Rowdell Pty Ltd v Commissioner of Taxation

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).)

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.

The case stated on the reference under s. 18 of the Judiciary Act asked certain questions. (Cf. Watson v. Federal Commissioner of Taxation [1] , and cf. Official Receiver v. Federal Commissioner of Taxation [2] .) The first of these relates to the proceedings before the Board of Review and subsequently in relation to objections against amended assessments and assessments notified in 1951. These proceedings were the subject of certain communications which, it is said, prevent the Board of Review acting as it did. I think the answer to the matter raised by question 1 simply is that before this Court there is a judicial proceeding in the original jurisdiction of the Court and the Court must decide the issues according to its view of what is legally correct. This question should therefore not be answered because the competence or propriety of the course taken by the Board of Review is not an issue upon which liability depends.

1. (1953) 87 C.L.R. 353. 2. (1956) 96 C.L.R. 370.

Question 2 relates to the application of s. 260. It is a question subdivided into three parts. The answer should be that s. 260 does not apply upon the facts of the present case to govern liability to tax.

I have found the third question a difficult one, because it goes to one chief complication of the case. But I think that it should be answered: (a) Yes; (b) and (c) No.

Question 4, which relates to s. 46, presents similar difficulties, but I think the answer should be: (a) Yes; (b) and (c) No. Question 5 should be answered: No. Question 6 should not be answered. The answer to question 7 is: No.

This is a case stated in an appeal and cross-appeal from a Board of Review under the Income Tax Assessment Act 1936-1949 Cth. The decision of the Board related to the assessment of tax payable in respect of income derived by the taxpayer, which I shall call Rowdell, in each of the years ended 30th June 1947, 30th June 1948 and 30th June 1949.

In respect of each of the years mentioned, the Commissioner made more than one attempt to assess the correct amount of tax. In 1948 he made an assessment in respect of the 1947 year, and in 1949 he made an assessment in respect of the 1948 year. In 1951 he amended these assessments to give effect to an altered view as to the proper application of the Act to the circumstances; and in the same year he made an original assessment in respect of the 1949 year, applying the altered view. In 1953, having formed still another view, he amended all three assessments.

Against the assessments made in 1948 and 1949 Rowdell lodged no objection. But it lodged objections against the two amended assessments and the one original assessment made in 1951, and it lodged objections also against the three assessments as amended in 1953. The objections were all disallowed by the Commissioner, and Rowdell under s. 187 of the Act requested the Commissioner to refer his decisions to a Board of Review. The Board heard the references and gave a decision (by majority) which meant that the assessments as amended in 1953 were vacated, but that the first two as amended in 1951 and the third as originally made in that year were confirmed.

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.

The case stated relates to ten transactions which Rowdell carried through in the relevant years of income in the course of a business of dealing in stocks, shares and securities. The transactions differed from one another in detail, but they had certain main features in common. Each was a transaction with all or some of the shareholders in a company which Rowdell had discovered to possess accumulations of profits such that, if distributed to shareholders, they would be exempt income under s. 44 (2), or would attract a rebate under s. 107, or (in the case of a shareholder being a company) would attract rebate under s. 46. The transaction consisted in buying shares in the company at prices somewhat lower than the net value of its assets, stripping the company of the whole or a large part of its accumulated profits by means of declarations of dividends or distributions in liquidation or both, and then re-selling the shares if the company was not in liquidation, or, if it was in liquidation, participating in a liquidator's distribution of capital.

The transactions of this general description that took place yielded a tax advantage to the vendor-shareholders (subject to the operation of s. 260 where it applied) for, though they received from Rowdell a price that was less than the net assets value of their shares, the whole of what they received came to them as capital and was therefore tax-free; whereas any dividends or distributions in winding-up that they might have otherwise received would have been taxable as income to the extent to which they represented income derived by the company (s. 47), subject only to the operation of the exemption and rebate provisions of the Act. For this reason it was profitable for the vendor-shareholders to sell their shares even for less than the assets were worth. Rowdell, for its part, looked for a profit consisting in each case of the excess of the aggregate amount it would receive (from dividends, distributions in winding-up and, where the shares were re-sold, the proceeds of re-sale) over the total cost of its acquisition of the shares; and it expected that the tax payable in respect of that excess would be diminished by the application of the provisions of ss. 44 (2), 46 and 107 as to exemption and rebates in respect of dividends.

