Cappid Pty. Limited v. Federal Commissioner of Taxation.
Judges:Menzies J
Court:
High Court
Menzies J.: This appeal from an assessment to tax under Div. 7 of Pt. III of the Income Tax Assessment Act 1936-1965, hereinafter called ``the Act'', in respect of income of the year ended 30 June 1966 turns, subject to a preliminary matter, upon a decision whether or not the taxpayer was a private company in relation to the year of income. It was assessed to the tax in question as a private company, but has claimed throughout that it was a public company by virtue of sec. 103A(2)(c) of the Act, which provides, in effect, that a company is a public company in relation to a year of income if:
``(c) the company has not, at any time since its formation, been carried on for the purposes of profit or gain to its individual members and was, at all times during the year of income, prohibited by the terms of its constituent document from making any distribution, whether in money, property or otherwise, to its members or to relatives of its members.''
In order to allow the appeal I must be satisfied about two elegents stated in para. (c); the first relating to the whole period since the taxpayer's formation, the second relating to the whole of the year ended 30 June 1966.
The parties have entered a special case for argument before the court pursuant to Order 35, Rule 5 of the High Court Rules. The questions of law for my opinion are:
``1. Is the Appellant, on this appeal against the assessment to additional tax on undistributed income, precluded from asserting that it is a public company or asserting that it is not a private company for the purposes of Division 7 of Part III of the Income Tax Assessment Act 1936-1966 by reason of the facts set forth in paragraphs 26-35 hereof?
2. If the answer to Question 1 is No, was the taxpayer, in relation to the year of income ended 30 June 1966, a public company for the purposes of Division 7 of Part III of the Income Tax Assessment Act 1936-1966 by virtue of the provisions of paragraph (c) of sub-sec. (2) of Sec. 103A of the said Act?''
The first question relates to what I have referred to as a preliminary matter and I shall deal with it first.
Paragraphs 26-35 inclusive of the special case show that the taxpayer furnished a return of taxable income of $573,547 for the year ended 30 June 1966 under cover of a letter claiming that it was a public company. The Commissioner chose to treat it as a private company, assessing primary tax upon taxable income increased to $593,617 at the rates specified in the Income Tax Act 1966, Sixth Schedule, Items 3(a) and (b), i.e. as a private company. The taxpayer objected to the assessment and, upon consideration of that objection, the Commissioner allowed it in part and issued an amended assessment but at private company rates upon a taxable income of $587,182. The taxpayer objected and an appeal was instituted, but withdrawn. The consequence of all this is that the taxpayer has been assessed to and has paid primary tax, at rates applicable to a private company but is maintaining its objection to an assessment to additional tax upon an undistributed amount of $234,050 on the ground that it is a public company. The Commissioner has raised the question whether or not the taxpayer is precluded from doing so, arguing that, because it has been treated as a private company for the purposes of the assessment of primary tax, it cannot dispute that it is a private company and assert that it is a private company and assert that it is a public company in order to escape additional tax.
I do not accept the contention made on behalf of the Commissioner. The taxpayer, in making its returns, claimed that it was a public company; the Commissioner has at all times asserted that it was not a public company,
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but a private company, and has assessed accordingly. The taxpayer cannot be precluded from maintaining its objection to the assessment now in question because in relation to another assessment it yielded to the Commissioner's insistence upon taxing it at private company rates. It is true that if it succeeds in this appeal it will have had the advantage of a primary assessment as a private company, although it has established that it was not a private company for the purposes of additional tax, but the assessment to primary tax creates no bar in favour of the Commissioner and against the taxpayer. I have found no basis for deciding that this appeal should be dismissed merely because of the other assessment, which was, after all, no more than the act of the Commissioner.I have, therefore, to consider the second question and to do so some statement of the relevant facts is necessary.
The taxpayer was incorporated on 30 June 1965. It was incorporated in a hurry in order that those concerned should have the advantage of sec. 103A(2)(c), which perhaps explains infelicities hereafter to be noticed. Its members have at all times been two-Giris Pty. Ltd. holding two shares of $2 each and R. G. B. Skinner holding one share of $2. At all times material R. G. B. Skinner held his one share as nominee of Giris Pty. Ltd. At all times material Giris Pty. Ltd. held all its right, title and interest in and to its shares in its capacity as trustee of the Janssen family trusts.
By an agreement in writing dated 1 July 1965-the date upon which Act 110 of 1964 of the Commonwealth came into force-Giris Pty. Ltd. sold the business of manufacturer of electrical goods etc., which it had previously carried on as trustee of the Janssen family trusts, to the taxpayer for $897,692.45. The sale covered the assets and undertaking of the business but excluded the land and buildings upon which the business was carried on and the good will thereof. The price was payable on demand, and while unpaid was to bear interest. The price has not yet been demanded and no part has yet been paid. The agreement also provided that Giris Pty. Ltd. should permit the taxpayer to use the land and buildings aforesaid for the purpose of carrying on the business at the rental fixed thereby. The taxpayer has not conducted the business itself, but appointed a company, now known as Utilux Pty. Ltd., its attorney and agent to conduct the business on its behalf. Since its incorporation the taxpayer has not (save for its share capital) received any money or property whether by way of dividend or otherwise from any source, save payments made by Utilux Pty. Ltd. acting as its attorney under power.
