Federal Commissioner of Taxation v. Casuarina Pty. Ltd.

Members: Barwick CJ

McTiernan J
Owen J
Walsh J
Gibbs J

Tribunal:
High Court (Full Court)

Decision date: Judgment handed down 23 April 1971.

---

McTiernan J.: These appeals are brought from the orders of Windeyer J. allowing the respondent's appeals against the disallowance of its objections to its assessments for the year of income ending 30 June 1968.

The facts proved before his Honour are in summary as follows.

In February 1967 Forum Holdings Limited (hereinafter called ``Forum'') was incorporated by a firm of accountants and on 12 April 1967 the respondent company, Casuarina Pty. Limited (hereinafter called ``Casuarina''), was incorporated by the same firm of accountants. On its incorporation the respondent company did not carry on any business. On 19 April 1967 almost 80% of the shares in Forum were allotted to W. B. and H. Nominees Pty. Limited. The latter company transferred one-third of those shares to each of three companies. At all material times at least two of the transferee companies were public companies within the meaning of Div. 7 of Part III of the Income Tax Assessment Act 1961-1968(Cth) (hereinafter referred to as ``the Act'') and between them beneficially owned more than 50% of Forum's shares. It was conceded that Forum was a subsidiary of a public company within the meaning of sec. 103A(2)(d)(v) of the Act.

On 24 April 1967 one, Sternberg, and his wife acquired forty-nine shares in Casuarina, which at that time represented its entire issued capital. On 15 May 1967 Forum was allotted fifty-one redeemable preference shares in Casuarina. Soon afterwards Sternberg and his wife became sole directors of Casuarina which then acquired shares in Lex Sternberg Motors Pty. Ltd. (hereinafter called ``Sternberg Motors''), a private company engaged in motor sales and controlled by Sternberg. On 29 March 1968 Sternberg Motors declared a dividend of $6560 in favour of Casuarina, almost all of which sum remained with Sternberg Motors as an interest free loan.

It appears to me that the question to be decided here is whether, as found by the learned trial judge, the Commissioner was in error in treating the respondent as a private company in relation to the above-mentioned year of income for the purposes of Div. 7 of Part III of the Act.

The respondent claimed that it was not a private company in relation to the year of income in question for the purposes of Div. 7 because it was a subsidiary of a public company according to sec. 103A(2)(d)(v) of the Act. The public company of which it claimed to be a subsidiary was Forum: In order to be a subsidiary of a public company a company must fulfil the conditions set forth in sec. 103A(4) of the Act.

It seems that the Commissioner does not dispute that the requirements of para. (a) are satisfied.

The Commissioner contended however that the respondent did not fulfil the requirements of para. (b) on the ground that cl. 73 of Table A of the Companies Act, 1961 (Vict.), which Table was incorporated in Casuarina's articles by art. 1 of its articles of association, enabled the directors (the Sternbergs) to exercise any power of the company not required by the Act or Table A to be exercised by the company in general meeting. Such a power was the power given by art. 4 cl. 3A(d) which entitled the company to redeem all or part of the redeemable preference shares at any time on giving the holders not less than seven days' notice in writing provided that no such redemption should be made between June 24 and July 7 in any year. Article 10 provided that at least twenty-one days' notice must be given of a general meeting of the company.

It was argued that in these circumstances where the shares of Forum could always be redeemed before a general meeting could be held, it may not be said that that company was capable of controlling or of obtaining control of more than one-half of the voting power in Casuarina.

The respondent submitted that the words ``capable of controlling or of obtaining control of more than one-half of the voting power'' must be related to the end of the year of income, that on 30 June 1968 Forum was capable of controlling more than one-half of the voting power in Casuarina as it existed then and that it did not matter that this capacity might be defeated at some stage in the future.

Although there is much force in the appellant's contention and there must be a point where the actual position as regards control may not be

---

ATC 4071

disregarded (see Dixon J. (as he then was) in
Avon Downs Proprietary Limited v. F.C. of T. (1949) 78 C.L.R. 353 at pp. 361-2 , I am prepared to hold in this case that at the end of the year of income Forum was capable of controlling more than one-half of the voting power in Casuarina.

As regards paras. (c) and (d) the appellant contended that the word ``would'' imports an element of futurity so that the question asked at the end of the year of income is who is going to be beneficially entitled to receive more than one-half of any future dividends or more than one-half of any future distribution of capital in the event of a winding up or a reduction of capital. But in my opinion the section makes the end of the year of income the relevant time of consideration and at that time Casuarina fulfilled the requirements of (c) and (d).

The appellant relied in the alternative on sec. 260 of the Act.

The appellant submitted that an arrangement within the meaning of the section was constituted by the allotment to Forum on 15 May 1967 of the fifty-one redeemable preference shares in Casuarina, which owned shares in Sternberg Motors and the directors of which Sternberg and his wife were to become at a later date, with an understanding by all concerned that, provided Forum received a dividend calculated not by reference to profits but by reference to a service fee for extending its status as a public company, it would not interfere in the control of Casuarina by exercising the votes attached to its shares. In fact it never exercised those votes.

