Brookton Co-operative Society Limited v. Federal Commissioner of Taxation.
Judges:Brennan J
Deane J
Fisher J
Court:
Federal Court of Australia
Brennan J.: The Brookton Co-operative Society Ltd. (the appellant) is a company formed under the Co-operation Act 1923 (N.S.W.). It seeks to show that at all times during the income years ended 30 June 1972, 1973 and 1974 it was a co-operative company as defined in sec. 117 of the Income Tax Assessment Act 1936 and that, in consequence, it is entitled to be assessed to tax in those years as a co-operative company under Div. 9 and as a public company under Div. 7 (sec. 103A(2)(b)). It was assessed on the footing that it was not a co-operative company. It pursued objections to its assessments for those income years before a Board of Review, and on appeal to the Supreme Court of New South Wales. It failed in those proceedings and by leave appeals to this Court.
The primary question upon which the appellant's status depends is whether the company satisfies that part of the definition of ``co-operative company'' which is expressed in sec. 117(1)(d) in these terms:
``... a company... which... is established for the purpose of carrying on any business having as its primary object or objects one or more of the following:
- ...
- (d) the rendering of services to its shareholders;''
Evidence relevant to the elements of this definition was led before the Board of Review and, by consent, tendered before the Supreme Court without alteration or addition. Oral evidence was given by Mr. Bainton, Q.C. He explained how a group of professional men who encountered difficulties in looking after their respective personal affairs, and who appreciated that a co-operative society was entitled to deduct from its assessable income the rebates distributed among its shareholders, thought of forming a co-operative society to render services of varying kinds to its members. Finding a considerable interest among their colleagues for the proposal, they decided to form a co-operative that might buy different commodities required by the members, the first commodities to be wine and other beverages.
The appellant was formed accordingly on 28 July 1971, and its rules contained its objects:
``The objects of the society shall be -
(a) the acquisition of commodities for disposal or distribution among its shareholders and no others,
(b) the rendering of services to its shareholders and no others,
(c) without prejudice to the generality of clauses (a) and (b) the objects of the society shall include -
- (i) the purchase for resale to its shareholders, but no others, of consumer goods including foodstuffs, liqueurs (sic), electrical appliances, motor vehicles, accessories, furniture and furnishings, stationery and goods and chattels of any description.
- (ii) to act as the agent of its shareholders, but no others for the purchase on their behalf of consumer goods, including foodstuffs, liqueurs (sic), electrical appliances, motor vehicles, accessories, furniture and furnishings, stationery and goods and
ATC 4220
chattels of any description, and the arranging of travel, accommodation, holiday and the like services.- (iii) to provide to shareholders, but no others, stenographical, secretarial, accounting, advisary (sic) and any other services desired or required by the Society's shareholders or any of them.
- (iv) the transaction of any business in furtherance of or in accordance with any of the Society's objects in any other State and in any Territory of the Commonwealth of Australia.
- (v) the establishment of branches or agencies in any State or Territory of the Commonwealth for the more convenient carrying out in any such place of the business of the Society.''
The services of a manager were obtained. The first manager had had some experience with wines, and was in the office of an accountant who was one of the promoters of the appellant. The functions which the manager performed in connection with wine were described by the learned trial judge ( Helsham C.J. in Eq.) in these terms:
``Basically there was a manager who arranged for supplies to members from one or more retailers; deliveries were made to members, who paid the supplier; the supplier then paid a commission on wines so bought to the society of the nature of 7-10 per cent. The Liquor Act prevented the society from buying and re-selling liquor, so it acted really as an intermediary to take orders, pass them on, and receive a commission from sellers who delivered to members. The society, through the manager, gave periodic information to members in monthly bulletins about what was available and other matters of interest; the bulletins started in October 1971. It seems that the supplying of wine from retailers to members began about October 1971 also.''
The wine activities continued in later years, and the appellant earned commissions of $408, $1,178 and $1,443 in the respective income years of 1972, 1973 and 1974. Drawing on other sources of income presently to be mentioned, the appellant resolved to distribute rebates or bonuses to its members based upon their wine purchases, in the amounts of $2,500, $8,615 and $12,521 respectively on purchases made in the years 1972, 1973 and 1974, the distribution to be made in the year after the year in which the purchases were made. In fact, only $2,295 and $4,316 were distributed in the respective income years 1973 and 1974.
