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Case L59

Judges:
AM Donovan Ch
LC Voumard M
G Thompson M

Court:
No. 2 Board of Review

Judgment date: 9 November 1979.

A.M. Donovan (Chairman); L.C. Voumard and G. Thompson (Members): In March 1967 there were registered transfers of shares representing a little less than 60% of the issued and paid up capital of the taxpayer, which is a private company for the purposes of the Act. In periods subsequent to the change in shareholders, the Commissioner declined to allow to the taxpayer deductions in respect of losses which had been incurred prior thereto. He also refused a deduction in respect of debts which had arisen before the change and which were written off as bad in the later period. Objections were lodged against the rejection of these claims, and upon their disallowance requests were made for the matters to be referred to the Board.

2. The assessments, the subject of the objections, are those in respect of the years ended 30 June 1967 to 30 June 1973, both inclusive, with the exception of the year

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ended 30 June 1969, in which the taxpayer traded at a loss. The legislation governing the allowability of the deductions claimed underwent some change during the years in question, and the first task is to identify the provisions operative at the relevant times.

3. Before the Board the matter was argued on the basis of principle, and in consequence there was no specific evidence of the amount of the losses in the earlier years or the periods to which they related. Nevertheless, it appears that the losses amounted to $21,515 and that they arose not earlier than seven years prior to the years in which the taxpayer sought to deduct them. To this extent, therefore, the requirements of sec. 80(2) have been met. There is no dispute concerning the allowability of the 1969 loss which the Commissioner took into account in determining the taxable income of the 1970 year. But the contention for the taxpayer is that part of the $21,515 should have been allowed in that year and the 1969 loss should not have been deducted until the 1973 year, for throughout the period the Act provided for losses to be taken into account in the order in which they were incurred. If this were done, the losses of the years prior to the change in shareholding would finally be absorbed in the year of income ended 30 June 1972, so that the deductibility of those losses in their entirety is governed by the law as it stood immediately prior to the amendments effected by Act No. 51 of 1973.

4. The bad debts were written off during the year ended 30 June 1973, and claimed as deductions in that year. The amendments effected by Act No. 51 of 1973 therefore apply. They inserted not only sec. 63A and 63B which have direct reference to the allowance of deductions for bad debts, but also amended sec. 80B which, subject to some modification, bears on the first of these provisions.

5. The taxpayer was incorporated in 1961 with a nominal capital of £5,000 divided into 5,000 shares of £1 each, all being of the same class. At all material times 2,935 shares were issued, 600 being held by Mr. L and a similar number by his wife. The balance, being 1,735, was held by Mr. L's children, a friend and an accountant. The taxpayer encountered financial difficulties, and a meeting of its creditors was called for 12 February 1964, for the purpose of considering a statement of its affairs and a proposal for winding it up. It appears to have been said at this meeting that the taxpayer's losses for taxation purposes had some value, and instead of its being put into liquidation a decision was taken to appoint Mr. A, an accountant, as official manager. In a circular letter to creditors dated 19 August 1964, he advised that the finalisation of the taxpayer's affairs would take some considerable time and that for ``a sale of the company for its losses'' to be effected it would be desirable for him to be in a position to execute all necessary documents. He accordingly suggested that the creditors appoint him trustee to collect and distribute to them moneys received from the payment of debts due to the taxpayer, from the sale of its stock and from the ``sale of the company''. As a step towards these ends, creditors were invited to assign to him their claims against the taxpayer. It is common ground that Mr. A was appointed trustee for the creditors, presumably in accordance with the terms of his circular letter.

6. Negotiations which resulted in the share transfers referred to were conducted on one side by Mr. W who, at all times, appears to have acted only on behalf of H Pty. Ltd. or of interests associated with that company. At the relevant time he was a member of a firm conducting an accountancy practice, but he also was the secretary of H Pty. Ltd. having been appointed about 1965. It so happened that H Pty. Ltd. was the largest of the taxpayer's creditors, and Mr. W told the Board that at an accountants' convention he had had a discussion with Mr. A ``to the extent that we wanted to know what was happening about the affairs of (the taxpayer)'' and that nothing came of the discussion at that time. He then went on to speak of a further discussion on 1 March 1967, which resulted from an approach by Mr. A. Mr. W said that he wrote on the day following this discussion confirming the arrangements which had then been made. It is unnecessary to refer in detail to them. Suffice it to say that the letter confirmed an offer that H Pty. Ltd. ``purchase by way of assignment'' all the debts owing by the taxpayer company, the consideration being 12½ cents for each dollar of loss allowed by the Commissioner as a deduction to the taxpayer. The offer was subject to

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conditions, the most important of which was couched in the following terms: ``Shareholders of (the taxpayer) (excluding Mr. and Mrs. (L) who hold between them 1200 shares) will transfer to (H Pty. Ltd.) their total shareholding. The consideration will be one cent per shareholders (sic)''.

