Balmoral Building Co. Pty. Ltd. v. Federal Commissioner of Taxation.Judges:
Supreme Court of New South Wales
Mahoney J.: Balmoral Building Co. Pty. Limited (``the taxpayer'') had, by 1968, accumulated tax losses which were then available to it as allowable deductions under sec. 80 of the Income Tax Assessment Act 1936 (as amended). Before the events here relevant, there were four issued shares in the company, held as follows: Mr. Simmons, 1 share; Mr Spooner, 1 share; Mr. Hawkins, 1 share; and Mr. Lewis, 1 share.
As part of a transaction or series of transactions for (as it was put) ``the use of its tax losses'', steps were taken as follows:
- 1. A new share in the taxpayer was issued to H.F. Saint Investments Pty. Limited
- 2. Mr. Hawkins transferred his share to H.F. Saint Builders Pty. Limited
- 3. Mr. Lewis transferred his share to H.F. Saint Industries Pty. Limited
- 4. A Scheme of Arrangement was approved under the Companies Act, as then in force, in respect of the debts of the company.
Thereafter, in the years of income ended respectively 30th June 1969 and 1970, the taxpayer earned assessable income and claimed allowable deductions in respect of such losses. The Commissioner disallowed such claims and a Taxation Board of Review, by majority, upheld the Commissioner's assessment.
The taxpayer has appealed to this Court.
In summary, the relevant facts are as follows:
28th September 1960: The taxpayer was incorporated, its principal object being to carry on business as a builder.
1962-1966: The taxpayer carried on business under the control of its four shareholders, Messrs. Hawkins, Lewis, Simmons and Spooner, who were then its directors and it accumulated substantial trading losses.
18.2.1966:Mr. Ryan was appointed as Official Manager as from 4th March 1966 by resolution of a meeting of the company's creditors.
March 1966-September 1968: The official management continued during this period. The company was unable to ``trade out of its financial difficulties''. It had a Committee of Management which included Mr. Simmons and Mr. Spooner and also Mr. Saint, a person associated with companies who were creditors of the taxpayer.
11.1.1968: The Official Manager, in a report to creditors, said (inter alia): ``With regard to the tax losses of the company, several parties have expressed interest. It is estimated that the losses will amount to between $85,000 and $90,000. Possible purchase price would be between 10¢¢ to 12¢¢ in the dollar''.
Early 1968: Discussions took place between Mr. Saint and his legal and accounting advisers and the company's advisers and the Official Manager as to the acquisition by Mr. Saint's companies of an interest in the taxpayer under ``a tax loss Scheme of Arrangement''. It was explained to Mr. Saint that under such a Scheme, his companies would acquire a 60% interest in the taxpayer and that for tax purposes it was important that a 40% interest be left with existing shareholders. At some stage an oral agreement was reached generally of the kind later carried into effect by the Scheme of Arrangement, and Mr. Saint resigned from the Committee of Management.
19.4.1968: Apparently as a preparatory step to the Scheme, a general meeting of the taxpayer was held at which resolutions were passed providing for:
- (a) alterations to the company's Articles of Association (in substance, removing certain articles relating to permanent directors which were inappropriate if an outside party were to acquire a 60% interest in the taxpayer);
- (b) the execution by the company of the indenture to which I shall refer; and
- (c) the propounding of a Scheme of Arrangement.
2.5.1968: The Supreme Court of South Australia summoned a meeting of creditors to consider the proposed Scheme of Arrangement.
22.5.1968: At the taxpayer's solicitor's office:
- (a) meetings were held of creditors and members and resolutions were passed to approve the Scheme of Arrangement;
- (b) the indenture was executed;
- (c) documents, including share transfers by Mr. Hawkins and Mr. Lewis, were executed.
11.6.1968: The Supreme Court of South Australia approved the Scheme of Arrangement.
21.6.1968: An office copy of the order of the Supreme Court was lodged with the Registrar of Companies.
