Cooper Brookes (Wollongong) Pty. Limited v. Federal Commissioner of Taxation.

Judges:
Woodward J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 6 October 1977.

Woodward J.: This matter concerns the application of the provisions of sec. 80, and the sections following of the Income Tax Assessment Act 1936-1965 in a claim by the appellant to be entitled to an allowance of certain deductions, the allowance of which has been refused by the Commissioner.

Section 80 permitted a deduction of losses incurred by a taxpayer during the seven years next preceding the year of income. The relevant years of loss in this matter were 1964 and 1965 and that of income 1971. At all relevant times the provisions of sec. 80A, 80B, 80C, 80D and 80E restricted the deduction of previous years' losses of both public and private companies to cases where there was a substantial continuity of shareholding in the year of loss and the year of income in respect of which the loss and the year of income in respect of which the loss was claimed or, alternatively, the company could satisfy the requirements of the ``continuing business'' test of sec. 80E. With this alternative I am here not concerned. The relevant provisions of the above sections were as follows:

sec. 80A - (1) Notwithstanding the last preceding section, but subject to the next succeeding sub-section, and the next four succeeding section a loss incurred by a taxpayer, being a company, in a year before the year of income shall not be taken into account for the purposes of the last preceding section unless -
- (a) the company satisfies the Commissioner; or
- (b) in the case of a company that is not a private company in relation to the year of income, the Commissioner is satisfied that it is reasonable to assume,
that, at all times during the year of income, shares in the company carrying between them -
- (c) the right to exercise not less than two-fifths of the voting power in the company;
- fifths of any dividends that may be paid by the company; and
- (e) 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 of a reduction in the capital, of the company,
were beneficially owned by persons who, at all times during the year in which the loss was incurred beneficially owned shares in the company carrying rights of those kinds.
sec. 80B - (5) Where -
- (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 sub-section 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 last-mentioned 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
    
    ATC 4418
    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 section eighty 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 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.
sec. 80C - (1) Notwithstanding sections eighty and eighty A of this Act but subject to this section and to section eighty E of this Act, where a company in which no other company had a controlling interest (in this section referred to as ``the holding company'') had a controlling interest in another company (in this section referred to as ``the subsidiary company'') at any time during a year in which a loss was incurred by the subsidiary company, the loss shall not be taken into account for the purposes of section eighty of this Act unless the Commissioner is satisfied that, at all times during the year of income of the subsidiary company -
- (a) the holding company had a controlling interest in the subsidiary company; and
- (b) shares in the holding company carrying between them -
  - (i) the right to exercise not less than two-fifths of the voting power in the company;
  - (ii) the right to receive not less than two-fifths of any dividends that may be paid by the company; and
  - (iii) 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 of a reduction in the capital, of the company,
  were beneficially owned by persons who, at all times during the year in which the loss was incurred by the subsidiary company, beneficially owned shares in the holding company carrying rights of those kinds.

Section 80C(1) required a continuity of ownership during the year of income of the necessary shares in the holding company, similar to that required in the earlier section in the case where there was no holding company.

At that point it is seen that where there was no holding company sec. 80A required the continuity of the ownership of shares and that sec. 80B(5) permitted the Commissioner in case there was an arrangement of the type specified to deem the shares as not having been beneficially owned by the particular person during the year of income. Section 80C dealt with the situation where there was a holding company so that the taxpaying company was a subsidiary of it. It required a similar type of continuity in the share holding but instead of re-enacting in more specific terms the deeming provisions that are contained in sec. 80B(5) it provided by subsec. (3) of sec. 80C as follows:

For the purposes of the application of either of the last two preceding sub-sections the provisions of sub-sections (3) to (8) inclusive of the last preceding section apply in relation to the holding company and in relation to every company that was at any relevant time interposed between the holding company and the subsidiary company as if references in those sub-sections to the company were references to the holding company or to the interposed company as the case may be.

It would seem then that the purpose of sec. 80C(3) was to apply to the situation created in sec. 80C(1) the terms of subsec. (5) of sec. 80B. It would be reasonable to require that where losses of previous years of a subsidiary are sought to be taken into account in a year of income of a subsidiary there must be substantial continuity of the beneficial ownership of the shares in the holding company.

Before, however, proceeding to the facts in this case let me look at certain aspects that are raised by the sections that I have referred to. It is of importance to determine whether, in this case the situation is governed by either sec. 80A, or sec. 80C, or both, and the effect of sec. 80C(3) in relation to the application of sec. 80C(1) to the facts.

In
Kolotex Hosiery (Australia) Pty. Limited v. F.C. of T. 73 ATC 4094; (1972-73) 130 C.L.R. 64

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Mason J. was concerned with a contest as to the application of sec. 80, 80A, 80B(5), 80C and 190(b) of the Income Tax Assessment Act. After referring to the various sections his Honour, at ATC p. 4101; C.L.R. p. 76, said as follows:

``Section 80A(1) was expressed to be subject to `the next four succeeding sections'. Section 80C(1) commences `Notwithstanding sections eighty, eighty AA and eighty A of this Act'. The relationship between the two sections is not entirely clear. As their provisions are negative, there is something to be said for the view that their requirements are cumulative, subject perhaps to the paramountcy of sec. 80C in the event that there is a compliance with its requirements. However, in the circumstances of this case it is unnecessary to decide this question, because, as will appear later, I take the view that the requirements of sec. 80C, in so far as they apply, are not satisfied.''

On appeal (see 75 ATC 4028; 132 C.L.R. 535), Barwick C.J. at ATC pp. 4030-31; C.L.R. p. 540, said:

``However, where the taxpayer was for any part of the year in which the loss occurred a subsidiary of another company (the `holding company' - described as a company in which no other company had a controlling interest), there are further conditions to be met before the claim to the deduction of the losses may be allowed. In that event by reason of the terms of sec. 80C(1) a claim will not be allowable unless in addition to the matters I have already mentioned, the Commissioner is satisfied that throughout the year of income the holding company had itself a controlling interest in the taxpayer and that throughout both the year of income and the year of loss the same persons beneficially owned shares in the holding company which between them carried the rights (a) to (c) which I have earlier described in connexion with the requirements of sec. 80A(1)...

I have expressed the conditions, which must be satisfied before a deduction must be allowed, as cumulative if there is a holding company at any time in the year of loss, as in my opinion they are. Section 80A is expressly made subject to, amongst other sections sec. 80C which section is expressed to operate notwithstanding, amongst other sections sec. 80A. However, if it should be concluded that the limiting conditions of sec. 80C(1) have not been met in this case, assuming that section to be applicable, it would not be necessary to decide whether or not the conditions of that section are cumulative on those of sec. 80A. If for no other reason, the paramountcy of sec. 80C would enable the disposal of the case against the appellant on the basis of that section alone. But if 80C(1) is applicable and its conditions are satisfied, those laid down by sec. 80A(1) must in my opinion also be fulfilled.''

Gibbs J. expressed a contrary view and at ATC pp. 4043-44; C.L.R. p. 560 said:

``Both sec. 80A and sec. 80C state conditions which must be fulfilled before a taxpayer to whom the section applies may treat losses in previous years as an allowable deduction. Section 80A applies to a taxpayer which is a company and sec. 80C to a taxpayer which is a `subsidiary company' within the meaning of that section. The fact that each section is negative in form, and provides that the loss shall not be taken into account unless the condition therein stated is fulfilled, suggests that when the taxpayer is a `subsidiary company' both sections are applicable and both conditions must be fulfilled before a deduction may be allowed. However, it is provided in sec. 80A that that section is subject (inter alia) to sec. 80C whereas the provisions of sec. 80C are expressed to take effect notwithstanding those of sec. 80A. These provisions, in my opinion, rather indicate that if sec. 80C applies sec. 80A does not. This question need not be resolved in the present case. It is quite clear that if Kolotex was a `subsidiary company' in any year in which a loss was incurred, a deduction in respect of that loss cannot be claimed unless the condition stated in sec. 80C has been fulfilled, and if in any year of loss Kolotex was not a `subsidiary company', no deduction will be available unless the condition stated in sec. 80A has been satisfied.''

With respect to Barwick C.J. and Mason J. (both of whose comments are obiter only), I find myself unable to read sec. 80A and 80C as being cumulative. Section 80A(1) imposes the same requirements as sec. 80C(1) as to

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(a) the year of loss
(b) the year of income
(c) the satisfaction of the Commissioner and
(d) the continuity of beneficial shareholding.

The difference is that where there is a holding company during the year of loss which loss is incurred by the subsidiary company, sec. 80C is brought into operation and its requirements are imposed. Other than those requirements similar to what are in sec. 80A(1), it is required that at the appropriate time

(e) no other company had an interest in the holding company and
(f) the holding company had a controlling interest in the subsidiary company.

I prefer the view of Gibbs J. that if sec. 80C applies, sec. 80A does not. It is only where there is no holding company that the provisions of sec. 80A apply. Where that section does apply sec. 80B is brought into operation by the provisions of both sections in determining whether the relevant loss is to be allowed as a deduction. Where, however, there is a holding company sec. 80C applies notwithstanding sec. 80A. I take this to mean that the provisions of sec. 80A are excluded where the situation comes within sec. 80C. I find support in the statement of Barwick C.J. that if sec. 80C(1) is applicable, and its requirements are satisfied, those laid down by sec. 80A(1) must be taken to have been fulfilled: This matter has throughout been conducted for the Commissioner upon the basis that the deeming provision in sec. 80B(5) has been incorporated into sec. 80C by sec. 80C(3). To this I will later refer.

The effect of sec. 80C(3) depends upon its interpretation. It would appear that the object of the Legislature in inserting sec. 80C(3) was to introduce into sec. 80C provisions having, where there is a holding company, a similar effect as sec. 80B(5) has in relation to sec. 80A. This would permit the Commissioner, in the appropriate case, to treat relevant shares beneficially owned as being not so owned.

In
Crawford v. Spooner (1846) 6 Moore P.C. 1, 8, 9, the Judicial Committee said:

``We cannot aid the legislature's defective phrasing of an Act, we cannot add and mend, and, by construction, make up deficiencies which are left there.''

In
Miller v. Salomons (1852) 7 Ex. 475 at p. 560 Pollock C.B. said:

``If the meaning of the language be plain and clear, we have nothing to do but obey it - to administer it as we find it; and, I think, to take a different course is to abandon the office of Judge, and to assume the province of legislation.''

Lord Blackburn in
Direct United States Cable Co. v. Anglo-American Telegraph Co. (1877) 2 A.C. 394 said at p. 412:

``The tribunal that has to construe an Act of a Legislature, or indeed any other document, has to determine the intention as expressed by the words used. And in order to understand those words it is material to inquire what is the subjectmatter with respect to which they are used and the object in view.''

In
Mersey Docks v. Henderson (1888) 13 A.C. 595 Lord Halsbury at p. 602 said:

``... no case can be found to authorize the construction of the majority of the Court of Appeal altering a word so as to produce a casus omissus.''

In
Tasmania v. Commonwealth (1904) 1 C.L.R. 329 O'Connor J. said at p. 358:

``I do not think it can be too strongly stated that our duty in interpreting a Statute is to declare and administer the law according to the intention expressed in the Statute itself.''

See also
Shire of Arapiles v. Board of Land and Works (1904) 1 C.L.R. 679 at 686 per Griffith C.J.

In
London and India Docks Co. v. Thames Steam Tug and Lighterage Co. Ltd. (1909) A.C. 15 Lord Atkinson said at p. 23:

``The intention of the Legislature, however obvious it may be, must, no doubt, in the construction of statutes, be defeated where the language it has chosen to use compels to that result, but only where the language compels to it.''

It is a consequence of the rule stated that a statute may not be extended to meet a case for which provision has clearly and undoubtedly not been made.

In the case of
Lumsden v. I.R. Commrs. (1914) A.C. 877

ATC 4421

Viscount Haldane L.C. said at p. 896:

``The duty of Judges in construing Statutes is to adhere to the literal construction unless the context renders it plain that such a construction cannot be put on the words. This rule is especially important in cases of Statutes which impose taxation.''