The conduct of the wine activities of the appellant was relied on to constitute the ``carrying on of a business having the rendering of services to its shareholders as its primary object'', and it was submitted that the appellant was established for the purpose of carrying on that business, and that it was therefore a ``co-operative company''. In order to consider that submission, it is necessary to refer to some other matters in which the appellant had an interest.
The appellant invested its capital and derived a small income from that source. It also held shares in a number of wholly-owned subsidiary companies, the shares in which were given to it. (The Co-operation Act prohibited the appellant from investing its funds in these subsidiaries.) The subsidiaries were engaged in purchasing the shares in companies which were in a position to distribute dividends or assets in specie to their shareholders, and in procuring those companies after purchase to make those distributions. These activities, which were sometimes referred to in the evidence as ``dividend stripping'', were on a large scale. The share trading accounts of a number of subsidiaries were tendered, and it suffices to refer to one, Boongil Investments Pty. Ltd., which was one of the first subsidiaries acquired by the appellant (it was acquired on 27 June 1972), and which appears to have had the largest share trading account. Between 29 April 1971 and 30 June 1972, Boongil acquired shares for a cost of $1,132,146, received dividends of $1,230,130, and at the end of the year valued the shares on hand at $30. Between 1 July 1972 and 30 June 1973, it sold the shares on hand for $30, acquired other shares for a cost of $4,416,681, received dividends of $427,589, sold some of the shares for a further $3,853,897, and at the end of the year valued the shares on hand at $287,424. The share trading accounts of other subsidiaries likewise show large financial transactions.
ATC 4221
Some of the moneys received by the subsidiaries as profits were distributed to the appellant as dividends, and were included in the returns of income furnished by the appellant to the respondent in respect of the income years 1972, 1973 and 1974: in 1972 those dividends amounted to $3,000; in 1973, to $130,202 (subsequently reduced by $47,915); and in 1974, to $8,500. Other profits were held and not distributed by the subsidiaries. The commercial success of the subsidiaries' businesses depended upon their shedding the status of private companies for the purposes of Div. 7. In order to become public companies as defined by sec. 103A(2)(d)(v), the holding company of the subsidiaries had to be a public company, and the appellant's promoters hoped that it would have that status. The benefit to the subsidiaries of acquiring the status of a public company was foreseen by the promoters of the appellant before its formation. Mr. Bainton deposed:
``... some one or more of us realised that such companies have public company status under the Income Tax Assessment Act and that at that time there was a great deal of traffic in what was then known as excess distribution companies. It may be [subsidiaries of] a co-operative society could enjoy some of the business that was apparently about.
After the co-operative had in fact been formed it acquired, I think initially one, but it may be two subsidiary companies.''
He explained that he foresaw the advantage of subsidiary companies acquiring public company status to avoid the application of Div. 7 and to permit the profitable undertaking by the subsidiaries of dividend stripping and capital reduction operations.
The subsidiaries became subsidiaries of the appellant in one of three ways, as Mr. Bainton's evidence showed. The first way was by the gift of September Six Pty. Ltd., a company controlled by the promoters of the appellant. The shares given were transferred to and held by the appellant or its nominee. One of the companies which became a subsidiary in this way was RHD Investments Pty. Ltd. The arrangements for the formation of RHD Investments Pty. Ltd. and for its becoming a subsidiary were made prior to or, at the latest, contemporaneously with the formation of the appellant. The second way was by the gift of RHD Investments Pty. Ltd. after it became a subsidiary. The shares given were transferred to and held by the appellant or its nominee. The third way was under a settlement of money made by September Six Pty. Ltd. The trustees of the settlement applied the funds made available to them in subscribing for or purchasing shares in companies, some of which they held in trust for the appellant, some of which they transferred to the appellant to be held by it. At least 14 subsidiaries were acquired in this way, 8 in the 1972 year, and 3 each in the 1973 and 1974 years. The dividends received by the appellant were paid by the subsidiary companies Tunwin Pty. Ltd., RHD Investments Pty. Ltd., Sans Holdings Pty. Ltd. and Wyomee Investments Pty. Ltd.