11.9.1968:A Meeting of the shareholders of the company was held and:
- (a) one new share was issued to H.F. Saint Investments Pty. Limited;
- (b) Mr. Hawkins and Mr. Lewis each transferred his share to one of the Saint companies;
- (c) Mr. Hawkins and Mr. Lewis resigned as directors;
- (d) It was resolved that Mr. Simmons and Mr. Spooner remain as directors and that Mr. Saint and Mrs. Saint become directors.
At this point, the shareholding in the company was:
Mr. Simmons 1 share Mr. Spooner 1
share H.F. Saint Investments Pty. Ltd. 1 share H.F. Saint Industries P ty. Ltd. 1 share H.F. Saint Builders Pty. Ltd. 1 share
30.9.1968: The Scheme Manager, as attorney for the creditors of the taxpayer, executed an assignment of the debt due by the company ($67,945) in favour of Mr. Saint in consideration of the payment to him of $6021.
(The parties have not formally agreed upon the facts but there has been prepared a chronology of events upon which Counsel have agreed and the events as I have stated them are taken from that chronology.)
Three main questions have been argued in this proceeding:
- 1. Whether the requirements of sec. 80A are satisfied;
- 2. (If they were) did the facts give rise to a power under sec. 80B(5)?; and
- 3. (If they did) has that power been or can it be properly exercised?
In this proceeding, the parties have tendered the decision of the Taxation Board of Review and the transcript of evidence and the exhibits in evidence before that Board. It has been agreed that these matters shall constitute the evidence in this proceeding and, insofar as inferences are to be drawn by me, they may be drawn from such material.
1. Was sec. 80A satisfied?
Section 80A, standing alone, requires, for the tax losses to be available as allowable deductions, that the taxpayer satisfy the Commissioner that at all times during the two years of income, the shares in the taxpayer owned by Mr. Simmons and Mr. Spooner carried between them the rights specified in sec. 80A(1) and that they were beneficially owned by these two gentlemen. Upon the evidence as it is before me, I am satisfied that the two shares in question carried such rights at all relevant times and that they were, at all relevant times, beneficially owned by Mr. Simmons and Mr. Spooner. I have considered the evidence given by these gentlemen and the statements which were made by them, but, on the whole of the evidence, I am satisfied that they remained at all times registered as shareholders in respect of those shares and that they did not part with or qualify their beneficial ownership of them. It has not been contended that the effect of the indenture of 22nd May 1968 was to qualify such beneficial ownership.
However, the terms of sec. 80A require that the company satisfy the Commissioner in this regard. The Commissioner was himself not so satisfied. But, in my opinion, the Taxation Board of Review was so satisfied and, under sec. 193, a determination or decision of the Board is deemed to be a determination or decision of the Commissioner. In my opinion, the Commissioner, in deciding whether he is satisfied for the purposes of sec. 80A(1) is making a determination or decision within sec. 193. Therefore, the Board, in being satisfied, brought about compliance with sec. 80A.
In argument, for the Commissioner, it was contended that a Board of Review in such an appeal as the present, acts merely to uphold or not uphold an assessment and that therefore there is no determination or decision of the Board within sec. 193; in effect, as it was argued, there cannot be, or at least was not in this case, a review of the satisfaction or non-satisfaction of the Commissioner on this matter.
I do not agree with this argument. Each member of the Board of Review addressed himself to sec. 80A and two of the members of the Board, Mr. Dubout and Mr. Thompson, held that they were satisfied for the purposes of the section. This is, in my opinion, a determination or decision operative under sec. 193. I do not think that this is affected by the fact that, in the outcome, Mr. Dempsey, agreed in the result that, by virtue of sec. 80B(5), sec. 80A should be treated as not having been satisfied. For the purposes of determining whether there has been the necessary ``satisfaction'' under sec. 80A, the Board of Review is, in my opinion, properly to be treated as having made distinct determinations or decisions, one of which was a determination or decision in respect of sec. 80A.