7. Mr. W said that he forwarded a draft of minutes of a directors' meeting to be held, and there was then produced in evidence a copy of minutes of a directors' meeting of the taxpayer expressed to have been held on 3 April 1967, and signed by the witness on 4 April 1967, as a true record of the meeting's proceedings. The meeting ``proposed'' the registration of transfers by existing shareholders of 1,735 shares to H Pty. Ltd., appointed three additional directors, being persons associated with H Pty. Ltd., and appointed Mr. W as secretary and alternate director for Mr. L who until that time had been the sole director of the taxpayer. It was also resolved that the secretary lodge the appropriate notices of these changes with the Registrar of Companies. The notices so given bore the date 28 April 1967.

8. It was not until September 1967 that Mr. A assigned to H Pty. Ltd. the claims of the creditors against the taxpayer, such claims having earlier been assigned by the creditors to him. The consideration was somewhat different from what had been agreed upon by Messrs. W and A earlier, but the difference is immaterial for the present. It can be added that the funds which thus came to Mr. A's hands were distributed amongst the creditors of the taxpayer.

9. This account of events is in part incomplete and in part inaccurate, for in cross-examination it was elicited that Mr. W had failed to refer to an earlier discussion between himself and Mr. A which had taken place on 27 January 1966, which was followed by a letter of 2 February in which he advised that it could be an advantage both to the taxpayer's creditors and H Pty. Ltd. if the creditors' claims were assigned on the basis of accumulated tax losses. He sent another letter on 1 March 1966, which put forward a number of proposals for consideration, including a suggestion that H Pty. Ltd. purchase all the shares of the taxpayer for £1. This letter also referred to compliance with what is popularly referred to as the ``continuing business'' requirement of the Act in relation to the deductibility of losses of prior years, and expressed the view that ``obviously this can only be done by a company which can re-establish the same trade previously conducted by (the taxpayer)''. Mr. A replied stating that except in a minor matter the proposals were satisfactory. Early in May, however, Mr. W wrote that H Pty. Ltd. was unlikely to be in a position to use tax losses within the next year or so and made further reference to compliance with the continuing business requirement. The letter concluded by advising that H Pty. Ltd. did not wish to take the matter any further.

10. In so far as Mr. W's evidence tended to show that the meeting of directors referred to was held on 3 April 1967, it was incorrect. The meeting was held on 1 March 1967. What happened on that day was that Mr. W and Mr. A had a discussion, in the course of which Mr. L arrived and the directors' meeting was held. There is no reason to think that the business of the meeting was not as recorded in the minutes. When that meeting was over, Mr. L. withdrew leaving Mr. W and Mr. A still in conference. The reason for postdating the minutes may perhaps be found in the fact that, as stated above, notification of the changes adopted by the meeting was not given to the Registrar of Companies until 28 April.

11. The foregoing aspects of Mr. W's evidence have been referred to, not because they bear directly on the issue, but because they show that in some respects his recollection was unreliable. Indeed, he seemed unable to recall events unless they had been recorded in a document of some kind. These comments are not intended to be critical of him. He was, after all, being asked to cast his memory back some 13 or more years, and the negotiations in question were possibly no more than an incident in the conduct of his firm's accountancy practice, lacking at the time any features to impress them particularly on his memory.

