1) and that as s. 44 (1) prima facie brings the whole of every dividend into assessable income, and does so in the case of a person carrying on a business no less than in any other case, so s. 44 (2) excludes the whole of every dividend which answers any of the descriptions it contains. This seems clearly correct; but what is the result? Income which is not assessable income is called by the Act "exempt income": see the definition in s. 6 (1); and s. 51 (1) excepts from losses and outgoings that are to be allowable deductions any that are "incurred in relation to the gaining or production of exempt income". The consequence, therefore, of excluding from Rowdell's assessable income the full amount of the dividends which it derived is that from its allowable deductions there must be excluded all losses or outgoings incurred in relation to the gaining of those dividends. In my opinion that description fits exactly the "loss" incurred in each of the ten transactions. It is beyond dispute that what excited Rowdell's interest at the outset in each case was the amount of the relevant company's profits which acquisition of the shares would enable Rowdell to get into its hands before either re-selling the shares or receiving a return of capital in a winding-up. On each occasion the crucial consideration for Rowdell was whether the "loss", the deficiency consisting of the difference between the cost of acquiring the shares and the proceeds of their ultimate realization, was worth incurring for the sake of the dividends which would be received in the meantime. The deficiency was foreseen and deliberately incurred as the cost of getting the dividends. It was so closely bound up with the gaining of the dividends that to describe it as incurred in relation thereto seems to me a completely accurate use of the words of s. 51 (1). In a word, it seems to me but a recognition of fact to treat the whole of what Rowdell received in regard to shares in a particular company as constituting one coherent "milking" operation, and therefore as being fundamentally different in nature from the ordinary case of a purchase of shares cum div. I therefore agree with the majority of the Board of Review that the method of assessment which the Commissioner adopted in 1948 and 1949 was incorrect as regards the application of s. 44 (2).

[26]

The second provision to consider is s. 46, which provides for a rebate of tax in respect of dividends derived by a resident company. The amount of the rebate is described by sub-s. (1) as the amount obtained by applying to that part of the dividends included in the company's taxable income the average rate of tax payable by the company. The part of the dividends so included in the taxable income is defined by sub-s. (3) as the amount remaining after deducting from the amount of dividends included in the company's assessable income deductions allowable to it under the Act from income from dividends. The reference in the last few words is to s. 50 (a): North Australian Pastoral Co. Ltd. v. Federal Commissioner of Taxation [1] ; so that the amount to which the average rate of tax payable by the company is to be applied in order to ascertain the rebate is the amount remaining after deducting from the amount of the dividends every allowable deduction (or part of an allowable deduction) which "relates directly to" income from dividends, whether of the year of income or of a previous year of income. Of the possible views as to the correct way of applying this formula in the present case two only need be considered. One is that the relevant allowable deduction is the total cost of acquisition of each parcel of shares, and that only a part of that deduction relates directly to income from dividends, namely the part which was not ultimately recouped by means of return of capital or sale of the shares. The other is that the relevant allowable deduction is not the whole of the cost of acquisition but only that part of it which was not so recouped, and that the whole of that deduction relates directly to income from dividends. In either view, the direct relation to income from dividends exists for the reason I have stated in discussing s. 44 (2). Either view leads to the same result. What the Commissioner has called the loss on realization of the shares in each transaction is to be deducted from the amount of the dividends, and the amount of the rebate of tax is to be ascertained by applying the average rate of tax to the remainder, diminished, of course, by any other deduction or part of a deduction which also relates directly to income from dividends. Accordingly I am of opinion that in relation to s. 46 the view which the Commissioner applied in 1951, and not that which he applied in 1948 and 1949, was correct.

