Kolotex Hosiery (Australia) Pty. Ltd. v. Federal Commissioner of Taxation.Judges: Barwick CJ
Full High Court
Stephen J.: The Income Tax Assessment Act recognizes the right of a taxpayer to deduct from the assessable income of a year of income losses incurred in past years. Section 80 confers this right, subject to certain presently irrelevant limitations, and the appellant taxpayer sought to take advantage of it in respect of the 1967 year of income. During the seven years from 1960 to 1966 inclusive it had sustained losses of more than $500,000 and these it sought to have deducted from its assessable income for 1967, a year in which its income somewhat exceeded its accumulated losses for the preceding seven years.
However the taxpayer is both a company and one which was at all times a subsidiary of another company. The Act has, in the sections which follow sec. 80, imposed special limitations upon the right of companies to obtain deductions in respect of their past losses and where a company is one in which a controlling interest is held by another company still further requirements must be satisfied before past losses are deductible.
The Commissioner disallowed as a deduction the whole of the losses sustained by the taxpayer in the years 1960 to 1966 and consequently assessed it to tax on a taxable income in excess of $500,000. It is from the order of Mason J. dismissing the taxpayer's appeal against the Commissioner's rejection of its objection to this assessment that the present appeal is brought.
In imposing special limitations upon the right of companies, and particularly controlled companies, to claim deductions for past losses the legislature saw fit to make entitlement depend upon the Commissioner being satisfied as to the existence of certain states of fact and in the present case the Commissioner's disallowance of the claimed deductions was due to his not being so satisfied.
Mason J. has found, in my view correctly, that the course of reasoning which the Commissioner followed in reaching his conclusion that he was not satisfied involved errors of law. Had the Commissioner not been misled by those errors it would seem from the evidence that, on his then understanding of the facts and of the law, he would have concluded that he was satisfied of the existence of those states of fact which the Act calls for if a taxpayer company is to be entitled to deduct its losses of past years. However, as I have said, because of the errors which the Commissioner made, he in fact never reached this requisite state of satisfaction of mind.
Such a situation would present no difficulty to a Court were there no more to it than this; the Court would be free to correct the errors of the Commissioner and if it then appeared that, but for those errors, the Commissioner
ATC 4054should have been satisfied of the matters contemplated by the legislation then the Court would allow the taxpayer's appeal and remit the assessment to the Commissioner so that effect might be given to the taxpayer's right to a deduction for past losses. It would no doubt be aided in reviewing the Commissioner's state of mind by the knowledge, in a case such as the present, that but for those errors the Commissioner would himself have attained the state of satisfaction of mind called for by the Act.
In the present case, however, a further factor has intervened. After issue of the assessment and before the hearing of the appeal before Mason J., the Commissioner, while still maintaining the propriety of his original course of reasoning, discovered, as he thought, quite different grounds upon which might be justified his failure to be satisfied as contemplated by the Act.
No doubt, attainment by the Commissioner of a state of satisfaction or his failure to attain that state of mind must, if it is to have any statutory significance, occur before notice of assessment issues to the taxpayer; I would regard as irrelevant to the correctness of the original assessment any state of mind existing after that time. But the present is, in any event, not such a case. Both before and after issue of the notice of assessment the Commissioner has remained unsatisfied. All that has happened is that he has discovered, as time has passed, what he regards as additional and alternative grounds for his failure to be satisfied and the significance of these new grounds is only this: before the Court may review the Commissioner's failure to be satisfied it must detect some error of law affecting that conclusion or some other of the grounds for interference referred to by
Avon Downs Pty. Ltd. v. F.C. of T. (1949) 78 C.L.R. 353 at p. 360 . Here such grounds exist, they are provided by the errors affecting the Commissioner's course of reasoning which led him to his conclusion. But having entered upon a review of the Commissioner's conclusion the Court must form its own opinion of what should have been the Commissioner's conclusion and must do so unaffected not only by those errors which led the Commissioner to his original conclusion unfavourable to the taxpayer but also unaffected by any other errors or oversights, whether or not favourable to the taxpayer, which may have affected the Commissioner's original conclusion. The Court will therefore necessarily have to consider any new grounds urged by the Commissioner as justifying the assessment, not because they may support the Commissioner's already vitiated state of dissatisfaction of mind, but rather because they may assist the Court in determining whether either a contrary conclusion should be substituted for the Commissioner's original failure to be satisfied, founded as it was upon reviewable error, the appeal therefore being allowed, or whether, on the contrary, the assessment should stand unaffected and the appeal be dismissed because, once all errors and oversights are rectified, the case is not seen to be one in which the Commissioner should have been satisfied in terms of the Act.