The promoters, sensing the risk to the continuance of the appellant as a wine-buying co-operative if it acquired cash resources, secured options in favour of September Six Pty. Ltd. over 45 of each parcel of 50 shares issued to the appellant's members. The options given by the original members of the appellant were dated prior to the formation of the appellant, though they may have been given later. The reason for requiring the members to give options over their shares in the appellant was stated by Mr. Bainton:
``... if those dividends turned out to be substantial there was an obvious temptation to the majority of members to want to get their hands on cash. We did not want that to occur. We wanted the society to continue.''
The promoters doubtless wanted the society to continue to carry on a co-operative business of buying wine and other commodities, and to confer public company status upon the subsidiaries. But the question which is posed by sec. 117(1) is not whether the promoters, or some of them, wanted the appellant to perform the functions which they had assigned to it, but whether the appellant ``is established for the purpose'' specified in the subsection.
The subsection requires that a defined purpose should be the purpose for which the company is established; it does not suffice that a defined purpose be merely a purpose
ATC 4222
of establishment. The establishment of a company can be said to be for the purpose of carrying on a business of a stated kind when the dominant purpose of the company's existence is the carrying on of that business (cf.Jacob v. F.C. of T. 71 ATC 4192 at p. 4193; (1971) 45 A.L.J.R. 568 at p. 569 ). If the company exists for a number of purposes, only one of which is the statutory purpose, and the statutory purpose is not dominant, it is not right to describe the statutory purpose as the purpose of the company's establishment. On the other hand, if the statutory purpose be the dominant purpose, it is the purpose of the company's establishment though other and subsidiary purposes may be found.
To attribute a purpose to the establishment of a company, reference must be made to the whole of the surrounding circumstances. It is not the purpose of an individual mind which is determinative, but the purpose which an observer who knows the material facts and circumstances (including those which are foreseen as possible future events) would predicate of the establishment. The material facts and circumstances include the company's constitution, the activities actually carried on, the company's history and its control (per
Fullagar
J. in
A.
&
S. Ruffy Pty. Ltd.
v.
F.C. of T.
(1958) 98 C.L.R. 637
at p. 656
). These facts and circumstances may alter from time to time, and the purpose of establishment may correspondingly change.
It is not sufficient to look to the formation of the company and to ascertain what was, at that time, the purpose of its formation. In
Renmark Fruitgrowers Co-operative Ltd.
v.
F.C. of T.
69 ATC 4135
,
Menzies
J. at p. 4137 held that the relevant question ``is whether, at a particular time, the company is established for the purpose stated''. The periodic operation thus given to the words ``is established'' requires a determination whether, at a given time, the company is then established for the statutory purpose. If the purpose of its establishment at a given time is not the purpose defined by sec. 117(1), the company does not, at that time, have the status of a co-operative company. The statutory purpose is the carrying on of a business of a kind stated in the subsection. The kind of business which falls within the statutory purpose is stated to be a business ``having as its primary object or objects one or more of the'' objects specified in the lettered para. (a) to (e). Provided any one of the objects enumerated in para. (a) to (e) of subsec. (1) is a primary object of the business, it is immaterial that the business has another of those objects either as a primary or non-primary object. The reference to ``object'' in the definition tends to lead the reader, by an association of ideas familiar in the context of company law, to consider the company's Memorandum of Association; but the object to which the definition refers is not an object of the company, but an object of the company's business (a distinction not observed in sec. 120(1)(c), perhaps because the statutory antecedents of sec. 117(1) and sec. 120(1)(c) were introduced into income tax legislation by different amending Acts: sec. 117(1) may be traced to sec. 4 of the
Income Tax Assessment Act
1925, and sec. 120(1)(c) to sec. 8 of the
Income Tax Assessment Act
1930). An enquiry as to the primacy of a given object of the business does not depend exclusively upon the objects contained in the company's Memorandum (
Ruffy's case, (supra),
per
Dixon
C.J.,
Williams
and
Webb
JJ. 98 C.L.R. at p. 649). The Memorandum may be regarded, however, as a relevant factor in the enquiry (per
Fullagar
J., in
Ruffy's case
at p. 656;
Revesby Credit Union Co-operative Ltd.
v.