[31]

In appeals to this Court under s. 196 of the Income Tax Assessment Act from the Commonwealth Taxation Board of Review No. 2, Kitto J., pursuant to s. 18 of the Judiciary Act, has stated a case for the consideration of the Full Court which asks seven questions relating to the taxpayer's income tax assessments for the years 1947, 1948 and 1949. The tax payable under the original assessments for each of the years 1947 and 1948 was £1 7s. 0d. but in 1951 the assessments for those years were amended to increase tax for 1947 to £1,777 7s. 0d. and for 1948 to £1,840 9s. 0d. At the same time tax for the year 1949 was assessed at £6,271 5s. 0d. What the Commissioner did in 1951 was to apportion deductions arising out of the purchase of shares in the course of the taxpayer's business as a share dealer and attribute proportionate parts thereof to dividend income that was either exempt under s. 44 (2) of the Act or rebateable under s. 46 or s. 107 which had been derived from the shares that the taxpayer had purchased and realized in the year of income. To take an example to illustrate the course that was followed, £8,809 - the cost of 3,000 shares of £1 each in H. L. Downe Ltd. (in liquidation) purchased in 1947 - was reduced by £3,000, that part of the distribution in the course of the liquidation that was treated as representing capital and was not to be deemed dividends pursuant to s. 47, and the loss (i.e. the difference between £8,809 and £3,000, viz. £5,809) was attributed to distributions which in accordance with s. 47 were to be regarded as dividends making up the balance of what was paid by the liquidator (viz. £5,943) as follows: - Exempt or rebateable by virtue of Total s. 44 (2) s. 46 s. 107 £ £ £ £ Dividend 1800 2769 1374 5943 Proportion of loss 1759 2707 1343 5809 Difference 41 62 31 134 The taxpayer was then assessed as if its exempt income were £41 rather than £1,800 and its rebateable dividends were £62 instead of £2,769 under s. 46 and £31 instead of £1,374 under s. 107. In 1953 the assessments were further amended to increase the tax payable for 1947 to £1,817 11s. 0d., for 1948 to £2,391 15s. 0d. and for 1949 to £11,891 0s. 0d. The amendments in 1953 were made on the footing that, in any case where there had been an arrangement having the purpose or effect of avoiding tax to which the taxpayer and the persons from whom the taxpayer purchased shares were parties and the avoidance by s. 260 of the Act of that arrangement and the steps taken to carry it out resulted in the vendors of the shares being regarded as having remained the holders of the shares for the purpose of assessing their tax, the Commissioner could in assessing the taxpayer disregard the transfers to it and treat it as not being the holder of the shares transferred so that any moneys received as dividends did not have the character of dividends exempt or rebateable and the amount by which what the taxpayer received exceeded what it paid in the course of carrying out each transaction was a profit which the Commissioner was entitled to treat as a reward for participating with the vendors of the shares in an arrangement to avoid their tax: in other words, as payment for the service of transforming what would have been income into a capital receipt. Again, to illustrate the basis of assessment by reference to transactions concerning shares in H. L. Downe Ltd. (in liquidation), the taxpayer was not regarded as having received any dividends but was treated as having been rewarded by the vendors of the shares for participating in an arrangement with them to avoid their tax obligations by being permitted to retain the difference (viz. £134) between what was received from the liquidator (£8,943) and what was paid to or for the purported vendors in the guise of purchase money (£8,787) and for stamp duty (£22), in all £8,809.

[35]

