The Commissioner of Taxation of the Commonwealth of Australia v Cooper Brookes (Wollongong) Pty Ltd [1979] FCA 80

Federal Court of Australia|1979-08-15|Before: Fisher JJ, Brennan J

Income tax - Allowable deductions - Carry-forward losses + Holding in subsidiary company ~ Continuity of beneficial ownership of shares in holding company - Principles of interpretation ~ Existence of contract or arrangement with specified purpose - Whether subjective or objective purpose - Continuance of arrangement - Parties to arrangement -

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA v. COOPER BROOKES (WOLLONGONG) PTY.LTD.

) NEW SOUTH WALES DISTRICT REGISTRY ) No. G90 of 1977

ON APPEAL FROM THE SUPREME COURT OF NEW SOUTH WALES ADMINISTRATIVE LAW DIVISION

BETWEEN : THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA = Appellant AND : COOPER BROOKES (WOLLONGONG) PTY.LTD. Respondent ORDER

The order of the Supreme Court of New South Wales be set aside and in lieu thereof 1t be ordered: that the appeal by Cooper Brookes (Wollongong) Pty.Ltd. to that Court against its assessment to income tax in respect of the year of income ended 30 June 1971 be dismissed, that the assessment be confirmed, and that Cooper Brookes (Wollongong) Pty.Ltd. Pay the costs of the appeal to the Supreme Court incurred by The Commissioner of Taxation of the Commonwealth of

ON APPEAL FROM THE SUPREME COURT OF NEW SOUTH WALES ADMINISTRATIVE LAW DIVISION

BETWEEN : THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

Appellant AND : COOPER BROOKES (WOLLONGONG) PTY. LIMITED Respondent

In this case, I have had the advantage of reading my brother Fisher's reasons for judgment. I agree that the appeal should be allowed, and I am content to follow in the steps which lead his Honour to that conclusion. I would, however, add briefly my reasons for holding that s.80C(3) of the Income Tax Assessment Act 1936 does not have the effect of applying s.80B(5)(c) to a case falling within s.80C(1) as though the phrase "for the purpose of enabling

the company to take into account a loss that the company

has incurred" read "for the purpose of enabling the holding company to take into account a loss that the holding company has incurred".

Section 80C(1) provides that, notwithstanding ss.80, 80AA and 80A "but subject to this section and to section eighty E" of the Act, a loss incurred by a subsidiary company shall not be taken into account for the purposes of s.80 or s.80AA unless the Commissioner is satisfied of two conditions referred to in the subsection. The conditions are, first, that the holding company which had a controlling interest in the subsidiary company at any time during the year of loss, also had a controlling interest in the subsidiary at all times during the relevant year of income; and, second, that shareholders who beneficially owned shares carrying not less than 40% of the voting, dividend and capital distribution rights in the holding company at all times during the year of loss, also beneficially owned shares carrying rights of those kinds in the holding company at all times during the relevant year of income. If the beneficial owners of shares in the holding company carrying rights of the kind referred to in s.80C(1) during the whole of the year of income had not beneficially owned shares carrying those rights during the whole of the year

in which the subsidiary incurred the relevant loss,

s.80C(2) empowers the Commissioner to take into account

for the purposes of s.80 or s.80AA such part of the loss as he considers to have been incurred while they had beneficially owned shares carrying those rights. Subsections (1) and (2) of s.80C each apply to a loss incurred by a subsidiary, and define the conditions upon which it is or may be allowed as a deduction in a subsequent year of income, pursuant to s.80 or S-80AA. Neither subsection applies to a loss incurred by a holding company before a particular year of income, for the deductibility of such a loss falls for consideration under s.80A. But there is a legislative intention, too clear to mistake, common to s.80A and s.80C, as to the condition relating to continuity of beneficial ownership of shares upon which a company may be allowed a deduction: the condition is expressed in s.80A(1) with respect to the taxpayer company in precisely the same terms as it is expressed in s.80C(1) with respect to the holding company of the taxpayer company; and in s.80A(2) it is expressed with respect to the taxpayer company in precisely the same terms as it is expressed in s.80C(2) with respect to the holding company of the taxpayer company. Indeed, the only circumstance which takes the loss incurred by a taxpayer subsidiary company out of the application of s.80A is that the taxpayer was a subsidiary at a time during the year of

as s.80B(1). provides, "for the purposes of the application

of [s.80A] in determining whether a loss incurred by a

company...is to be taken into account...". Section 80C(3)

applies the same subsections in relation to a holding

company for the purposes of the application of s.80C(1)

or s.80C(2) - provisions which also relate to whether a

loss incurred by a company is to be taken into account.

