Stocks and Holdings (Constructors) Pty. Limited v. Federal Commissioner of Taxation.
Members: Barwick CJMenzies J
Stephen J
Mason J
Tribunal:
High Court (Full Court)
Stephen J.: Stocks and Holdings (Constructors) Proprietary Limited (the Company) was assessed to tax in respect of the year of income ended 30 June 1966 at the rates applicable to a public company; the Company objected to that assessment on the ground that it was a private company and ought to be assessed accordingly, its objection was disallowed and on review the assessment was upheld by the Taxation Board of Review No. 1. The Company then appealed to this Court, the matter coming before Walsh J. who, at the request of the parties, has stated a case pursuant to sec. 18 of the Judiciary Act seeking answers to six questions related to the Commissioner's treatment of the Company as a public company in respect of the relevant year of income.
The adjustment sheet accompanying the Company's assessment stated that ``in terms of sec. 103A(5) the company has been deemed a public company for income tax purposes'' and the case states that it was pursuant to the provisions of that section of the Income Tax Assessment Act 1936-1965 that it was assessed as a public company rather than as a private company.
The Company had made a sufficient distribution, within the meaning of sec. 105A of the Act, in respect of the relevant year of income, as indeed it had done in each of the preceding five years, and it would not, therefore, have been liable to any additional tax under Div. 7 of Pt. III of the Act had it been treated as a private company. The only apparent consequence of the adoption by the Commissioner of his basis of assessment was to make applicable to the Company's taxable income the higher rate of primary tax applicable to public, as distinct from private, companies.
The Company would not have been a public company in the relevant year of
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income but for the exercise by the Commissioner of the provisions of sec. 103A(5). Section 103A(2)(d)(v) provides that a subsidiary of a public company is itself a public company; the Company was incorporated under the laws of New South Wales and had for some years been a subsidiary, as that term is defined for the purposes of company law, of a company which was at all material times a public company for purposes of income tax. However the definition of ``subsidiary'' in sec. 103A(4) is narrower than is the definition found in the applicable companies legislation. Section 103A(4) requires that before a company is, for the purposes of sec. 103A, a subsidiary of a public company four criteria must be satisfied, one of which is that, by reason of beneficial ownership of shares, the public company is capable of controlling or obtaining control of more than one-half of the voting power of the company. The Company's voting power was, in fact, vested in three individuals, three of its directors, who held the only issued B class shares which alone carried voting rights; so that although the other criteria of a subsidiary for the purposes of sec. 103A were satisfied because a public company owned more than one-half of its paid up capital, and was beneficially entitled to receive more than one-half of any dividends paid by it and more than one half of any distribution of its capital, the concentration of voting rights in the hands of three individuals ensured that the Company was not a subsidiary of a public company for the purposes of the section; nor was it otherwise within the definition of ``public company'' in sec. 103A(2).The stated case asks six questions, most of which are concerned with the propriety or otherwise of the Commissioner and of the Board of Review taking into account or failing to take into account various considerations when forming an opinion under sec. 103A(5). On the view which I have formed it becomes unnecessary to answer a number of the questions asked since I consider that in the circumstances of this case it was not open to the Commissioner or to the Board of Review to apply at all to the Company the provisions of sec. 103A(5).
Subsection (5) of sec. 103A is as follows -
``(5) Where a company would not, under the last three preceding subsections, be a public company for the purposes of subsec. (1) of this section in relation to the year of income but the Commissioner is of the opinion that, having regard to -
(a) the number of persons who were, at any time during the year of income, capable of controlling the company and whether any of those persons was a public company;
(b) the paid-up value of the shares issued by the company before the end of the year of income;
(c) the number of persons who beneficially owned shares in the company at the end of the year of income; and
(d) any other matters that he thinks relevant, it is reasonable that the company should be treated as a public company for the purposes of subsec. (1) of this section in relation to the year of income, the company shall be deemed to be a public company for those purposes in relation to the year of income.''
The nature and extent of the power conferred upon the Commissioner by subsec. (5) involves a consideration of its context as part of sec. 103A which is, in turn, part of the elaborate set of provisions which go to make up Div. 7 of the Act. The first section of that Division, sec. 103, supplies all the definitions necessary for the operation of the rest of the Division except the critical definition of a private company which it is the exclusive function of sec. 103A to define. Section 104 then imposes upon those private companies which, in relation to a year of income, are not to be deemed to have made a sufficient distribution a liability to additional tax upon the undistributed amount and sec. 105A describes what is to be deemed a sufficient distribution. Sections 105AA, 105B and 105C are necessary machinery provisions, sec. 106 enables excess distributions to be carried forward, sec. 107 exempts from inclusion as assessable income of a shareholder certain dividends paid by a company and sec. 107A makes special provision for those private companies which carry on the business of insurance.