Paragraphs 21 to 23 of the special case, with some omissions, are as follows:
``21. The Appellant did not pay any amount by way of dividend to its shareholders during the period 1 May 1966 to 30 April 1967. The Appellant has not since its incorporation paid any money or property, whether by way of dividend or otherwise, to or on behalf of its shareholders save as follows: the following amounts were paid to or on behalf of Giris Pty. Ltd. as trustee of the Janssen family trusts. The said payments were made on the following dates to the persons set out opposite the same, namely- [up to here]
9.7.65 - Cash Advance - 100 pound ($200) - Giris Pty. Ltd. as Trustee 16.7.65 - Cash Advance - 300 pound ($600) - Giris Pty. Ltd. as Trustee 30.9.65 - Cash Advance - 500 pound ($1000) - Giris Pty. Ltd. as Trustee 11.11.65 - Cash Advance - 150 pound ($300) - Giris Pty. Ltd. as Trustee 8.2.66 - Cash Advance - 500 pound ($1000) - Giris Pty. Ltd. as Trustee 23.5.66 - Cash Advance - $300 - Giris Pty. Ltd. as Trustee 2.6.66 - Cash Advance - $1000 - Giris Pty. Ltd. as Trustee 16.2.66 - Payment of N.Z. Income Tax for Trusts - $264.84 - Commissioner of Taxes (N.Z.) In year ended 30.6.66 - Payment of Trusts Income Tax - $86,582 - Deputy Com- missioner of Taxation In year ended 30.6.66 - Cash Advance to No. 5 Trust - $15,126.38 - Payments at the direction of Mrs. E. E. Janssen.Each of the aforesaid payments was made by a cheque drawn by Utilux Pty. Ltd. in favour of the payee shown in the table above. Each of the said payments is shown in the Appellant's journal and in the Appellant's Ledger where they are debited to `Giris Pty. Ltd. - Current Account' and
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credited to the `Utilux Pty. Ltd. - Control Account'. The said payments are also shown in the Appellant's Balance Sheet for the year ended 30 June 1966 as deductions from the said rent and interest on purchase money referred to in paragraph 18 hereof. The said rent and interest payable by the Appellant to Giris Pty. Ltd. are shown in the Appellant's Journal and in the Appellant's Ledger where they are debited to `Income Account' and credited to the said `Giris Pty. Ltd. - Current Account'. Giris Pty. Ltd. was assessed to income tax for the year ended 30 June 1965 in the sum of $86,582.22. At no time during the year of income or at any other time has the Appellant owned, either legally or beneficially, any shares in the capital of any company.
23. At all material times the Appellant and each of its shareholders and two of its Directors (namely the said R. G. B. Skinner and Joseph Janssen) had notice of the Janssen family trusts, of the terms thereof...''
The trustees of the Janssen family trusts have been as follows:
``Giroud Trusts Nos. 1-7 from the date of creation until 1 July 1957 - R. G. B. Skinner
Giroud Trusts Nos. 1-7 from 1 July 1957, and Cappis Trusts Nos. 8-10 and Giroud Trusts Nos. 11-12 from respective dates of creation until 10 April 1962-R. G. B. Skinner and D. M. Wood
All trusts-from 10 April 1962 to date-Giris Pty. Ltd.''
Among the objects for which the taxpayer was established were:
``4.(a) To carry on business as manufacturers of and dealers in all articles parts accessories appliances apparatus or things required for or capable of being used in connection with electricity or electrical apparatus.
7. To undertake and execute any trusts the undertaking whereof may seem desirable and either gratuitously or otherwise and to act as executor or administrator manager agent attorney or committee and generally to undertake and perform any office of trust or confidence.''
In the enumeration of the taxpayer's objects there appears this provision:
``39. The Company shall not be carried on for the purpose of profit or gain to its individual members and is prohibited from making any distribution whether in money property or otherwise to its members or to relatives of its members.''
Paragraph 42 of the memorandum was as follows:
``42. The objects set forth in the foregoing subclauses of this clause shall not except when the context expressly so requires be in any wise limited or restricted by reference to or inference from the terms of any other clause or by the name of the Company. None of such clauses or the objects therein specified or the powers thereby conferred shall be deemed subsidiary or auxiliary merely to the objects mentioned in the first clause but the Company shall have full power to exercise all or any of the powers conferred by any part of any clause in any part of the world and notwithstanding that the business undertaking property or acts proposed to be transacted acquired dealt with or performed do not fall within the objects of the first clause. The operation of sec. 19(c) of the Companies Act 1961 is hereby expressly excluded but the powers set out in the Third Schedule are deemed to be main objects.''
To the relationship between 39 and 42, as aforesaid, I will have to return.