The symmetry of the provisions suggests that subsections

(3) to (8) of s.80B are to provide a common dictionary

for the operation of the condition relating to continuity

of beneficial ownership of shares in the taxpayer company

when s.80A applies, or of shares in a holding company of

Paragraph (c) of s.80B(5) might therefore be expected to have a like operation with respect to the deductibility of a subsidiary's loss under s.80C, to the operation which it has with respect to the deductibility of a company's loss under s.80A. Paragraph (c) denies deductibility to a loss otherwise falling within s.80A where a contract agreement or arrangement, referred to in that subsection, was entered into for a purpose of obtaining a deduction for the loss. Prima facie, paragraph (c) should be construed in its application to a case under s.80C as denying deductibility to a loss

a" subsidiary company's loss - where a contract, etc., was

entered into for_a purpose_of_,obtaining a deduction for the subsidiary company's loss. No doubt the contract, etc., referred to in paragraph (b) relates to the continuity of shareholding in the holding company, but the relevant purpose is connected with the deductibility of a loss falling within s.80C - the subsidiary's loss.

To hold otherwise would attribute an operation to s.80C(3) and s.80B(5)(c) which would be incongruous in comparison with the operation of s.80B(1) and s.80B(5)(c). Yet there is nothing to suggest any difference in legislative intention as to the respective applications of s.80B(5) (c) by s.80B(1) and by s.80C(3), wnless one fastens on the phrase in s.80C(3): "as if references in those sub-sections to the company were references to the holding company...". But s.80C(3) applies the whole of the operation of subsections (3) to (8) to cases falling within s.80C, and the quoted phrase may be construed as interpretative, requiring references to a company to be references to the holding company, when that interpretation does in truth apply the whole of the operation of subsections (3) to (8) to the condition relating to continuity of shareholding in a holding company under s.80C. To fulfil that legislative intent of s.80C(3),

as ascertained from its context, I would construe the

reference to"company'in s.80B{5)(c) as applied by s.80C(3) to be a reference to the company which was to be enabled to take into account the loss referred

I certify that this and the 5 preceding pages are a true copy of the

Reasons for Judgment herein of nis honour Mr. Justice Brennan.

ON APPEAL FROM THE SUPREME COURT OF NEW SOUTH WALES ADMINISTRATIVE LAW DIVISION

BETWEEN: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

DEAWE J: I have had the benefit of reading the judgment of Fisher J. I agree with the conclusions which he reaches and, subject to what is said hereunder, with the reasons which he advances for those conclusions. The one question upon which

I would add some comments for myself concerns the construction

of s.80C(3) of the Income Tax Assessment Act, 1936 ("the Act").

The sub-section has since been repealed and references to it

and to other provisions of the Act are to the relevant provision

in the form applicable to the year of ancome ended 30 June, 1971.

s.80B(5) by providing that, in the specified circumstances,

references to "the company" in the provisions of that sub-section

should be read as references to "the holding company or the interposed company as the case may be". If the provisions of s.80C(3) are given their strict literal meaning, the present case does not fall within s.80B(5), and the latter sub-section does not destroy the continuity of beneficial ownership of shares which is necessary if the taxpayer 1n the present appeal is to be entitled to the benefit of the disputed deduction in respect of losses of previous years. On the other hand, if the direction embodied in s.80C(3) to read references to "the company" in the manner indicated, is construed as subject to

an implied qualification that they are to be so read "where appropriate", s.80B(5), in its extended operation, has the

effect of destroying that continuity of beneficial ownership.

Ordinarily, I would be loathe to attribute to the provisions of a taxing act a meaning different from their literal meaning where the literal meaning would not, and the attributed meaning would, deprive a taxpayer of a deduction to which he or it would otherwise be entitled. The legislative intent must be derived from the words which the Legislature has seen fit to use. The fact that the literal interpretation

of the words used by the Legislature may seem to result in a

more favourable result to a taxpayer than the Legislature

may have! intended does not, in itself, constitute any warrant for a court disregarding the literal meaning of the words which the Legislature has used and attributing to those words a quai- ified meaning which it is assumed the Legislature intended to convey. In the present case however, as Fisher J. has illustrated, a literal reading of the words used in s.80C(3) would result in taxpayers who were plainly not intended to be caught by the provision being deprived of the benefit of deductions to which they would otherwise be entitled. If the direction contained in the sub-section is read as qualified by the words "where appropriate" that unintended result would be avoided. In these circumstances, it 1s plainly legitimate to regard the importance of the fact that such a qualification of the words used would have the result of depriving the taxpayer in the present appeal (and presumably other taxpayers) of the benefit of a deduction in respect of past losses to which they would otherwise be entitled, as discounted by the consideration that it is reasonably clear that it would be quite anomalous

for the taxpayer and others in the same circumstances to enjoy

The implication of words such as "where appropriate" in a legislative direction to substitute words in another legislative provision so as to apply that legislative provision to circumstances to which it would not otherwise be applicable does not involve doing violence to the words which the Parliament has used. Where, as in the present case, the direction to

substitute the different words is given 1n respect of a variety

of different legislative provisions, the implication can be

t made almost as readily as can the implication of the qualificat- - ion "subject to a contrary intention" in a definition section.