For some of the vendor-shareholders in these transactions, however, s. 260 lay in wait, and in the end it defeated their expectations as to tax by rendering the arrangements between themselves and Rowdell void as against the Commissioner so far as the arrangements had the purpose or effect of avoiding the liability to tax which the vendor-shareholders would have incurred if they had received while still holding the shares the profits which in the event were distributed to Rowdell. Admittedly this happened in eight of the ten cases. The reported case of Hancock v. Federal Commissioner of Taxation [1] provides an example. In essential respects the transactions in these cases bore a resemblance to that which the Privy Council held in Newton's Case [2] to be within s. 260. What the section did was to invalidate, as against the Commissioner, the arrangements and everything done in carrying them into effect, including the transfer of shares to Rowdell, so far as they had (that is to say, would have had, but for the section) the purpose or effect of avoiding a liability to tax on the part of the vendor-shareholders by depriving of the character of income such profits of the companies as were distributed after the making of the transfers and either (a) reached the hands of the vendor-shareholders in the form of capital because Rowdell used them to pay the purchase price of the shares, or (b) remained with Rowdell as its profit from the transaction.

1. (1961) 108 C.L.R. 258. 2. [1958] A.C. 450; (1958) 98 C.L.R. 1.

In the forefront of the case is the question whether Rowdell is liable for tax on the footing that it derived the moneys which, because of the application of s. 260, are to be considered as having been derived by the vendor-shareholders. There is a superficial attractiveness in the notion that, where one person, A, has been assessed to tax on the footing that certain dividends were in truth his and were derived by him, the Commissioner should not be entitled to assess another person, B, on the footing that the same dividends belonged to him and were derived by him. The operation of s. 260 extends, of course, beyond the arrangement (in the limited sense of the consensus between the parties) to everything done as part of the concerted means adopted for the avoidance of a liability to tax. But it applies as against the Commissioner only, and even as against him it does not render anything void generally. Its operation stops at depriving what has been done of efficacy to produce or contribute to the tax-avoidance for which the arrangement is the chosen means. Thus, in each of the cases we are considering, the share transfers by which the vendor-shareholders divested themselves of the right to receive future dividends, and by so doing brought it about that (subject to s. 260) the dividends, when paid, were not assessable income of theirs, must be considered as against the Commissioner, by force of s. 260, as not having been effectual to obviate the liability for tax which the payment of the dividends would have involved for the vendor-shareholders if they had continued to hold the shares. But that is all. The section prevents anyone from setting up against the Commissioner that the transfers were part of an effectual means adopted for the avoidance of tax by the vendor-shareholders; but it does not prevent the Commissioner from setting up against Rowdell that the transfers were effectual to entitle Rowdell as shareholder to the dividends which in fact it received.

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.

1. [1958] A.C. 450; (1958) 98 C.L.R. 1. 2. [1958] A.C., at p. 468; (1958) 98 C.L.R., at p. 11. 3. [1958] A.C. 450, at p. 465; (1958) 98 C.L.R., at p. 8.

Anticipating this conclusion, counsel for the Commissioner submitted that the section applies to each of the relevant transactions not only as being a means for avoiding a tax liability on the part of the vendor-shareholders but also as being a means for avoiding a tax liability on the part of Rowdell. As to this, no more need be said than that tax-avoidance on the part of Rowdell was clearly not within either the purpose or effect of the transactions. No doubt among the considerations which led Rowdell to enter into the transactions was the consideration that its tax liability resulting from the transactions would be reduced by the application of ss. 44 (2), 46 and 107 (or whichever of them should apply in the circumstances); but it is impossible to point to any tax liability which Rowdell would have incurred if the arrangement had never been made and for the avoidance of which the arrangement was a concerted means.

The 1953 amendments therefore cannot be justified by any of the lines of reasoning suggested on behalf of the Commissioner. The question remains which is the main question in Rowdell's appeal against the decision of the Board of Review, namely whether the sections providing for exemption or rebates in respect of dividends apply only to what I have been describing as the profit from each transaction (considered as made up of proportionate parts of the dividends from which the "loss" has been deducted) or whether, on the other hand, they apply to the gross amount of the dividends received in all ten transactions. The two original assessments made in 1948 and 1949, which Rowdell says were correct, were made on the footing that the sections apply to the gross amount of the dividends, and that the whole cost of acquisition of the shares in each case should be considered an allowable deduction as part of the mass of outgoings incurred in carrying on the business of dealing in stocks or shares.