The respondent contended that there was no agreement that Forum would not exercise the rights attached to its shares in Casuarina. However, I agree with respect with Windever J. in his judgment when he said: ``Nevertheless it was I think an element in the scheme, well understood by all concerned, that Forum would not in fact interfere in Casuarina's affairs provided it received by way of dividends the stipulated payments for taking Casuarina in as one of its subsidiaries''.

It must be borne in mind that both those companies were formed by the same firm of accountants and controlled by members of that firm (one of whom was a director of both companies) at the time of the allotment of shares in Casuarina to Forum.

In seeking to bring this arrangement within the words of sec. 260 the appellant relied upon the passage in
Newton v. F.C. of T. (1958) 98 C.L.R. 1 at p. 8 where their Lordships say -

``In order to bring the arrangement within the section you must be able to predicate - by looking at the overt acts by which it was implemented - that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge that the transactions are capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax, then the arrangement does not come within the section.''

It was argued that to allot for $51.00 shares which carry rights to participate equally in dividends, in any reduction of capital and in the winding up of a company with assets of $12,000 (received from Sternberg Motors and another associated company) is not explicable by reference to ordinary commercial or family dealings.

The respondent cited the judgment of Dixon C.J. and Kitto and Taylor JJ. in W.P.
Keighery Proprietary Limited v. F. C. of T. (1956-57) 100 C.L.R. 66 at pp. 93-94 where their Honours said -

``The very purpose or policy of Div. 7 is to present the choice to a company between incurring the liability it provides and taking measures to enlarge the number capable of controlling its affairs. To choose the latter course cannot be to defeat evade or avoid a liability imposed on any person by the Act or to prevent the operation of the Act.''

The respondent also cited Newton's Case, at pp. 8-9 where their Lordships said -

``Thus, no one, by looking at a transfer of shares cum dividend, can predicate that the transfer was made to avoid tax. Nor can anyone, by seeing a private company turned into a non-private company, predicate that it was done to avoid Div. 7 tax, see W.P. Keighery Pty. Ltd. v. F.C. of T. (1958) 32 A.L.J.R. 118; 11 A.T.D. 359. Nor could anyone, on seeing a declaration of trust made by a father in favour of his wife and daughter, predicate that it was done to avoid tax, see
D.F.C. of T. v. Purcell (1921) 29 C.L.R. 464 .''

In
Hooker-Rex Pty. Ltd. v. F.C. of T. 70 ATC 4033 , I said at p. 4042 -

``I believe that the test of `ordinary business dealing' propounded by Isaacs J. and Starke J. in Jaques' Case, and adopted and expanded by the Privy Council in Newton's Case must limit the application of the dicta quoted from Keighery's Case and Cecil Bros.' Case. .''

In my opinion the intricate series of transactions carried out in this case have all the indicia of having been implemented in the way that they were in order to avoid a liability imposed by the Act. They do not appear to be capable of explanation by reference to ordinary business or family dealing. Although the liability had not accrued at the time of the transactions the section is

---

ATC 4072

nevertheless attracted: See Newton's Case at p. 7 where their Lordships say: ``To `avoid a liability imposed' on you means to take steps to get out of the reach of a liability which is about to fall on you''.

I am not of the opinion that their Lordships in Newton's Case intended to state that the transactions entailed in the conversion of a private company into a non-private company could never fall within the ambit of sec. 260. It must be remembered that, notwithstanding their statement at pp. 8-9, ``Thus, no one, by looking at a transfer of shares cum dividend, can predicate that the transfer was made to avoid tax'', the very act which was held to be struck down in Newton's Case was a transfer of shares cum dividend. It is necessary to consider the whole arrangement to determine whether sec.260 is attracted.

The next question that arises is what is rendered void as against the Commissioner in this case by sec. 260. In my opinion, a reading of the section, which states that the arrangement is rendered void only in so far as it has the effect of avoiding a liability imposed by the Act, indicates that it is the allotment of the shares in Casuarina to Forum which is rendered void as against the Commissioner. The result is that Casuarina remains a private company for the purposes of Div. 7 and so liable to taxation under sec. 104(1).

On the basis that Casuarina was a private company for the purposes of Div. 7 it was entitled to a rebate for each dollar of private company dividends included in its taxable income under sec. 46(2)(a). The respondent contended that if it were held to be a private company for the purposes of Div. 7 it was entitled to an additional rebate for each dollar of private company dividends included in its taxable income under sec. 46(3)(a).

The Commissioner disallowed this claim. The respondent submitted that, notwithstanding the word ``may'' in sec. 46(3), the Commissioner has no discretion to refuse a rebate if he is satisfied of the facts set out in para. (a). The respondent argued that para. (c) embodied a discretion and rendered any further discretion within sec. 46(3) redundant.

In my judgment there is no justification for contruing the word ``may'' in sec. 46(3) as ``shall''. Section 46(2) is an example of the draftsman not granting any element of discretion to the Commissioner. There is no reason to presume that the Act did not intend to entrust a discretion to the Commissioner in sec. 46(3).

I would allow the appeals with costs and restore the assessments of the Commissioner.