In my view, the qualification "where appropriate" should be

The appeal to this Court should be allowed with costs. The orders made by the Supreme Court of New South Wales should be set aside and, in lieu thereof, it should be ordered that

{ corltiy fuat this and the preecding pages are a {rue copy of ihe reasons for Judgment hercin of His Honour Mr, Justice Deane

) ) NEW SOUTH WALES DISTRICT REGISTRY ) No. G90 of 1977 ) )

THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA

LIMITED Respondent CORAM: Brennan, Deane and Fisher JJ. 15 August 1979. REASONS FOR JUDGMENT FISHER J.: This 1s an appeal by the Commissioner of Taxation

("the Commissioner") from a decision of the Supreme Court of

New South Wales in its Administrative Law Division. The Supreme Court upheld an appeal by Cooper Brookes (Wollongong) Pty. Lamited ("the taxpayer") against an income tax assessment issued against the taxpayer 1n respect of the year of income ended 30 June 1971. At 1ssue in the appeal 1s the taxpayer's entitlement in the assessment of income for that year to a deduction of the amount

The taxpayer 1n the years of income ending 30 June 1964 and 30 June 1965 ("the years of loss") accumulated losses totalling $44,077. In its return of income for the year ending 30 June 1971 ("the year of income") it claimed to be entitled to an allowable deduction of the amount of these accumulated losses. The Commissioner in his assessment rejected this claim stating in the adjustment sheet that he relied upon s.80C and in particular that "in pursuance of s.80B (5) the shares held by E.H. King in Wellington Holdings Pty. Lamited have been treated as shares not beneficially owned by him at any time during the year of income and the Commissioner accordingly cannot be satisfied in terms of s.80C (1)(b)." Wellington Holdings Pty. Limited at all relevant times beneficially held all] of the issued shares in the capital of the taxpayer. The taxpayer objected to the assessment and the Commissioner disallowed the objection. On appeal to the Supreme Court of New South Wales, Woodward J. found

Before the trial judge two substantial 1ssues arose, namely

whether by virtue of s.80C (3) of the Income Tax Assessment Act 1936 ("the Act") s.80B (5) had an extended application to a case such as the present where the taxpayer claiming the benefit of a loss incurred in a previous year was, at all relevant times, a subsidiary of some other company, and

whether there was before him evidence upon which it was reasonable to infer a relevant arrangement between Mr. E.H. King, ("King") the continuing shareholder in the holding company Wellington Holdings Pty. Limited ("Wellington") and Network Pinance Limited ("Network")

the purchasing shareholder or any person on its behalf.

Tlzis Honour also gave consideration to Lwo subsidiary questions, namely whether s.80A and s.80C of the Act have a cumulative effect and whether the grant by King of a proxy on 24 May 1968 came within s.80B (5)(b) and (c) of the Act. It 1s agreed by counsel for both parties that the former subsidiary question does not

On the hearing before the trial judge, little prominence appear to have been qiven to an alternative contention upon which the Commissioner relied before this Court. That contention, which was clearly raised by the Commissioner's letter of particulars dated 4 May 1977, was that there was a relevant arrangement between Kang and the Scheme Trustees ("the trustees"). In his judgment Woodward J. concentrated his attention almost exclusively upon the possible existence of the alleged arrangement between King and Network. On the hearing of the appeal counsel for the Commissioner put as his primary submission that there was evidence from which it was reasonable to infer an arrangement between King and the trustees. As in my op2znion this submission should be upheld at 1s necessary for me to traverse the evidence because, even though 1t 1s not 1n dispute, certain portions thereof assume a different significance when considered in relation to the alternative arrangement that was alleged. It was not suggested that this alternative submission was not properly open to the

It will be necessary from time to time to refer to particular sections of the Act as they were at the relevant time and it is appropriate to set them down at the outset. They are:

"s.80A - (1) Notwithstanding sections eighty and eighty AA

of this Act, but subject to the next succeeding sub-section, and the next four succeeding sections a loss incurred by

a taxpayer, being a company, in a year before the year of iancome shall not be taken into account for the purposes of section eighty or section e1ghty AA of this Act unless -

(b) 1n the case of a company that 1s not a private company in relation to the year of income, the Commissioner is satisfied that 1t 18S reasonable to assume,

that, at all times during the year of income, shares in the company carrying between them -

{c) the raght to exercise not less than two- fafths of the voting power in the company;

(d) the right to receive not less than two- fifths of any dividends that may be paid by the company; and

(e) the right to receive not less than two-fifths of any distribution of capital of the. company in the event of the winding up, or of a reduction in the capital of the company,

were beneficially owned by persons whos, at all tames during the year in which the loss was incurred beneficially owned shares in the company carrying rights of those kinds.