It is in the light of the foregoing that I approach the present appeal. Its particular facts appear in the reasons for judgment of Mason J.; the relevant sections of the Act, to the extent to which their terms require statement, will also be found there. The Commissioner had failed to be satisfied in terms of sec. 80C of the Act in respect of each of the seven loss years in issue. In the case of the first year, 1960, this was, his Honour found, because the Commissioner thought that the company which had a controlling interest in the taxpayer in that year did not have such an interest in it in 1967, the year of income, and therefore a prerequisite to satisfaction under sec. 80C was absent. In the case of the remaining six years, 1961 to 1966, it was because the Commissioner considered himself entitled to invoke his powers under sec. 80B(5) in relation to the ownership by a Mr. Howie of his shares in a company which, during those years and also during the year of income, was the taxpayer's holding company, thereby producing what may be described as a deemed situation, in which the facts prerequisite to satisfaction under sec. 80C were absent.
His Honour concluded, for reasons with which I am in full agreement and which I would adopt as my own, that in each case the Commissioner was in error. In the case of the loss sustained in the 1960 year the company
ATC 4055which in 1960 had a controlling interest in the taxpayer did not, as the Commissioner thought, cease to be a holding company having such an interest in the taxpayer when, by 1967, the year of income, it had itself become ``controlled''; it is enough that it still had, in 1967, a controlling interest in the taxpayer, this is all that sec. 80C(1) calls for so far as the year of income is concerned; it does not require that in that year the ``holding company'' should be one in which no other company has a controlling interest.
In the case of the losses incurred in the six subsequent years the Commissioner was not, in my view, entitled to invoke sec. 80B(5) in respect of those years. Mason J. concluded, after a careful examination of the facts, that there was no proper basis upon which it could be said that the shares in Moomba Pty. Limited owned by Mr. Howie were the subject of any contract, agreement or arrangement falling within para. (b) and (c) of sec. 80B(5). Having heard argument at length on this aspect I am of the view that his Honour was correct in that conclusion and this for the reasons stated by him; it follows that the deeming power conferred upon the Commissioner by sec. 80B(5) never became exercisable.
I disregard the role which sec. 80D may have played in the Commissioner's disallowance of the deductions claimed by the taxpayer; to the extent that the assessment was influenced by the Commissioner's reliance upon sec. 80D this would involve a further error on his part, induced in part by the the taxpayer's own mistake. Disregarding as I do this aspect, it nevertheless sufficiently appears that the other errors to which I have referred necessarily vitiate the Commissioner's failure to be satisfied in terms of sec. 80C; but it does not follow that, these errors apart, he ought to have been satisfied in terms of sec. 80C.
It seems, from the material that was in evidence before Mason J., that, but for the consequences of these two errors upon their approach to the task of assessment and ignoring for present purposes their concern with sec. 80D, the two senior investigation officers upon whose report the Commissioner must be taken to have acted would have concluded that the taxpayer satisfied the requirements of sec. 80A and sec. 80C. I would regard it as a proper inference from the evidence that the Commissioner's course of reasoning leading to his making of the assessment followed that of his two officers and that he shared with them the view that but for what I have described as their two errors, the taxpayer would be entitled to deduct the losses incurred in the preceding seven years. One cannot, however, fix upon this particular stage in the course of reasoning leading to the assessment and, by disregarding the ultimate failure to be satisfied because it was vitiated by error, elevate this belief on the Commissioner's part into the statutory satisfaction which sec. 80A and sec. 80C call for. That the Commissioner in fact reached a contrary view, and failed to be so satisfied, is an inference called for by the evidence and the question must then be, not ``Would he but for the errors he made, and otherwise on his then understanding of the facts and law, have been satisfied?'' but rather, ``Should he, on what the Court regards as the proper view of the facts and the law, have been satisfied?''.
It is with the discharge by the Commissioner ``of his exact function according to law'' that the Court is concerned
J. in the
Avon Downs case
at p. 360, and see
F.C. of T. v. Brian Hatch Timber Co. (Sales) Pty. Ltd. 71 ATC 4093 , per Walsh J. at p. 4095; 72 ATC 4001, per Menzies J. at p. 4007 and per Owen J. at p. 4013; (1972) 128 C.L.R. 28, at pp. 30, 51, 61. Consideration is, in the first instance, to be confined to material which was before the Commissioner when he made his assessment, as is made plain by the judgments in this latter case; but once it is established that the Commissioner has, in this case through error of law, failed properly to perform his statutory function the Court will then determine what state of mind concerning the matters in sec. 80A(1) and sec. 80C(1) will amount to a discharge of that function and will do so having regard to the facts then before it, viewed in the light of what the Court regards as the true effect of the legislation.
Mason J. undertook such an investigation and concluded that, upon grounds different from those upon which the Commissioner in fact acted, he should not have been satisfied in terms of the legislation. He accordingly dismissed the appeal. In the case of the loss
ATC 4056years 1960 and 1961, he held that H. & J. (Holdings) Pty. Limited, which, for the purposes of sec. 80C(1), was the holding company of the taxpayer for the whole of the 1960 year and for part of the 1961 year, had, contrary to the requirements of sec. 80C(1), no controlling interest in the taxpayer during the income year 1967. For the loss year of 1962 his Honour arrived at a similar result, in that case the relevant holding company being Moomba Pty. Limited. These conclusions bear a misleading similarity to that of the Commissioner in disallowing any deduction for the losses of the 1960 year but in fact are based upon quite different reasoning, reasoning which also led his Honour to conclude that the situation affecting the losses for the four subsequent years, 1963 to 1966, was also one which did not meet statutory requirements, in this case those of sec. 80A(1). There was only one shareholder of the taxpayer during 1967, the income year, which had also been a beneficial owner of shares in those four loss years; this was Levi & Hill Pty. Ltd. and the shares it held did not then carry the right to exercise not less than two-fifths of the voting power in the taxpayer; hence the requirements of sec. 80A(1) could not be regarded as complied with.