These amendments were supported by reliance upon s. 260 and no case was made by the Commissioner that, independently of this section, the taxpayer's purchases of shares ripe to yield dividends were otherwise than genuine transactions for all purposes. In very general terms, what the taxpayer did during all the years in question was to seek out companies with substantial profits available for immediate distribution and whether or not in the course of liquidation and offer to purchase shares at a price some-what below asset value from holders who would be taxable upon distributions as dividends. Such purchases themselves would afford the taxpayer the virtual certainty of profit because before it purchased it could calculate that it would receive by way of capital returns either on liquidation of the company or upon a resale of the shares and by the receipt of non-taxable or rebateable dividends the equivalent of the asset value of the shares without tax deduction - that is, it would receive free of tax more than it paid. There was for the taxpayer the further advantage that, being a share dealer, any loss made upon the realization of the shares would be taken into account in the calculation of its taxable income. For the prospective vendors the inducement was that instead of receiving taxable dividends, they would receive in the character of purchase money a capital sum enhanced by reason of their company's profits available for distribution which were represented in the asset backing of the shares. One of the taxpayer's transactions (that is, the purchase of shares in Mulga Downs Pty. Ltd.) was considered by this Court in Hancock v. Federal Commissioner of Taxation [1] where the facts are set out in detail so that it is convenient to examine the general problem now under consideration in relation to the taxpayer's purchases of shares in that company. The taxpayer purchased 11,210 shares in Mulga Downs Pty. Ltd. from one group of shareholders (i.e. the Lefroy family) for £40,000 and 7,728 shares from another group of shareholders (i.e. the Hancock family) for £23,500 and so became the holder of all the shares in the company. After these purchases it withdrew £49,981 9s. 10d. in dividends from the company and then sold all the shares that it had purchased to the Hancock family for £21,000. It therefore paid £63,500 and received £70,981 9s. 10d. leaving a difference of £7,481 9s. 10d. of which £2,043 1s. 8d. arose from the Lefroy family shares and £5,438 8s. 2d. arose from the Hancock family shares. The Lefroy family and the Hancock family were assessed upon the footing that s. 260 applied to the foregoing transactions and that by virtue of its operation the members of the families were entitled to, and taxable upon, the dividends arising from the shares that they had sold to the taxpayer. The assessment of the Hancock family upon this basis was upheld on the footing that the transfers of their shares were void as against the Commissioner because the members of the family were parties to an arrangement to avoid their tax obligations and the transfers were made in the carrying out of that arrangement. The objections of the Lefroy family were allowed on the ground, so it seems, that the arrangement was not made to avoid their tax obligations and the transfers of their shares were not avoided by s. 260. The 1953 amendments of the taxpayer's assessment for 1949 brought into account as non-dividend income subject to no rebate the sum of £7,481 9s. 10d. already mentioned and the question now for determination in relation to these transactions is whether this sum, or so much of it as represented what arose from the Hancock shares (i.e. £5,438 8s. 2d.), was correctly brought into account in this way. At the hearing some question arose whether, even if the Commissioner could properly assess the taxpayer on the footing that it did not become the holder of the Hancock shares because the correctness of the assessment of the Hancock family on the footing that s. 260 did make void the transfers of their shares to the taxpayer was not in dispute, it could be concluded that the taxpayer had not become the holder of the Lefroy shares notwithstanding that the assessment of the Lefroy family on the footing that they had not transferred their shares to the taxpayer had not been sustained. As was intimated at the hearing, it seems that the case stated was based upon the footing that it was only in those cases where the Commissioner had made and maintained an assessment based upon s. 260 against the vendors of shares that the question arose whether the taxpayer as transferee of shares under transfers that were admittedly void as between the Commissioner and the transferors should be assessed as though it had not become the owner of the shares and that to facilitate the determination of this question the taxpayer for the purpose of these proceedings conceded that in such cases the correctness of taxing the vendors on the footing that s. 260 avoided the transfers so far as they and the Commissioner were concerned was not in dispute. In other words, in such cases neither the existence of an arrangement to which s. 260 applied nor that as between the Commissioner and the transferors that section avoided the transfers was disputed by the taxpayer. This was the view of counsel for the taxpayer but at one stage counsel for the Commissioner sought to justify the 1953 amendments in so far as they related to what the taxpayer got from the Lefroy shares on the footing that, notwithstanding the result of the proceedings upon the objections of the Lefroy family, the case stated showed sufficiently that the transfers by the Lefroy family to the taxpayer were void as against the Commissioner by reason of s. 260. I do not think it does; indeed, if the basis already indicated upon which it appears the case was stated is to be departed from, I would not be ready to conclude that there is sufficient in the case stated to show that any of the transactions whereby the taxpayer bought shares was affected by s. 260. It was only after an elaborate examination of the position of Mulga Downs Pty. Ltd. and that of the Hancock family and of the negotiations between the Hancock family and the taxpayer that it was concluded in the earlier litigation that there was an arrangement within the scope of s. 260, the avoidance of which involved the assessment of the Hancock family on the footing that they remained the owners of the shares. The case stated does not provide the material for a similar investigation of any of the transactions to which it relates and, except upon the basis which the taxpayer is prepared to accept, I do not think it has been made out that s. 260 has any application to the transactions covered by the case stated. The summaries of what occurred which appear in the case stated are sufficient upon which to proceed if the basis already referred to is accepted but they would not by themselves warrant the conclusion that there was in each of the ten cases covered by exhibit "O" an arrangement to which s. 260 applied. The real problem as I see it, therefore, in relation to the taxpayer's purchase of shares in Mulga Downs Pty. Ltd. and of the other companies concerned is whether, as certain transfers are void as against the Commissioner by reason of s. 260 because they were made to carry out an arrangement to avoid the vendors' tax obligations, it follows that the purchaser ought to have been assessed upon the footing that it had not become the owner of the shares transferred to it and so could not have received dividend income to which ss. 44 (2), 46 and 107 would apply.