In
Commr. of Stamp Duties (N.S.W.) v. Simpson (1917) 24 C.L.R. 209 Barton J. at p. 217 said:

``To use the words of Lord Macnaghten (for the Judicial Committee) in
Williams v. Permanent Trustee Co. of New South Wales Ltd. (1906) A.C. at p. 253, the Act of 1898 must `be read and construed as it was enacted. The Court has no authority to take the Act to pieces and to rearrange the sections so as to produce an effect which, on the face of the Act as it stands, does not seem to have been intended.' To pursue such a process in the case of any Act would, in my view, be a dangerous departure from principle. If it can be more dangerous in one case than in another, then the taxing of the subject is the last case for its application.''

(See also
Astor v. Perry (1935) A.C. 398 at p. 417;
I.R. Commrs. v. Westminster (1936) A.C. 1 at pp. 24, 25;
Nokes v. Doncaster Amalgamated Collieries Ltd. (1940) A.C. 1014 at p. 1022;
I.T. Commrs. for the City of London v. Gibbs (1942) A.C. 402 at p. 414.)

Applying then sec. 80C(3) to sec. 80B(5), as paraphrased it reads -

Where -

(a) a person who beneficially owned any shares in the holding company during the year of loss also beneficially owned shares in the holding company during the year of income; and
(b) before or during the year of income, that person entered into an arrangement; and
(c) the arrangement was entered into for the purpose of enabling the holding company to take into account a loss that the holding company had incurred in a previous year,

the Commissioner may treat those shares as not having been beneficially owned in the year of income.

I can see no other way in which sec. 80B(5) can be read. Whether such a situation as that envisaged can occur does not matter. Where it is the subsidiary which has had the loss, and if there were an arrangement which was for the purpose of enabling the subsidiary company to take into account the loss that it had incurred in a previous year, there is no ground for the Commissioner exercising his deeming power under sec. 80B(5). Otherwise I would have to read the relevant words in sec. 80C(3) as meaning that only the references in those subsections to the company ``other than the company which had incurred the loss in the year before the year in which the contract, agreement or arrangement was entered into'' were references to the holding company. This I am not prepared to do. If that were what the Legislature intended to say it seems to me it could easily have been said. For me to pursue such a process in this case would, in the words of Barton J., be a dangerous departure from principle. I must therefore deal with this case upon the basis that insofar as the provisions of sec. 80C apply to the facts no arrangement within the meaning and terms of sec. 80B(5) is relevant unless the arrangement has a purpose of enabling the holding company to take into account for the purposes of sec. 80 of the Act a loss that it had incurred in a year before the year in which the arrangement was entered into. It has not been contended that such an arrangement was ever made.

It was contended on behalf of the Commissioner that it was the intention of the Legislature that in applying sec. 80B(5) for the purposes of sec. 80C it was intended to refer to ``losses in a subsidiary company''. Therefore, it was said, that when the words are incapable of bearing such a meaning the Court would construe the statute so as to give the words that intended meaning.

The difficulties that exist in the construction of sec. 80C(3) have been referred to by members of the High Court. In the earlier Kolotex case (supra, at ATC p. 4106; C.L.R. p. 85) Mason J. said:

``The submission encounters three further difficulties. One arises from sec. 80C(3) which in applying sec. 80B(5) to sec. 80C in relation to the holding company and any interposed company provides that the relevant subsections of sec. 80B shall apply `as if references in those subsections to the company were references to the holding

ATC 4422
company or to the interposed company, as the case may be'. Taken literally, this provision would contemplate the separate application of sec. 80B(5) to each company in a hierarchy and sec. 80B(5)(c) when applied to a holding company would be read as relating to losses of the holding company, not to losses of the subsidiary company. If sec. 80C(3) is given a literal application then the requirements of sec. 80B(5)(c) could not be satisfied in relation to shares beneficially held in Moomba. But the construction of sec. 80C(3) is not a matter which I need decide.''

Barwick C.J., in the appeal supra, at ATC p. 4030; C.L.R. p. 540) said:

``It should be observed firstly that the terms of sec. 80B(5) are made applicable to sec. 80C(1) by sec. 80C(3) though to what extent they are to apply may need discussion later.''

Again at ATC p. 4035; C.L.R. p. 547 his Honour said:

``... to my mind as at present advised it is not absolutely clear that sec. 80C(3) is effective to introduce the provisions of sec. 80B(5) into sec. 80C(1) except in relation to the holding company itself, though such a limited operation of sec. 80B(5) may be of little consequence.''

Gibbs J. at ATC p. 4053; C.L.R. p. 574 said:

``In these circumstances the Commissioner has no need to invoke the provisions of sec. 80B(5), and it is unnecessary to consider the difficulties raised by that subsection, and by sec. 80C(3) which purports to render sec. 80B(5) applicable to the holding company and to interposed companies, but does not explain how sec. 80B(5)(c) is to be sensibly applied to such a situation.''

On this matter Stephen J. expressed no view.

The facts in this matter are somewhat involved.

Ken Bridges Pty. Limited was incorporated on 20th October, 1961. Its name was subsequently changed to Cooper Brookes (Wollongong) Pty. Limited, (hereinafter referred to as the appellant), and it formed one of a group of companies, subsidiary to what later became Wellington Holdings Pty. Limited.

Upon incorporation 3,000 fully paid up $1 ordinary shares in the company were allotted as follows:

      A.J. De Montford ...............................1
      K.J. Bridges .................................150
      J.K. Cranston ................................150
      E.H. King ..................................2,699

On 22nd November, 1962, Cranston transferred his 150 shares to Cooper Brookes Pty. Limited.

E.H. King Holdings Pty. Limited was incorporated on 30th April, 1962, and subsequently changed its name to Wellington Holdings Pty. Limited (hereinafter called Wellington). As signatories to the memorandum of association D.G. McKay and A.J. De Montford became the holders, each of one B class share. Following an allotment of shares made on 30th April, 1962, the shareholders were as follows:

      E.H. King ............... one A class;       14,999       B class
      J.A. King (Mrs.) ........ one A class;        4,999       B class
      D.G. McKay .....................................one       B class
      A.J. De Montford ...............................one       B class.

Mr. and Mrs. King were appointed directors on 26th April 1962, (sic) and continued so to act until liquidation.

On 19th April 1963, E.H. King transferred to Wellington Holdings 2,699 shares in the appellant. On 20th November, 1964, Bridges transferred to Wellington Holdings a further 150 shares in the appellant, (thus increasing its holding to 2,849 shares).

The relevant years of loss of the appellant with which I am concerned were the financial years ending 30th June, 1964, and 1965, and for both those years Wellington Holdings owned, and, it is not disputed, beneficially, more than forty per cent of the shares in the appellant, and was its holding company in terms of sec. 80C(1). E.H. King owned beneficially more than forty per cent of the shares in Wellington, and no other company had a controlling interest in it.

On 28th April, 1965, at a meeting of directors of Wellington (Mr. and Mrs. King) it was decided to take the necessary steps to place the company in voluntary liquidation.

On 12th May, 1965, one C.N. Roberts was appointed liquidator of Wellington in a voluntary winding up, and on 7th June, 1965, one C.H.R. Jackson was appointed by the Supreme Court of New South Wales the official liquidator of the Cooper Brookes

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group of companies (which included the appellant). Mr. W.E. Fisher had been the secretary of Network Finance Limited (hereinafter called Network Finance) prior to 1967, and as such became aware of discussions (presumably amongst the directors) concerning the acquisition by that company of shares in the Cooper Brookes group, with a view to benefiting from the losses of these companies.

The appellant ceased trading operations during the year ended 30th June, 1965 and the balance sheet for that year showed a deficiency of $41,980.00.

To acquire the companies as they then stood would have been of no benefit to a purchaser and what was subsequently done was done pursuant to a plan of operation conceived probably prior to 18th July, 1967.

On 18th July, 1967, E.M. King and his wife J.A. King entered into an agreement with Jackson and Roberts (therein called ``scheme trustees''), which recited, inter alia, that the scheme trustees had agreed to sell the structure of Wellington to a company acquiring it for the benefit of the tax losses of certain of its subsidiaries; that the purchaser would for the transfer of 11,999 (sic) shares by the Kings) pay $1,200 direct to the trustees, to be disposed of in accordance with the scheme of arrangement for the benefit of the creditors of Wellington. In fact it was to meet the fees of the scheme trustees in relation to the schemes of arrangement. The Kings agreed to make no claim upon the $1,200; that the trustees could deal with the money as they thought fit and that they, the Kings, would make no inquiry as to the administration of the scheme. Although the number of shares referred to in the agreement is not the same, it is probable that the transfer referred to is that which is set out in the 5th Schedule of the deed dated 19th April, 1968.

In his letter of particulars the Commissioner, in cl. 8, refers to advice given by Jackson on 7th July, 1967 to the Corporate Affairs Commission that negotiations had been completed for the sale of the tax losses of the taxpayer - but that on 8th January, 1968 Jackson advised that the negotiations had failed, but he was seeking another purchaser. Because of cl. 10 in that letter I would assume that the deed of 18th July, 1967 made between Jackson and the Kings was a different agreement. On 19th April, 1968, a deed was made between Jackson and Roberts (as scheme trustees) and Network Finance (therein called ``the lender''). It was agreed that in consideration of the loan of certain moneys to enable the scheme set out in the deed to be carried out, and subject to other stated terms, the trustees would, upon completion, deliver to the lender the transfer of the issued shares in Wellington for the consideration set forth in the 5th Schedule. Roberts as liquidator of Wellington undertook to sanction such transfers. The trustees further agreed to apply for an order staying the winding up of Wellington and to apply to the Supreme Court for an order confirming a reduction of capital in Wellington in such form as Network should require, following the passing of the necessary resolution.

Clause 8 of the agreement was in the following terms:

``8. Contemporaneously with completion the scheme trustees shall cause a Board meeting of each of the companies to be held, and all such resolutions passed there at, and all such persons appointed to or resigned from the Board as the lender may by notice in writing to the scheme trustees or to their solicitors require prior to completion.''

The 5th Schedule of that deed set out the numbers of shares required to be transferred by the nominated shareholders in Wellington in accordance with cl. 3 and 5 of the deed.

Thereafter transfers of shares in Wellington were effected in accordance with the details set out in the schedule of the deed.

On 3rd May, 1968, E.H. King transferred to Network Finance 14,997 of his B shares in Wellington, thus retaining two. On 8th May, 1968, J.A. King transferred to Network Finance 4,999 B class shares and one A class share; E.H. King to Network Finance one A class share; A.J. De Montford to Network Finance one B class share, and D.G. McKay to Network Management & Control Finance Pty. Limited (hereinafter called Network Management), one B class share.

On completion of those transfers the position was that the 20,002 issued shares of the company were owned as follows:

            
      Network Finance                A class              2
                                     B class         19,997
      Network Management             B class              1
      E.H. King                      B class              2.

On 24th May, 1968 a meeting of the creditors of Wellington was held attended by Messrs. Roberts and Jackson. A resolution was carried fixing the liquidator's remuneration at a figure equal to the balance of funds presently held in the liquidator's bank account. On the same date there was executed by E.H. King a document in the following terms:

``I, Edward Henry King, of 568 Toorak Road, Toorak, being a member of Wellington Holdings Pty. Ltd. hereby appoint C.K. Roberts of 2 Castlereagh St. Sydney or, failing him, P.M. Somerset of 55 Hunter St. Sydney for my proxy to vote for me and on my behalf at any extraordinary general meeting of the Company to be held on 31st day of May, 1968 and at any adjournment thereof.''

There is no evidence of the terms of any relevant discussion had with King at or before the giving of this proxy, nor is there any explanation given for the failure to call a witness who may have deposed to it. A concession was made by the Commissioner in the terms of Ex. O, which reads as follows:

``The Commissioner agrees for the purposes of the submission based on `right' or `power' within the meaning of sec. 80B(5) but not the submission based on `arrangement' within the meaning of sec. 80B(5) that Mr. King would say if asked about the purpose of granting the proxy that he was asked to give the proxy and he gave it because he was asked to do so and had no other consideration in mind except that he was aware of his own previous actions.''