(a) a person who beneficially owned any shares in the company at all times during the year in which the loss was incurred also beneficia- ly owned shares 1n the company at any time (an this sub-section referred to as 'the relevant time') during the year of income;

(b) before or during the year of income, that person entered into a contract, agreement or arrangement, or granted or was granted a right, power or option (including a contingent right, power or option), that, in any way, directly or indirectly, related

(1) the beneficial interest of that person in the Last-mentioned shares, or the value of that interest;

(22) the right of that person to sell, or otherwise dispose of, that aunterest or any such sale or other disposition;

(111) any rights carried by those shares, or the exercise of any such rights; or

(iv) any dividends that might be paid, or any disliibulion of capital that might be made, in respect of those shares, or the payment of any such dividends or the making

(c) the contract, agreement ox arrangement was entered anto, or the right, power or option was granted, for the purpose, or for purposes that included the purpose, of enabling the company to take into account for the purposes of section eighty or section eighty AA of this Act a loss that the company had incurred ina year before the year in which the contract, agreement or arrangement was entcred into or the right, power or option was granted or a Loss that the company maght incur in that last mentioned year,

the Commissioner may, subject to the succeeding provisions of this section, treat those shares as not having been beneficially owned by that person at the relevant time.

Notwithstanding sections eighty and eighty AA and eighty A of this Act but subject to this section and to section eighty E of this Act, where a company in which no other company had

a controlling interest (in this section referred to as 'the holding company') had a controlling interest in another company (in this section referred to as 'the subsidiary company') at any time during a year in which a Joss was incurred by the subsidiary company, the loss shall not be taken into account for the purposes of section eighty or section eighty AA of this

Act unless the Commissioner is satisfied that, at all tames during the year of income of the subsidiary company -

(a) the holding company had a controlling interest in the subsidiary company; and

(b) shares 1n the holding company carrying between them ~

(2) the raght to exercise not less then two-fifths of the voting pover an the company;

(12) the right to receive not less than two-fifths of any dividends that may be paid by the company; and

(231) the right to receive not less than two-fifths of any distribution of

capital of the company in the event of the winding up, or of a reduction

were benficially owned by persons who, at all tames during the year in which the loss was incurred by the subsidiary company, beneficially owned shares in the holdang company carrying rights of those kinds.

s.60C - (3) For the purposes of the application of either of the last two preceding sub-sections the provisions of sub-sections (3) to (8) inclusive of the last preceding section apply in relation to the holding company and in relation to every company that was at any relevant time interposed between the holding company and the subsidiary company as 1f references in those sub-sections to the company were references to the holding company or to the interposed company as the case may be."

The taxpayer was incorporated on 20 October 1961 under the name Ken Bridges Pty. Limited. Subsequently but prior to the relevant years 1t changed its name to Cooper Brookes (Wollongong) Pty. Limited. Shortly after its incorporation the taxpayer had

A.d. De Montford 1 K.J. Bridges 150 J.K. Cranston 150 King 2,699

J.K. Cranston transferred his 150 shares on 22 November 1962 to

E.vI. King Woldiangs Pty. Limited was iancorporated on 30 April 1962 and subsequently it changed 1ts name to Wellington Holdings Pty. Limited ("Wellington"). Oa the day of its incorporation certain allotments of shares were made which shares together with

King 1 Class A, 14,999 Class B. J.A. King (Mrs) 1 Class A, 499 Class B. D.G. McKay 1 Class B.

A.J. De Montford 1 Class B. King and Mrs. J.A. King ("Mrs. King") were directors of Wellington

On 19 April 1963 King transferred hos holding of 2,699 shares in the taxpayer to Wellington, and the taxpayer remained a subsidiary of Wellington at all relevant times. Wellington had an addition to the taxpayer three further subsidiaries, Cooper Brookes Pty. Limited, Cooper Brookes Trading Co. Pty. Lamited and Cooper Brookes Industries Pty. Limited. These five companies are, where appropriate, referred to compendiously as "the

It would appear that in the years of the early sixties each of these companies incurred losses. The taxpayer incurred its relevant losses in the years of income ending 30 June 1964 and 30 June 1965. In each of these years it 18 accepted that King owned beneficially more than forty percent of the 1ssued shares an Wellington (1n which no other company held a controliing anterest) and that Wellington held beneficially more than forty percent of the shares 1n the taxpayer and was its holding company

