Finance Facilities Pty. Limited v. Federal Commissioner of Taxation.

Judges: Barwick CJ

McTiernan J
Windeyer J
Owen J

Court:
High Court (Full Court)

Judgment date: Judgment handed down 12 November 1971.

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McTiernan J.: This appeal concerns a notice of assessment issued in accordance with the provisions of the Income Tax Assessment Act 1936-1966 (``the Act'') to Finance Facilities Pty. Limited (``the taxpayer'') and based on income derived during the year ended 30 June 1967. The taxpayer's taxable income for that year included private company dividends. The Commissioner allowed a rebate under sec. 46(2)(a)(i) of the Act in respect of $29,916, being one-half of those private company dividends included in the taxpayer's taxable income for the year in question.

The question to be decided in this appeal is whether the taxpayer was entitled to a further rebate under sec. 46(3) of the Act with respect to the remaining half of the private company dividends included in its taxable income. Sec. 46(3) of the Act reads as follows: -

``Subject to the succeeding provisions of this section, the Commissioner may allow a shareholder, being a company that is a private company in relation to the year of income and is a resident, a further rebate in its assessment of the amount obtained by applying the average rate of tax payable by the shareholder to one-half of the part of any private company dividends that is included in its taxable income if the Commissioner is satisfied that -

(a) the shareholder has not paid, and will not pay, a dividend during the period commencing at the beginning of the year of income of the shareholder and ending at the expiration of ten months after that year of income to another private company;

(b) where the shareholder has paid, or may pay, a dividend during the period -

(i) commencing at the beginning of the year of income of the shareholder; and

(ii) ending at the expiration of ten months after that year of income,

to a company, being a private company in relation to the year of income of the company in which the dividend was, or may be, paid, the company has not paid, and will not pay, a dividend during the period -

(iii) commencing at the beginning of the year of income of the company in which the dividend has been, or may be, paid by the shareholder; and

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(iv) ending at the expiration of ten months after that year of income,

to another private company; or

(c) having regard to all the circumstances, it would be reasonable to allow the further rebate.''

The evidence shows that the taxpayer met the condition embodied in para. (a) of sec. 46(3) in that all private company dividends included in its taxable income for the year in question were paid to two companies, Talford Investments Pty. Limited and Steed Investments Pty. Limited, both of which fell within the meaning of the term ``public company'' in sec. 103A(2)(d) of the Act by virtue of their being subsidiaries of a public company within the meaning of sec. 103A(4).

In my opinion however the requirements of para. (a), (b) and (c) are conditions precedent which must be satisfied before the Commissioner is called upon to exercise his discretion. I adhere therefore to the opinions which I expressed with regard to sec. 46(3) in
F.C. of T. v. Casuarina Pty. Limited 45 A.L.J.R. 213 at p. 261 , to the effect that the words ``may allow'' connote a discretion vested in the Commissioner to grant or to refuse a further rebate after satisfying himself that the stated requirements have been met. In my judgment this conclusion gains support by references to sec.46(2) which states that a shareholder is ``entitled'' to a rebate in certain circumstances, thereby explicitly denying any discretion to the Commissioner.

It is perhaps instructive to compare sec. 46(3) to a provision considered by this Court in
The King v. Trebilco and Others; ex parte F.S. Falkiner and Sons Limited 56 C.L.R. 20 . In that case the Court considered sec. 66(1) of the Land Tax Assessment Act 1910-1934 (Cth). That section read as follows -

``In any case where it is shown to the satisfaction of a Board consisting of the Commissioner, the Secretary to the Treasury and the Comptroller-General of Customs, or of such substitutes for any or all of them as the Minister from time to time appoints -

(a) That a taxpayer liable to pay land tax has become bankrupt or insolvent, or has suffered such a loss that the exaction of the full amount of tax would entail serious hardship;

(b) that, by reason of drought or adverse seasons or other adverse conditions, the returns from any land owned by the taxpayer upon which he carries on agricultural or pastoral pursuits have been serious impaired; or

(c) that, owing to low prices in respect of primary products the income derived from the land the subject of land tax has been so reduced that the taxpayer is unable to pay the whole of the tax out of his income derived in the financial year for which the land tax is assessed, and that the financial position of the taxpayer is such that the exaction of the full amount of land tax would entail serious hardship,

the Board may release such taxpayer wholly or in part from his liability for land tax or for land tax in respect of any particular land the returns from which have been so impaired, and the Commissioner shall make such alterations in the amount of tax payable and shall make such refund of tax already paid as is necessary to give effect to the decision of the Board.''

The members of the Court were of the opinion that, notwithstanding the fulfilment of one of the conditions (a), (b) or (c), the Board was not bound to exercise its authority in favour of the taxpayer. Dixon J., with whom I agreed, said at p. 31 -

``Pars. (a), (b) and (c) of sub-sec. 1 state conditions, one of which must be fulfilled before a taxpayer qualifies for relief. But if a taxpayer does satisfy one of the conditions precedent so laid down, he does not obtain a right to relief. In my opinion, he obtains only a title to the consideration by the Board of the general circumstances of his case and to a determination whether it is just and proper that he should receive any, and if so what, relief.''

and at p. 32 -

``The degree of relief is left to the Board in express terms. A power given by the word `may' in such a provision must, I think, be understood as discretionary. It confers a discretion to release, or not to release, the taxpayer according to the board's opinion of the justice of the case.''

I feel that I am not at liberty to substitute for the word ``may'' in sec. 46(3) of the Act the word ``shall'' and thereby achieve uniformity in the functions of the Commissioner in administering sec. 46.

It was also submitted however for the taxpayer that even if the Commissioner does possess a discretion in this case he has not properly exercised that discretion. The Commissioner furnished the following statement of the grounds on which the discretion was exercised -

``The Commissioner decided not to allow the further rebate provided for in sec. 46(3) because he was of the view that even if and upon the basis that the conditions set forth in paras. (a) or (b) were met he had a discretion to refuse to

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allow the further rebate and in the circumstances which are in evidence before the Court he was of the opinion that the further rebates should not be allowed and, in so far as the provisions of sec. 46(3)(c) were concerned, that it was not reasonable to allow it because, inter alia, the facts which are now before the Court disclose what was in his view a tax avoidance scheme aimed at avoiding liability to tax pursuant to the provisions of Div. 7 of the Act.''

The evidence seems to me to show that the payment of the dividends in question by the taxpayer was part of a scheme to avoid liability to tax under Div. 7 of the Act. The core of the scheme took place on 20 April 1967 when the taxpayer, which at that time had a nominal capital of $200,000, increased that capital to $220,000, the increased capital being partially applied to redeemable preference shares which were entitled to the entire dividend declared by the taxpayer and which were allotted soon afterwards to Talford Investments Pty. Limited and Steed Investments Pty. Limited. Those companies received dividends of $20,000 in respect of the newly-allotted shares from the taxpayer and, as subsidiaries of public companies within the meaning of sec. 103A of the Act, were not liable to the tax on undistributed profits which would have befallen that $20,000 in the hands of the taxpayer, a private company.

The principle governing the exercise of a discretion such as that possessed by the Commissioner under sec. 46(3) was expressed by Latham C.J. in
Shrimpton v. The Commonwealth 69 C.L.R. 613 , at p.620 , where his Honour said -

``The discretion must be used and the power exercised bona fide and with the view of achieving ends or objects not outside the purpose for which the discretion or power is conferred.''

In my opinion it cannot be said that this exercise of the Commissioner's discretion was not directed to the ends and objects of the Income Tax Assessment Act.

I would therefore dismiss the appeal.