On 27th May the transfers of the shares effected on 3rd and 8th May were approved by resolution of the liquidator.

On 31st May two meetings were held, an extraordinary general meeting of the members at 9.30 a.m. and a meeting of the directors at 9.35 a.m. King's proxy related only to the first meeting. That meeting was attended by R.A. Southern representing Network Finance, P.A. Somerset representing Network Management, and C.K. Roberts as proxy for King. The minutes of that meeting read as follows:

``The chairman advised the meeting that the liquidation of the company has been stayed and the previous directors were no longer in office. All the shareholders of the company being present it was therefore resolved that Peter Andrew Somerset and C.K. Roberts be appointed directors of the company.''

Mr. Somerset was a member of the firm of Messrs. Abbott, Tout, Creer and Wilkinson, solicitors of Sydney. There is no evidence that King was informed of the purpose of the meeting, or of the result that was intended to be achieved. At that time his shareholding in the company was negligible and there is no evidence of any reason why the proxy was given.

The meeting of directors which followed was the first step for the reduction of capital. The minutes of this meeting contain the following statement:

``The Board noted the agreement by the liquidators of the company with Network Finance Limited for the sale of the structure of the subsidiaries to Network Finance Limited for the benefit of the tax losses available for recoupment in those companies, and that pursuant to the agreement it was necessary that the capital in this company (Wellington) be reduced to a small nominal amount for the Scheme of Arrangement with the creditors to be implemented.''

It was resolved to hold an extraordinary general meeting of the company on 4th June for the purpose of passing a resolution (which was passed) which would have the effect of producing an alteration in the shareholding, which was in fact achieved, so leaving King the apparent beneficial owner of forty per cent of the shareholding in the Company.

On that same day (a Friday) envelopes were addressed to E.H. King at two addresses, one at North Ryde and one at North Baldwin (sic), Victoria - probably intended to go to North Balwyn. Neither of these addresses agreed with that given in the proxy dated 24th May, 1968. In each of those envelopes was placed a copy of a notice of the meeting to be held on 4th June and both were posted with postage prepaid at the General Post Office, Sydney. The creditors of the appellant had been disposed of and Network Finance owned all but three shares out of the 20,002 issued in

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Wellington, which was the holding company of the appellant.

On 4th June, 1968 there was held an extraordinary general meeting of Wellington attended by Messrs. Southern and Somerset. There is no evidence that King received notice of this, nor did he attend. However, the provisions of sec. 144(2) of the Companies Act 1961 were complied with. A special resolution was passed (in the terms of the notice of meeting referred to above) to effect a reduction in capital in the company and on 17th June the reduction was confirmed by the Supreme Court of New South Wales. It cancelled the two A class shares and 19,995 B class shares leaving only five B class shares in the capital of Wellington, of which King held two, Network Finance two and Network Management one.

On 8th July, 1968, the Corporate Affairs Commission was advised by Mr. C.H.R. Jackson that he, as liquidator, had entered into an agreement for the sale of the appellant and other companies conditionally upon the claims of creditors being converted into claims against Scheme Funds to be constituted by Schemes of Arrangement. The terms of the proposed Scheme in respect of the appellant and other companies was set out in a notice issued pursuant to sec. 182 of the Companies Act, 1961, dated 29th August, 1968.

On 26th September, 1968 a meeting of the creditors of the appellant was held pursuant to an order of the Supreme Court. Mr. Jackson presided over this meeting at which he and Mr. Roberts (both as proxies) were the only persons present. He reported the situation as to the present affairs of the company, and the minutes of that meeting read as follows:

``In addition he had entered into an agreement for the sale of the company structure of Cooper Brookes (Wollongong) Pty. Limited and those of several of the associated companies to a public company interested in acquiring them for the benefit of their recoupable tax losses. The terms of the sale provided that the buyer would make available further monies for distribution to creditors in compromise settlement of their claims but completion of the sale was subject, inter alia, to the various Cooper Brookes companies involved entering into Court-approved Schemes of Arrangement with their Creditors. It was the Scheme of Arrangement applicable to Cooper Brookes (Wollongong) Pty. Limited (In Liquidation) which was now before the present Meeting of creditors for their consideration.''

It was resolved that the Scheme of Arrangement presented for consideration be approved, subject only to any modifications as the Court might require. On 14th October the Scheme of Arrangement was approved by the Supreme Court of New South Wales. On the 17th of that same month there was held a meeting of the directors of Wellington. A board of a further four directors was appointed, after which Messrs. Somerset and Roberts resigned, and Mr. Fisher was then also appointed as secretary, and to represent the company pursuant to sec. 140 of the Companies Act at all general meetings of, inter alia, the appellant company. There is no mention in those minutes of the resignation of Mr. or Mrs. King as directors, to accord with the entry in the register in the handwriting of Mr. Fisher. On 21st October a share certificate for two shares in Wellington was issued in the name of Network Finance, although certificates in the name of King and Network Management had been issued on 31st May, earlier that year. On 21st November, 1968, De Montford transferred his one share in the appellant to Network Finance.

The income tax return lodged on behalf of the appellant for the year ended 30th June, 1969 stated that the status of the company was changed to that of a public company.

On 30th June, 1970 Wellington declared a dividend of $130 and resolved that the same be paid to the holders of B class ordinary shares, as follows:

      Network Finance Limited ....................$78
      E.H. King ..................................$52

On 9th July, 1970, there was forwarded by post to E.H. King at North Balwyn a cheque for $52, and a certificate of that posting was duly obtained. The letter was unclaimed, and returned to Network Finance.

Towards the end of the year there was commenced the operation of a proposal that must have been conceived some time earlier, the object being to permit Wellington to retain control of the appellant until 30th June, so that, at least on the face of it, King would retain a forty per cent holding in Wellington, of which the appellant would remain a

ATC 4426

subsidiary, but that immediately thereafter the total shareholding of Wellington would be made to pass into the hands of Network Finance, leaving it and Cooper Brookes Pty. Limited, after 30th June, 1971, the owners of its total issued shares, and Wellington holding none of the shares.

This conclusion was brought about in the following way: On 26th November, 1970, it was resolved at a meeting of directors of the appellant that the annual general meeting of the company be held on 31st December, 1970, and that a resolution be passed increasing the authorised capital of the company to $750,000 by the creation of 370,000 (sic) ordinary shares at $2 each. No reason was assigned for such a step. Notice dated 10th December, 1970, was given of that proposed meeting. On 17th December, 1970, Wellington wrote to Network Finance seeking a loan to enable it to apply for the following shares -

In the appellant company 183,751 at $2 each -- $376,502.00
In Cooper Brookes Industries Pty. Limited 255,000 at $2 each -- $510,000.00.

That letter was signed by Mr. Fisher.

On 23rd December, 1970, Network Finance by letter under the hand of Mr. Fisher notified Wellington that the loan sought had been approved and that Network Finance would require Wellington to enter into ``the usual loan agreement'', and lodge with it as security, share certificates to the value of said shares in the respective companies.

On 31st December, 1970, the annual general meeting of the appellant was held and a resolution was passed authorising the increase of capital in accordance with the notice. That meeting was attended by D.C. Brown as representative of Network Finance, W.E. Fisher as representative of Wellington, and N.C. Burns as representative of Cooper Brookes Pty. Limited.

On the same date the annual general meeting of Wellington was held and R.A. Southern attended as representative of Network Finance, and Mr. Fisher as representative of the company formerly Network Management. It was noted that Messrs. Burns and Campbell were in attendance, and that E.H. King was absent. There is no record in the minutes of any discussion concerning either the proposed resolution or the resolution passed at the annual general meeting of the appellant held on the same date and attended by Mr. Fisher as a representative of Wellington, nor is there any record of him having been so appointed. There is no evidence that King received any notification of this meeting although he was alleged to hold a beneficial interest in forty per cent of the shares. It must have been obvious at that meeting what were the reasons for the steps that either were to be or had been taken at the meeting of the appellant company, and the result which was intended to be effected. This is consistent with (inter alia) a disregard by the majority of King's substantial but minority holding in Wellington; or with the making of an arrangement to which he was a party.

On 3rd January, 1971, at a meeting of directors of the appellant company, at which Messrs. Fisher, Burns and Brown were present, it was resolved that 367,500 ordinary shares at $2 each be allotted as follows:

      Network Finance ....................183,749 shares
      Wellington .........................183,751 shares

and that the sum of $2 per share due on allotment be made payable at the office of the company forthwith. The secretary was instructed to lodge the necessary return of allotment. There is no record of the acquisition of those shares being approved or discussed by either the members or directors of Wellington prior thereto.

On the same day there was held a meeting of the directors of Wellington, at which were present Messrs. Burns, Fisher, Campbell and Brown. It was resolved:

(i) that the company borrow from Network Finance $877,502;
(ii) the principal be payable on demand;
(iii) the loan to be free of interest, the mortgage property 186,751 shares in the appellant company registered in the name of Wellington, and 255,003 shares of $2 each in Cooper Brookes Industries Pty. Limited, also registered in the name of Wellington,

and that a Deed of Charge securing the advance (a draft of which was tabled) be executed. On the same date a meeting of directors of Network Finance was held, at which it was resolved that the company make

ATC 4427

the advance to Wellington of $877,502, to be secured by the Deed of Charge referred to.

On the same date there was executed a Deed of Charge between Wellington and Network Finance. The security included 186,751 shares in the appellant company, registered in the name of Wellington. The Deed provided that the mortgagor would on execution hand to the mortgagee an executed transfer of share scrip in respect of the mortgage property, and irrevocably appointed the mortgagee its attorney to complete any such transfer in the event of default by the mortgagor under the Deed. There was, at the same time as the Deed was executed, handed over to Network Finance a transfer of 186,600 shares in the appellant company from Wellington to Network Finance, such transfer being executed by each of the companies. At the time the transfer was not dated, but it was subsequently dated 1st July, 1971.

The result of all this, therefore, was that after the 3rd January King had a forty per cent interest in Wellington, which itself had over fifty per cent interest in the appellant company, but had mortgaged its interest to secure the repayment on call of a large sum of money, so that if the loan was not repaid at call all Wellington's shares in the appellant company might be transferred to Network Finance. The legal effect of this does not appear to have been considered. This, however, could not be done before 1st July, 1971, otherwise it could not be said that Wellington, in which King had a forty per cent shareholding, controlled the appellant company during the whole of the year of income.

On 18th January, 1971, there was filed a return of an allotment of shares alleged to have been made by the company on 3rd January, 1971. That return showed all shares the subject of it as being allotted to Network Finance Limited. In August 1971 an amended return was lodged. It set out the allotment as it appears in the records of the companies, and explains the error as being due to the fact that the money for the shares was loaned to Wellington by ``its parent, Network Finance Limited''. (This was inaccurate but that is not significant.)

At a meeting held on 1st July Network Finance resolved to seek payment of $373,502 advanced to Wellington. The payment not being met, Network Finance purported to foreclose, pursuant to the Deed of Charge, and the transfer form supporting the Deed was duly dated. At a meeting of the directors of Wellington held on 1st July, 1971, Messrs. Fisher, Burns and Campbell were present. It was noted, no doubt not with surprise, that Network Finance had ``foreclosed'', and details of the security were also noted in the minutes. On the same date there was also held a meeting of the directors of the appellant company, which was attended by Messrs. Fisher, Burns and Brown. The transfer of the 186,600 shares from Wellington to Network Finance was approved. There was also approved the transfer of 150 ordinary shares from Cooper Brookes Pty. Limited to Network Finance.

On 2nd July, 1971, at a meeting of directors of the appellant company it was resolved that a dividend absorbing $38,000 be declared out of dividends for the year ended 30th June, 1971, and that the same be credited to the account of Network Finance. Messrs. Fisher, Burns and Brown were present at that meeting.