F.C. of T.
(1965) 112 C.L.R. 564
at p. 576
), and it is material to ascertain whether the business which is in fact being carried on is within the company's objects (
Renmark Fruitgrowers' case, (supra),
per
Menzies
J. 69 ATC at p. 4137).
The test of primacy, as the majority judgment pointed out in
Ruffy's case ((supra),
98 C.L.R. at p. 649) ``may not always be quite easy, but relatively speaking, the test... may be considered practicable''.
Fullagar
J. (at p. 656) thought that light may be thrown on the primary object of the business (as well as on the purpose of the company's establishment) by ``the activities actually carried on by the company... its history, constitution and control.'' In
Social Credit Savings and Loans Society Ltd.
v.
F.C. of T.
71 ATC 4232
at p. 4236;
(1971) 125 C.L.R. 560
at p. 567
,
Gibbs
J. thought it right to refer to ``the activities actually carried on by the company''.
ATC 4223
In the present case, the evidence shows that there was only one business carried on by the appellant, and that business had but one object: the object of buying wine for, or of facilitating the buying of wine by, the company's shareholders - an object to which I shall refer as the wine-buying object. Wine-buying was within the appellant's constitution, it is to be found in the history of the business, and was perhaps the only activity in which the appellant was engaged. The businesses of dividend stripping were the businesses of the subsidiaries, not of the appellant. And thus one is not concerned to enquire whether dividend stripping rather than wine-buying is the primary object of the appellant's business. The appellant's activities with respect to its subsidiaries were those of a holding company, but the evidence is not sufficiently precise to show that the appellant engaged in a business of managing the portfolio of shares which it held in the subsidiaries. Although the only business shown to have been carried on by the appellant had wine-buying as its primary object, that does not determine the application of sec. 117(1). The basic question of purpose of establishment remains to be answered.
In my view, what emerges from the evidence, and it emerges with clarity, is that the dominant purpose of the appellant's establishment from its formation to the end of the relevant income years, was not the purpose of carrying on a business having wine-buying as its primary object. Rather, the dominant purpose of establishing the appellant was to hold shares in, and thereby to confer the status of subsidiary upon, the companies whose shares should be transferred to it. No doubt it was hoped that the operation of sec. 103A(2)(d)(v) would thereby clothe the subsidiaries with the tax-protective mantle of public company status. The dominance of one purpose of a company's establishment over another is not necessarily to be answered by a comparison of the degree of activity involved in fulfilling one purpose or the other, for a purpose may be susceptible of fulfilment with little or no activity on the part of the company. Little or no activity was required on the part of the appellant to hold the shares in the subsidiaries, yet the dominance of that purpose appears from a consideration of the financial importance of the subsidiaries' activities to the appellant and its members, the magnitude of those activities and the fiscal significance of public company status upon the results of those activities to the subsidiaries and to the appellant.
The dominant purpose of the appellant's establishment is not a purpose defined by sec. 117(1), and the appellant therefore did not acquire the status of a co-operative company under Div. 9 or of a public company under Div. 7. Paradoxically, it was the very importance of clothing the subsidiaries with the mantle of public company status which rendered ineffective the attempt to do so. It was not sufficient to attract the operation of sec. 117(1) that the appellant was established for the subsidiary purpose of carrying on a business having the primary object of wine-buying - a purpose which, had it been the dominant purpose, would have conferred the status of a co-operative company on the appellant. It follows that, in my judgment, Helsham C.J. in Eq., was right in dismissing the appeals to the Supreme Court in relation to the appellant's status.