12. As the case developed, it became apparent that the circumstances under which Mr. and Mrs. L continued to hold their shares, representing 40.8% of the taxpayer's issued capital, were of significance. Nobody apart from Mr. W negotiated on behalf of H

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Pty. Ltd., and his dealings were substantially with Mr. A. He never saw Mrs. L, and he could remember only one meeting with Mr. L, and that was on the occasion of the directors' meeting which we have found took place on 1 March. Mr. W's evidence was that there was no agreement between him and Mr. A, or between him and Mr. L, that the later or his wife would be in any way restricted in dealing with their shares. He went on to speak of the only occasion on which he could remember being with Mr. L, and said ``I cannot recall and I am sure that it did not eventuate at that meeting any discussion with (Mr. L) about him retaining his 40%''. He said that Mr. A knew of the necessity for 40% of the issued shares to continue to be held by the same shareholders, and that he himself was well aware of the problems which would arise if there were any arrangement made with Mr. L concerning his or his wife's shareholding.

13. Mr. L was also called as a witness for the taxpayer, and in effect said that he acted for his wife and that he did not enter into any agreement or arrangement of any description which restricted his or her right to deal with their shares. In cross-examination, however, a somewhat different version of events emerged, and it is desirable that his evidence on these points be set out in some detail. He agreed that he contemplated dealing with the tax losses as an asset of the company, although he said that ``he was not terribly conversant with the tax losses aspect'' and ``always had a public accountant to look after that side of things''. He recalled that Mr. A had said ``... I would need to clearly know that I would not be able to sell the shares for some considerable time. I think he said 10 years or so...'' There later appears the following passage in the transcript of evidence:

``Q. And you appreciated that you were being co-operative in helping the (H Pty. Ltd.) group avail themselves of these tax losses? - A. No I would think that the fact that H Pty. Ltd. were the people negotiating was quite incidental. It could have been somebody else.

Q. But certainly vis-a-vis (H Pty. Ltd.) you were prepared to do anything you properly could do to assist them to get the benefit of the tax losses? - A. No. If there had been somebody else with a better offer...

Q. But there was not. With this particular offer you were prepared to do all that you could lawfully to assist them to get the benefit? - A. No, you cannot hang the name (H Pty. Ltd.) on. It could have been anybody as far as I was concerned.

Q. Including (H Pty. Ltd.)? - A. Yes fortunately.

Q. And indeed, your understanding was that in order to help them you would have to hold the shares for a long period, something like 10 years? - A. Yes, to have the arrangements through with anybody, yes. I had thought...

Q. That was the common understanding of all persons involved? - A. Yes, it was the best that I could possibly do.

Q. But you knew it and (Mr. A) knew it and (Mr. W) knew it, that you and your wife would have to hold those shares for something like 10 years? - A. Yes, they are the experts.

Q. And you agreed to do that? -

A. Yes.

Q. And you communicated that agreement to (Mr. A)? - A. Obviously, yes.

Q. And to (Mr. W)? - A. Yes, at this meeting.''

14. Mr. L appears to have entertained some expectation that the shares which he and his wife were retaining would ultimately become of some value to them, but the possibility that this expectation may have been realised seems to have first come to him during the hearing of the references. We are satisfied, however, that the necessity for holding the shares for a protracted period was not in his understanding connected with this expectation. Rather, it was regarded by him as a requirement to enable H Pty. Ltd. to get the benefit of the transaction into which it was entering through the taxpayer company's being eligible, because of the continued shareholding, to deduct losses it had incurred in earlier years.

15. Although Mr. L is an elderly gentleman whose memory of recent happenings proved defective, he impressed

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us as having an accurate recollection of events connected with the transfer of the shares to H Pty. Ltd. This may in part be attributable to the fact that the financial failure of the taxpayer while under his control, and the consequent loss to its creditors, amongst whom was his wife, were matters which caused him the utmost distress. To the extent that his evidence and that of Mr. W differ, we accept that of Mr. L. Accordingly, we find as a fact that he was told by Mr. A that he and his wife had to continue to hold their shares for a long period; that he well understood that this was necessary to ensure that the taxpayer company would be eligible to deduct its losses of earlier years, and so benefit H Pty. Ltd. which was becoming a shareholder of almost 60% of the taxpayer's issued capital. Furthermore, he consented to continue to hold the shares and communicated his willingness to do so to both Mr. W and Mr. A.

16. It is necessary now to consider how the provisions of the Act as then in force operate upon these facts. The effect of sec. 80A(1) is that the taxpayer has to satisfy the Board standing in the stead of the Commissioner that the shares of Mr. and Mrs. L, which unquestionably were beneficially owned by them when the losses were incurred, were also beneficially owned by them during the years of income in which the losses were claimed as deductions. In this regard the provisions of sec. 80B are material for they introduce artificial tests of beneficial ownership.