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Together these sections make up a complete legislative scheme for the imposition of additional tax upon private companies making an insufficient distribution. They operate to discourage, by that means, the retention of profits by those companies carried on for profit which, of their nature, would otherwise be likely extensively to retain profits. Because companies are, as to the bulk of their income, taxed at a flat rate of tax which is lower than the upper ranges of the graduated rates of tax payable by individual taxpayers those companies which are closely held corporations would, but for Div. 7, provide a ready means for the accumulation of profits which have borne a relatively light tax burden. It is to those closely held companies that Div. 7 directs its attention and, by means of the threat of additional tax, seeks to deter the undue accumulation of profits which, if it nevertheless occurs, attracts that tax.
The function of sec. 103A is, then, the effective identification of those companies at which the provisions of Div. 7 are aimed. That this is no simple task is revealed by the legislative and judicial history of the predecessors of sec. 103A and of that section itself. Section 103A proceeds about its task of identification by a process of exclusion from the relevant class of private companies of those companies which it classifies as public. In the main this is done by reference to objective criteria which of their own force serve to identify particular companies as public companies but two subsecs., (5) and (6), depend for their operation upon the formation of an opinion by the Commissioner.
There exists a significant contrast between the forms in which the Legislature has chosen to cast each of these two subsections; subsec. (6) closely circumscribes the powers of the Commissioner. Only if he forms the opinion that, by reason of certain specified matters, certain specified states of affairs existed during a relevant year of income may he treat as a private company a company which would otherwise qualify as a public company, either because of stock exchange listing or because of its character as a co-operative company. On the other hand the power conferred on the Commissioner by subsec. (5) is much wider; if, having regard to specified matters including ``any other matters that he thinks relevant'', he is of opinion that it is reasonable that a company should be treated as a public company then, in relation to the relevant year of income, it is to be deemed to be a public company.
The reason for this difference lies in the quite different results which flow from the operation of the two subsections; to apply subsec. (6) is to subject a company to the stringent distribution requirements of Div. 7 when it would otherwise be free of them; to apply subsec. (5) is to exempt from those requirements a company which would otherwise be subject to them.
Parliament having taken the view that the protection of the revenue required that there be conferred upon the Commissioner power to apply the stringent provisions of Div. 7 to a company, not because of the existence of objective facts but because of an opinion which he might form, it is consistent with a responsible exercise of legislative power that the Commissioner should be closely circumscribed in the formation of that opinion; this subsec. (6) achieves. The contrast provided by the terms of subsec. (5) suggests that its function is not to enable onerous liabilities to be imposed upon a company but, instead, to confer a wide power upon the Commissioner to prevent unforeseen anomalies arising from the operation of the necessarily complex provisions of the Division.
A similar legislative intention can be discerned where, elsewhere in the Act, provisions similar in form to subsec. (5) appear. It was by Act No. 110 of 1964 that a number of discretionary powers were conferred upon the Commissioner, including those appearing in sec. 103A(5) and (6). By that Act powers expressed in terms of varying degrees of similarity to that used in subsec. (5) were conferred by sec. 23F(8) - now sec. 23F(16) - (private company dividends paid to superannuation funds), sec. 46(3)(c) (rebates on private company dividends received by a private company), sec. 80B(4) and (7)(b) (limitations upon the carrying forward by companies of losses of past years), sec. 82AAE(b) (the deduction of
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contributions to employees' superannuation funds), sec. 94(6) and (8) (further tax on certain partnership income) and sec. 99A(2) (special rate of tax applied to certain trust income). There are many other instances to be found in the amending Act of 1964 where discretionary powers, linked with questions of reasonableness, are given to the Commissioner but they do not bear the same similarity to sec. 103A(5) as do those set out above.If the provisions specified above are examined it emerges that whenever they confer a power upon the Commissioner, as a result of his having arrived at a conclusion that a certain course is reasonable, that power is not one whereby a taxpayer may be subjected to the particular tax or disability with which the section is concerned; on the contrary the power is to exempt the taxpayer from that tax or disability which would otherwise apply.
Occasionally a consequence of the exercise of these powers by the Commissioner may result in other sections becoming applicable which may bring about unfavourable consequences for the taxpayer; an example is provided by
Perron
v.
F.C. of T.
72 ATC 4169
,
46 A.L.J.R. 577
, which involved sec. 99A(2). A further example would arise were the Commissioner to apply sec. 103A(5) to a company which, while not having made a sufficient distribution, had retained profits amounting to little more than the permitted retention allowance. The additional tax to which it would be liable under Div.7 might then be less than the difference between the tax payable by it at private, as distinct from public, company rates so that the company would be better served by being treated as a private company. Yet this exercise of the Commissioner's power could not be attacked by the taxpayer so long as the Commissioner's opinion was not shown to have been formed ``arbitrarily or fancifully or upon facts or considerations which could not be regarded as relevant''
-
Giris Pty. Ltd.
v.
F.C. of T.
69 ATC 4015
;
119 C.L.R. 365
, per
Barwick
C.J. at P. 374. The Commissioner would be employing sec. 103A(5) in the manner intended, namely to relieve a company of the onerous provisions of Div. 7 which would otherwise apply to it, and he would not have been shown to have failed to form a
bona fide
opinion on proper grounds as to the reasonableness of his action in doing so.