The Commissioner did not contend, nor do I think he could have contended, that it was not open to the Board, upon the evidence before it, to be so satisfied.
2. Did a power arise under sec. 80B(5)?
This subsection provides:
- (a) a person who beneficially owned any shares in the company at all times during the year in which the loss was incurred also beneficially owned shares in the company at any time (in this subsection referred to as `the relevant time') during the year of income;
- (b) before or during the year of income, that person entered into a contract agreement or arrangement or granted or was granted a right power or option (including a contingent right power or option) that in any way directly or indirectly related to affected or depended for its operation on:
- (i) the beneficial interest of that person in the lastmentioned shares, or the value of that interest;
- (ii) the right of that person to sell or otherwise dispose of that interest or any such sale or other disposition;
- (iii) any rights carried by those shares or the exercise of any such rights; or
- (iv) any dividends that might be paid or any distribution of capital that might be made in respect of those shares or the payment of any such dividends or the making of any such distribution of capital; and
- (c) the contract agreement or arrangement was entered into or the right power or option was granted for the purpose or for purposes that included the purpose, of enabling the company to take into account for the purposes of sec. 80 or sec. 80AA of this Act a loss that the company had incurred in a year before the year in which the contract agreement or arrangement was entered into or the right power or option was granted or a loss that that the company might incur in that lastmentioned year,
the Commissioner may, subject to the succeeding provisions of this section, treat those shares as not having been beneficially owned by that person at the relevant time.''
I have recently expressed my views as to the effect of this subsection and it is not necessary that I repeat them in detail: see
K.Porter & Co. Pty. Limited v. F.C. of T. 74 ATC 4093. In my opinion, the term ``arrangement'' as used in the subsection includes an understanding or a plan which may not be enforceable in law, and would include, inter alia, the legally effective acts which are done in the carrying out of that plan or arrangement.
For the subsection to apply, it is sufficient that there be an arrangement that related to or affected any rights carried by the shares retained by Mr. Simmons and Mr. Spooner, and that that arrangement was entered into for a purpose that included the purpose of enabling the company to take into account the relevant tax losses.
(a) The arrangement: As the matter has been argued, the relevant arrangement is that which was evidenced by or consisted of the indenture made on 22nd May 1968. This indenture was made between the four original shareholders of the taxpayer, the three companies with which Mr. Saint was associated and to which I have referred, and Mr. H.F. Saint (therein described as ``the Scheme Purchaser''). It recited that the original shareholders had agreed ``for the sale or issue of certain shares in the capital of the company to the purchasers (the three companies) on the terms set forth in the indenture''. The indenture then provided, in general terms, for two things: the bringing into effect of the Scheme of Arrangement, and the rearrangement of the shareholdings of the taxpayer and matters associated therewith. It provided that, after the commencement date of the Scheme, the Scheme Purchaser should pay the sum as provided by the Scheme of Arrangement: cl. 1; and all parties to the indenture agreed that they would consent to the Scheme and do all in their power to enable its provisions to be carried out: cl. 2.
