Taxation, Commissioner of (Cth) v Ellers Motor Sales Pty Ltd - [1972] HCA 17 - HCA 1972 case summary — Zoe

CTHHCA

Taxation, Commissioner of (Cth) v Ellers Motor Sales Pty Ltd

[1972] HCA 17

High Court of Australia|1972-07-01|Before: Gibbs JJ, McTiernan J

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Source facts

Court

High Court of Australia

Decision date

1972-07-01

Before

Gibbs JJ, McTiernan J

Source

Original judgment source is linked above.

Judgment (35 paragraphs)

[1]

For the reasons which I have already given, I think that to treat s. 260 as applying here would be to render ineffectual attempts to give to the taxpayers concerned an advantage which s. 45 of No. 110 of 1964 was designed to give them. 1. (1957) 100 C.L.R. 66. 2. (1971) 127 C.L.R. 62. 3. (1957) 100 C.L.R., at pp. 92-93. 4. (1969) 121 C.L.R., at p. 678.

[2]

With respect, I do not think that these appeals can be decided upon the ground thus indicated in his Honour's reasons. No doubt, the persons concerned made use of the provisions relating to rebates and to private companies which remained applicable to income of the year ended 30th June 1965. Whether the availability of those provisions ought to be described as an "advantage" which s. 45 of the 1964 Act was designed to give or as an "indulgence" was questioned in the arguments submitted to us, but the matter does not depend upon verbal criticisms of that kind. I find myself in respectful disagreement with his Honour, because I do not think that the application of s. 260 to the facts of this case in the manner for which the appellant contends would operate, except to the extent which will be indicated later, to render ineffectual an attempt to give any of the persons or the companies concerned any advantage which the legislation, and in particular s. 45 of the 1964 Act, was designed to give them. The appellant does not seek to deny to any company the benefit of a "full" rebate in accordance with the provisions of the unamended s. 46. The appellant does not now contend (although before his Honour the right was reserved to challenge the correctness of Keighery's Case [1] ) that Holdings was a private company on 30th June 1965 or that s. 260 requires that it must be taken to have been a private company. The appellant relies upon a different aspect of the transaction. He contends that, upon the question whether s. 260 applies so as to prevent the Harcourt shareholders from asserting against him that the moneys which came into their hands were capital receipts and not income, the principle upon which Keighery's Case [1] was decided has no bearing, and that that question falls to be determined upon considerations which make the formation of a "Keighery company", although that was one step in the scheme, an irrelevant factor.

[5]

Subject to certain arguments to the contrary which have yet to be considered, this appears to me to be an arrangement of the kind to which s. 260 should be applied, so as to enable the Commissioner to assess tax on the former shareholders in Harcourt as if they had remained its shareholders, in accordance with the principles as to the operation of s. 260 established in such cases as Bell v. Federal Commissioner of Taxation [1] , Federal Commissioner of Taxation v. Newton [2] , and on appeal to the Privy Council [3] , and Hancock v. Federal Commissioner of Taxation [4] . According to those authorities it is appropriate to look at the end result of the transaction from the point of view of Harcourt and from the point of view of those who were its shareholders before the transfer of the shares to Holdings. The end result was that the profits had gone out from Harcourt and that an equivalent amount had come into the hands of its shareholders. To adopt the phrase used by Fullagar J. in Newton's Case [5] , it may be said in my opinion that "the only real money" which figured in the transactions was Harcourt's money. The loan from the bank to Ellers, the loan from Ellers to Holdings, the use by Holdings of the credit so obtained to pay for the shares, the use of the dividend received by Holdings to pay back the loan obtained from Ellers and the use by him of that money to repay the bank were all steps in the transaction which, although they were "genuine" and although on the face of them they effected transfers of assets (the Harcourt shares) in exchange for a price, did not prevent the end result from being, as it was intended to be, that the Harcourt profits found their way into the hands of those who had been its shareholders. It does not matter that the payment for the shares was made (by means of borrowed money) before the dividend was actually received by Holdings. As was said by Menzies J. in Mayfield v. Federal Commissioner of Taxation [No. 2] [6] , "a substantial identity between what the company distributed and what the assumed members received is sufficient".