17. To avoid the necessity of quoting a large part of the provision, we note that subsec. (5) operates, inter alia, when the beneficial owner of shares has ``entered into a contract, agreement or arrangement'' (para. (b)) which relates to his right to sell or otherwise dispose of his beneficial interest in those shares (subpara. (ii)). If this be so, and if pursuant to para. (c) the purpose of the ``contract, agreement or arrangement'' be to enable the taxpayer to obtain a deduction under sec. 80 of the Act in respect of losses of previous years, then the shares may be treated as not being beneficially owned by that person.

18. The words ``contract, agreement or arrangement'' in this provision repeat a phrase that has for many years appeared in sec. 260 and a part of which more recently found a place in sec. 44(2D)(b). On more than one occasion the Courts have been required to consider the meaning of ``arrangement'' in the context of sec. 260, and it is inevitable that whenever the meaning of the word has subsequently fallen for consideration, regard has been said of it. It is not intended here to review the earlier authorities, and we content ourselves with referring to the unanimous decision of the Full Federal Court in
F.C. of T. v. Cooper Brookes (Wollongong) Pty. Ltd. 79 ATC 4398. The leading judgment was that of Fisher J., with whom his brethren agreed, and it contains the following passage (at pp. 4414-15):

``The essential nature of `an arrangement' was the subject of a discussion in the course of the joint judgment of Gibbs and Mason JJ. in the
)Lutovi case 78 ATC 4708) at p. 4712 delivered subsequent to argument in this matter with which judgment, as I have said, Murphy J. expressed his agreement. Their Honours when addressing their minds to the arrangement referred to in sec. 44(2D)(b) of the Act said:

  • `In the context of sec. 260 an arrangement is something less than a binding contract or agreement, something in the nature of an understanding which may not be enforceable at law (Newton v. F.C. of T. at p. 7). A similar view has been taken of an arrangement falling within sec. 80B(5) (see
    K. Porter & Co. Pty. Ltd. v. F.C. of T. 74 ATC 4093 at p. 4100; (1974) 1 N.S.W.L.R. 536, at pp. 542-544; 77 ATC 4472; (1978) 52 A.L.J.R. 41;
    F.C. of T. v. Students World (Aust.) Pty. Ltd. 78 ATC 4040; (1978) 52 A.L.J.R. 298). It is, however, necessary that an arrangement should be consensual, and that there should be some adoption of it. But in our view it is not essential that the parties are committed to it or are bound to support it. An arrangement may be informal as well as unenforceable and the parties may be free to withdraw from it or to act

    ATC 476

    inconsistently with it, notwithstanding their adoption of it.'

As to the term `arrangement' in sec. 80B(5)(b) both parties referred without dissent to the reasoning of Mahoney J. in K. Porter & Co. Pty. Ltd. v. F.C. of T. cited in the preceding quotation from the Lutovi case.''

19. We take the view therefore that ``arrangement'' for the purposes of sec. 80B(5) is to be understood in the sense explained in the passage from the Lutovi case above quoted and in the sense adopted by Mahoney J. in F.C. of T. v. K. Porter & Co. Pty. Ltd. 74 ATC 4093. When the word is so understood, the facts of these references as set out above show clearly that there was an arrangement within the meaning of sec. 80B(5). Mr. L's understanding that he and Mrs. L would continue to hold their shares for a protracted period, perhaps 10 years, must be taken to have been shared by Mr. W and Mr. A for they were so told by him. The belief of all three in this regard was not something formulated by the individuals in isolation, one from the others and without knowledge of the state of mind of the other two. There was on this topic a coming together of the minds of all three - a true consensus on the matter. No inference can be drawn other than that the belief of all three was adopted and indeed acted upon.