A further question relates to the assessable income of the appellant in the 1973 tax year. Its income was at first returned at $130,202, but subsequently an amended return excluded $47,915 of this sum. The excluded sum represents the amount declared as an interim dividend to be paid by Tunwin Pty. Ltd. to the appellant. The resolution declaring the dividend was passed on 23 April 1973 by the directors of Tunwin, Messrs. Bainton, Grant and Smith in the following terms:
``Resolved that an interim dividend of $47914.97 be declared and credited to the accounts of Brookton Co-operative Society Limited and be available to that company on demand.''
The Tunwin directors were also directors of the appellant. The minutes of the appellant's directors' meeting of 15 May 1973 note the advice given to that meeting that the Tunwin dividend, inter alia, ``had been declared and [was] due to the Society''. It was resolved that ``upon receipt of these dividends the money be invested on fixed deposit''. The relevant journal entry was made in the books of Tunwin and credited to the appellant in
ATC 4224
Tunwin's ``Sundry Creditors'' ledger. The amount of $47,914.97 was reflected in the financial statements of both companies at 30 June 1973.At the time when the interim dividend was declared, Tunwin was under a contingent liability to make certain payments pursuant to a contract which had yielded the profit required to support the interim dividend. The Tunwin directors had thought it right not to make provision, or sufficient provision, for the contingent liability before declaring the interim dividend. Subsequently, Tunwin was required to meet that liability and, after meeting it, it had insufficient funds or remaining profits out of which to pay $47,914.97 to the appellant. When the liability was met, the Tunwin directors purported to rescind the declaration of the dividend, by passing the following resolution at a meeting held on 10 December 1973:
``RESOLVED that it now being apparent from an examination of certain share sale agreements from which the company had anticipated deriving of profit in respect of the year ended 30/6/72 that there were not profits of $47,914.97 derived during that period, the declaration of a dividend of $47,914.97 on 29th April, 1973, be rescinded, the credit of $47,914.97 to Brookton Co-operative Society Limited be reversed and that Brookton Co-operative Society Limited be requested to acknowledge and accept the reversal of this credit.''
On the same day the appellant's directors resolved to ``accept the said rescission and the corresponding alteration in the credit to it''. The question is whether the amount which was credited to the appellant's account with Tunwin forms part of its assessable income for the 1973 income year.
Its first return of that year's income, which included the relevant amount, formed the basis of an assessment to primary and Div. 7 tax. The notice of assessment to primary tax was issued on 30 April 1974, and the objection which the appellant made to that assessment was limited to challenging the respondent's basis for assessing the appellant to tax as a private company. A notice of assessment to Div. 7 tax was issued on 17 March 1975, to which an objection was lodged dated 13 May 1975. The objection raised the ground that:
``the undistributed amount of income derived during the year ended 30th June, 1973 is not more than $82,287 for the reason that the amount of dividends received during the said year was in fact $82,287 and not $130,202 as included in the taxable income of the said year in the Income Tax Return submitted.''
On 2 June 1975, the appellant wrote a letter to the Deputy Commissioner of Taxation enclosing an amended 1973 return to exclude ``the amount of a dividend from Tunwin Pty. Ltd. which was reversed in the 1974 accounts when it was found that Tunwin did not have enough funds to pay the dividend''. The respondent disallowed the objection and contends that the amount was a dividend ``paid'' to the appellant within the meaning of that term when used in reference to dividends in the
Income Tax Assessment Act
1936 and thus formed part of the appellant's assessable income (sec. 44(1)(a)). ``Paid'' is given an extended meaning in the Act, and it includes ``credited'' (sec. 6(1)). The meaning of ``credited'' was referred to by
Isaacs
J. in
Webb
v.
F.C. of T.
(1922) 30 C.L.R. 450
at p. 479
:
``The Legislature, as it appears to me, has by the word `credited' sought to reach cases where, through a member or shareholder who has not been `paid' the dividend or bonus, there has been credit in the company's books imputed to the share he holds... But, at all events, `profits credited or paid' are, as it seems to me, pointed to `profits' which have in some way been made a debt by the company to the shareholder, & c. In the case of a shareholder, that would be by a `dividend or bonus' - or even by `interest' used in the sense of distribution of profits. But the declaration of a `dividend' creates a debt ( In
re Severn and Wye and Severn Bridge Railway Co. (1896) 1 Ch. 559 , at p. 564 ).''