The taxpayer's Articles of Association contain this provision:
``2.(e) The Company shall not be carried on for the purpose of profit or gain to its individual members and is prohibited from making any distribution whether in money property or otherwise to its members or to relatives of its members.''
The Articles, although containing no provisions relating to the payment of dividends, do contain provisions authorising the reduction of capital and regulating the distribution of assets in a winding up as follows:
``44. The Company may by special resolution and subject to confirmation by the Court reduce its share capital and any capital redemption reserve fund in any manner and inter alia may
- (a) extinguish or reduce the liability on any of its shares in respect of share capital not paid up,
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- (b) in addition or alternatively cancel any share capital which is lost or unrepresented by available assets.''
``107. The distribution of the assets of the Company upon a winding-up shall be determined by special resolution.''
I am now in a position to consider whether the taxpayer has established the two conditions referred to in sec. 103A(2)(c) to make it a public company in relation to the year ended 30 June 1966.
First, has it been established that the taxpayer has not, at any time since its formation, been carried on for the purpose of profit or gain to its individual members?
I do not regard the phrase ``its individual members'' in sec. 103A(2)(c) as excluding corporate members. I therefore consider the problem treating Giris Pty. Ltd. as an individual member of the taxpayer.
The taxpayer's contention, in its simplest form, is that, because the only two members of the taxpayer were trustees and that this was known to all concerned with the transactions that have taken place - including the taxpayer's directors - it cannot be said that the business of the taxpayer was carried on for the purpose of profit or gain to those members.
To one accustomed to the ordinary rule that a company is entitled to treat the registered holder of any share as the absolute owner thereof, and is not bound to recognise equities, this contention did not command instant acceptance. Naturally enough, upon the first reading of sec. 103A(2)(c), one's mind goes to the kind of company formed for charitable purposes, bound to apply its profits to such purposes, and prohibited from the payment of dividends to its members, such as are referred to in sec. 24 of the Companies Act. Upon reflection, however, I cannot confine sec. 103A(2)(c) to companies of this kind. Had this been intended, it could so easily have been said. It seems to me that the first part of sec. 103A(2)(c) requires an examination of what has actually occurred since the formation of the company, and a decision that the company has not been carried on for the purposes stated could be reached notwithstanding that, until the last year, the company could, by virtue of its constituent document, have made distributions to members and their relatives. Furthermore, the limitations to be found in sec. 103A(2)(c) go beyond the paying of dividends. Moreover, the word ``individual'', once it has been decided that its purpose is not to exclude corporate members, seems to me to carry with it the notion of profit or gain to the members themselves.
Upon the whole, therefore, I have come to the conclusion that, in the case where a company has been carried on for the purpose of profit or gain for persons other than the members, and for such persons exclusively, it is proper to conclude that it has not been carried on for the purpose of profit or gain to its individual members.
The difficulty about the second condition is that the company's constituent document-which I take to be its Memorandum of Association, although it may be that it comprehends both the Memorandum and Articles of Association-is not free from inconsistency. Thus, although para. 39 is couched in language which is clear and unambiguous, that paragraph does not stand alone, for para. 42, while excluding the operation of sec. 19(c) of the Companies Act 1961, goes on to provide that the powers set out in the Third Schedule to the Act are deemed to be main objects. Among the powers enumerated in the Third Schedule is 23 in these terms:
``To distribute any of the property of the company among the members in kind or otherwise but so that no distribution amounting to a reduction of capital shall be made without the sanction required by law.''
Then too, although Art. 2(e) is clear and unambiguous, the articles relating to the reduction of capital and to the distribution of assets in a winding up cast some doubt upon the absolute character of the earlier prohibition.
However, notwithstanding any contradictions which there may be, I am satisfied that it would be a breach of a prohibition in the taxpayer's constituent document if it were to make a distribution in money, property or otherwise to its members or relatives of its members.
In the course of argument I was referred to a number of technical rules of construction which would support this conclusion; viz. that para. 39 of the Memorandum of Association precedes para. 42 thereof; that the former is special, whereas the latter is general; that the former is in writing, whereas the latter is
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printed. I have reached my conclusion, however, without aid from these technical rules, for, upon the reading of the document as a whole, I am satisfied that para. 39 is of over-riding force and that its effect cannot be destroyed by the words at the end of para. 42 which seem to me to lack any precise meaning. Moreover, looking at the Articles of Association, either as an aid to the construction of the memorandum or as themselves forming part of the constituent document of the taxpayer, I find in Art. 2(e) a similar overriding provision.In the face of para. 39 of the memorandum and Art. 2(e) I am not in doubt that distributions to members and relatives of members are prohibited, notwithstanding the ingenious use that counsel for the Commissioner has made of other parts of the documents. The memorandum and the articles are untidy, but I do not think there is any doubt about the effective existence of a prohibition in accordance with sec. 103A(2)(c).
For the foregoing reasons I find that the taxpayer was a public company within the description of sec. 103A for the purposes of the tax year ended 30 June 1966, and, accordingly, I allow the appeal and set aside the assessment to additional tax.
ORDER:
Appeal allowed with costs. Assessment set aside. Usual order with respect to exhibits.
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