These provisions are, then, dispensing provisions in the sense that they take out of the application of onerous sections taxpayers who would otherwise be prejudicially affected by them and they do so when it appears reasonable to the Commissioner that this should occur. They are not dispensing provisions in any wider sense. They are in no sense provisions to be applied only upon the request of the taxpayer or only when the end result, having regard to other provisions of the Act, will necessarily be to the taxpayer's advantage; they dispense only with the application of the particular onerous section of which they form part. It may be that a taxpayer left to his own choice would prefer the obligations of that section to the fate to which the dispensation effected by the Commissioner exposes him. But it is for the Commissioner, not the taxpayer, to apply these provisions and to determine upon reasonableness.
It follows, however, from this that it is only where the sections of which these provisions form part would, of their own effect and viewed apart from other provisions of the Act, have an onerous operation upon a taxpayer that occasion arises for the Commissioner to consider whether or not it is reasonable that they should apply; only then is there any call for the Commissioner to consider their application. Where the facts relevant to the taxpayer are not such as would otherwise subject him to the incidence of those onerous sections there can be no occasion for the Commissioner to employ these provisions; to employ them for extraneous purposes so as to subject the taxpayer to some other onerous liability, to, as it were, cast a taxpayer who is not already in the frying pan into a fire to which he would not otherwise be exposed, appears to me to be contrary to the clear legislative intent given expression in these provisions. This is what is being sought to be done in the present case.
The Company was a taxpayer for which, although it was a private company, Div. 7 held no terrors; it had for many years
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followed a practice of making a sufficient distribution by way of dividends. It needed no exercise of the Commissioner's power under sec. 103A(5) in its favour and it was not, in my view, open to the Commissioner to exercise such power in relation to it. The concept of reasonableness to which subsec. (5) refers is only meaningful in a case in which Div. 7 has some potentially onerous operation, here it had none because the taxpayer had already made a sufficient distribution.It is, of course, of relevance that under Div. 7 a year-by-year approach is adopted; the facts applicable to a company in the relevant year of income, subject to the Commissioner's power to form an opinion under subsecs. (5) and (6), determine its status in respect of that year; any opinion formed by the Commissioner will only relate to that one year of income. This makes it appropriate enough that the Commissioner's power to apply subsec. (5) should be dependant upon whether or not the company, if not a public company by virtue of the earlier subsections, makes a sufficient distribution in respect of the relevant year of income.
In my conclusions concerning the light thrown upon the terms of sec. 103A(5) by the other provisions of Div. 7 I have disregarded sec. 108 and 109, the last two sections of the Division. Unlike earlier sections, they are not concerned with excessive retention of profits by private companies but instead enable certain loans and payments by private companies to be deemed to be dividends. They, like a substantial number of other provisions throughout the Act, depend for the incidence of their operation upon the definition of ``private company'' contained in sec. 103A and it was urged on behalf of the Commissioner that in determining the meaning of subsec. (5) these various provisions should not be omitted from consideration. In particular the Sixth Schedule to the annual Income Tax Acts, which imposes a lower rate of tax upon the income of private companies than upon that of public companies, was relied upon. It was said that the existence of these various provisions made it wrong to treat sec. 103A(5) as only a part of the legislative scheme designed to ensure a sufficient distribution of profits by way of dividends; to be unduly influenced by this factor was, it was said, to fall into error.
While appreciating that to classify a company as other than a public company may be productive of a number of consequences quite apart from those with which sec. 103 to 107 are concerned, I cannot accept the view that this should influence the meaning to be given to sec. 103A(5). Although the predecessors of sec. 108 and 109 have long formed part of Div. 7, being first introduced into the legislation in 1934, they deal with problems remote from the central theme of Div. 7; so do other legislative provisions which operate by reference to the distinction between private companies and others. When by Act No. 110 of 1964 sec. 103A was introduced into the Division it was, I think, to that central theme that its provisions were directed and it should, in my view, be so interpreted.
The Taxation Board of Review No. 1, in their decision which is the subject of this appeal to
Walsh
J., took the view that the decision of
McTiernan
J. in
Stocks
&
Holdings (Sales) Pty. Ltd.
v.
F.C. of T.
69 ATC 4092
,
122 C.L.R. 139
, precluded them from regarding subsec. (5) as in any sense conferring only a dispensing power upon the Commissioner. I do not so understand his Honour's judgment. His Honour did reject the view that the power conferred by the subsection should only be exercised on the request of a taxpayer; in such rejection, I respectfully concur but, as I have endeavoured to point out, the rejection of that view is, I think, in no way inconsistent with the operation which I would give to the subsection, an operation which does not appear to have been contended for in the argument before his Honour and with which, accordingly, his Honour did not deal in his reasons for judgment.
For the reason which I have stated I conclude that it was not open to the Commissioner to seek to apply the subsection and I would, for that reason, answer Question 1 ``No''. Each of the succeeding questions, either directly or by reference to earlier questions, raises for
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consideration matters with which I have found it unnecessary to deal, relating as they do, in the main, to the effect which the facts of this case might be thought properly to have upon the formation of an opinion under subsec. (5). Since I have concluded that the Commissioner was not empowered to form any opinion under the subsection in relation to the Company no answer is required other than to Question 1.This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.