The Deed of Charge bears a memorandum acknowledging that ``the within security has been satisfied and discharged''. This memorandum is executed, but dated only ``September 1971''. The evidence indicates however that in fact the memorandum was executed on 6th October of that year.

On 29th October there was lodged the relevant return claiming the deduction of the losses in previous years. That return showed that the shareholders in the appellant as at 30th June, 1971, were Wellington, 2,999 and Network Finance, one. This is not accurate, although Wellington did have the controlling shareholding. That same return showed that there was owing to the appellant by a related company $33,609 and that there was owing by it to a related company the sum of $265,000.

It was later stated in a letter of 20th March, 1972, from the accountants of the appellant to the Commissioner that the first amount related to a loan to Network Finance on 2nd February, 1971, and the second amount to a loan from Network Finance on 3rd May, 1971. In a letter of 26th January, 1972, the Commissioner referred to and purported to set out the provisions of sec. 80C(1). He then stated that in determining whether the company had satisfied the Commissioner in terms of sec. 80C it was necessary to establish

ATC 4428

whether a beneficial owner of shares owned in both the year of income and the year in which the loss was incurred had entered into an arrangement or granted a right, power or option within the terms of subsec. (5) of sec. 80B. The letter did not refer to the provisions of cl.(c) of the subsection. The Commissioner further required the appellant to satisfy him that the shares in Wellington registered in the name of King were benefically owned by him at all times in the year of income and that the rights attached to the shares, including the right to transfer the shares, or to assign the beneficial interest in them, were not restricted in any way. The letter asked the appellant to establish that King had not taken any of the actions stated in the letter in relation to sec. 80B(5) and sought information on other matters.

To this letter the accountants replied on 20th March, 1972. It was contended that King was at all times during the years of loss and the year of income the beneficial owner of the shares held by him. It was stated that King had at all times received notices of meetings of shareholders of Wellington, and had also participated in a dividend declared on 30th June, 1970. It was pointed out that the only proxy ever given by King in respect of the voting rights attached to the shares registered in his name was in favour of Roberts for the meeting held on 31st May, 1968, in connection with the staying of the liquidation of Wellington, but it did not point out that at the time of the giving of the proxy or at the time of the exercise of the right King held only two out of over 20,000 shares in the company.

On 17th April, 1972, a letter was written to E.H. King at Bougainville enclosing a cheque for $52 in respect of his entitlement to the dividend in Wellington as at 30th June, 1970. It pointed out that no dividend was declared in 1971, and none was proposed for the current year, but that should profits arise in the future he would participate in accordance with his holding. It states that he will continue to be sent notices of meetings, ``which, like your 1970 dividend cheque, have in the past been returned to us, address unknown''. No mention was made of the steps taken during 1971 or of the fact that Wellington had no further interest in the appellant company. A further letter was written to him, enclosing a copy of that previous one.

On 1st June, 1972, King wrote to Wellington acknowledging receipt of the letter of 17th April, the dividend cheque having been banked in May. He advised of his new address. Correspondence occurred between the Australian Post Office and Wellington concerning the non-delivery of mail to King. On 1st December, 1972, King was notified that it was intended to hold an extraordinary general meeting of Wellington on 29th December, 1972. The matters to be dealt with at that meeting were not alleged to be of any significance. It is difficult to understand why efforts were made to communicate with King after the result had been achieved which deprived him of having through Wellington any interest in the appellant company.

A Notice of Assessment was issued dated 4th July, 1973, by the Commissioner, which had attached to it an adjustment sheet. The adjustment sheet added to the income returned $44,077, classed as ``deduction claimed for losses of previous years, not allowed by reason of sec. 80C''. The Notice contained the following statement by way of explanation:

``In pursuance of sec. 80B(5) shares held by E.H. King in Wellington Holdings Pty. Limited have been treated as shares not beneficially owned by him at any time during the year of income, and the Commissioner accordingly cannot be satisfied in terms of sec. 80C(1)(b),.''

By letter dated 5th July, 1973, the appellant's accountants objected to the assessment, claiming that the loss was deductible in terms of sec. 80 and sec. 80C of the Act. The letter claimed that:

(i) Wellington had been the holding company at all relevant times;
(ii) the shares held by King in Wellington had been beneficially held by him at all relevant times, and
(iii) the provisions of sec. 80B(5) had no application, because King did not enter into any contract etc., or grant any right of the kind referred to in the Section.

As evidence in support of King's beneficial ownership there were enclosed copies of the documents relevant to the payment, or attempts at payment, to King of the dividend in 1970, and of the Notice of extraordinary general meeting forwarded to him in December 1972. It was contended that from

ATC 4429

the evidence provided King was in fact paid a dividend, efforts were made by the appellant to contact him, and he was still notified of meetings. On 24th September, 1973, the Commissioner disallowed the objection.

At the commencement of the instant proceedings there was tendered a letter from the Commissioner to the solicitors for the appellant dated 4th May, 1977, setting out the facts and circumstances ``which were then accepted and taken into consideration by the Commissioner in determining, pursuant to sec. 80B(5) of the Income Tax Assessment Act 1936-1971, to treat the shares held by E.H. King in Wellington Holdings as not having been beneficially owned by him at all times during the year of income ended 30th June, 1971.''

Clause 2 of the letter states:

``That at all times during the said year of income and the said years of loss shares in Wellington Holdings Pty. Limited carrying between them the rights referred to in section 80C(1)(b) of the Act were beneficially owned by Mr. E.H. King.''

The Commissioner's case in relation to the existence of any ``arrangement'' is set out in the provisions of cl. 21 of the Letter. That clause is in the following terms:

``21. That having regard to the above facts and circumstances there existed a contract, agreement or arrangement of the kind referred to in sec. 80B(5)(b) and (c) in that there existed a contract, agreement or arrangement entered into by Mr. E.H. King either personally or through the agency of Mr. C.K. Roberts and/or Mr. C.H.R. Jackson with persons acting on behalf of any one or more of Network Finance Limited and Network Management & Control (Finance) Pty. Limited and/or Messrs. Roberts and Jackson as trustees of the scheme of arrangement; the terms of the said contract, agreement or arrangement being that each party thereto would do all things necessary to ensure the continued availability to the taxpayer of the relevant losses and including the various relevant things referred to in the preceding paragraphs; the said contract, agreement or arrangement being one which directly or indirectly related to, affected or depended for its operation on the retention by Mr. King at all relevant times of a 40% beneficial shareholding interest in Wellington Holdings Pty. Limited and which directly or indirectly, related to or affected the value of that interest, the purpose of all parties being to enable the taxpayer to take into account for the purposes of sec. 80 of the Act losses which the taxpayer had incurred in the said years of loss being years before the year in which the said contract, agreement or arrangement was entered into.''

Mr. Simos, of Queen's Counsel, for the Commissioner, submitted that the proved facts and the inferences which could be drawn, indicated that there was an arrangement at all material times, that the Commissioner's discretion arose under sec. 80B(5) and that he properly exercised it. Written submissions handed to me were concerned with the existence of an arrangement and the application of sec. 80B(5) to the provisions of sec. 80C of the Act. He contended that the parties were aware at all material times of what was required on behalf of King in order to enable Network Finance to take advantage of the tax losses. It was thus unnecessary for any discussion to be had, and none was had. Moreover they both were aware that because of the provisions of sec. 80B(5) there should be no discussion, and this provided a further reason why they did not discuss what was required on the part of King to enable Network Finance to take advantage of the tax losses. Network Finance realised that the liquidator would not enter into negotiations unless he was satisfied that King intended to and would do or refrain from doing what was necessary, even though he might not be legally obliged to do so.

He claimed that in the result there was an ``arrangement'' within the meaning of sec. 80B(5), because of the understanding between the parties as to the following, namely: That King would have to take certain actions in respect of his shares in Wellington to enable a purchaser of them to obtain the benefit of the tax losses of the appellant, in return for which the purchaser would supply funds to enable the appellant's creditors to receive a small dividend. He submits that the terms of the arrangement were that each party would do whatever was necessary to be done to enable the purchaser to acquire the relevant shares, and to obtain the benefit of the tax losses of the appellant company.

ATC 4430

After judgment had been reserved the matter was again on 22nd July brought into Court and further discussion had with counsel. I had previously brought to the attention of counsel the fact that there existed an allegation that King beneficially owned the required number of shares in Wellington Holdings. At no time was any submission made to me upon the basis that independently of any arrangement in fact King did not beneficially own the shares. When the matter was mentioned before me as I have just said, after judgment had been reserved, counsel for the appellant handed me in written form submissions which he had already made in oral argument. To this was added further factual submissions concerning the effect of the steps taken about December 1970 which resulted in Network becoming the owner of all the shares in the appellant. He contended that the failure of King to interfere with the arrangement of December 1970 did not lead to an inference that there must have been some understanding or arrangement with King that dated from the time of the acquisition of the shares that he would acquiesce in any such procedure. In support of this he relied upon the propriety of the charge taken over Wellington's shares in the appellant to secure the loan, the raising of the loan and the subscription for shares. He contended that in order to enable the appellant to make money ``in the year of income'' either loan money or share capital had to become available to it and the only party willing to furnish either was Network Finance directly and indirectly through Wellington Holdings. To this counsel for the Commissioner countered that such analysis was artificial - it is certainly naive, but that is of no consequence to me; nor am I concerned with whether what was done was proper or legal. My concern is only with whether the deduction was properly claimed. An examination, however, of the circumstances might in an appropriate case justify a conclusion, if it were capable of being reached, that either the required continuity of beneficial ownership did not exist, or that facts existed which entitled the Commissioner to apply the deeming provisions of sec. 80B(5), if such a course were open to him.

The action of Network Finance purporting to be taken pursuant to the deed of charge was conceded by counsel for the appellant to constitute an act of foreclosure and it was agreed that such a foreclosure in the circumstances could not have been effected validly without an order of the Court. (The Law of Mortgages, Professor C.H.M Waldock, 1950 ed. at pp. 250, 251, 362; Mortgages and Securities, E.A. Francis, 1975 ed., p. 130.) This must be considered, however, in the light of the realities of the situation and the whole of the facts, not the least important of which are that Network Finance and Network Management owned the controlling interest in Wellington (and have since prior to 1971) and considerable delay has occurred since the purported foreclosure.