Clause 4 of the indenture provided:
``Upon or immediately after the commencement date of the said Scheme, the member of vendors covenant for the consideration in each case for the sum of $2:
- (a) they will agree to and procure and arrange for the registration of the following transfers:
- (i) by the said Clifford Hawkins to H.F. Saint Investments Pty. Limited of one ordinary share in the capital of the company
- (ii) by the said George Lewis to H.F. Saint Industries Pty. Limited of one
ATC 4063ordinary share in the capital of the company
- (b) they will agree to and procure the issue to H.F. Saint Builders Limited of one ordinary share in the capital of the company
- (c) they will agree to procure and (where applicable) vote in favour of such amendments to the Articles of Association of the company as the purchaser may from time to time require PROVIDED HOWEVER, that unless otherwise agreed between the parties hereto no such amendment shall prevent the shares of the vendor members or such of them as remain at all times carrying between them the right to exercise not less than two-fifths of the voting power in the company, the right to receive not less than two-fifths of any dividends that may be paid by the company and the right to receive not less than two-fifths of any distribution of capital of the company in the event of the winding up or reduction in the capital of the company
- (d) they agree to and will procure the appointment of persons nominated by the Scheme Purchaser as directors of the company
- (e) they agree to and will procure the registration of the present directors and all present officers of the company
- (f) they agree to and will cause to be delivered to the new directors the common seal, register of members, register of mortgages and charges, minute books, books of account, bank statements, cheque butts, documents of title and all records documents and papers relating to the business and property of the company whatsoever in proper order and condition fully entered up so as to disclose full and up to date information relating to the company and its affairs and complying with all statutory requirements
- (g) they agree to and will execute such powers of attorney relating to their shareholdings or to their said debts as the Scheme Purchaser may from time to time require to enable these presents and the provisions of the said Scheme to be effectively carried out
- (h) they agree to and will determine the appointment of the Official Manager of the company as and when required by the Scheme Purchaser.''
Clause 8 of the indenture provides:
``The parties hereto agree to ensure that as soon as possible after the execution of this indenture, a meeting of shareholders of the said company will be held to approve of the said Scheme and also so that proceedings will be taken in the Supreme Court of South Australia on behalf of the company for an order that meetings of creditors of the company be held to consider the said Scheme and subject to the necessary majority of numbers under sec. 181 of the Companies Act 1962-1966 being obtained to have the said Scheme approved by the said Court.''
Clause 11 of the indenture provides:
``It is hereby declared that this indenture shall not in any way affect the beneficial interests of the member vendors in their shares in the company or their right to sell or otherwise dispose of those interests or the rights carried by such shares for the exercise thereof except as herein provided or any dividends that might be paid or any distribution of capital that might be made in respect of those shares or the payment of any such dividend or the making of any such distribution of capital.''
Clause 12 of the indenture provides:
``All parties hereto agree to do all things and to sign all documents necessary to give force and effect to these presents and all covenants by the member vendors are both joint and several.''
There was, as a schedule to the indenture, the Scheme of Arrangement to be proposed. That Scheme of Arrangement envisaged, inter alia, that the Scheme Manager would be appointed by each of the Scheme creditors to be his attorney ``for the purpose of executing on his its or their behalf respectively (a) Deed of Assignment of the said debts as compromised in a form required by the Scheme Purchaser and in accordance with the Scheme''.
The sundry creditors of the taxpayer as at 31st January 1966 were shown to be a number of persons and companies whose debts aggregated $72,162.69. It is, I infer, these debts or debts of this kind which, as the parties have accepted, were ultimately transferred ``in favour of Mr. Saint''.
In my opinion, the arrangement in question related to or affected the right to vote which
ATC 4064was appurtenant to the shares retained by Mr. Simmons and Mr. Spooner. Mr. Ellicott, in the course of his helpful and able argument, conceded that it was ``difficult to sustain'' the contrary proposition. The provisions of both para. (c) and (g) of cl. 4 of the indenture make this clear, and cl. 11, by the words ``except as herein provided'' contemplates that this will be the effect of cl. 4.
(b) The purpose of the arrangement: It is this aspect of sec. 80B(5) which, in this case, raises the most difficult problem of construction. However, in my opinion, the arrangement, having regard to the extent to which it related to the use by Mr. Simmons and Mr. Spooner of the voting power attached to their shares, was entered into for the purpose of enabling the company to take into account its tax losses.