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).

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.

Finally, s. 107 has to be considered. That section (as it stood at the material time) provides for a rebate of the amount by which a person's income tax is increased by the inclusion in his assessable income of certain dividends. It is true, as was contended on behalf of Rowdell, that the effect of the provision in a particular case is to be found by making two assessments, one treating the s. 107 dividends as included in assessable income and the other treating them as not included, and subtracting the tax ascertained by the one from the tax ascertained by the other. But in making the second assessment it is a logically necessary consequence of excluding the dividends from the assessable income that any amount which in the first assessment was treated as an allowable deduction but was incurred in relation to the gaining or production of the excluded dividends must be treated in the second assessment as excluded from the allowable deductions by the application of the exempting words of s. 51 (1). In other words the situation is similar to that which I have stated in dealing with s. 44 (2).

For these reasons I am of opinion that the Commissioner was right in deciding in 1951 that his assessment in respect of the 1946-1947 and 1947-1948 years had been made in error. For the purpose of applying ss. 44 (2), 46 and 107 he ought not to have set off the total outgoings (including the cost of acquiring shares) against the total receipts (including both proceeds of realization and dividends), and treated the excess of the latter over the former as consisting of proportionate parts of the various items of receipts. He was, I think, right in turning to a different method - taking each of the ten transactions by itself, deducting from the dividends received in that transaction the loss consisting of the excess of cost of acquisition over proceeds of realization, treating the balance thus obtained as consisting proportionately of the several classes of dividends received, and applying ss. 44 (2), 46 and 107 to such of the amounts thus obtained as fall within their terms.

The case stated asks a question as to whether the making of the 1951 and 1953 amendments of Rowdell's assessments was precluded by the provisions of s. 170. On the view of the case that I have taken the question is material only to the 1951 amendment; but it was not argued even in relation to that amendment, and no pronouncement upon it is called for.

I would answer the questions in the stated case as follows: - 1. This question does not arise in the appeal. 2. (a) No. (b) No. (c) No. 3. (a) No. (b) Yes. (c) No. 4. (a) No. (b) Yes. (c) No. 5. Yes. 6. Not answered. 7. No.

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.

The taxpayer objected to all the 1951 and 1953 assessments and, upon its objections being wholly disallowed, the Commissioner's decisions were in accordance with the taxpayer's request referred to the Board of Review in accordance with s. 188 of the Act. Prior to the hearing before the Board of Review, the Commissioner wrote to the taxpayer advising that it was not intended to argue the principle upon which the 1951 assessments were based and that "the matters" then remaining in dispute will be those in which it is intended to rely upon the provisions of Section 260 to support the existing assessments on the view that any income received by Rowdell Pty. Ltd. from certain transactions was in the nature of a profit or reward in respect of which no rebates are allowable under the Act. The particular transactions are: -

1947 H. L. Downe Ltd. 1948 Sumpton and Sons Ltd. H. J. Wigmore & Co. Ltd. 1949 Baltic Agencies Pty. Ltd. Mills & Ware Pty. Ltd. Mulga Downs Pty. Ltd. Naracoorte (Pty.) Ltd. Western Press Pty. Ltd. /Wheatgrower covenant.

The Board of Review by a majority rejected the Commissioner's contention upon these matters and allowed the taxpayer's objections to the 1953 amendments but, notwithstanding that there had been no argument with regard to the 1951 amendments, the Board went on to uphold the Commissioner's decision disallowing the taxpayer's objections to the 1951 amendments. Both the taxpayer and the Commissioner have appealed to this Court; the taxpayer supporting the Board of Review's decision so far as the 1953 amendments are concerned and appealing against its decision so far as the 1951 amendments are concerned; the Commissioner appealing against the decision so far as the 1953 amendments are concerned and, if unsuccessful in this, supporting the decision so far as the 1951 amendments are concerned. In these circumstances it seems desirable to start with a consideration of the 1953 amendments.

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.