[10]

if they have included a transfer of property from the taxpayer in consequence of which income from the property, instead of being received as such by the taxpayer, has followed either of two courses: (i) a course which has carried it through the hands of other persons to the taxpayer, but so as to reach him with the character of capital; or (ii) a course which has amounted in effect to an application of the moneys by the taxpayer, and so has been a practical equivalent of a receipt by him followed by an expenditure by him. If a taxpayer makes a decision to arrange matters so that income from his property follows one of the courses so described and reaches him with the character of capital, in my opinion he is not thereby exercising a "right of choice between alternatives which the Act lays open to him", whether or not the intermediary which he has chosen to interpose between himself and the source of the money happens to be a "Keighery company". At this point it is important, in my opinion, to distinguish between the tax liability of a company which has been formed or reconstructed in such a manner that its character is, for the purposes of the Act, that of a non-private company and the liabilities for tax assessed upon their own incomes of others who have been concerned in that formation or reconstruction. In my opinion it is possible that the circumstances may be such that s. 260 may be used in assessing the latter liabilities, notwithstanding that it cannot be applied in assessing the tax liability of a company so as to treat the company as having a character different from that which it bears according to the terms of the Act as applied to the facts which exist at the relevant date. In Federal Commissioner of Taxation v. Casuarina Pty. Ltd. [1] , in referring to the fact that the taxation liabilities of the Sternberg companies or the Sternbergs were not in question, I recognized that possibility; so also did Gibbs J. [2] . 1. (1961) 108 C.L.R. at p. 283. 2. (1971) 127 C.L.R. 62, at p. 97. 3. (1971) 127 C.L.R., at p. 104.

[11]

It is necessary now to refer to some submissions on behalf of the respondents. One was that s. 260 is not applicable, for the reason that the profit did not get out to the pockets of the shareholders, but remained in the company group; and will be liable when distributed by Holdings to taxation as dividends received by the shareholders therein. In relation to that submission, there has been a contest upon the question whether or not it is inevitable that a tax liability of that kind will be incurred in the future. In my opinion, this is not inevitable, but I do not think that the result of these appeals depends in any way upon deciding what tax, if any, will be imposed in the future in consequence of an assumed distribution of profits by Holdings, whether by way of dividends or by way of a distribution in a winding-up. There is no doubt that "the real money" came to the hands of the respondents. It came in such a form that it is not taxable unless s. 260 operates. The question whether s. 260 operates or does not operate to enable the appellant for the purposes of the assessment of tax upon the recipients to treat the money as if it had been received by them as income cannot depend, in my opinion, upon what will ultimately happen to the profits shown in the balance sheet of Holdings as at 30th June 1965 as "unappropriated profits". If the scheme enabled the respondents to avoid or alter or defer liabilities which might otherwise have fallen upon them, the arrangement was in my opinion within the descriptions contained in s. 260, regardless of whether it was effective to solve completely the problems of the group of companies, including any which might subsequently arise in relation to the consequences of the carrying out of the scheme. In this connection it may be observed that the shareholders of Holdings, upon whom if they remained shareholders a tax liability in respect of future dividends declared by it would fall, do not include Sales or Junelle, but are two only of the former shareholders in Harcourt. But even if the shareholders were identical, the question whether they were liable to tax as if they had remained shareholders in Harcourt and had received the money which came from it as income would not depend in my opinion upon determining whether or not they might come under a tax liability at some time in the future, as shareholders in Holdings, as a consequence of its having received the dividend from Harcourt.