Considerable reliance is placed by counsel for the appellant upon the evidence of Mr. Fisher. I was impressed by him and no attack has been made upon his veracity, either in the course of cross-examination or in subsequent address. It is difficult to avoid the conclusion that if there were an arrangement of the type contended by the Commissioner King must have known of its existence. To offer any criticism of the members of the board of Network Finance in the transaction would probably not by justified in the absence of further information. Probably no person other than Mr. Fisher was called so as to avoid the risk of cross-examination on the procedures adopted and the seemingly arrogant disregard of King's beneficial rights. The appellant cannot dispute (nor does it seek to) King's beneficial interest in the forty per cent of the shareholding of Wellington and its control until 1st July, 1971, of the appellant. It is my view that this conduct did not establish that King had no beneficial interest in his shares and that this was the belief of persons forming part of and associated with the board of Network Finance but, rather, that he did have such a beneficial interest and they were prepared to take the risk to which Network Finance was subjected of acting contrary to the interests of King in the expectation that he would not become aware of such actions, or if he did would either fail to understand them or be prepared to shrug his shoulders and let the consequences follow. The meaning of the statement contained in the adjustment sheet attached to the notice of assessment is not clear. Section 80B(5) permits the Commissioner to treat the ``necessary'' shares as not having been beneficially owned where the person who owned the shares in the company at all times in the year of loss also beneficially owned the shares at any time during the year of income and before or during

ATC 4431

that year that person entered into an arrangement or granted an option that depended upon the beneficial interest in the shares and was entered into or granted for the purpose of enabling the company to take into account a loss that the company had previously incurred. Before the Commissioner could ``deem'' such shares not to be beneficially owned the facts stated had to be established. (No doubt to the reasonable satisfaction of the Commissioner.) But the onus did not lie upon the taxpayer to establish that such an arrangement, or the grant of such option, did not exist or was not made. The words ``in pursuance of sec. 80B(5) shares held by E.H. King in Wellington Holdings Pty. Limited have been treated as shares not beneficially owned by him at any time during the year of income'' can therefore only mean that the Commissioner has, as he is permitted to do under the subsection, treated the shares in such a way because the facts to warrant such a treatment have been established (to his satisfaction). He is not permitted to reach such a conclusion because the taxpayer has failed to establish the contrary to the Commissioner's satisfaction. Section 80C(1)(b) provides that where the relationship of holding and subsidiary company exists between two companies during a year of loss incurred by the subsidiary company, that loss shall not be taken into account for the purpose of sec. 80 unless the Commissioner is satisfied that a continuity of beneficial ownership exists during the year of loss and the year of income. This imposes upon the taxpayer the obligation of satisfying the Commissioner. It would seem that what the Commissioner therefore is saying in disallowing the deduction is that in terms of sec. 80C(1)(b), which imposes the onus of proof upon the taxpayer and requires the Commissioner to be satisfied, he cannot be satisfied because he has treated the shares held by King in Wellington Holdings as not being beneficially owned by King pursuant to sec. 80B(5), which imposes no onus upon the taxpayer. Insofar as the Commissioner in the letter of 26th January, 1972, purports to place upon the appellant the obligation of satisfying him of the existence of the requirements set out in sec. 80C(1) it is a proper requirement. Insofar, however, as it might purport to place upon the appellant the onus of establishing that the matters do not exist that are necessary to bring into operation the provisions of sec. 80B(5) it is an inaccurate statement. The request that the company establish that King had not taken any of the actions stated in the letter in relation to sec. 80B(5) is no doubt made because of the provisions of sec. 80C(3) of the Act. If he means by that that it is necessary to establish that such a situation exists, I agree with him. It seems to me that the subsec. 80B(5) imposes upon the Commissioner the requirement that he be satisfied of the existence of the facts disentitling the taxpayer to take advantage of the provisions of sec. 80 of the Act, so that the Commissioner may treat the shares as not having been beneficially owned by the person at the relevant time. The letter of 4th May, 1977, to my mind, concedes that facts and circumstances must be established to the satisfaction of the Commissioner to permit him to determine pursuant to sec. 80B(5) to treat the necessary shares as not having been beneficially owned at all times during the year of income by the person who owned them during the year of loss.

It is difficult to apply the provisions of sec. 80A to the facts of this case. During the years of loss Wellington owned beneficially more than forty per cent of the shares in the appellant. Although the shareholding was changed the minimum limit was observed until 1st July, 1971. Because, however, of the provisions of sec. 80B(5) the Commissioner could deem the shares owned during the year of income as not having been beneficially owned if there were an arrangement between Wellington (it being the person maintaining the continuity of ownership in the appellant) and some other person for the purpose of enabling the appellant to take into account a loss that it had incurred in a previous year. That, however, depended upon establishing in this particular case an arrangement between Wellington and Network and not between King and Network, unless King had the authority to make the necessary arrangement. Section 80C(1), however, meets the present situation where there is, as here, a holding company interposed between the appellant and the persons maintaining the continuity of ownership. In the present case the matter has been conducted upon the basis that if there is an arrangement it was an arrangement made by King as being the person alleged to have had the beneficial ownership in the necessary shares at all relevant times.

The difficulty that then arises is whether in

ATC 4432

the circumstances sec. 80C(1) applies to the facts of this case. For that to be so reliance must be placed upon an interpretation of sec. 80C(3) which has the effect of incorporating into the section the provisions of sec. 80B(5) subject to the variation stated in 80C(3).

In the light of the conclusion that I have reached as to its meaning let me look again at the provisions of sec. 80C(1). Section 80A imposes upon a taxpayer company certain obligations with which it must comply before it can take advantage of the provisions of sec. 80 in relation to losses in previous years. This provision is expressed to be subject to the next succeeding four sections which includes sec. 80C. Section 80B is expressed to be for the purposes of the application of sec. 80A in determining whether a loss in a previous year is to be taken into account. Section 80C(1) then says that notwithstanding sec. 80A, where a situation exists (as it does here) that there is a holding company controlling a subsidiary at any time during the year of loss that loss is not to be taken into account for the purposes of sec. 80 unless the Commissioner is satisfied of the continuity of beneficial ownership of the necessary percentage of shares in the holding company. The deeming provisions then of sec. 80B(5) only come into effect where any arrangement that has been established or the non-existence of which has not been proved (if that is necessary) is one that has the purpose of taking into account a loss that the holding company has incurred. The deeming provision in this case does not apply, as there is no evidence of a relevant arrangement or, for that matter, a grant of an appropriate right, power or option. It follows therefore that providing the taxpayer company is able to come within the terms of sec. 80C(1) the loss is to be allowed as a deduction, unless, of course, the company is caught by the provisions of sec. 80A.

Before reaching a conclusion in regard to the existence of an arrangement one must determine what is meant by the expression ``arrangement'', and what is the type of arrangement envisaged by the Act.

In
F.C. of T. v. K. Porter & Co. Pty. Ltd. 74 ATC 4093; (1974) 1 N.S.W.L.R. 536 Mahoney J., (as he then was), considered the meaning of the word as used in sec. 80B(5) of the Act. His Honour referred to the meaning of the term in sec. 260 of the Act, and to the comments of the High Court in
Bell v. F.C. of T. (1953) 87 C.L.R. 548 at 573, and of the Privy Council in
Newton v. F.C. of T. (1958) 98 C.L.R. 1, at pp. 7 and 8. He, at p. 542, says:

``In my opinion the term `arrangement', as used in sec. 80B(5) 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.''

Again, at p. 543, he said:

``A seller of a 60% share interest in a loss company is not party to a relevant arrangement solely because he knows the purchaser proposes to order the affairs of the company so as to ensure that its position will be such that the losses will be available as deductions.''

In his Honour's view the words in sec. 80B(5) indicate that there must be an element of commitment one to the other in order to satisfy the statutory requirement. The commitment may arise because the seller has expressly told or actually represented to the buyer that he will (although not bound to do so) follow a particular course of conduct (see
Re British Basic Slag Limited's application (1963) 1 W.L.R. 727 at p. 746, per Diplock L.J., as he then was). The element of commitment to the course of conduct may be inferred or implied from the dealings between the parties. It is not enough that the seller knows of the desires or hopes of the buyer to order the affairs of the company so as to make the losses available as deductions. This, he would be justified in assuming, is the reason for the purchase.

Mahoney J. at p. 544, said:

``If a course of concerted action is outlined and the seller of the 60 per cent interest would regard himself, as a reasonable and conscientious man, as under a duty to the buyer, be it legal, moral or social, to conduct himself in accordance with that course of conduct, then in my opinion there would be an arrangement within sec. 80B(5), if that course of conduct related to, affected or depended upon any of the matters referred to in sec. 80B(5)(i)-(iv).''

Particular actions of parties done subsequently to any alleged arrangement made, can, in an appropriate case, be evidence from which it can be inferred that they earlier

ATC 4433

made an arrangement of the kind alleged (ibid p. 547). So the fact that the purchaser ``treated the taxpayer company as completely controlled by him, and did so to the extent that formalities which might not otherwise have been disregarded were disregarded in its affairs'', may be evidence of the existence of such an arrangement.

What probably were the terms of any alleged arrangement. If there were an arrangement the object must have been to produce a situation such as resulted on 1st July, 1971. That was that the purchaser, Network Finance, on that day substantially owned the taxpayer which in the year just concluded had made a profit equivalent to the losses in the relevant years of loss, although in such year of income forty per cent of the holding company had been beneficially owned by the person who beneficially owned such a share of it in the year of loss. The result could not have been fortuitous.

A number of basic facts had to exist to enable the result to be achieved. During the years 1964 and 1965 the essential basic facts were:

(i) The appellant made losses.
(ii) Wellington was the holding company of the appellant.
(iii) King owned beneficially more than forty per cent of the shares in Wellington.
(iv) No other company had a controlling interest in Wellington.

Thereafter Wellington went into voluntary liquidation and a liquidator was appointed and, by order of the Supreme Court, the winding-up of the appellant commenced.

The appellant became available for disposal as a loss company, but both it, its holding company and other subsidiaries of that company owed a considerable amount of money.

Network had available money for deposit so as to make the acquisition by it of the appellant, freed of its creditors, a worthwhile acquisition as a loss company, subject to Wellington being freed of its debts.

If an arrangement did exist it may be difficult to select with accuracy the time when any arrangement were made. It seems reasonable, however, to conclude that if one did exist its terms encompassed the following steps:

(a) That Wellington and its subsidiaries should be freed of their creditors;
(b) that during the year of income King should retain a forty per cent interest in Wellington, and Wellington a controlling interest in the appellant;
(c) that at the conclusion of the year of income Wellington's controlling interest in the appellant should cease and pass to Network Finance.

This end was achieved. It was achieved because a situation was brought about whereby Network Finance was on 1st July, 1971, able to and did, deprive Wellington of its shares in the appellant to its own advantage, thereby controlling substantially the whole of the appellant, and thus obtaining the benefit of any dividend that might be declared. It had provided for an appropriate dividend by lending money to the appellant interest-free which it, the appellant, could then invest and from such investment obtain an income approximately equal to the amount of the loss available to it.

The creditors of the appellant were disposed of, leaving the position that Network Finance was substantially the owner of Wellington, in which King held only two shares. By a reduction of capital two A shares and 19,995 B shares were cancelled, leaving only five issued B class shares, of which King held two.

I have been invited to make a finding as to whether or not there existed between Network Finance and King an arrangement of the kind referred to in sec. 80B(5), this upon the assumption that it is relevant to the application of sec.80C(1) to the facts of this case.

Section 190 of the Income Tax Assessment Act provides that upon appeal such as the present the taxpayer shall be limited to the grounds stated in his objection and the burden of proving that the assessment is excessive shall lie upon him. This section is to be read subject to the comments and decision of the High Court in
Gauci v. F.C. of T. 75 ATC 4257; (1976) 50 A.L.J.R. 358. In that case the taxpayer had purchased certain land which some six years later was resumed and a sum by way of compensation considerably in excess of the original purchase price was paid. The Commissioner included the difference

ATC 4434

between the sum received and the purchase price in the assessable income of the taxpayer upon the ground that the taxpayer's purpose in acquiring the land and what he claimed was the resultant profit fell within the scope of sec. 26(a) of the Act. In the Supreme Court of Western Australia Lavan J. found that the intention of the appellant taxpayer was to acquire the land for the purpose of profit-making by a re-sale and did not accept the reasons as given by the appellant for acquiring the land. It was held by Barwick C.J. and Jacobs J. (Mason J. dissenting) that although sec. 190 of the Act requires an appellant to show that an assessment is excessive, there is no presumption that property is acquired for re-sale at a profit, and where the relevant facts are known, if there be no material upon which it may properly be concluded that the property was acquired with the purpose of profit-making by way of re-sale, the assessment is thereby shown to be excessive. It was further held there was no evidence from which any prima facie inference of a relevant purpose of profit-making by re-sale could be drawn. Nor was there any evidence from which it could be inferred that the appellants were trading in land as a matter of business. Barwick C.J., at ATC p. 4260; A.L.J.R. p. 360, said:

``Thus, in the present case, assuming that the appellants had offered no evidence at all, there would, in my opinion, have been no basis for an assessment of any part of the compensation paid for the resumption of the land as income of the appellants by reason of the provisions of sec. 26(a). There is no presumption that property is acquired for re-sale at a profit. No doubt sec. 190 of the Act requires the appellant to show that the assessment is excessive. But the relevant facts being known, if there is no material upon which it may properly be concluded that the property was acquired with the relevant purpose, the assessment is thereby shown to be excessive. As I have said, there is no presumption of purpose to aid the assessment. In particular, sec. 190 does not raise any such presumption.