First, the arrangement did affect in a significant way, the exercise by Mr. Simmons and Mr. Spooner of such voting power. By cl. 4(c) of the indenture, they agreed to procure and vote in favour of ``such amendments to the Articles of Association of the company as the purchaser may from time to time require''. Subject to those amendments not affecting the ``60-40 ratio'' required by sec. 80A, this obligation was unlimited. It was sought, in argument, to limit the amendments which might be sought by Mr. Saint by the fact that the opening words of cl. 4 required the performance by the shareholders of this obligation ``upon or immediately after the commencement date of the said Scheme''. I do not think that, as a matter of construction, this would prevent Mr. Saint ``from time to time'' requiring amendments to the Articles of Association within cl. 4(c); if a verbal reconciliation of the opening words of cl. 4 and this portion of cl. 4(c) is to be made, it may in my opinion, be made by reference to cl. 4(g). This provision envisages that (let it be assumed) ``upon or immediately after the commencement date of the said Scheme'' the shareholders will execute ``such powers of attorney relating to their shareholdings... as the Scheme Purchaser may from time to time require to enable these presents and the provisions of the said Scheme to be effectively carried out''. However, even if the exercise of voting power envisaged by cl. 4(c) were limited to amendments proposed ``at or immediately after the commencement date of the said Scheme'' that would, in my opinion, give the power to Mr. Saint to require amendments covering the wide field to which I have referred.
The provisions of cl. 4(g) also in my opinion, relate to or affect the voting power attached to the relevant shares. This would enable Mr. Saint to require a power of attorney authorising the attorney to exercise such voting rights so as to procure, for example, such amendments to the Articles of Association of the company as would fall within cl. 4(c).
Second, the arrangement had the necessary statutory purpose.
Standing alone, an arrangement for the barring of the debts of the tax loss company might not be sufficient basis for the inference that the arrangement had the purpose of enabling the company to take its losses into account. Similarly, for the reasons to which I referred in the Porter case (supra) I do not think that an agreement for the sale to a purchaser of a 60% interest in a tax loss company would, standing alone, ground such an inference, even where it appeared that each party understood what the requirements of the law were in relation to tax loss companies and what was required so that the losses should be available as allowable deductions. But, the purpose to be inferred from any particular arrangement will depend upon the terms and context of that arrangement. The effect of the obligation cast upon Mr. Simmons and Mr. Spooner to procure any required amendments to the Articles of Association (subject only to the maintenance of the ``60-40 ratio'') was that they were obliged to procure any amendment to the Articles of Association which would ensure control by Mr. Saint and those associated with him of the management of the taxpayer and its day to day operations. In particular, the effect was that Mr. Saint and those associated with him (if they were not already in that position) were able to ensure that they would be put in that position. This would, in turn, enable Mr. Saint and those associated with him to cause the company to derive income against which the tax losses might be claimed as allowable deductions.
Whether, in sec. 80B(5) the effect of an arrangement is to be taken necessarily as being its ``purpose'': cf. the decisions given in respect of ``purpose'' in sec. 260; at least the effect of a provision is relevant in determining what that purpose is. In the present case, it is in my opinion, clear that the reason why Mr. Saint and those associated with him entered into the arrangement was, in general, to enable the tax
ATC 4065losses of the taxpayer to be put to use (to put the matter in a neutral form). Whilst the stipulated 40% shareholding was left with the original shareholders, steps were taken, not merely to ensure that no existing creditor would have a claim against the company, but also to ensure the financial control of the company by the assignment of the debts as Mr. Saint directed, at least to the extent of those debts: cf.
XCO Pty. Ltd. v. F.C. of T. 71 ATC 4152; (1971) 45 A.L.J.R. 461. Apart altogether from the evidence given by the witnesses, as recorded in the Board of Review transcript, it is, in my opinion, proper to infer that one of the purposes of the provisions of the arrangement insofar as they affected the use of the voting power of the shares, was to ensure the control by Mr. Saint and those associated with him, of the future operations of the company and, as part of that, to ensure that the company could be caused to derive assessable income as Mr. Saint might determine, against which the tax losses could be claimed as allowable deductions.
