Duggan and Ryall v. Federal Commissioner of Taxation.Judges:
Stephen J.: These three appeals, which were, by consent, heard together, relate to the operation of sec. 99A of the Income Tax Assessment Act.
The taxpayers are, apparently, trustees of sixteen settlements created by Mrs. E.M. Dennis, one in favour of each of her sixteen grandchildren, the children of her three sons. I am concerned with only three of these trusts; in each of these the facts are, for all relevant purposes, identical and it will be convenient to consider the matter in terms of one of them, the settlement in favour of Julie Dennis, a daughter of Mr. J.F. Dennis. In respect of the year ended 30 June 1970 the appellants, as trustees of that settlement, were assessed to tax on the income of the trust estate at the rate of 50¢ in the $1 applicable under sec. 99A. The amount of assessable income is not in dispute but the appellants contend that the assessment should have been raised under sec. 99, resulting in a considerably lower rate of tax.
The appellants' objection to that assessment was disallowed by the Commissioner who, at the time of disallowance, wrote to the taxpayers informing them of the formation by him of an opinion ``that it would not be unreasonable for sec. 99A to apply''; the full terms of that letter which, as a matter of convenience, I shall refer to as emanating from the Commissioner although in fact signed by a Deputy Commissioner, are as follows -
Re - Dennis Trusts - 13 Beneficiaries
(TR's 82044 - 82048, 82051 - 82056 & 82058 & 82059)
With reference to your notices of objection in relation to the abovenamed trusts for the year ended 30 June 1970, it is advised that due to the following factors, the opinion was formed that it would not be unreasonable for section 99A to apply.
1. The declaration of discriminatory dividends by the private companies in which the trusts hold shares for the year ended 30 June 1970.
2. The existence of loans by parents of the beneficiaries to the respective private companies in which the trusts hold shares and to subsidiaries of these companies.
3. The powers in the Articles of Association of the private companies in which the trusts hold shares, to issue shares with variable dividend rights andconferring upon the governing directors the right to compulsorily acquire the shares of the members in consideration of the payment of a sum equal to the amount paid-up on the shares.
Deputy Commissioner of Taxation.''
In substance the appellants make two distinct complaints; they contend that the factors relied on by the Commissioner involve errors of fact and that the Commissioner's opinion, formed on the basis of erroneous facts, is thereby vitiated so that there had never been any proper formation of an opinion such as is required by the section. Alternatively they contend that even if the factual basis for the Commissioner's opinion were correct the factors which he has set out in his letter do not in themselves justify his conclusion that ``it would not be unreasonable for sec. 99A to apply''.
The Commissioner called no evidence but did cross-examine at some length one of the appellants, Mr. Ryall, who is not only one of the trustees of this and of the other fifteen settlements above referred to but is also the
ATC 4242secretary both of the company, J.F. Dennis Pty. Ltd., in which this trust and other trusts in favour of other of Mr. J.F. Dennis' children hold shares from which they derive most of their income, and also of the Dennis group of operating companies from which that company in turn derives its income. He is also the secretary of two other companies in which the trusts in favour of the children of the two other sons of the settlor hold shares. He had advised the three Dennis brothers in 1963, when the sixteen settlements were created, when the three companies in which the trustees hold shares were incorporated and when each of those companies acquired from the three brothers and their wives substantial shareholdings in the group of operating companies. The effect of the steps taken in 1963 was that each of the sixteen settlements in favour of a grandchild of the settlor, Mrs. Dennis, thenceforth became entitled to portion of the profits earned by those operating companies, which profits had previously been wholly received by the older generation of the Dennis family, consisting of the settlor's three sons and their wives. I mention these matters only to dispose of them by saying that I do not consider them to be material in the determination of this case. Objection was taken by Counsel for the taxpayers to the opening up of this material in cross-examination of Mr. Ryall and while I allowed that cross-examination to proceed I have now concluded that that objection was well founded.
It is not the function of this Court to determine for itself, having regard to all the circumstances surrounding the creation and subsequent administration of the settlements, whether or not it is unreasonable that sec. 99A should be applied to these trust estates. So long as it is established, as it is in this case, that income assessed to tax under sec. 99A is not income to which sec. 97, 98, 99A(1) or 99A(5) applies, the only occasion for intervention by this Court will be if it appears from the evidence that the Commissioner has failed in the duty, cast upon him by sec. 99A(2), properly to consider and come to a conclusion concerning the reasonableness or otherwise of the application of sec. 99A. In that event the assessment will be set aside and it will then be for the Commissioner to assess in accordance with law.