At a meeting of directors of Wellington held on 28 April 1965 King and Mrs. King resolved to place that company into voluntary liquidation. On 12 May 1965 Mr. C.K. Roberts ("Roberts") a chartered accoantant, was appointed liquidator of Wellington. On 7 June 1965 a winding-up order was made by the Supreme Court of New South Wales in respect of each of the other four companies (anclusive of the taxpayer) in the Wellington Group. Mr. C.H.R. Jackson ("Jackson"), a chartered accountant and a partner of Roberts, was appointed offic1al liquidator in each instance. The Wellington Group had little in the way of assets other than their tax losses and nothing significant appears to have occurred in

On 18 July 1967 King and Mrs. Kang entered into an agreement in writing with Roberts and Jackson (therein called "the Scheme Trustees") to which agreement I would attach some significance. It recited the holding by the Kangs of anter alia 11,999 shares in Wellington, which 1s almost exactly sixty percent of 1ts issued shares and the fact that they were to transfer these shares to the"purchaser of the tax losses"of the subsidiaries of Wellington in consideration of the sum of $1,200. It further recites that the trustees were selling the structure of Wellington to a company which was acquiring the same for the benefit of the tax losses of certazn of the subsidiaries of~ Wellangton. The agreement further recited that the sum of $1,200 would be paid direct to the trustees who 'ould dispose of the same in accordance with the terms of the scheme of arrangement. In the events that happened this sum was established as represent- - ang the fees of the trustees. By the covenants of the agreement the Kings acknowledged that they had no claim to the sum of $1,200 and that the trustees were entitled to deal with it in their absolute discretion subject only to the scheme of arrangement. Moreover the Kings covenanted that they would make no enquiry nor would they be entitled to enquire into the manner of administration

There 1s evidence that the particular transaction envisaged at the time of this agreement fell through. It 1s however significant that this 1s the only evidence (apart from the proxy) of any express authority having been given by the Kangs or either of them to the trustees and there are some indications that the arrangements in this agreement at least in relation to the sum

of $1,200 were carried through into the ultimate scheme.

Certainly the trustees appear to have assumed that they had authority to enter into comnitments on behalf of the Kings.

The trial judge when commenting in his reasons on this agreement said that although the number of shares is different the transfer referred to in that agreement was probably the transfer set out in the fifth schedule to a subsequent agreement made by deed on 19 April 1968, thereby no doubt linking together the two agreements. For my part I see further sagnificance in the differing number of shares bat will reserve my comments until I am considering the latter agreement. It is also noteworthy that the first agreement merely recites an oblagation on the part of the Kings to transfer a certain number of shares, and does not

The next event to occur was the making on 19 April 1968 of a deed between the trustees as Scheme Trustees and Network, described therein as the lender. This deed provided in consider- - ation of the loan of certain monies to enable the scheme to be carried out, and subject to other stated terms, the trustees would on completion of the scheme deliver to Network a transfer of all the issued shares in Wellington for the consideration set forth an the f1fth schedule to the deed. Roberts as liquidator of Wellington undertook to sanction such transfers. The trustees covenanted to apply to the Supreme Court of New South Wales for an order staying the wanding-up of Wellington and also to apply to that court for an order confirming a reduction of capital of Wellington in such form as Network should require. The trustees further covenanted that contemporaneously with the

completion of the scheme they would cause a board meeting to be

held by each of the companies 1n the Wellington Group and cause all such resolutions to be passed and all such persons "appointed to or resigned from the board" as the lender might require. The fifth schedule to the deed set out the consideration to be paid

as abovementioned to be again the sum of $1,200 but in this instance not merely in respect of sixty percent of the shares

as under the previous agreement and not in respect of all of

the issued shares as contemplated in the body of the deed but

un respect of all but two of the issued shares which two were

The deed of 19 April 1968 does not relate or recite the authority which the trustees had to arrange for the transfer of the shares for the stated consideration, or their authority to call board meetings and to have resolutions passed and appointments or resignations of board members effected. Rather at tends to assume that persons associated with Wellington, whether as directors or shareholders, would concur in whatever

The deed 1s ain the form of an agreement between the trustees as Scheme Trustees on the one hand and Network Finance Limited the lender on the other part. In addition to the matters already referred to it recites the winding-up of each of the companies an the group and the earlier appointment of the two trustees as official liquidator and liquidator respectively. It recites also the undertaking on the part of the trustees to seek the approval of the Equity Division of the Supreme Court of New South Wales to the provisions of a scheme of arrangement in

respect of each of the four subsidiary companies. Each such

scheme was set out in a schedule Lu-lLhe deed. Finally, the deed recites that, as abovementioned, the lender had agreed to lend to each of the subsidiaries a sum of money, which sum was 1n respect of each of the subsidiary companies other than the taxpayer as appears from the scheduled schemes, on the basis of twelve and a half cents for each dollar of losses confirmed by the Deputy Commissioner of Taxation as allowable by way of deduction under s.80 of the Act. In the case of the taxpayer the calculation

vas at the rate of nine cents for each dollar of losses.