It may be argued that there is a distinction between an arrangement whose purpose is the use of the tax losses and an arrangement whose purpose is to ensure that, after the tax losses have been used, the holder of the 40% shareholding will not derive the benefit (by way of dividend, capital, and otherwise) which he might normally be expected to derive from such a shareholding. I referred in passing to this argument in the Porter case. Whatever be the effect of a provision of the latter kind (a matter on which I express no opinion) the arrangement in the present case goes beyond that. As I said in that case:
``To give control of the tax loss company in order to permit the buyer to achieve such a result is in my opinion, to act `for the purpose' specified in para. (c). The words `enabling the company to take into account' may at first sight appear awkward in this context. `Take into account' is used, as it is used in sec. 80(2)(c) as meaning `deduct from assessable income': cf. sec. 80(2)(a) and (b) and the definition of `taxable income' in sec. 7. The word `enabling' at first sight appears inapt when what is achieved by the arrangement or grant of a right is the derivation of income, but where the context is one in which it is contemplated that there will or may be an element of manipulation or artificiality in the circumstances in which the income will be derived by the company, the word, in the sense of `making it possible' is less inappropriate.
This view of para. (c) finds support in the judgment of Menzies J. in
F.C. of T. v. Brain Hatch Timber Co. (Sales) Pty. Limited, 72 ATC 4001 at p. 4009; (1972) 46 A.L.J.R. 111 at 116G. The court there was considering the effect of the grant of proxies to vote at meetings of the company: Menzies J. said: `It has next to be considered how the condition expressed in sec. 80B(5)(c) may be fulfilled. This is a difficult provision. It seems to me that the usual way in which a company takes into account a loss that the company had incurred in a previous year is by making profits from which such a loss can be deducted. It is true that there is no right to a deduction unless there is substantial continuity of ownership of the shares in the company as required by sec. 80A. However, an arrangement to secure conformity with the requirements of sec. 80A(1) does not itself enable a company to take a previous loss into account. The simplest instance of such a conformity would be that the beneficial ownership of all the shares remained unchanged. Here I do not doubt that the proxies were obtained to enable the company to become one of the Brian Hatch group of companies and to carry on business profitably. If it were to be assumed, as I think it must for the purpose of sec. 80B(5) that the Clearys retained the beneficial ownership of the two original shares, then it could only be by the use of the proxies that the Brian Hatch interests could take control of the company. I would therefore be prepared to find that the proxies were taken for the purpose of enabling the company to use the tax losses. However, this is not the exact problem which sec. 80B(5)(c) poses. The problem is whether the proxies were granted for that purpose. It does appear from their statements that the Clearys were aware that the purpose of the sale was to take advantage of the tax losses. The purpose of Mrs. Cleary and Mr. Scutt in giving the proxies may have been for the same purpose. If that were so, the condition expressed in sec. 80B(5)(c) would, I think, be fulfilled.
The result of this consideration of the meaning of sec. 80B(5) and its possible application to the facts of this case, satisfies
ATC 4066me that, in this case, it was necessary to allow the Commissioner, in reassessing, to consider the possible application of sec. 80B(5)'.
It was argued for the company in the present case that these observations were dicta only and that I should not follow them.
The words of para. (c) are not easy to construe but their ordinary meaning is, as I have said, wide enough to comprehend such a meaning as Menzies J. referred to. In addition (if it be relevant) in relation to the construction of para. (c) it may be noted that the legislature has given some indication that in the context of `the continuing business' test in sec. 80E, processes whereby income is derived as the result of transactions of a kind not previously entered into by a tax loss company are of such a nature as to warrant disallowance of the losses: sec. 80E(2). It may be that it can be inferred that, in relation to sec. 80B(5) the transactions whereby income is diverted to a tax loss company are within the mischief to be dealt with by that section.