[17]

I have stated the conclusion that the appellant was entitled to assess the respondents on the footing that the sums which they received from the sale of the shares in Harcourt were received by them as dividends, by means of which the profits of Harcourt were distributed to them. A question that still remains to be considered is a question as to the manner in which the tax that was properly payable in respect of the income derived respectively by each of the respondents is to be ascertained. As to Mr. and Mrs. Ellers this presents no problem. But as to each of the companies, a problem arises at this point concerning the application, for the purpose of determining its status for tax purposes, of the principles accepted in the cases of Keighery [1] and of Casuarina [2] . For reasons which I have stated, I am of opinion that those principles do not operate to make inapplicable such authorities as Hancock's Case [3] and Newton's Case [4] . Section 260 may be applied to render ineffective the attempt to prevent the receipt by the shareholders in Harcourt of a distribution of its profits from being taxable, by arranging that the money should be received in the form of capital. But it is another question whether s. 260, as interpreted in the cases of Keighery [1] and Casuarina [2] , can be applied so as to treat Sales and Junelle as retaining the character of private companies, doing this by disregarding the effect of the transfers of the shares in Harcourt to Holdings upon the character of those companies. One of the objections raised to the assessments of each of those companies was that in relation to the year of income ended 30th June 1965, it was not a private company for the purposes of Div. 7. On the hearing of these appeals it was submitted that the consequence of the transfer by Sales and by Junelle of the shares in Harcourt to Holdings was that Sales and Junelle became companies which were not private companies as defined by the Act. It was submitted that it was open to them to do the acts which brought about that result and that the resulting change in their character was a change which cannot be disregarded when assessing tax in respect of income received by them in the relevant year. In my opinion, these submissions should be upheld.

[26]

That leaves for consideration the appeal which relates to an assessment against Sales of Div. 7 tax in respect of the year of income which ended on 30th June 1967. In respect of that year Sales made an income tax return in which it described itself as a private company. That was correct. It was a private company on 30th June 1967, under the legislation which was then in force, as it was not a subsidiary of a public company as defined by that legislation. Its return showed a taxable income of $12,528. In arriving at that figure a deduction had been made of losses in previous years amounting to $15,184. The company was assessed for ordinary tax on its taxable income. The tax was $3,698. Later, there was a Div. 7 assessment levied on an undistributed amount of $4,415. It seems plain that that figure was obtained by deducting an allowance (s. 105B) of fifty per cent from the balance remaining after deducting the amount of the primary tax from the taxable income. Very little argument was addressed to the Court in relation to this appeal. From the grounds of objection, it appears that it was there claimed that there was a large sum which ought to be treated as an "excess distribution" and deemed to be a dividend paid during the prescribed period of 1st May 1967 to 30th April 1968, in accordance with the provisions of s. 106 (2) of the Act. The notice of objection set out that objections were being lodged against the assessments in respect of the income of the year ended 30th June 1965 and a copy of those objections was incorporated in the objection to the Div. 7 assessment with respect to the income of the year ended 30th June 1967. Alternative claims were then made. The first was that if the company was a private company in relation to the 1965 year of income and if the amount received on the sale of the Harcourt shares should be excluded from the assessable income and the taxable income of that year, then the company was entitled by s. 106 (2) to have an excess distribution deemed to be a dividend. The second claim was to the effect that if the company was not a private company in relation to the 1965 year and if the amount derived from the sales of the shares should be excluded from the assessable income and the taxable income of that year, then the Commissioner was not empowered to correct what was said to have been a mistake of law made by him in treating the company as a private company in relation to that year and he could not now treat it as a non-private company. The consequence was said to be that the company was entitled under s. 106 (2) to have an excess distribution deemed to be a dividend. It was an essential element in each of those alternative claims that the money received upon the sale of the shares should not have been included in the assessable income or the taxable income of the 1965 year. It follows from my conclusion that that money was properly included in the income of that year, that neither of those claims, as stated in the notice of objection, has been made out. The grounds of objection referred to an appendix setting out the basis upon which was calculated an amount claimed to have been an excess distribution in respect of the year of income ended 30th June 1965. It seems that this appendix was not included in the appeal books but I have seen a copy of it. It is not self-explanatory. It has not been explained or discussed in argument. In my opinion it has not been established that there was, within the meaning of s. 106 of the Act, an excess distribution for the year of income ended 30th June 1965.