The deed additionally provided that the sum of $1,200 vould be refundable to the purchaser of the Wellington shares 1f the trustees were unable to comply with the provisions of the agreement ombodied in 1t for any reason other than death of a shareholder. Somewhat surprisingly, in the event that the agreement could not be completed because of the death of a shareholder the sum of $1,200 was to be forfeited to the trustees to meet their costs and expenses. This perhaps indicates that the trustees were satisfied that the shareholders would concur in all arrangements made an effect on their behalf under the scheme and to that extent coincides with the clause concerning enquiry in the first agreement. The trustees were satisfied that it could be assumed thst all would go according to their plan so long as the share-

There 1S also in the deed a similar provision in respect of a loan by Network to Cooper Brookes Pty. Limited, namely that it was refundable in full to the lender in the event of the trustees being unable for any reason other than death to comply

with the provisions of the scheme. In the latter event, namely

the death of a shareholder, the amount of the loan was forfe1ited

Thereafter King played the part doubtless expected of him an the implementation of the scheme. On 3 May 1968 he transferred to Network all but 2 of his B Class shares for a stated consider- ation of $899.82. There 1s evidence to the effect that he did not ever receive from the company a certificate for the 2 shares whach thereafter he held. It would appear that during the month he resigned as a director of Wellington as this fact was reported at a meeting of members of the company held on 31 May 1968. In respect of this meeting King appointed Roberts or failing him P.M. Somerset (Robert's Solicitor) as his proxy. The form of proxy 1S set out in the reasons of the trial judge but no evidence was called in respect of the giving of the proxy or the reasons therefor or in relation to any of the activities of Kang at this

On 8 May 1968 King and the other shareholders in Wellington transferred the balance of the issued shares (other than the 2 Class B shares retained by King) to Network or its nominees.

Thereafter the 20,002 1assued shares in Wellington were held as

follows: Network 2 Class A 19,997 Class B Network Management & Control Finance Pty. Ltd. 1 Class B King 2 Class B

On 24 May 1968 a meetang of creditors of Wellington was

held for the purpose of approving the remuneration of Roberts,

the liquidator. Roberts and Jackson were the only persons present. They held proxies from a number of the creditors.

The trustee of the Superannuation [Funds of three of the subsidiary companies gave his proxy in favour of the Chairman Roberts, doubtless in reliance upon the fact that King had some weeks earlier confirmed that he and his \1ife had agreed to waive any claim they might have against the funds. Subsequent to that conversation this trustee executed a release of debt in favour of Wellington on behalf of each of the funds. The meeting of

24 May 1968 approved the appropriation of the balance of the funds held in the liquidator's account to the remuneration of

The proxy given by King an favour of Roberts ox failing him his solicitor P.M. Somerset was 1n respect of an extra-ordinary general meeting of members of Wellington held on 31 May 1968 and at any adjournment thereof. This meeting vas attended by representatives of the two Network shareholders and Roberts as proxy for King. It was short and the minutes recorded as follows:

"The Chaarman advised the meeting that the liquidation

of the Company had been stayed and the previous directors were no longer in office. All the shareholders of the company being present, it was therefore resolved that

Peter Andrew Somerset and C.K. Roberts be appointed directors of the company."

There 1s as the trial judge states, no evidence that King was informed of the purpose of the meeting, or of the result at was intended to achieve. Nor was there any evidence of the reason why he gave a proxy for the meeting. Admittedly at the date of the meeting his shareholding in the company was negligible but this meeting to appoint new directors was required under

the scheme, an essential feature of which was the application to

the Supreme Court of New South Wales to approve a reduction in

A meeting of the new directors of Wellington was held following the meeting of members. The minutes of this meeting at which Roberts presided contained the following statement:

"The Board noted the agreement by the liquidators of the company with Network Pinance Limited for the sale of the structure of the subsidiaries to Network Finance Limited for the benefit of the tax losses available for recoupment in those companies, and that pursuant to the agreement it was necessary that the capital of this company (Wellington

be reduced to a small nominal amount for the scheme of arrangement with the creditors to be implemented."

The meeting approved resolutions for presentation to an extra-ordinary general meeting of members fixed for 4 June 1968, and directed that notices should be forthwith dispatched concerning the meeting. Two copies of the notice were sent to King, one envelope being addressed to North Ryde, and the other to North Baldwin (sic) Victoria, doubtless intended as North Balwyn.