And in
Commr. of I.R. (N.Z.)
v.
Taylor
(1964) 13 A.T.D. 389
,
Henry
J. referred to
Webb's case
and said at p. 397:
``The essence of the expression is that a debt by the company to the shareholder is recorded as a credit in his account with the company. The inquiry is thus narrowed down to a consideration whether or not the directors did create a
ATC 4225
debt between the company and the shareholder and recorded that debt in an account with the shareholder... The entry could become a `credit in account' only when the directors decided to pay it.''
Provided the credit shown in a taxpayer's account with the company declaring the dividend represents a debt owing to the taxpayer, the dividend is ``credited'' and, in that sense, ``paid'' for the purpose of the Act.
Where a final dividend is credited after it is declared, as in the
Severn Bridge Railway Co. case,
the amount credited is a debt and may form part of a shareholder's assessable income as a ``dividend paid''. But it is otherwise where an interim dividend is declared by directors whose powers are expressed in the terms of Tunwin's Art. 99. That Article provided that the directors ``may from time to time pay to the members such interim dividends as appear to the directors to be justified by the profits of the company''. Where directors, acting under such a power, resolve either to declare or to pay an interim dividend, the resolution itself does not create a debt owing by the company to the shareholders, as
Brightman
J. said quoting the 13th edition of
Buckley on the Companies Acts
in
Potel
v.
I.R. Commrs.
[1971] 2 All E.R. 504
at p. 513
:
``The passage in Buckley reads:
- `Where the directors are authorised to pay interim dividends, a mere resolution to pay does not create a debt as between the company and the member so as to prevent the directors from subsequently rescinding the resolution.'
I think that is a correct conclusion from the decision in the
Lagunas Nitrate case ( (1901) 85 L.T. 22 ), which establishes that an interim dividend is, as it were, subject to the will of the directors until it is actually paid.''
In
Industrial Equity Ltd.
v.
Blackburn
(1977) 52 A.L.J.R. 89
,
Mason
J. cited
Potel's case
with approval saying:
``There is a well recognized distinction between a power to declare a final dividend and a power to pay an interim dividend. One consequence of the distinction is that although the declaration of a final dividend gives rise to a debt payable by the company to the shareholder immediately or from the date stipulated for payment, a resolution for the payment of an interim dividend does not create such a debt in favour of the shareholder...''
The Tunwin directors, acting in pursuance of Art. 99 had no power to create a debt enforceable by the members against the company. They had power to pay an interim dividend, but they could not create an obligation to pay it. Of course, payment may be made otherwise than in cash (
Thairwall
v.
Great Northern Railway
(1910) 2 K.B. 509
) and in some circumstances the entering of items in accounts between the company and the shareholder may be an effective means of making a payment (
In
Re Harmony and Montague Tin and Copper Mining Company (Spargo's case)
(1873) L.R. 8
Ch. App. 407
;
In
Re Paraguassu Steam Tramroad Company (Ferrao's case)
(1874) L.R. 9
Ch. App. 355
). But the mere entering of a credit in the books of a company in favour of a shareholder does not necessarily pay the amount so entered. As
Barwick
C.J. said in
Manzi
v.
Smith
(1975) 49 A.L.J.R. 376
at p. 377
:
``We were referred to cases in which a payment of money was held to have been made by means of entries in books of account. But in those cases the entries represented the agreement of the appropriate parties e.g.,
Eyles v. Ellis (1827) 4 Bing. 112 ; 130 E.R. 710 , and Re Harmony and Montague Tin and Copper Mining Co. (Spargo's case) (1873), 8 L.R. Ch. App. 407. These decisions, quite clearly, are not authority for the proposition for which they were advanced, namely, that a payment of money was made by the making by the company of a journal entry in the books of account without reference to, or without the agreement of, the persons said to be the recipients of the money. The company's assertions in its books of account did not establish the indebtedness of the appellants or any payment of money in discharge of that indebtedness.''