However this be, the words of para. (c) are wide enough to comprehend the `purpose' to which I have referred and I respectfully be of the view that his Honour's observations correctly interpret the paragraph; but in any event, such observations represent the considered view of a member of the High Court of Australia, concurred in by the Chief Justice (at ATC p. 4003 and A.L.J.R. p. 112) and as such should be followed by me.''
In addition, if regard be had to the evidence as a whole, the inference is, in my opinion, to be drawn that the future control of the voting power of the relevant shares was a significant matter in the ``purchase of the tax losses'' and I accept that it was so seen by all of the parties involved, including Mr. Simmons and Mr. Spooner.
3. The exercise of the power under sec. 80B(5)
If, upon the findings which I have made, the power given by sec. 80B(5) arose for exercise, it remains to be determined whether it has been or should be exercised adversely to the taxpayer.
Unless the power is exercised, then, where sec. 80A has in its terms been satisfied, the losses are available and allowable deductions. Prima facie, the power is available for exercise by the Commissioner or, on review by a Taxation Board of Review, by the Board of Review.
In the present case, the Commissioner exercised the discretion adversely to the taxpayer. The Board of Review, on the face of the judgments of its members, also purported to exercise the power adversely to the taxpayer. There was, in my opinion, evidence before the Board of Review upon the basis of which it could properly have exercised the power adversely to the taxpayer. It could have taken the view that the restriction of the exercise of voting power by the original shareholders fell precisely within the proscription which the legislature, by sec. 80B(5), was seeking to enact.
However, the argument advanced by Mr. Ellicott, for the taxpayer, was as follows: He argued that although the Board of Review in this case purported to exercise the power under sec. 80B(5), it did not validly do so; that the failure of the Board of Review to exercise the power did not ``reinstate'' the Commissioner's purported exercise of the power; and that therefore, the power had not been exercised adversely to the taxpayer. He accepted that, if there was some basis in law, on the facts as found, on which the power could legally be exercised adversely to the taxpayer, then the proper course was to refer the matter back to the Board of Review for the exercise of the power. However, as he argued, there was in the present case, no such basis, and therefore these appeals should be dealt with upon the basis that the power had not been exercised adversely to the taxpayer.
In my opinion, the power was so exercised by the Board of Review, and the manner of its exercise did not render it ineffective for present purposes.
Mr. Dubout, the Chairman of the Board, considered the effect of the indenture of 22nd May 1968 in three steps: he held that cl. 4(a) and (b) gave rise to the power but felt that they did not ``call for an exercise of the discretion in a manner adverse to the taxpayer''; he then held that cl. 4(g) did not give rise to the power; and, finally, he held that cl. 4(c) did give rise to the power and saw ``no reason why I should not
ATC 4067treat the shares held by (Mr. Simmons and Mr. Spooner) as not having been beneficially owned by them at the relevant time''.
Mr. Dempsey held that the requirements of sec. 80A had not been satisfied. He then, in relation to sec. 80B(5) considered cl. 4(g) of the indenture and said:
``In his discussion on sec. 80B(5) Menzies J. placed considerable importance on the grant of the proxies by Mrs. Cleary and Mr. Scutt and considered this to be sufficient for the conditions expressed in sec. 80B(5)(c) to be fulfilled. In my view the effect of cl. 4(g) of the indenture dated 22nd May 1968 referred to supra, is of equal if not greater importance. Counsel for the taxpayer endeavoured to have this clause interpreted as only binding the two shareholders who agreed to transfer their shares. I consider this is not justifiable. These shareholders having transferred their shares faded from the scene and the only persons who could, at all times including the present, be bound by this clause were the `vendor members' who still retained their shares, the persons I have referred to as C and D. The effect of this clause in my opinion was that C and D (Mr. Simmons and Mr. Spooner) being aware that the purpose of the sale was to take advantage of the tax losses, their purpose in being parties of the indenture was for the same reason. As Menzies J. said [72 ATC 4001] at p. 4009 of the Brian Hatch case, supra, the conditions expressed in sec. 80B(5)(c) would, as he felt, be fulfilled.