Neither of these addresses coincides with King's address on the form of his proxy for the earlier meeting or his address in the share certificate for his two shares which was sealed on that day. There was no evidence that King received either of the notices

At the meeting two special resolutions were passed, one relating to the reduction of capital and the other sanctioning the arrangement under s.273 of the Companies Act 1962 (N.S.W.) ("the Companies Act") which had previously been approved by the

The reduction of capital was confirmed by the Supreme Court

on 17 June 1968. The two Class A shares and 19,995 Class B shares

held by Network were cancelled, leaving the capital comprising 5 Class B shares, of which King held 2, Network 2 and Network Management 1. King was thus restored to the position of a substantial shareholder, holding the necessary forty percent

On 17 October 1968, shortly after the obtaining on 14 October 1968, of the approval by the Supreme Court of the scheme of arrangement in so far as it related to the four subsidiary companies a meeting of directors of Wellington was held and four additional directors were appointed. Roberts and Somerset then resigned. One of the directors, W.E. Fisher ("Fisher") was appointed secretary of Wellington and its representative

Prior to the approval of the Supreme Court of the scheme of arrangement a meeting of creditors of the taxpayer was held pursuant to an order of that court. Jackson and Roberts as proxies for the creditors the bulk in value of whom were members of the subsidiaries of the Wellington Group were the only persons present. The minutes of the meeting record that Jackson reported as follows:

"In addition he had entered into an agreement for the sale

of the company structure of Cooper Brookes (Wollongong)

Pty. Limited and those of several of the associated companies to a public company interested in acquiring them for the benefit of their recoupable tax losses. The terms of the sale provided that the buyer would make available further monies for distribution to creditors in compromise settle- ment of their claims but completion of the sale was subject unter alia, to the various Cooper Brookes Companies involved entering into Court - approved schemes of arrangement with theiar creditors. It was the scheme of arrangement applicable to Cooper Brookes (Wollongong) Pty. Limited (in liquidation) which was now before the present meeting of creditors."

The scheme of arrangement was approved at the meeting, subject to any modifications the court might require. On 14

On 30 June 1970 the directors of Wellington declared a dividend of $130 and resolved that the same be paid to the holders of the Class B ordinary shares as follows:

On 9 July 1970 a cheque for $52 was forwarded by post to King at North Balwyn, and a certificate of posting was tendered in evidence. The letter vas unclaimed and returned to Network,

At this stage it was doubtless apparent that Wollongong had commenced to operate profitably and funds were becoming available

At about this tame a further scheme was conceived which had the consequence as far as King was concerned of ensuring that he did not participate in any subsequent dividend declared by Wellington out of profits made by the taxpayer. It was essential of course that he retain his forty percent shareholding during the ensuing year, but from the point of view of Network doubtless desirable that he was denied the right to participate in

distribution thereafter of profits made in that year by the tax-

The scheme is described 1n detail by the trial judge and his finding on the scheme and the manner of its implementation were not subject to challenge before us. In essence the plan was for Wellington to borrow from Network sufficient funds to

enable it to subscribe to a substantial new assue of capital by

the taxpayer and to secure its borrowing by a charge in favour

of Network over all of its shares in the taxpayer. At the appropriate time Network would make demand, Wellangton would default and Network would foreclose, thus depriving Wellington of the

For present purposes the details of the implementation

of the scheme are not relevant, but what 1s significant 1s the manner in which 1 would appear that the interests of King as a substantial albeit minority shareholder were ignored. The plan was carried unto effect 1n the period late December 1970 - early January 1971, and the Annual General Meeting of Wellington was held on 31 December 1970. King was not present and there is no record of him having received or having been sent a notice of the meeting. There was no discussion at the meeting of the - proposals which were then before the directors in respect of the

borrowing and taking up of the additional shares in the taxpayer.

The scheme worked according to plan. Throughout the year ending 30 June 1971 King held his forty percent interest in Wellangton and thus indirectly a forty percent interest in Wellington's shareholding an the taxpayer. On 1 July 1971 Network made demand, and payment not being made, on that day purported to foreclose. On the same day a meeting of directors of Wellington noted the foreclosure. On the same day the darectors of the taxpayer approved the transfer of the shares subject to the

On the following day 2 July 1971 the directors of the tax-

payer declared a dividend of $38,000 out of the profits for the

year ending 30 June 1971, the same to be credited exclusively to the account of Network. The desired result was achieved, an that King received neither directly or in any way indirectly