If, on the other hand, the acquired property is re-sold within what may fairly be described as a time proximate to its acquisition, the requisite purpose may be inferred. Thereafter, the taxpayer must overcome the prima facie inference there drawn. Unless he does so, sec. 190 will require the confirmation of the assessment. That was the situation in Pascoe v. F.C. of T. (1956) 30 A.L.J. 402 and in
Jacob v. F.C. of T. 71 ATC 4192; (1971) 45 A.L.J.R. 568.''

The appellant relied upon the decision in support of a submission that there being no evidence of an arrangement there was no obligation upon the appellant to establish that there was no such arrangement merely because of the provisions of sec. 190. In my view one must consider the application of that section in the light of the evidence. It is not necessary, in order to impose an onus upon the appellant, to find that an arrangement existed. That would be transferring the onus from the appellant to the Commissioner. There is no presumption of the existence of an arrangement. If the facts are such as to raise a reasonable inference that an arrangement existed, there is, in my view, an obligation upon the appellant to prove that no such arrangement existed and that therefore the assessment was excessive. Section 190 must, however, be considered in the light of the provisions of the relevant sections with which I have been dealing. Section 80A imposes upon the appellant the onus of satisfying the Commissioner of the continuity of beneficial ownership of the forty per cent shareholding and that such shareholding was beneficially owned at all times during the year of income. Section 80B(5) gives the Commissioner power to deem such shares as not having been beneficially owned during the year of income if they were so beneficially owned but an arrangement of the kind referred to has been made before or during the year of income. That I think requires the Commissioner to reach a conclusion that the required facts exist before he may treat as a fact that which is not a fact. I cannot interfere with the decision of the Commissioner as to the existence of the necessary facts, unless the matter is brought within the terms of the principle laid down by Dixon J. in
Avon Downs Pty. Ltd. v. F.C. of T. (1949) 78 C.L.R. 353 to which I will later refer. I find no obligation on the taxpayer under that subsection to satisfy the Commissioner that no such arrangement existed.

Section 80C(1) in the circumstances therein set out requires the Commissioner to be satisfied of the existence of certain facts and thus there is imposed upon the taxpayer the onus of establishing to the Commissioner's satisfaction the existence of such facts and

ATC 4435

where relevant that the Commissioner was so satisfied. Upon the assumption for the moment that sec. 80C(3) does what I think it was intended to do the Commissioner is in the same position as he would be as that stated above in relation to the application of sec. 80B(5). Without sec. 190 the onus is on the appellant in this case to establish the facts required to exist in order to obtain the benefit of sec. 80A(1) or sec. 80C(1). Consideration of the application of sec. 190 would not arise, if I were to come to the conclusion that there was or there was not an arrangement within the meaning of the provisions of sec. 80B(5). Where, however, I am unable to decide because of the state of the evidence, one way or the other in relation to the existence of an arrangement, the provisions of sec. 190 require me to treat the matter as if, there being an onus upon the appellant to establish that the assessment was excessive, I am unable to make a finding in his favour, and therefore the appeal cannot succeed insofar as it relates to that issue.

It is at this point that the failure on the part of the appellant to call King may be relevant. Whether King, if called, would give acceptable evidence is not a matter upon which one can speculate. If an arrangement had been made between him and some person representing, or on behalf of Network Finance he could speak of it. If no arrangement were made he could give evidence of that also. Whether that would be true must be a matter of speculation. He has not been called, nor has any explanation been given for the failure to call him. By arrangement between counsel a document was admitted in evidence in the following terms:

``The Commissioner agrees for the purposes of the submission based on `right' or `power' within the meaning of sec. 80B(5) but not the submission based on `arrangement' within the meaning of sec. 80B(5) that Mr. King would say if asked about the purposes of granting the proxy that he was asked to give the proxy and he gave it because he was asked to do so and had no other consideration in mind except that he was aware of his own previous actions.''

In
McQueen v. The Great Western Railway Company L.R. 10 Q.B. 569 Cockburn C.J. said at p. 574:

``If a prima facie case is made out, capable of being displaced, and if the party against whom it is established might be calling particular witnesses and producing particular evidence displace that prima facie case, and he omits to adduce that evidence, then the inference fairly arises, as a matter of inference for the jury and not as a matter of legal presumption, that the absence of that evidence is to be accounted for by the fact that even if it were adduced it would not disprove the prima facie case. But that always presupposes that a prima facie case has been established; and unless we can see our way clearly to the conclusion that a prima facie case has been established, the omission to call witnesses who might have been called on the part of the defendants amounts to nothing.''

It may also be inferred that if a witness is available to be called by either party and is called by neither that witness could say nothing that would aid the case of either party. (See Jacob v. F.C. of T. (supra) ATC at p. 4194; A.L.J.R. at p. 570.)

Wigmore on Evidence 3rd ed. (1940) Vol. 2, states as follows:

``The failure to bring before the tribunal some circumstance, document, or witness, when either the party himself or his opponent claims that the facts would thereby be elucidated, serves to indicate, as the most natural inference, that the party fears to do so, and this fear is some evidence that the circumstance or document or witness, if brought, would have exposed facts unfavourable to the party. These inferences, to be sure, cannot fairly be made except upon certain conditions; and they are also open always to explanation by circumstances which made some other hypothesis a more natural one than the party's fear of exposure. But the propriety of such an inference in general is not doubted.''

This was quoted with approval by Windeyer J. in
Jones v. Dunkel & another (1959) 101 C.L.R. 298 at p. 321. His Honour quoted two passages from R. v. Burdett (1820) 4 B. & Ald. 95:

``Abbott C.J. said: `No person is to be required to explain or contradict, until enough has been proved to warrant a reasonable and just conclusion against him, in the absence of explanation or contradiction; but when such proof has been given, and the nature of the case is

ATC 4436
such as to admit of explanation or contradiction, if the conclusion to which the proof tends be untrue, and the accused offers no explanation or contradiction; can human reason do otherwise than adopt the conclusion to which the proof tends? The premises may lead more or less strongly to the conclusion, and care must be taken not to draw the conclusion hastily; but in matters that regard the conduct of men, the certainty of mathematical demonstration cannot be required or expected.' and Best J. said: `Nor is it necessary that the fact not proved should be established by irrefragable inference. It is enough, if its existence be highly probable, particularly if the opposite party has it in his power to rebut it by evidence, and yet offers none; for then we have something like an admission that the presumption is just'.''

In the same case Menzies J. said at p. 312:

``... where an inference is open from facts proved by direct evidence and the question is whether it should be drawn, the circumstance that the defendant disputing it might have proved the contrary had he chosen to give evidence is properly to be taken into account as a circumstance in favour of drawing the inference.''

This, in my view, extends to such a case as the present where the evidence which might have been called is not of a party but of a witness presumably available to a party.

If, therefore, a proper inference which may be drawn from the facts of this case is that an arrangement existed between King and Network Finance, or some person acting on its behalf, it may the more readily be drawn because of the failure of the appellant to call King to disprove it in the present proceedings.

Before adverting to the facts of this case let me look at the law which confines my powers in departing from any decision made by the Commissioner. I return to consideration of sec. 80A, 80B and 80C of the Act. Section 80A(1) requires the taxpayer to satisfy the Commissioner of the continuity of beneficial ownership of shares during the year of loss and the year of income. Unless the Commissioner is so satisfied he may disallow the loss incurred in the earlier year so that it cannot be taken into account for the purposes of sec. 80. Section 80B(5) permits him in certain circumstances to treat the said shares as not having been beneficially owned by the particular person ``at the relevant time''. The subsection provides that where there exists a stated set of circumstances the Commissioner's power arises.

I note that in a letter of 26th January, 1972, written by the Commissioner to the appellant he stated that in determining whether the company had satisfied the Commissioner in terms of sec. 80 it was necessary to establish whether a beneficial owner of shares owned in both the year of income and the year in which the loss was incurred had entered into an arrangement etc. within the terms of sec. 80B(5). If it is meant that it was necessary to establish the existence of such a situation I agree with him. That subsection certainly imposes no onus upon the taxpayer but rather it seems to me imposes upon the Commissioner the requirement that he be satisfied of the existence of the facts disentitling the taxpayer to take advantage of the provisions of sec. 80 of the Act, so that he may treat the shares as not having been beneficially owned by the required person at the relevant time. Insofar as the letter purports to place upon the appellant the onus of establishing that the matters did not exist that are necessary to bring into operation the provisions of sec. 80B(5) it is an inaccurate statement.

Section 80B(5) does not repose in the Commissioner the power of satisfying himself of the existence of the facts referred to in it. If the taxpayer disputes the assertion of the Commissioner the latter must, in order to support his ``deeming'' action, establish the existence of the facts upon which he seeks to rely. This situation seems to have been accepted by Mahoney J. in F.C. of T. v. K. Porter & Co. Pty. Ltd. (supra). His Honour at ATC p. 4106; N.S.W.L.R. p. 551 stated that he was satisfied that the requirements of sec. 80B(5)(a) and (b) were satisfied. Although his Honour did not advert to the question directly the rest of his judgment thereafter was consistent only with the view that the onus was upon the Commissioner to establish the existence of an arrangement and that in this the Commissioner had succeeded. He said at ATC p. 4108; N.S.W.L.R. p. 554:

``I am, therefore, of opinion that the arrangement as to the use of voting power was such as to bring into operation the Commissioner's power under sec. 80B(5).''

ATC 4437

and again at ATC p. 4110; N.S.W.L.R. p. 556 -

``In my opinion, therefore, Mr. and Mrs. Porter did at the relevant time enter into an arrangement of the kind referred to in sec. 80B(5).''

Finally, at ATC p. 4111; N.S.W.L.R. p. 557 he said -

``In my opinion, upon the principles established by Menzies J. (
F.C. of T. v. Brian Hatch Timber Co. (Sales) Pty. Ltd. 72 ATC 4001 at p. 4009; (1972) 128 C.L.R. 28 at pp. 55-56; 46 A.L.J.R. 111 at p. 116) the requirements of sec. 80B(5) were satisfied in the present case.''

Before the appellant can acquire the benefit of either sec. 80A(1) or sec. 80C(1) he must, in addition to all other matters stated, establish that he has satisfied the Commissioner of the facts therein stated. This he must prove in accordance with the civil onus. Such proof would normally be given by establishing that the Commissioner has expressed his satisfaction. That he has not been so satisfied can also be the subject of expression. If he has not conveyed either conclusion then the taxpayer may be unable to establish that he was satisfied. (See Kolotex Hosiery etc. per Gibbs J. at ATC pp. 4047-48; C.L.R. p. 566, infra.) There may be facts from which it can be inferred that the Commissioner was satisfied of the continuity of beneficial ownership. In this case there is in my opinion such evidence. He stated in his letter of 26th January, 1972, that in determining whether the company had satisfied him in terms of sec. 80C it was necessary to establish whether the beneficial owner of shares both in the year of loss and in the year of income had entered into an arrangement. I do not agree with this statement and on the reading of it it would seem that not only has the Commissioner omitted from his statement in relation to the arrangement a statement as to the purpose of such, but that he has confused the position in the application of sec. 80B(5) to the situation. To establish the existence of an arrangement became necessary only where the Commissioner was unable to say that he was not satisfied that continuity of beneficial ownership existed. If he were to say that he was not satisfied of such a continuity because of the existence of an arrangement he would in my view be misdirecting himself as to the conclusion he should reach. Section 80B(5) comes into operation to meet the situation where, despite the continuity, steps have been taken to defeat the operation of the requirement of continued beneficial ownership.

Following the taxpayer's reply to that letter came the assessment with the adjustment sheet. There the Commissioner does not disallow the deduction on the basis that the shares were not beneficially owned but says that he cannot be satisfied in terms of sec. 80C(1)(b) because pursuant to sec. 80B(5) he has treated shares (beneficially) owned by King as not being so owned by him. In other words, as stated by the Commissioner, pursuant to sec. 80B(5) he treats the shares as not being beneficially owned by King because of the existence of an arrangement, and if that arrangement is established so as to justify him in so treating the shares, he cannot be satisfied in terms of sec. 80C(1)(b).