20. Since there was thus for the purposes of para. (b)(ii) of sec. 80B(5) an arrangement that affected the right of Mr. and Mrs. L to dispose of their shares, pursuant to that section the Commissioner (and upon a reference, the Board) ``may'' treat those shares as not having been beneficially owned by them during the relevant years of income. The word ``may'' in a statute frequently gives rise to a problem whether it is to be understood as being merely permissive or as being mandatory. It is not intended to consider that question here, but to proceed on the basis that it is to be understood in the first mentioned sense. Nevertheless, the scheme of the Act is to deny a deduction in respect of losses of previous years in certain circumstances, and if any of the situations referred to in sec. 80B(5) is found to exist we take the view that the legislation should operate to deny a deduction, unless there are countervailing circumstances. There is nothing in the facts which we have set out, or for that matter in any of the evidence put before the Board, that would amount to a countervailing circumstance. Accordingly, the Board should and does conclude that the shares held by Mr. and Mrs. L were not beneficially owned by them for the purposes of sec. 80B(5) of the Act. The consequence is therefore that, by reason of sec. 80A, the losses of earlier years are not to be taken into account.

21. The case put by counsel for the taxpayer was that there was no arrangement at all of the type of which sec. 80B(5) speaks. No alternative argument was advanced that if such an arrangement existed the purpose to which para. (c) refers was absent, nor was it submitted that the arrangement did not continue into the relevant years of income. It is not proposed to deal with these matters here beyond saying that these aspects have been considered and we are satisfied that the relevant purpose did exist. If it is a necessary element for the operation of the provision that the arrangement did continue throughout the years of income in which deduction of the losses was sought, we are also satisfied that it did so continue.

22. In connection with the claim to deduct bad debts written off during the year ended 30 June 1973, some further facts need to be stated. At about the time it acquired its shares in the taxpayer company, H Pty. Ltd. intended to commence a new branch of its existing business in premises acquired by another company in the group. It was in fact the taxpayer which commenced this contemplated activity and which continued to carry it on with some modification until at latest the end of June 1972. The business then ``reverted back to'' H Pty. Ltd. At the time the taxpayer ceased to operate the business all but $767 of the losses incurred in previous years were thought to have been absorbed for taxation purposes.

23. During the year ended 30 June 1973, the taxpayer acted only as a service company in relation to the business it had formerly conducted, by leasing a small amount of equipment and by providing the staff engaged in the business. For so doing it derived hiring charges and fees of almost $33,000, which exceeded the expenses it actually incurred in so doing. Its net income

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for that year was $6,503 which, in the taxpayer's view, was reduced to a taxable income of $686 when the balance of earlier year losses of $767 and bad debts of $5,050 were taken into account.

24. The taxpayer continued to provide services for only one more year, but for so doing derived merely sufficient by way of income to cover the expenses it incurred. It was towards the end of this year of income, i.e. 1974, that an intention was formed to put the company into liquidation. The receipt of the assessments now under challenge has, however, caused any action in this regard to be deferred, and during the 1975 and subsequent financial years the company has lain dormant.

25. During the 1974 year of income the taxpayer lent virtually its entire funds of some $22,000 to H Pty. Ltd. and another company in the group free of interest, and this situation remained unchanged up to the time of the hearing of the references. The taxpayer has not paid the tax notified in the assessments to which it has objected, but H Pty. Ltd. has arranged for bank guarantees to cover the amount, if any, ultimately found to be due.

26. We have already mentioned that the claim to deduct the bad debts written off has to be determined by reference to the very extensive amendments to the Act effected by Act No. 51 of 1973, which amongst other changes introduced sec. 63A and sec. 63B. The case was argued on these two provisions, for if it was not formally it was at least tacitly conceded that the requirements of sec. 63 were satisfied in that the debts were written off during the year and that they had previously been brought to account as assessable income.

27. For the 1973 year of income only the words ``more than one-half'' in sec. 63A(2) have to be read as ``not less than two-fifths'' (sec. 24(1), Act No. 51 of 1973). The minimum requirements relating to the extent of the shareholding which has to continue unchanged have therefore been met by the taxpayer. Counsel for the Commissioner argued that, though this be so, the shares of Mr. and Mrs. L were not ``beneficially owned'' by them as required. This followed, it was said, because, by sec. 63A(10), sec. 80B (subject to the substitution of certain references) is made to apply to sec. 63A in like manner as it applies to sec. 80A. Put shortly, counsel submitted that if pursuant to sec. 80B the taxpayer's claim to deduct previous years' losses failed, so too did the claim to deduct bad debts.