On 29 October 1971 the taxpayer lodged its return claiming the Losses as an allowable deduction. By letter dated 26 January 1972 the Commissioner sought iznformation for the purpose of determining compliance by the taxpayer with s.80C of the Act. The taxpayer's advisors replied by letter dated 20 March 1972 and set out information much of which 1s already recorded in these reasons and made certain submissions. They stated in particular that there never had been any communication with or contact by any representative of Network with King, and this fact is confirmed by the oral evidence at the hearing. They further stated that the only persons having any dealings with King were Jackson and Roberts, chartered accountants of the firm of Hungerford Spooner & Co, who were Scheme Trustees for the ereditors of the company for the purposes of the scheme of arrangement. They also disclosed as relevant the agreement of 18 July 1967, and described 1t as relating to the appropriation of the consideration paid to King and his wife for the shares transferred by them. They acknowledged that this consideration was "in fact the amount required to pay the fees of the trustees aun relation to the scheme of arrangement, and was arrived at accordingly as being required to be paird by the purchaser for

Subsequent to this correspondence with the Commissioner,

Wellington made further efforts to pay King the dividend declared

on 30 June 1970. A cheque was forwarded to him in Bouganville on 17 April 1972, which he acknowledged by letter dated 1 June 1972. Wellington then for the first time corresponded with the Australian Post Office concerning non-delivery of mail to King and in December 1972 notice of an extra-ordinary general meeting was sent to him which this time he received. Notwithstanding Wellington's renewed interest 12n King, no mention was made to ham of any events which had occurred in the intervening years and in particular of the fact that Wellington had been deprived

of 1ts interest in a profitable subsidiary, namely the taxpayer.

By letter dated 4 May 1977 the Commissioner set out the facts and circumstances "which were then accepted and taken into consideration by the Commissioner in determining, pursuant to

s.80B (5) of the Income Tax Assessment Act 1936-71, to treat the

shares held by E.H. King in Wellington Holdings as not having been beneficially owned by him at all times during the year of income ended 30 June 1971." Clause 21 sets out the Commissioner's case as to the existence of the alleged arrangement and 1s as follows:

"21. That having regard to the above facts and circumstances there existed a contract, agreement or arrangement of the kind referred to in s,80B (5) (b) and (c) in that there existed a contract, agreement or arrangement entered into by Nr. ELH. King e1ther personally or through the agency of Mr. C.K. Roberts and/or Mr. C.H.R. Jackson with persons acting on behalf of any one or more of Network Finance Limited and Network Management and Control (Finance) Pty. Limited and/or Messrs Roberts & Jackson as trustees of

the scheme of arrangement; the terms of the said contract, agreement or arrangement, being that each party thereto vould do all things necessary to ensure the continued availability to the taxpayer of the relevant losses and including the various relevant things referred to in the preceding paragraphs; the sa2rd contract, agreement or arrangement being one which directly or indirectly related to, affected or depended for 1ts operation on the retention by Mr. Kang at all relevant times of a 40% beneficial shareholding interest in Wellington Holdings Pty. Limited and which directly or indirectly related+to or affected the value of that anterest, the pucpose of all parties being to enable the taxpayer to take into account for the

purposes of s.80 of the Act losses which the taxpayer

had incurred 1n the said years of loss being years before the year in which the said contract, agreement or arrange- ment was entered 1nto."

It 1s to be noted that the parties to the arrangement are alternatively stated, inter alia as King personally or through his agents on the one hand and Network or Roberts and Jackson on the other. The trial judge concentrated his attention on King and Network as parties to the alleged arrangement, but on the hearing of the appeal counsel for the Commissioner, as has been mentioned, relied pramarily on the parties being King and

At the hearing oral evidence was tendered on behalf of the taxpayer. Fisher as secretary of the taxpayer and also secretary of Network gave evidence both oral and on affidavit of the acquisition by Network of the Wellington Group. He was the only witness called by the taxpayer, and in particular there was no explanation for the failure to call King or Roberts and Jackson. The Commissioner called Colin Le Tet, the trustee of the three superannuation funds referred to above, who deposed by affidavit and orally to the waiving by the Kings of their claim under the superannuation funds of which he was the trustee. The trial judge commented in his reasons that he accepted the evidence of Fisher, particularly to the effect that there had been no contact between King and Network. It would appear that the trial judge substantially relied upon this evidence in reaching in his ultimate finding that there was no evidence from which 21t would be

reasonable to infer a relevant arrangement between King and Network.

The first crucial question 1s one of construction, namely

whether the provisions of s.80B (5) have any application in the

present circumstances. As to the question whether s.80A and 80C have a cumulative effect it 1s one which counsel agree does not here arise for consideration. Additionally counsel for the Commissioner accepts that at all relevant times King had a benef- icial interest 1n the shares 1n Wellington in his name. Thus af s.80B (5) has application the question 1s whether the Commissioner is entitled pursuant to the provisions of that sub-section to treat the shares as not having been beneficially owned by King

at the relevant time. A further question 1s whether King had

by the giving of the proxy for the meeting of 31 March 1968 granted

a right or power within the provisions of the saird sub-section.

At a glance

Court

Decision date

Before

Source

Judgment (344 paragraphs)

Cited By (2)