ATC 4226
No doubt it is open to a company and its shareholder to agree that the amount of an interim dividend to be paid should, on payment, be lent by the shareholder to the company, and to give effect to that agreement by appropriate book entries which effect a payment of an interim dividend and a lending of the amount so paid to the company (
Eyles v. Ellis, (supra),
Joseph
v.
Campbell
(1933) 50 C.L.R. 317
at p. 324
). Where an agreement of that kind is made, the shareholder acquires a debt for the money lent. The company's obligation is then to repay the money lent, and a payment in discharge of that obligation is not to be characterized as the payment of an interim dividend. (It may be different where an existing liability to pay a final dividend is sought to be exchanged for an identical liability for moneys lent:
Re Associated Electronic Services Pty. Ltd.
(1965) Qd. R. 36
.) Where the entry of a credit item representing an interim dividend is allowed to remain by consent of the shareholder in the company's books, a nice question arises as to whether the shareholder has been paid and has then deposited the amount of the dividend on loan with the company, or whether the dividend has not been paid at all. The answer to this question must turn upon the intention of the parties. In the present case, the intention of the Tunwin directors as expressed by their resolution was not to pay the dividend until demand was made for it. It does not appear that any demand was made prior to the rescission of the resolution declaring the interim dividend, and the payment of the dividend thus remained ``subject to the will of the directors''. There is no evidence of the appellant's making of a loan of the amount of the dividend to Tunwin. The entries made in the books and financial statements of Tunwin and of the appellant do not show a payment of the dividend by Tunwin and a lending of the amount paid to Tunwin. Tunwin's journal records the amount to be paid upon the authority of the directors' resolution declaring the interim dividend, and records the reversal of that entry on the authority of the directors' resolution rescinding the prior resolution. There is no journal entry which records a payment and a lending of the amount paid. The resolutions and the journal entries are consistent only with the non-payment of the interim dividend. As the interim dividend was not paid, and as it was incapable of giving rise to a debt before payment, the amount of the interim dividend was not part of the appellant's assessable income for the 1973 year. This conclusion makes it unnecessary to examine the submission that the declaration of the interim dividend was invalid because there were no profits out of which that dividend might have been paid
-
a submission which might have required consideration of the reference in sec. 44(1)(a) dividends ``paid out of profits''. But as the dividend declared was not ``paid'' it is unnecessary to consider this submission.
In my view, the dividend of $47,915 should not have been included in the amount first returned by the appellant as its 1973 income. Although the assessment to Div. 7 tax assessed the undistributed amount upon which the tax was calculated in accordance with the appellant's original return of income, it was assumed in argument both before the Supreme Court and this Court that it was open to the Court to direct an amendment of the assessment to reduce the taxable income of the appellant by the amount of the Tunwin dividend consequent upon the objection which was lodged to the assessment to Div. 7 tax. Though I should not wish to comment upon the correctness of the assumption in the absence of argument, it is right that the order of this Court should adopt the common basis of the submissions made, and direct the amendment of the assessment in accordance with its view of the true quantification of the taxable income. The taxable income for the purposes of calculating Div. 7 tax should therefore be reduced by deducting the amount of the Tunwin dividend.
This conclusion produces a difference between the taxable income upon which primary tax is assessed and the taxable income which is used to determine the undistributed amount upon which Div. 7 tax was calculated in the 1973 year; but that consequence flows from the appellant's failure to raise the relevant ground in its objection to the assessment to primary tax and its consequent inability to seek relief upon that ground by pursuing such an objection on appeal against that assessment (cf.
Cappid Pty. Ltd.
v.
F.C. of T.
70 ATC 4124
at p. 4126
per
Menzies
J.).
ATC 4227
The objection to the assessment to Div. 7 tax in the 1973 year should be allowed in part, and the appellant's taxable income for the purposes of calculating Div. 7 tax should be reduced by $47,915. The judgment of the Supreme Court should be varied accordingly with consequential orders as to costs here and in the Supreme Court. The judgments of the Supreme Court in respect of the status of the appellant should be affirmed and, subject to the variation mentioned, the appeals should be dismissed with costs.
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