28. In their application to the year of income ended 30 June 1973, the provisions of sec. 80B were in some respects different from those we have referred to in relation to the years we have already considered. It would unnecessarily extend these reasons to refer to the amendments in detail. Little more needs to be said than that in its amended form sec. 80B(5) refers only to ``agreement'' and not as formerly to ``contract, agreement or arrangement''. However, the new subsec. (11) makes it clear that an ``arrangement'' is comprehended by the section in its amended form. Since this is so, and since sec. 80B(5)(b)(ii) remained unaltered, the considerations that led us to conclude that there was an arrangement for the purpose of that particular provision as it earlier stood led us to find that there was an ``agreement'' of the type of which the provision speaks in relation to the year ended 30 June 1973.

29. That finding, however, does not conclude the matter for para. (c) is cumulative to the preceding paragraphs and has also to be considered. The substitution of the references which sec. 63A(10) makes, means that the purpose to which sec. 80B(5)(c) refers, when considered in the context of sec. 63A, is a ``purpose of securing that a deduction would be allowable in respect of a debt that the company has written off or might write off as a bad debt''. This is an entirely different purpose from that mentioned when the section refers to sec. 80A. When it does so, the purpose relates to the obtaining of a deduction for losses of previous years. We have already said that in our view this last mentioned purpose existed. This was so because in virtually the whole of the negotiations about which the Board was told, it was the previous years' losses that were of concern.

30. In the discussions between the parties, the matter of bad debts seems to have arisen only incidentally. There is nothing in Mr. L's evidence to indicate that he ever turned his mind to the subject. Mr. W's evidence about it was meagre. It is true

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that he knew at the time of the transfer of the shares that debts were owing to the taxpayer which could not be collected. The total amount owing was established with precision, and details of the individual debts constituting the total were provided to him by Mr. A, but at the time this may have been merely a step towards bringing up to date the taxpayer's books of account. There was no reference to bad debts in Mr. W's letter of 2 March 1967, which ``confirmed'' the offer by H Pty. Ltd. to acquire the shares. Later, in September 1967, when Mr. A assigned the debts owing by the taxpayer, the consideration for the transfer was based not only on the quantum of previous years' losses, but also on the amount of the bad debts, and Mr. W did say ``the debts situation was not treated in isolation as regards the total operation of the company''. However, in the absence of direct evidence, we take the view that there is nothing in these objective facts to provide a satisfactory basis for an inference that the purpose of the arrangement under which Mr. and Mrs. L continued to own their shares was for the taxpayer to obtain a deduction in respect of bad debts. The necessary purpose cannot therefore be taken to exist, and counsel's submission that the requirements of sec. 63A had not been satisfied has to be rejected.

31. There were alternative submissions that, even if the taxpayer satisfied sec. 63A, it failed to meet the additional requirements set out in sec. 63B. As we understood the submission in this regard it was that none of the alternative tests imposed by para. (a), (b) and (c) of sec. 63B(1) was met. Section 63B(1)(a), as far as it is material, provides:

``... a debt that is written off as a bad debt during the year of income, is not an allowable deduction if -

  • (a) during the year of income the company derived income that the company would not have derived if the debt had not been incurred and written off, or capable of being written off, as a bad debt.''

32. The source of the taxpayer's income during the year ended 30 June 1973, has been explained. It is to be noted that while it was believed that losses of previous years were available as deductions the taxpayer conducted a business. When those losses were on the point of being fully absorbed, the business passed to H Pty. Ltd. and the taxpayer then derived income by way of service fees from that company. Later when, on the taxpayer's calculations, neither previous years' losses nor bad debts were any longer available, the taxpayer derived no further income, or in any event no income in excess of its outgoings. It did not even get interest on the money which it had lent. In these circumstances, it has to be inferred that the taxpayer would not have derived service fees during the year ended 30 June 1973 had the bad debts not been capable of being written off. The circumstances mentioned in para. (a) existing, the deduction in respect of bad debts which the taxpayer sought is prohibited by sec. 63B(1).

