Case B40
Judges: FE Dubout ChG Thompson M
N Dempsey M
Court:
No. 3 Board of Review
N. Dempsey (Member): The question to be decided in this reference is whether in terms of sec. 23F(16) it would be reasonable to exempt from tax a dividend of $400 paid to a Staff Provident Fund during the year ended 30 June, 1966. The dividend in question was paid to the Staff Provident Fund by a private company.
2. The private company was incorporated in November, 1959, its prime object being to carry on business as an investment company. Its authorised capital was 10,000 shares of £ 1 ($2) each, and up to 30 June 1960, the only shares issued were in the names of the subscribers to the Memorandum and Articles of Association. In actual fact they did not pay in the amount of £ 2 due on the subscribers' shares and still had not done so at 30 June, 1964. Whether they have since done so was not disclosed.
3. The Articles of Association provided that the Board of Directors shall have power to issue ordinary shares classified as ``A'' ordinary shares, ``B'' ordinary shares, ``C'' ordinary shares, ``D'' ordinary shares and so on.
4. The subscribers' shares were issued to a husband and his wife, one share issued to the husband being classified as an ``A'' ordinary share and the one share issued to the wife being classified as a ``B'' ordinary share.
5. The first directors appointed by the Articles of Association were the husband and the wife, and in addition the articles approved the husband permanent Governing Director to hold office until his death or his prior resignation.
6. Between the date of incorporation in November, 1959, and 30 June, 1960, the company acquired from the husband and wife shares held by them personally, and other shares held by a trustee for their son. These shares were in two family private companies. In all it acquired 2,700 ordinary shares in one company and 1,300 ordinary shares and 524 preference shares in the other company. All the shares acquired were £ 1 shares fully paid-up and the consideration fixed was £ 1.2.6 per share to give a total cost of £ 5,089.10.0.
7. The consideration to acquire these shares and other assets acquired before 30 June, 1960, appears to have been advanced substantially by the husband and to some extent also by the wife.
8. Although the company only paid £ 1.2.6 per share, evidence given by a share valuer from the Income Tax Department was to the effect that when he made a valuation of these shares in February, 1970, to arrive at their true value at the time of their transfer to the company, he placed a valuation of £ 7.16.0 per share on the 2,700 ordinary shares in the one company, £ 5.4.7 on the 1,300 ordinary shares in the other company and £ 1 per share on the preference shares. The values arrived at by him were not seriously challenged by the taxpayer and were arrived at on an earnings capacity basis.
9. If this valuation is accepted then it is clear that at its inception and shortly thereafter the company obtained at a cost of £ 5,089.10.0 shares valued at approximately £ 28,400. It might be added that prior to 30 June, 1960, the company received dividends on these shares totalling £ 1,318.15.0, £ 701.5.0,
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from the company in which it held 2,700 shares and £ 617.10.0 from the other company.10. Having established the private company with the issue of two shares only, and set it firmly on its feet by the transfer to it for approximately £ 5,000 of shares valued at some £ 28,000, the next step taken was to establish the Staff Provident Fund. This event took place on 7 June, 1960.
11. The fund was established for selected members of the staff of the private company and the staffs of any of its existing or future subsidiary or associated companies.
12. To 30 June, 1966, which is the end of the year with which the Board is concerned, there has only been one person admitted to the fund, the permanent managing director of the private company, and he appears to be the only person who has ever drawn a salary from the private company. He also draws director's fees as does his wife.
13. The balance sheet of the provident fund indicates that up to 30 June, 1966, it had accumulated funds of $13,311. It would seem that part of this accumulation comprises annual contributions of $400 from the private company to the fund. The balance would appear to have been derived from interest on investment and dividends from the private company.
14. The right of the fund to receive dividends from the private company arises from the allotment for cash in July, 1960, of 200 ``C'' class ordinary shares. The trustees of the fund in applying for these shares did so in the following form -
``The trustees of..... hereby apply for 200 C class ordinary shares in..... and agree to be bound by the Memorandum and Articles of Association of the company, and in subscribing it is understood that the company shall have the right on the recommendation of the Board of directors to -
- (i) declare and pay a dividend on one or more classes of ordinary shares at a rate in excess of that paid and declared on any class or classes of ordinary shares; or
- (ii) declare and pay a dividend on one or more classes of ordinary shares and not to declare or pay a dividend on another or other classes of ordinary shares.''
15. The minutes of a meeting of the directors of the company held on 25 July, 1960, records the issue of the shares on the terms as set out in the application.
16. In December, 1961, 50 ``D'' class ordinary shares were applied for and issued to a brother of the permanent managing director as trustee for a son of this director. This brought the total number of shares issued to 252, giving a paid-up capital of $504 and this position maintained at 30 June, 1966.
17. In the year ended 30 June, 1966, the private company declared a total dividend of $2,400. This dividend was divided amongst the various classes of shares as follows -
(a) 1 ``A'' Ordinary Share $800
(b) 1 ``B'' Ordinary Share 600
(c) 200 ``C'' Ordinary Shares 400
(d) 50 ``D'' Ordinary Shares 600
________
$2,400
________
18. In assessing the income of the provident fund for the relevant year the Commissioner refused to form an opinion under sec. 23F(16) that it was reasonable to exempt this dividend from tax and accordingly assessed the Trustees of the fund on the dividend pursuant to sec. 121CA of the Act.
19. The trustees objected and the objection having been disallowed the matter is now referred to the Board.
20. Counsel for the taxpayer made certain submissions in relation to the provisions of sec. 23F(16) (a), (b), (c), (d), (e) and (f) and referred to decisions given by Board of Review No. 1, and in particular to decisions reported as
Cases
A38, A39 and A40,
69 ATC 225-233
. He suggested that the view adopted by the Board on the interpretation to be placed on paragraphs (a) and (b) was incorrect.
21. I regret I am unable to accept his argument and consider that the manner in which Board No. 1 has taken into account what they consider to be the correct approach to these paragraphs meets with my full approval.
22. These paragraphs have been included for a specific reason and if one adopts the view submitted by Counsel then they would be largely meaningless. I consider it very relevant that for the purposes of having regard to paras. (a) and (b) one must look at these
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paragraphs together and when this is done then one sees what amount has been actually invested in the shares and what is the true value of this investment.23. In both Cases A38 and A39, 69 ATC 225-229 referred to supra, the Board was greatly influenced by the fact that in each case the fund obtained its shares in the private company for far less than their fair value. This is a very striking feature of this case. Prior to the issue of shares to the fund the paid-up capital was £ 2 and the shareholders' funds on book value was some £ 1,300. The shareholders' funds on a reasonable valuation of the shares it had acquired were approximately £ 24,700.
24. The fund was allowed to contribute £ 200 for 200 fully paid shares, thus giving it an equity on a valuation basis of over £ 24,000 for its investment of £ 200. Surely this is to be had regard to, as Board of Review No. 1 has consistently held. In any case, if it is to be ignored for the purpose of paras. (a) and (b) then I consider that under para. (f) it is a very relevant matter.
25. From the foregoing it will be clear that I am not of the opinion that in the circumstances of this case it is reasonable to exempt the dividend from the private company from tax. The decision of the Commissioner is, therefore, upheld.
Claim disallowed
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