The Commissioner has a positive duty to reach a conclusion on this question of reasonableness -
Giris Pty. Ltd. v. F.C. of T. 69 ATC 4015, 119 C.L.R. 365, per Barwick C.J., at p. 4018, per Menzies J. at p. 4022, per Windeyer J. at p. 4024 and, semble, per McTiernan J. at p. 4019; contra Kitto J. at p. 4020. In the present case the Commissioner's letter makes it clear that he did reach a conclusion, one adverse to the appellants, and the remaining question is whether that conclusion has been shown by the evidence to have been vitiated for one or other of the reasons urged by the appellants.
It was said by the Chief Justice in the Giris case, at p. 4018, that the Court would intervene should the Commissioner's conclusion be shown to be lacking in bona fides or to have been arrived at -
``arbitrarily or fancifully, or upon facts or considerations which could not be regarded as relevant.''
A conclusion based upon a mistaken view of relevant facts will, I think, be in no better shape.
The errors of fact appearing in the Commissioner's letter are said to be three in number: that there were ``discriminatory dividends'' declared, that parents had made ``loans'' to, in the present instance, J.F. Dennis Pty. Ltd. and that other companies to which they had made loans were ``subsidiaries'' of, in this instance, J.F. Dennis Pty. Ltd.
Taking each of these three matters in turn, I am satisfied that on no fair meaning of a ``discriminatory dividend'' can it be said that the dividends declared by the relevant private company, J.F. Dennis Pty. Ltd., for the relevant year answer that description. It is true that its shares are divided into four classes and that in each year since its incorporation no dividend has been declared on the ``A'' class shares, held by Mr. and Mrs. J.F. Dennis, whereas each year the other three classes of shares, held by the trustees of three settlements, one for each of their children, have received dividends of equal amount. This is, however, explained by the fact that the ``A'' class shares, when allotted, were by the terms of allotment entitled to
ATC 4243voting rights but not any rights to dividends, the precise reverse being the case with the other three classes of shares.
It also seems to be clear on the evidence that Mr. and Mrs. J.F. Dennis, the parents of the relevant beneficiary Julie Dennis, have not made any loans to the relevant private company, J.F. Dennis Pty. Ltd., in which the trustees of that beneficiary's settlement hold shares. What occurred was that instead of demanding prompt payment by that company of the purchase price on their sale to it in 1963 of shares in the Dennis group of operating companies they have ever since allowed much of the purchase price to remain outstanding. A similar result could, no doubt, have been achieved by a payment in full by the company accompanied by a lending back of money by Mr. and Mrs. Dennis to it but this was not the method of financing which was in fact adopted.
Again it is apparent that the Commissioner was incorrect if by the term ``subsidiaries'' he intended to describe any of the Dennis group of operating companies, in all of which J.F. Dennis Pty. Ltd. holds shares. The latter company has no subsidiaries, its shareholding in each of the operating companies is substantially less than fifty per cent and it controls neither the board of, nor the voting power in, any of them.
It is, I think, quite irrelevant whether or not the appellants or their advisers were in any way misled or confused by these errors in the Commissioner's letter; their only significance is the extent to which they may reveal that the Commissioner formed his opinion upon a mistaken view of relevant facts.
They must be considered in the light of the very unusual terms of sec. 99A. This is not the common case of an administrative or judicial decision which, when once shown to be based upon an erroneous finding that a certain state of facts exists the existence of which is a prerequisite to validity of that decision, ceases to be a valid decision. Because sec. 99A lays down no precise criteria it cannot, I think, be predicated in advance what are the prerequisites to the formation of the Commissioner's opinion as to whether or not it would be unreasonable that the section should apply; it may well be that there are no such prerequisites at all.
However if the Commissioner selects factors on which he bases his opinion and in describing them makes it clear that he has misconceived the relevant facts, that is, facts which he has chosen to treat as relevant and to elevate to the status of factors on which his opinion is based, his opinion then ceases, in my view, to be of any legal effect. It is as if he has failed to reach any opinion or has reached it upon the basis of irrelevant facts.
To describe the Dennis group of operating companies as subsidiaries does not appear to me necessarily to reveal, in its context, anything more than an undoubtedly loose use of language due, perhaps, to the fact that the letter was apparently dealing with thirteen of the trust estates at once; this may have led the writer to treat two, or perhaps three, of what he calls ``the respective private companies'' as one, so that together they might be described as having as their subsidiaries the various operating companies. At all events this error appears peripheral, the critical point in the second factor described in the letter seems to be the existence of loans rather than the precise character of the debtor companies.
It is less clear what importance the writer attached to the fact that the indebtedness of the respective private companies owed its origin to loans rather than to outstanding balances of purchase price. The inscrutable nature of sec. 99A(3) provides no guide and it is possible, although perhaps improbable, that had it been appreciated that no loans to these companies were here in question this would have affected the opinion that was in fact formed. It is, in the event, unnecessary for me to arrive at any firm conclusion on this point.