[37]

Upon what I have referred to as the real problem, the strength of the Commissioner's case is the generality of the language of s. 260 which does not in terms confine the avoidance which the section works to the Commissioner vis-à-vis a taxpayer whose tax obligations the arrangement was intended to reduce or to proceedings under the Act in relation to such a taxpayer. If it be that the transfers by the Hancocks to the taxpayer are void as against the Commissioner without some such limitation so that for all the purposes of the Commissioner the Hancocks are to be treated as remaining the holders of the shares in Mulga Downs Pty. Ltd. which they transferred to the taxpayer with the consequence that the taxpayer did not become the holder of those shares, it would seem to follow that in the assessment of the taxpayer it could not be regarded as a shareholder. The operative words of the section are that an arrangement, etc. shall so far as it has or purports to have a specified purpose or effect "be absolutely void as against the Commissioner or in regard to any proceedings under this Act". Although I do not regard it as possible by implication of any particular words in the phrases "as against the Commissioner" or "in regard to any proceedings under this Act" to restrict them to persons who, if the arrangement, etc. in question had been in full force and effect, would have obtained a taxation advantage in that (a) the incidence of tax would have been altered from themselves to others or (b) that they would have obtained relief from liability to make a return or to pay tax or (c) that they would have escaped a duty or liability which the Act would otherwise have imposed on them or (d) that the operation of the Act with respect to them would have been prevented, it seems that as the section invalidates the arrangement, etc. and the steps to carry it out only in so far as it has or purports to have the purpose or effect of avoiding tax obligations, to use compendious language, so, when it is seen that the purpose and effect of a particular arrangement is limited to the tax obligations of particular persons, it is a proper conclusion that it is only to that limited extent that the arrangement is avoided. The purpose and effect of the arrangement with which I am particularly concerned as an illustration of the transactions here under consideration was to avoid the tax obligations which the Act imposed upon the Hancocks and this alone: accordingly, it is avoided by s. 260 so far and no further. When, therefore, the question is not as to the Hancocks' obligations under the Act, nothing is avoided by s. 260. This construction may be thought to have the unexpected consequence that, so far as the Commissioner is concerned, the transfers in question are void for the purpose of taxing the Hancocks (the transferors) but are not void for the purpose of taxing the taxpayer (the transferee) but this follows from the limitation which the section itself imposes upon the avoidance that it works. The contention of the Commissioner that any arrangement which has the purpose or effect of doing any of the things set out in (a), (b), (c) and (d) is void against him for all purposes and in all proceedings under the Act does not, I think, take sufficient account of the words "so far as". This phrase is not the equivalent of "if". In other cases it has been pointed out that the use of the phrase "so far as" gives the section an operation when tax avoidance is not the only purpose and effect of the arrangement under consideration: see Newton v. Federal Commissioner of Taxation [1] ; in this case it is necessary to emphasize that the phrase "so far as" limits the operation of the section to what may be called an arrangement's tax-avoiding purpose and effect.