Fundamental to these conclusions was the view, urged on behalf of the Commissioner and adopted by Mason J., that the effect of certain of the articles of association of the taxpayer was to confer upon Mr. Howie, its governing director, powers so far reaching as to preclude any other party from having a controlling interest in the taxpayer during the income year, 1967. This was enough to defeat the claim to a deduction for the losses of 1960, 1961 and 1962, having regard to sec. 80C(1). The voting power thus conferred upon Mr. Howie by the articles of association of the taxpayer also operated to defeat the claim to deduct the losses of the four subsequent years since, having regard to sec. 80A(1), it could not be said that during 1967 the shares held by Levi & Hill Pty. Ltd. in the taxpayer carried the right to exercise not less than two-fifths of the voting power in the taxpayer company.
It was this contention, turning upon the meaning and effect of the taxpayer's articles of association, that the Commissioner for the first time espoused some time after issue of the assessment and which he later put forward on the appeal before Mason J. as an alternative ground for the Commissioner's failure to be satisfied in terms of sec. 80A and sec. 80C.
In my view the taxpayer's articles of association and, indeed, those articles in identical terms appearing in the articles of association of Moomba Pty. Limited, H. & J. (Holdings) Pty. Limited and Levi & Hill Pty. Ltd., do bear the meaning attributed to them by the Commissioner and do produce the consequences for which he contends. I share with Mason J., and for the reasons which he states, the view both that ``voting power in the company'' appearing in sec. 80A(1) and sec. 80C(1) means the entire voting power, all exercisable voting power, and not merely such voting power as is associated with the holding of particular shares, and that ``controlling interest'' in sec. 80C(1) is not confined to that form of control which stems from rights attached to shares but extends to powers of control not derived from such rights.
For the taxpayer it was submitted on this appeal that even if, contrary to the taxpayer's contentions, Mason J's construction of these phrases were correct it did not follow that the powers conferred by the articles of association upon Mr. Howie affected either the status of Moomba Pty. Limited and of H. & J. (Holdings) Pty. Limited as having a controlling interest in the taxpayer in 1967 or the right of Levi & Hill Pty. Ltd. to exercise in that year not less than two-fifths of the voting power in the taxpayer.
This submission I reject; in my view the relevant article, Article 17, confers upon Mr. Howie, in addition to whatever votes he may be entitled to by reason of shareholding, such additional votes as on any particular occasion may be required so as to make the total votes he may cast sufficient in number to constitute by themselves a simple majority, or, in the case of a special resolution, a three-fourths majority, of all votes cast not only by others, whether for or against the motion in question, but also by him both pursuant to his right as a shareholder and pursuant to his special right under this article. Moreover the article does not, in my view, attach his special voting rights to any particular shares but confers them upon him so
ATC 4057long as he holds the office of governing director (although not, I think, after he ceases to hold that office, in that event later articles come into effect the terms of which appear to me to be inconsistent with Mr. Howie thereafter retaining the special powers conferred by Articles 16 to 24). I would doubt his ability either to attend a meeting of members or to exercise any voting powers whatever under Article 17 were he at any time not a shareholder, but so long as he is both a shareholder and governing director, as he was at all times during 1967, the year of income, he has full exercise of those powers. Although he held his shares in all companies other than Moomba Pty. Limited in trust for other companies, I consider that the special voting power conferred on him by Article 17 would not, as distinct from any vote he might have as the holder of a particular share, be subject to any such trust. The evidence concerning such trusts, slight as it is, suggests that, as might be expected, they related to shares and to the rights thereby conferred and not to rights conferred by the articles independently of shareholding, even although exercise of such latter rights might be frustrated were Mr. Howie at any time not also a shareholder.
The consequence is, in my view, that the existence, in 1967, of the special voting powers possessed by Mr. Howie operated to prevent either H. & J. (Holdings) Pty. Limited or Moomba Pty. Limited from having any controlling interest in the taxpayer during that year. The existence of those powers also operated to make it impossible to say of Levi & Hill Pty. Ltd. that at all times during that year its shares in the taxpayer, which during the latter part of that year of income amounted to only slightly more than one half of its issued capital, carried the right to exercise not less than two-fifths of the voting power in the taxpayer. It follows that in the outcome the Commissioner's failure to be satisfied in terms of sec. 80A and sec. 80C was correct and the assessment was not excessive.
I would accordingly dismiss this appeal.