Following that notice the appellant on 5th July, 1973, by letter objected and offered further information. The Commissioner's reply to this was to disallow the objection. In the Letter of Particulars of 4th May, 1977, the solicitor for the Commissioner stated that his client had determined, pursuant to sec. 80B(5) to treat the shares held by King as not having been beneficially owned by him at all times during the year of income. Clearly he was purporting to reject the appellant's claim not because the appellant had failed to satisfy him pursuant to sec. 80C(1) but because being satisfied that King beneficially owned the necessary shares he exercised his power to treat those shares as not having been beneficially owned. He appears also to have realised the necessity of the beneficial ownership being established to his satisfaction before the terms of sec. 80B(5) could be called into aid. It is stated that one of the facts which was accepted and taken into account by the Commissioner in making his determination was ``that at all times during the said year of income and the said year of loss, shares in Wellington Holdings Pty. Limited carrying between them the rights referred to in sec. 80C(1)(b) of the Act were beneficially owned by Mr. E.H. King''. The inclusion at the end of the letter of a paragraph in the undermentioned form does not, in my view, relieve him of the consequence of the earlier statement:

``Would you please note that, although the

ATC 4438
above facts and circumstances were accepted by the Commissioner as at the date of making his determination, this should not be taken as an admission that the said facts and circumstances were true in fact.''

The Commissioner cannot, by a statement made in May, 1977, escape the consequences of a determination he made some years earlier at the time of the issue of his assessment. Also, on 4th May, 1977, the solicitor for the Commissioner wrote in the following terms:

``I refer to my letter of even date.

I am instructed to advise you that the Commissioner reserves all his rights to rely, at the hearing, upon any of the material which is before the Court as entitling him to have not been satisfied (whether pursuant to sec. 80B(5) or otherwise) as to any one or more of the matters referred to in sec. 80C(1) of the Income Tax Assessment Act 1936-1971.''

Throughout the hearing of the Appeal the argument was directed to me upon the basis that there existed an arrangement which brought into operation the provisions of sec. 80B(5). In the light of the above facts I am satisfied that the appellant has discharged the onus which he bears of establishing that the Commissioner was satisfied of the matters set out in sec. 80C(1). If I am wrong in this I find that the Commissioner misdirected himself as to his conclusion which was based upon a misconception. In the words of Dixon J. (Avon Downs Pty. Ltd. v. F.C. of T. (1949) 78 C.L.R. 353) he has failed in the discharge of his real function according to law. That case concerned the provisions of, amongst others, sec. 80 of the Income Tax Assessment Act 1936-1944. Section 80(5) excluded from allowable deductions of a private company any loss incurred by it in any year prior to the year of income unless the company ``establishes to the satisfaction of the Commissioner'' the necessary continuity of beneficial ownership of a percentage of shares. The Commissioner had disallowed objections and Dixon J. (as he then was) was prepared to accept an explanation given before him by the taxpayer. However, at p. 360 he said:

``But it is for the commissioner, not for me, to be satisfied of the state of the voting power at the end of the year of income. His decision, it is true, in not unexaminable. If he does not address himself to the question which the subsection formulates, if his conclusion is affected by some mistake of law, if he takes some extraneous reason into consideration or excludes from consideration some factor which should affect his determination, on any of these grounds his conclusion is liable to review. Moreover, the fact that he has not made known the reasons why he was not satisfied will not prevent the review of his decision. The conclusion he has reached may, on a full consideration of the material that was before him, be found to be capable of explanation only on the ground of some such misconception. If the result appears to be unreasonable on the supposition that he addressed himself to the right question, correctly applied the rules of law and took into account all the relevant considerations and no irrelevant considerations, then it may be a proper inference that it is a false supposition. It is not necessary that you should be sure of the precise particular in which he has gone wrong. It is enough that you can see that in some way he must have failed in the discharge of his exact function according to law.''

The situation as to establishing a continuity of ownership has remained substantially the same. It is, however, expressed slightly differently in the words that require ``the company satisfies the Commissioner''. That, however, is not of material significance to me in this particular case, in view of the issues which were litigated before me.

In
Giris Pty. Limited v. F.C. of T. 69 ATC 4015; (1969) 119 C.L.R. 365 the Court was concerned with a consideration of matters arising under sec. 99 and 99A of the Income Tax Assessment Act 1936. The Commissioner was permitted to form an opinion upon which to base an assessment of the liability of a taxpayer to tax. Barwick C.J. at ATC p. 4018; C.L.R. p. 374 said:

``The legislature, upon any construction of the sections, has made the existence of an opinion of the stated kind the condition of the operation of one of the sections rather than the other. Thus the Commissioner must hold the opinion. The Court can decide whether or not he did hold it. In my opinion, the Court can require him to form it. It can determine whether the opinion is held bona fide and, although as I have said,

ATC 4439
the discretion is wide and though being really legislative in nature, what is relevant to its formation may range over an extremely wide spectrum of fact and consideration, the Court can determine whether or not the opinion was formed arbitrarily or fancifully, or upon facts or 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.''

Windeyer J. in referring to the discretion of the Commissioner being apparently at large said at ATC p. 4024; C.L.R. p. 384:

``He is to have regard to certain stated matters; but what weight or influence each is to have is not made clear. Moreover the Act requires that he `shall have regard to such other matters, if any, as he thinks fit'. However I assume that he is to be guided and controlled by the policy and purpose of the enactment, so far as that is manifest in it. That would exclude from his consideration any matter which it would be unlawful for him to take as a criterion, such as the State of residence of a trustee or of the beneficiaries of a trust. It would also, I think, exclude all merely fanciful and prejudiced tests which were hypothetically suggested in argument, such as vocation, religion, colour of skin or hair. Nevertheless the statute seems to allow great latitude to the Commissioner in forming his opinion. That he has formulated certain considerations by which he is guided, and made them publicly known, may be important as shewing that in the exercise of his statutory discretion he acts honestly, consistently, and as he thinks, in accordance with the legislative purpose. That purpose I take it is to enable the Commissioner to keep sec. 99A as an instrument to prevent avoidance of taxation by the medium of trusts, but not to use it when to do so would seem to him not in accordance with that purpose. But that the purpose of an enactment is understandable, would not cure its invalidity if it were invalid.''

F.C. of T. v. Brian Hatch Timber Co. (Sales) Pty. Ltd. (supra) was concerned with the application of sec. 80A and sec. 80B. The provisions of sec. 80A(1) of the Act were, insofar as they were relevant, similar to the provisions of sec. 80A with which I am concerned. There the Commissioner refused to allow a deduction of an amount of losses incurred in earlier years on the ground that he was not satisfied of the matters referred to in sec. 80A. The only information available to the Commissioner were income tax returns and a report of an interview between an officer of his department and two persons who previously had, or may have had, a beneficial interest in the shares of the company and whose continued ownership was essential in order to have the losses as a deduction. From the report it was not clear whether those persons had retained their interests in or ownership of the shares. Walsh J., the primary judge, allowed the deduction on the basis that the Commissioner's dissatisfaction with the explanation must have sprung from some undisclosed error and his Honour relied upon Avon Downs Pty. Ltd. v. F.C. of T. (supra). Barwick C.J. expressed the view that the statements contained in the record of interview were sufficient to raise a doubt in the mind of the reasonable man as to whether or not beneficial ownership had continued through the required period. He was therefore unable to say that it was unreasonable for the Commissioner not to be satisfied.

Menzies J. at p. 52 said:

``It was for the taxpayer to satisfy the Commissioner and if, without error, he was left in doubt whether or not they had disposed of their beneficial interest the taxpayer failed.''

His Honour at p. 55 dealt with the facts of that particular case in relation to the granting of a proxy and reached a conclusion that the particular grant in that case came within the provisions of sec. 80B(5)(c). That case, as to the grant, raised quite a different problem in that it was a continuing proxy, unlike the facts of this instant case where the granting of a proxy was merely for one meeting and for one meeting at which no business was really conducted. The Court unanimously reversed the decision of Walsh J. (See also per Stephen J. in
Perron v. F.C. of T. 72 ATC 4169; (1972) 128 C.L.R. 595.)

If it can be shown that there is material which would make it not unreasonable for the Commissioner to refuse to be satisfied of the particular circumstance his decision cannot be

ATC 4440

questioned (Kolotex Hosiery (Australia) Pty. Ltd. v. F.C. of T. per Mason J. at ATC p. 4105; C.L.R. p. 83). The decision of Mason J. in the above case went on appeal to the Full High Court, 75 ATC 4028; (1975) 132 C.L.R. 535. Barwick C.J. referred to the judgment of Sir Owen Dixon in the Avon Downs case (supra). Gibbs J. referred at ATC p. 4047; C.L.R. p. 566 to the question whether the Commissioner was satisfied of the matters stated in sec. 80A and 80C. He referred to the argument on behalf of the taxpayer that the Commissioner must have been satisfied as to the matters stated in sec. 80C(1)(a) for it was only in relation to sec. 80C(1)(b) that he said he failed to reach satisfaction. Gibbs J. said at ATC p. 4048; C.L.R. p. 566:

``I find it impossible to accept these contentions. The conditions stated in sec. 80A and 80C are not fulfilled unless the Commissioner is actually satisfied. As Windeyer J. said in F.C. of T. v. Brian Hatch Timber Company (Sales) Pty. Ltd. 72 ATC 4001 at p. 4010; (1972) 128 C.L.R. 28 at p. 56: `Was the Commissioner duly satisfied in fact? That is the essential question; not was his dissatisfaction justified.' Once the Commissioner is in fact satisfied he is bound to allow the deduction, although of course only to the extent allowed by the provisions of sec. 80. If the Commissioner has in fact been satisfied he cannot subsequently refuse a deduction on the ground that ought not to have been satisfied, unless in the circumstances he is entitled to amend the assessment under sec. 170 of the Act. By the same reasoning, however, it cannot be said that if the Commissioner has not in fact been satisfied but ought to have been satisfied he is bound to allow the deduction, although such a case may be one in which the court on appeal will hold that the Commissioner's conclusion should be reviewed. Unless it is sought to review the conclusion of the Commissioner that he is not satisfied, it is not enough to say that he ought to have been satisfied, or that he would have been satisfied if he had not fallen into error.''

His Honour at ATC p. 4048; C.L.R. p. 567 said:

``The questions that then arise are whether the conclusion of the Commissioner is open to review and, if so, whether it should be held that he should reach the requisite satisfaction.''

His Honour then set out the grounds on which the conclusions by the Commissioner that he is not satisfied may be examined by a Court of Appeal and referred to the authorities to which I have already referred.

On the view that his Honour took of the law and the facts he concluded at ATC p. 4049; C.L.R. p. 568 that the Commissioner could not properly have been satisfied of the matters set out in sec. 80A and 80C. Because the conditions stated in sec. 80A were not fulfilled the deduction was rightly, in his view, disallowed. It was therefore in the circumstances unnecessary for the Commissioner to invoke the provisions of sec. 80B(5).

Stephen J. at ATC p. 4054; C.L.R. p. 576 referred to the judgment of Dixon J. in Avon Downs Pty. Limited v. F.C. of T. (supra). His Honour said:

``The court will therefore necessarily have to consider any new grounds urged by the Commissioner as justifying the assessment, not because they 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, 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.''

The decision of Mason J. was upheld by a majority, Barwick C.J. dissenting.

Three alternative situations could have existed consistent with the evidence that I have heard. In the first place, King could have had a beneficial interest in the shares in Wellington and at the same time have known what was intended to happen in that company and in the appellant company. Secondly, he may have had no beneficial interest whatever in the company and so be without interest in what happened and could rightly have been treated as having no interest; notice to him need not have been given of what was being done. The

ATC 4441

third possibility is that he did have a beneficial interest in Wellington to the extent of the forty per cent that is alleged and his rights have been ignored. This may have been on the basis that any interest that his holding in Wellington would have given him in the appellant company was given to him in the hope that he would not become aware of it, but that if he did become aware of it then he would be able to take advantage of the situation; but if he did not become aware of it his rights would be ignored.