As to the question of ``discriminatory dividends'' I have no doubt that what the Commissioner apparently regarded as the nature of these dividends, that they were discriminatory, is the very feature that he regarded as giving rise to the first factor upon which his opinion is stated to be based. The mere declaration of dividends cannot be thought, even against the background of a provision such as sec. 99A(3), to itself be any opinion-forming factor; it must be the discriminatory character of the dividend that is regarded as relevant.
I would understand a discriminatory
ATC 4244dividend to be one in the declaration of which a decision is involved to prefer some members or class of members over others, all of them being members whose shares carry such rights as would entitle those declaring the dividend, if they so chose, to provide equality of treatment. The present is not such a case and it follows that one factor relied upon by the Commissioner in forming his opinion did not in fact exist at all. That suffices to vitiate his opinion since it may be that had he appreciated the true facts he might have arrived at the contrary opinion.
It was said on behalf of the Commissioner that the three factors stated in the letter should not be treated as all being essential to the opinion formed, thus if one or more was shown to be factually correct that would suffice to support the opinion. I regard the statement of all three and their description as ``the following factors'' due to which the opinion was formed as fatal to this contention; added support for this view is perhaps gained by the fact that it is the first factor which I find to be erroneous, its position may be some reflection of the particular weight placed on it.
I am conscious of the fact that it might be said that if the Commissioner's decision is vitiated the only consequence is that sec. 99A is left to operate upon the trust estate. This possible interpretation was discussed in the reasons for judgment in the Giris case and I adopt, with respect what was there said, in answer to such a view, by the Chief Justice at p. 4017.
For the Commissioner it was contended that the grounds stated in the appellants' notice of objection were not such as to entitle them to attack the factual accuracy of the factors relied upon by the Commissioner. Although the appellants were unaware of those factors until some time after they lodged their notices of objections and hence could not specify as grounds any factual errors involved in those factors, the grounds stated included allegations that there had been a failure to examine the whole of the material facts and, as a distinct ground, that the exercise of discretion was made upon inadequate information or improper criteria and was unreasonable or capricious. This is, I think, sufficient to cover the matters argued.
It is strictly unnecessary for the disposal of this appeal finally to determine upon the appellants' alternative submission: that even if factually correct the three factors enumerated in the letter could not of themselves justify the Commissioner in forming the opinion which he did. However since these trust estates will no doubt now receive further consideration by the Commissioner I should, I think, state shortly my view. It was emphasised in the reasons for judgment in the Giris case that the terms of sec. 99A conferred upon the Commissioner a very wide discretion, described by the Chief Justice as ``really legislative in nature'' - p. 4018 - and by Menzies J as involving ``an extraordinary responsibility'' in its exercise - p. 4022. It is for the Commissioner to make what he can of such indications of legislative intent as may be discerned in sub-sec. (3) and then to form his opinion in the case of any particular trust estate, having regard to what he regards as factors rendered relevant by the terms of the section. In the present case the Commissioner has selected three factors as relevant; none of them can be said to involve ``merely fanciful and prejudiced tests'' such as were instanced by Windeyer J. in the Giris case at p. 4024; nor does any of them readily answer to the description of ``considerations which could not be regarded as relevant even to such a question as the unreasonableness of applying a taxing provision to a particular taxpayer in respect of the income of a particular year'' - per Barwick C.J. at p. 4018. On the contrary each of them is concerned with an aspect of the affairs of the trust estates or of the companies from which they derive their income and each factor appears to fall within the descriptions, contained in paras. (a) or (b) of sec. 99A(3), of matters to which the Commissioner must have regard, without need for the Commissioner to rely upon the wide terms of para. (c).
In those circumstances it cannot, I think, be said that the statement of factors by the Commissioner has revealed anything which, were those factors factually accurate, would of itself serve to invalidate the opinion arrived at. In dealing with legislation of this sort I should not attempt to determine for myself whether the Commissioner could or
ATC 4245could not, on the grounds stated by him, reasonably come to the opinion expressed but should instead confine myself to an examination of those grounds; if they prove to be of the kind which the legislation appears to contemplate as relevant to the Commissioner's task, not being clearly extraneous to questions of liability to tax, that will suffice to support the opinion expressed by the Commissioner. It is for these reasons that I would not accede to the appellant's alternative submission.
However, having concluded that at least one of the errors of fact affecting the grounds upon which the Commissioner formed his opinion is so fundamental as to vitiate that opinion, it follows that the present assessments should in each case be set aside. These appeals will therefore be allowed with costs and the three assessments set aside. The Commissioner will then be free to make such further assessments in accordance with law as may be appropriate.
Appeals allowed with costs. Assessments set aside. Usual order as to exhibits.