33. It was submitted, however, that the situation was saved for it by subsec. (2), which enacts that subsec. (1) does not apply ``where the continuing shareholders will benefit from the derivation of the income to an extent that the Commissioner considers would be fair and reasonable having regard to their rights and interests in the company''. In brief, what was argued was that the funds injected into the taxpayer by H Pty. Ltd. (if we may so express what was done) inured for the benefit of all the shareholders, including Mr. and Mrs. L, and where there had earlier been a capital deficiency there were by 30 June 1973 shareholders' funds slightly in excess of the amount of paid up capital. Attractive as this argument is, it appears to us to obscure the essence of the matter. A substantial part of the injected funds could be withdrawn by H Pty. Ltd. in payment of the debts that had been assigned to it. To that extent the continuing shareholders would not benefit from the derivation by the taxpayer of the income. Certainly Mr. and Mrs. L would not benefit in proportion to their shareholding, so that in our view it cannot be said that they would benefit to an extent which could be considered fair and reasonable having regard to their rights and interests in the company. In our view, therefore, sec. 63B(2) does not operate to assist the taxpayer.

34. We turn next to para. (b) of sec. 63B(1). The words ``transaction, course of conduct or course of business'' appearing therein comprehend the provision by the taxpayer of services to H Pty. Ltd. for

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reward. For reasons similar to those mentioned above, we conclude that the arrangement whereby the taxpayer provided services for reward would not have been entered into had the bad debts not been capable of being written off. Since H Pty. Ltd. paid more for the services than those services cost, it has to be concluded that pro tanto its own taxable income, and in consequence its tax liability were reduced. It follows therefore that for the purposes of para. (b) it received a benefit or obtained an advantage in relation to the application of the Act. It further follows that the bad debts are not deductible.

35. There is in subsec. (4) what might be supposed to be a saving provision, although its operation is obscure in the extreme. It excludes from the disqualification resulting from the situation referred to in sec. 63B(1)(b) a benefit or advantage obtained ``by a person who had a shareholding interest in the company in the year of income, being a benefit or advantage that the Commissioner considers to be fair and reasonable having regard to that shareholding interest''. The enquiry which this provision requires in the particular circumstances of this case is whether the benefit of reduced taxes obtained by H Pty. Ltd. is reasonable in the light of its shareholding in the taxpayer. There is no direct link between the benefit and the shareholding, so that the evaluation of fairness and reasonableness of the former with regard to the latter just cannot be made. That may be the position in most if not all cases, so that at best the provision may have only very limited application, if any at all. However, it seems possible to give some operation to it if regard is paid to the amount which gave rise to the benefit of reduced taxes (i.e. the excess of the payments made by H Pty. Ltd. for the services over the cost of providing them). That amount came into the taxpayer's hands, and if there were nothing more it could be regarded as giving rise to a fund in which all the members had an interest in proportion to their shareholdings. Some part of it might come back to H Pty. Ltd. but only in its capacity as shareholder. In the postulated circumstances, there is in a sense a similarity to an arms-length transaction, and it might be able to be said that the benefit obtained is reasonable having regard to the shareholding interest. The actual position is, however, otherwise. The payment for services in excess of their cost is capable of being applied by the taxpayer towards the satisfaction of H Pty. Ltd.'s assigned debts, so that the whole or part of the receipt is not available at all to the shareholders as such. There exists, therefore, the possibility that in whole or in part the payment that reduces H Pty. Ltd.'s tax will find its way back to H Pty. Ltd. other than by way of shareholder benefit. We do not consider, in the light of this possibility, that it can be said that H Pty. Ltd.'s benefit is reasonable, having regard to its shareholding interest in the taxpayer. We are unable to see any other possible operation of subsec. (4) which could assist the taxpayer and are forced to conclude that sec. 63B(1)(b), as well as sec. 63B(1)(a), denies the deductions sought in respect of bad debts.

36. It was also pressed upon us that the claim failed pursuant to sec. 63B(1)(c). If we may say so, the ambit of this para. (c) is even more uncertain than that of the provisions we have just discussed. Since in the circumstances it is not necessary to consider the meaning of the paragraph for the purposes of our decision, we refrain from doing so.

37. For the reasons set out, we are of the opinion that there is no entitlement in the taxpayer to deductions in the year ended 30 June 1967 and subsequent years in respect of losses referable to periods prior to H Pty. Ltd. becoming a shareholder of the taxpayer, and there is no entitlement to a deduction in respect of bad debts written off during the year ended 30 June 1973. The Commissioner's decisions on the objections should be upheld and the assessments before the Board confirmed.

Claims disallowed


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