[41]

So far as dividends rebateable under s. 46 are concerned, the question whether any deduction should be made therefrom depends upon that section and ss. 49 and 50. It is clear from s. 46 that the rebate for which it provides is not calculated upon the dividends that a resident company receives without deduction in any circumstances. The rebate is allowable upon "that part of the dividends included in its taxable income" and what that part is has not been just left to be worked out on general principles: it has been defined by sub-s. (3) as follows: - "The part of the dividends so included in the taxable income of the shareholder shall be the amount remaining after deducting from the amount of dividends included in its assessable income deductions allowable to it under this Act from income from dividends." This provision directs attention to such other provisions in the Act as provide for deductions from income from dividends. The only section that could be so relevant for present purposes is s. 50 and the critical question is whether the deduction sought to be made from dividends rebateable under s. 46 falls within the description of part of a deduction which "relates directly to income from dividends", to adopt the language of s. 50 (a). There is no doubt that in a sense it is part of a deduction to which the taxpayer as a share dealer was entitled that the Commissioner has taken from the dividends under consideration but it is doubtful whether it is in a relevant sense because, as has been seen, all the Commissioner has done is to take what is one deduction, reduce it by what is regarded as a corresponding receipt and apportion the difference rateably over the dividends derived from the shares in the same year. What has already been said about making deductions from exempt dividends illustrates the lack of authority there is for such a procedure. The difficulty of finding justification for treating purchase price as apportionable among dividends or even among dividends that are not exempt dividends points, however, to the fundamental weakness of what the Commissioner has done in making the 1951 assessment. It is not the fact that a definite part of the purchase price of shares can be attributed to the different receipts that a purchaser expects or even intends to obtain from the shares purchased. If the parties to a sale as part of their bargain make up the purchase price by adding together amounts to be paid for or in respect of different intended receipts, there would be some justification for resolving the resulting sum into its constituent parts for the purpose of attributing each part of the deduction to the receipt to which it relates, but to say so much is only to say that in such a special case a direct relationship between the receipt and part of the deduction might be found. In the absence of such special circumstances it is difficult to find a justification for, for instance, apportioning the price of shares bought cum div. between the prospective dividends and the other rights accruing to the purchaser upon transfer. Here there was no apportionment by the parties: indeed, the case stated states that the purchase price was in each case calculated with reference, not to the receipts that might be expected from the shares, but to the asset backing of the shares purchased and, without regarding this as negativing what was no doubt the fact, viz. that the taxpayer in deciding what it would pay did take into earnest consideration the size and character of the dividends that were available for distribution, recognition of this reality does not go to the length of enabling an apportionment that the vendors and purchaser did not make to be made as a matter of law subsequently. In this case I do not think it can be said that any part of the purchase price of the shares which the taxpayer bought related directly to income from dividends, actual or deemed. What was done does not bring the case within s. 50 (a) and so no deduction pursuant to s. 46 (3) is warranted for the purpose of ascertaining what part of any dividend which the taxpayer received was included in its taxable income. Furthermore, the application of s. 50 would not of itself require a proportionate deduction to be made from particular dividends; what the section provides is that, if there is income from dividends and other income, deductions related directly to income from dividends should be made in the first place from income from dividends. Whether general principles would dictate a reduction of rebateable dividends by the proportion of the purchase price attributable particularly to them is a matter that I do not find it necessary to consider in view of the conclusion I have already expressed.

At a glance

Court

Decision date

Before

Source

Judgment (43 paragraphs)

Parties

Cited By (1)