His nominal beneficial interest in the appellant company can be ascertained as follows: In the years of loss he owned 74.9 per cent, approximately, of Wellington and his wife 24.9 per cent. In 1964 Wellington owned 90 per cent of the appellant and in 1965 it owned 95 per cent of the appellant. By 30th June, 1968, he owned forty per cent of Wellington, which owned 95 per cent of the appellant. Following 3rd January, 1971, he still owned 40 per cent of Wellington, which owned just over 50 per cent of the appellant. After 1st July, 1971, he owned forty per cent of Wellington, which owned no shares in the appellant.

Ignoring 3,000 shares which had been issued prior to 3rd January, 1971, 367,500 shares had been allotted on that date at $2 per share, which must have been paid to the appellant on allotment. This money was available to it. An application by Wellington for a loan sufficient to repay Network could have been met and, in the interests of the shareholders of Wellington, should have been made. A favourable consideration of such request would have been justified.

Let me assume that King had a real beneficial interest to the extent of forty per cent in Wellington in the year of income. Such a minimum interest had not continued since the year of loss. By 8th May, 1968, he held only two out of 20,002 shares, the balance, except for one, being held by Network Finance. Of this fact he must have been aware following the signature of the deed dated 18th July, 1967, and the relevant share transfers. He then had no real interest in the company, nor (unless there was an arrangement) any hope of acquiring one. To be requested, therefore, to provide the proxy which he signed on 24th May probably bore no significance. It cannot be said he granted a right that depended for its operation on his beneficial interest in ``the shares'' and/or for the purpose of enabling the company to take into account the loss previously incurred. In the absence of an arrangement he may well have been prepared to sign any document which did not involve him financially, merely upon a casual request to do so, and one can understand the admission of the Commissioner as to what King would say in this regard if questioned. But why was the proxy given. There was no need for it had he been told of the purpose of the meeting and consented to what was being done. This may have constituted an arrangement. Was it to keep King from the meeting and to prevent him from asking any questions? A notice of the meeting could have been endorsed with King's consent in terms of sec. 144. Reference would have been made to the proposed resolution appointing as directors Messrs. Somerset and Roberts. A proxy was not thought to be necessary for the meeting of 4th June, 1968. King probably did not receive any notice of it. The purpose of the meeting of 31st May may have been to appoint ``tame'' directors. The statement that the previous directors (Mr. and Mrs. King) were no longer in office may not have been accurate. See Middle Harbour Investments Limited (In Liq.) & Companies Act, 28th October, 1976, unreported, per Bowen C.J. in Eq. (as he then was) at p. 7 where his Honour says:

``However, in the case of liquidation there is no vesting of property in the liquidator. The property remains vested in the company. The powers of the directors are sterilised and the liquidator has the power to conduct the winding up of the affairs of the company.''

See also The Law of Company Liquidation by Dr. B.H. McPherson, 1968, p. 152; In
re Union Accident Insurance Co. Ltd. (1972) 1 W.L.R. 640 per Plowman J. at p. 642. There was no evidence of the resignation of these directors and the entry in the Register of Directors in this regard made by Mr. Fisher is without foundation. This entry was probably inserted as an after-thought following the appointment of directors made on 17th October, 1968. The handwritten statement in relation to the Kings ``resigned'' appears to have been made at the same time as the entries relating to the appointment of Mr. Campbell and others on the last-mentioned date.

There was no need for a proxy from King had he been told of the purpose of the meeting

ATC 4442

of members and consented to what was being done. It may have been that to tell him that it was proposed to appoint Somerset and Roberts as directors may have constituted an arrangement, that being an essential step in the proceedings. Prior knowledge of the steps subsequently taken could be construed, if imparted to King, as part of an arrangement. At that stage his shareholding in the company was negligible and although there appears to be no evidence why the proxy was given it may be that it was obtained for the very purpose of providing some evidence to establish that there was no arrangement. This does not surprise me in view of the questions that could have been asked of and the subsequent criticism which could have been directed at any person in authority who might have given such evidence.

Having disposed of King (if it were necessary) as a director at 9.30 a.m. the directors' meeting held at 9.35 proceeded to the first step for a reduction of capital, of which, as I have said, there appears to have been no notice given to him. It may be reasonable to assume that by 8th May, King was aware that he held only two shares out of 20,002 in Wellington. He had disposed of the rest, and of this he would have been aware by his signature of the share transfers. To have told him that he would become, without any consideration passing from him, the owner of 40 per cent of Wellington would have put him on enquiry. Had he enquired it might have been necessary to inform him of the plan that the purchasers had in mind. This could be the reason why he was not told of the purpose of the proxy, or of the meeting intended to be held by the directors on 31st May for the purpose of originating the reduction of capital. That would be a good reason then for not notifying him of the meeting of members to be held on 4th June, which resulted in him becoming the owner of a 40 per cent interest in the company - this may be the reason for having posted to him a notice at an incorrect address with little chance of it reaching him prior to the meeting as it may have if directed to a correct address. It was not necessary for him to be the beneficial owner of such an interest prior to 30th June, 1970. On the other hand, if it were intended that he be not informed of the plan, or of the steps taken to give effect to it, it is strange that a dividend should be declared on 30th June, 1970, out of profits for the year ended on that date, and that an effort should be made to notify him of this. To a man unaware of what is going on, receipt of knowledge that for two shares out of a total of 20,002 he receives a dividend of $52 might put him upon enquiry immediately that there has been an alteration in capital that is consistent with a total amount of $520,052 being available for distribution amongst the shareholders. King therefore might have realised if and when he received the cheque, and if he took notice, that there had been an alteration in capital. This was a risk that the directors of Network Finance could afford to take. That could justify a conclusion either that he was or became aware of the true situation, but it does not necessarily establish that there was an arrangement which involved him. He may have realised that there was a plan which would be defeated if he interfered. His abstinence from interference does not make him a party to an arrangement. Where the question of onus of proof is important it may make it difficult for a taxpayer to establish that there was no arrangement.

It may be difficult to oppose the contention that if the steps that were taken between 24th May and 4th June, 1968, were taken without the knowledge of King, this constituted an action of Network Finance treating the appellant company as if it were completely controlled by Network Finance to the extent that necessary formalities had been disregarded. Perhaps it was thought unnecessary to inform King that he had suddenly, without a reason apparent to him, become the beneficial owner of a large shareholding of forty per cent in the company (an action not to his detriment). It might appear strange that he had not been told, or that share scrip had not been forwarded to him. It may have been thought that if he did not learn this fact the plan could have been followed to its conclusion in his ignorance without danger to its success and without financial injury to him. Whether to give to a person without his knowledge an advantage of which he is subsequently dispossessed imposes upon the original donor a legal or moral obligation to recompense the donee is not a matter which presently concerns me. Any impropriety in a failure to notify the donee that the donor proposes to deprive him of an advantage previously given is not relevant in the present circumstances. Nor, if the donor so behaves, can it be assumed that his behaviour constitutes an action which amounts to such a

ATC 4443

disregard of the apparent rights of the donee as to establish the existence of an arrangement between them. It may be that the donor has taken a calculated risk as to the likely action to be taken by the donee should he learn of the donation. If the donee were to take proceedings to protect what he claimed to be his beneficial interest in the donation, the donor may find opposition to the claim difficult, both legally and morally.

During the year of income and after 3rd January, 1971, King's interest was approximately twenty per cent of the appellant. If, therefore, he became aware of the situation he could have insisted on his receipt of an equivalent share in dividends paid by the appellant out of profits made for that year or taken advice as to what steps were available to him to establish and protect his interest. That was the risk that the directors of Network ran if there was no arrangement. If there were an arrangement Network Finance would lose the benefit of the losses and so the amount of tax payable - i.e. approximately $21,006. If there were no arrangement it could lose to King approximately $8,800.

It may be that the only comment that can be made on the facts is that at the particular time (being neither in the year of loss nor the year of income) it is of no consequence that King without his knowledge became possessed of forty per cent of the shareholding in Wellington. Nothing seems to have happened between June 1968 and 30th June, 1971, to justify an assumption that if King did not have a beneficial interest in forty per cent of Wellington following the reduction of capital, he gained it at any time thereafter. If he did have a beneficial interest in Wellington then the action taken subsequently to deprive him of it, without notification to him, might be said to be improper or consistent only with the existence of an arrangement with which such action did not conflict.

Let it be assumed that prior to December 1970, King had the beneficial ownership of forty per cent of Wellington; the steps then taken were without notification to him of the intention to take them and solely for the purpose of being able to destroy the value of his beneficial interest in the company, so that when a dividend was declared on 1st July Network Finance would take the lot. One might ask would honourable men deprive a shareholder of such a beneficial interest without advising him of it unless it was as a result of some arrangement previously made with him? As Mahoney J. has said, it could justify a conclusion that an arrangment existed which in its eyes entitled the purchaser to treat the taxpayer company as completely controlled by it to the extent that formalities otherwise required could be disregarded. On the other hand it could be consistent with King at no time knowing of the steps taken and the purchaser believing that he gained no moral right as a result of what was done. Although there is no evidence of any effort made to communicate with King and advise him of the procedures which were followed, I am not prepared to reach the conclusion that there was an arrangement and the terms of the arrangement were that what was done would be done. I express no view as to the consequences of an alternative conclusion that honourable men would not deprive a shareholder of a beneficial interest without advising him of it. None of the directors of Network Finance were called and their behaviour is not in issue. It may be that modern commercial standards would not be offended by their action.

The conclusions that I have reached are as follows:

1. Section 80A applies only where there is no holding company. Where sec. 80C is applicable (that is where there is a holding company) sec. 80A is not applicable. If I am wrong in this there is no evidence to support a rejection of the claim upon the ground that pursuant to sec. 80B(5) an arrangement existed between Wellington, the beneficial owner of the shares in the appellant, and Network, the purchaser of the appellant company. Although there is no evidence of the Commissioner's satisfaction in terms of sec. 80A(1) in respect of Wellington's beneficial ownership of shares in the appellant he has at no time expressed his lack of satisfaction. It is clear that at no time has he directed his mind to this problem. He has purported to make a decision based upon the beneficial ownership of King. Moreover this matter has not been conducted upon the basis that Wellington was not at all relevant times the beneficial owner of two-fifths of the shares of the appellant company. Failure of the Commissioner to be satisfied that Wellington was at all relevant times such a beneficial owner would be unreasonable.

ATC 4444

2. The relevant continuity of beneficial ownership in this case must be of King in Wellington. On the facts the Commissioner is precluded from contending that King did not have the relevant continuity of beneficial ownership or that he was not so satisfied. I find that at the relevant time the Commissioner was satisfied that King had such continuity.

3. Whether sec. 80A can apply in the case of a holding company is not a relevant consideration here. The whole matter has been conducted on the basis that sec. 80B(5) has been brought into application by the provisions of sec. 80C(3). The effect of sec. 80C(3) is to limit the application of sec. 80B(5) to 80C(1) where the relevant arrangement involves a taking into account of a loss previously incurred by the holding company; that is, by Wellington.

4. There is no evidence from which it would be reasonable to infer that there existed a relevant arrangement between King and Network or any person on its behalf; even if there were an arrangement established it is not of the kind relevant to the operation of sec. 80B(5) and 80C(3). The existence of an arrangement does not give the Commissioner a deeming power under sec. 80B(5) unless sec. 80C(3) properly brings sec. 80B(5) to the aid of sec. 80C(1).

5. If there were a grant (as related to the proxy given by King) it did not depend for its operation on the beneficial interest of him in his shares either on 24th or 31st May, 1968, nor can it have been for the relevant purpose mentioned in sec. 80B(5)(c).

I uphold the appeal of the taxpayer and allow the objection and order the Commissioner to pay its costs of the appeal.

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