For the reasons outlined, I would therefore confirm the primary assessment for the years ended 30th June 1969, 1970 and 1971 and the Division 7 assessment for the year ended 30th June 1970.''
Mr. Dempsey did not, in terms, proceed from his finding that sec. 80B(5) was ``fulfilled'' to the exercise of the discretion adversely to the taxpayer, but in my opinion, the exercise of that power is to be inferred from what he said. He had pointed out that, having decided against the taxpayer on sec. 80A, that decision ``disposes of the appeals'' but he said ``... but as in the Brian Hatch case, supra, there is the further matter of law in issue which concerns the meaning and application of sec. 80B(5) of the Act''. Mr. Dempsey's view of that section was, in my opinion, one of the ``reasons outlined'' upon the basis of which he confirmed the Commissioner's assessment.
It was then argued, in effect, that because Mr. Dubout and Mr. Dempsey differed as to the effect of the various paragraphs of cl. 4, they had not formed such a majority as would result in the exercise of the Board's power. It is true that Mr. Dubout thought cl. 4(g) of the indenture did not cause the sec. 80B(5) power to arise and that that power arose to be exercised by him only because of cl. 4(c); whereas Mr. Dempsey thought the power arose because of cl. 4(g). But this does not mean that the Board did not exercise the power. The proper question is whether ``the arrangement'' had the relevant purpose within sec. 80B(5)(c). In the present case, as I have held, several provisions of the indenture, including both cl. 4(c) and (g) assist in the conclusion that the arrangement as a whole had that purpose. It is, in my opinion, erroneous to confuse the question whether the arrangement had the necessary purpose with the reasons why it had that purpose. In the present case, Mr. Dubout and Mr. Dempsey differed as to the reasons why the arrangement had the statutory purpose but they agreed that it did have that purpose. Once that conclusion was reached by them, as the majority of the Board, then the power under the subsection arose for exercise. The question whether it should be exercised raises considerations different, of course, from those affecting the question whether the power arises at all. But power having arisen, both Mr. Dubout and Mr. Dempsey exercised it adversely to the taxpayer. The fact that each of them was influenced by different reasons does not, in my opinion, invalidate that exercise. Where a body or tribunal has more than one member, it is not prevented from exercising a power because its members, though agreeing upon the exercise, differ as to their reasons. Special cases may arise in such a context, but there is, in my opinion, no such problem in the present case.
The power having been exercised adversely to the taxpayer, by the Board of Review, there is, in my opinion, no need to consider the submissions which have been made as to the power or propriety of referring the matter back to the Board of Review.
Since this proceeding was argued and these conclusions formed, I have had the benefit of considering the decisions in
ATC 4068(Australia) Pty. Limited v. F.C. of T. (73 ATC 4094; 47 A.L.J.R. 439); (75 ATC 4028; 49 A.L.J.R. 35). In my opinion, the conclusions which I have formed are not inconsistent with the conclusions formed by their Honours in that case. Insofar as it may be relevant, if it fell to this Court to exercise the power under sec. 80B(5), whether arising by reason of cl. 4(c) or (g), of the indenture or generally, I would exercise that power adversely to the taxpayer. I am conscious that, in some cases, the power may arise because of inadvertence in the formulation of the relevant arrangement or because the terms of the subsection are, in the absence of governing authority, often difficult to apply. However, in the present case, the nature of the arrangement as a whole and of the restrictions placed upon the rights appurtenant to the shares held by Mr. Simmons and Mr. Spooner, and the use to which they might have been put lead me, on balance, to the conclusion that the present would be a proper case for the exercise of the power adversely to the taxpayer.
The proceedings have been dealt with upon the basis that I need not consider the detail of the assessments or of the orders which, in these circumstances, should be made. I therefore direct Counsel for the Commissioner of Taxation to bring in Short Minutes of the Orders appropriate to give effect to the findings which I have made.