Before considering this problem it is necessary to mention the matter to which, it seems, question 7 in the case stated is directed, namely, whether independently altogether of the situation of the other parties the arrangement to which it became a party had the purpose and effect of avoiding the taxpayer's own tax obligations. Again I have not been able to find sufficient in the case stated to support such a conclusion notwithstanding that it would seem that the acquisition by the taxpayer of shares for more than they realized upon disposal did provide it with deductions (i.e. the purchase price substantially larger than the corresponding receipts i.e. the selling price or its equivalent). This of itself, however, is not sufficient to attract s. 260 and, upon the material in the case stated, it is not possible to conclude that the taxpayer was party to arrangements that had or purported to have the purpose or effect of avoiding its tax obligations, to use a compendious phrase to describe what appears in (a), (b), (c) and (d) of s. 260.

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.

What has been written about the transactions in relation to the purchase by the taxpayer of the Hancock family's shares in Mulga Downs Pty. Ltd. applies equally to the other transactions under consideration and for the foregoing reasons I have come to the conclusion that s. 260 does not support the 1953 amendments and that the taxpayer's objections to these were properly allowed by the Board of Review. In these circumstances it is not necessary to go further and to decide whether, if s. 260 applied, its operation would in any event have justified the conclusion that the taxpayer should be regarded as having obtained the difference between what it received and what it paid as income of the character of rewards for services rendered.

The conclusion that the 1953 amendments cannot be supported makes it necessary to determine whether the 1951 amendments were correctly made and in so doing it is necessary to consider separately whether the Commissioner was right in making the deductions that he did from dividends having the character of exempt income, from dividends rebateable under s. 46, and from dividends rebateable under s. 107. At the outset it should perhaps be said that if any of such dividends should bear a proportion of some deduction, that deduction would be the cost of the shares which produced the dividends and not the difference between what the shares cost and what they brought after all dividends had been received. In other words, instead of the loss being spread over the dividends, the cost would have to be spread over the dividends and whatever else the taxpayer received for or on account of the shares. To revert to the H. L. Downe Ltd. transaction to illustrate the difference, the cost (£8,809) would have to be spread rateably over the exempt dividends (£1,800), dividends rebateable under s. 46 (£2,769), the dividends rebateable under s. 107 (£1,374) and the £3,000 representing share capital instead of what is called the loss (i.e. £5,809) being spread over the three dividends, the course followed by the Commissioner with regard to that and other like transactions. The important question is, however, should the dividends bear any proportion of the proper outgoing?

So far as the exempt dividends are concerned, it is beyond question that no part of any deduction can be attributed to them, for deductions are made from assessable income to arrive at taxable income, and exempt income is not assessable income. Dividends falling within s. 44 (2) are exempt simply because it is provided that the assessable income of a taxpayer shall not include the dividends therein described. To attribute part of an allowable deduction to an item of exempt income is clearly contrary to the Act and what might be thought a more debatable question has not been raised - that is, whether, if shares that produce exempt dividends have been bought for the purpose of receiving such income, what could be treated as a deduction or part of a deduction loses that character pro tanto because any outgoing, to the extent to which it is incurred in relation to the gaining of exempt income, is not a deduction (s. 51). Had the Commissioner assessed along these lines, it seems to me that questions would arise whether the purchase price was apportionable and, if so, whether the taxpayer's exempt dividends should have been reduced by deduction of the proportion of the price attributable to them. All that is necessary for me to say is that, for the reasons stated hereafter in connexion with what the Commissioner did in relation to rebateable dividends I do not think the purchase price was apportionable and that I am inclined to think that an assessment arrived at by disallowing the deduction pro tanto would have been different from that which the Commissioner made and now supports.

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.

What has been said about dividends rebateable under s. 46 also concludes the question whether any deduction should be made from dividends rebateable under s. 107. That section authorizes no deduction. It provides simply that a person shall be entitled to a rebate of the amount by which his income tax is increased by the inclusion in his assessable income of dividends paid to him by a company. If a deduction or any part of a deduction can be made from dividends rebateable under s. 107, it must be by virtue of s. 50 but, as has already been shown, no part of the purchase price of shares bought by the taxpayer can be directly related to any dividend received by the taxpayer from such shares.

It follows that the taxpayer's objection to the amendments made in 1951 ought to have been allowed. Applying the foregoing conclusions to the questions asked in the case stated, they should be answered as follows: - (1) Not necessary to answer. (2) (a) No. (b) No. (c) No. (3) (a) Yes. (b) No. (c) No. (4) (a) Yes. (b) No. (c) No. (5) No. (6) Not necessary to answer. (7) No.