E.A. Greenwood (N.S.W.) Pty. Limited v. Federal Commissioner of Taxation.
Members:Lee J
Tribunal:
Supreme Court of New South Wales
Lee J.
The plaintiff, E.A. Greenwood (N.S.W.) Pty. Limited, which was incorporated in 1958 under the name of K. Manning Pty. Limited, accumulated losses totalling $75,528 during the years 1961, 1962 and 1963. In the year ending 30 June 1968, it made a substantial profit and in its return of income for that year claimed to deduct these losses as allowable deductions pursuant to sec. 80 of the Income Tax Assessment Act 1936-66. The Commissioner rejected the claim and assessed the company's income without regard to the losses. It will be convenient to refer to the plaintiff hereafter as the taxpayer.
The taxpayer appealed against the assessment to the Taxation Board of Review No. 1 which upheld (by majority) the Commissioner's contentions. The taxpayer now appeals to this Court.
The matter in question in this appeal arises under sec. 80A and 80B of the Act (the sections were amended substantially by Act No. 51 of 1973).
The sections at the relevant time read as follows:
``80A(1) Notwithstanding sections eighty and eighty AA of this Act, but subject to the next succeeding sub-section and the next four succeeding sections, 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 section eighty or section eighty AA of this Act 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;
- (d) the right to receive not less than two-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.
80A(2) Subject to the next four succeeding sections, where a loss incurred by a taxpayer, being a company, in a year before the year of income is not, by virtue of the last preceding sub-section, to be taken into account but the company satisfies the Commissioner that, at all times during the year of income, shares in the company carrying the rights referred to in that sub-section were beneficially owned by persons who, at all times during a part of the year in which the loss was incurred, beneficially owned shares in the company carrying rights of those kinds, the Commissioner may take into account for the purposes of section eighty or eighty AA of this Act such part of the loss as he considers to be the amount of the loss that was incurred during that part of that year.
80B(1) For the purposes of the application of the last preceding section in determining whether a loss incurred by a company in a year before the year of income is to be taken into account, the succeeding provisions of this section have effect.''
80B(2) Not set out.
80B(3) Not set out.
80B(4) Not set out.
``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
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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
- (c) the contract, agreement or arrangement was entered into, or the right, power or option was granted, for the purpose, or for purposes that included the purpose, of enabling the company to take into account for the purposes of section eighty or section eighty AA 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 last-mentioned 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.''
80B(6) Not set out.
80B(7) Not set out.
80B(8) Not set out.
The facts show quite plainly that Mr. K.M. Manning was, during the years of the loss and the year of income, the legal owner of shares in the taxpayer which gave him the rights referred to in para. (c), (d) and (e) of sec. 80A(1) and the question is whether, on the facts, sec. 80B(5) applies so as to deprive the taxpayer of the benefit of deduction which would otherwise flow under sec. 80. The Commissioner, in the amended assessment of 13 April 1972, which gave rise to these proceedings, exercised his power under sec. 80B(5) and treated the shares held by Mr. Manning as not having been beneficially owned by Mr. Manning during the year of income.
The substantial question which arises in this appeal is whether within sec. 80B(5)(b) it has been proved that Mr. Manning entered into an ``arrangement'' and if so whether that arrangement was for a ``purpose'' as expressed in para. (c) of that subsection.
The matter is essentially a question of fact and it is unnecessary to refer other than briefly to authority. The interpretation to be placed upon the section in so far as it deals with an ``arrangement'' was considered by the High Court in
F.C. of T. v. Students World (Australia) Pty. Ltd. 78 ATC 4040; (1978) 52 A.L.J.R. 298; (1978) 78 A.L.R. 599 and
K. Porter & Co. Pty. Ltd. v. F.C. of T. 77 ATC 4472 and by the Federal Court of Australia in
F.C. of T. v. Cooper Brookes (Wollongong) Pty. Ltd. (79 ATC 4398). For the purposes of the present case it is only necessary to say that those cases make plain that the word ``arrangement'' in the section is ``sufficiently comprehensive to catch within its sweep a plan or understanding which is not enforceable at law. It may also include acts or transactions undertaken in execution of the plan or understanding''. F.C. of T. v. Students World (Australia) Pty. Ltd., 78 ATC 4040; (1978) 52 A.L.J.R. 298 per Mason J. at pp. 4044-4046; 300-301. The same meaning was given to the same word in sec. 260 of the Act in
Newton & Ors. v. F.C. of T. (1958) 2 All E.R. 759.
So far as the word ``purpose'' in sec. 80B(5)(c) is concerned, Mason J. at pp. 4048-4049; 303 and Aickin J. at p. 4053; 306 in F.C. of T. v. Students World (Australia) Pty. Ltd. (supra) both assert that the word refers to the purpose of the shareholder's interest in entering into the arrangement.
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Whether an ``arrangement'' is or is not established will, if there is no evidence of an express arrangement (e.g. by document or admission), depend upon whether an inference as to an arrangement can be drawn from all the facts proved (F.C. of T. v. Cooper Brookes (Wollongong) Pty. Ltd. (supra)). The present case is one in which, if an arrangement within the section is to be regarded as established, this will be so because that is the inference to be drawn from all the evidence put forward. Mr. Manning, whose shareholding during the year of income is the vital shareholding to which any arrangement under sec. 80B must be referable, suffered an illness in 1972 which severely affected his memory for events before that date, and none of the other witnesses called gave evidence of any express arrangement between Mr. Manning and anyone else in regard to his shareholding.
I should perhaps point out that, before me, the matter was treated as a hearing de novo and I had the benefit of hearing the oral evidence of the witnesses. Of course evidentiary material which was used before the Board was also before me.
The evidence before me established the following:
On 3 February 1958, the taxpayer was incorporated, under the Companies Act 1936, under the name ``K. Manning Pty. Limited''. The capital of the company was $10,500 divided into 2,500 ``A'' class shares of $2 each and 2,500 ``B'' class shares of $2 each; only the ``B'' class shares carried voting rights (Art. 2a). The Memorandum shows that Mr. Kenneth Michael Manning subscribed for five ``B'' class shares and Mrs. Manning for one, and the share register discloses that no other shares were ever issued. The first directors were Mr. Manning and his wife and Art. 64a provided that they should be entitled to remain as directors so long as they each held at least one share. The taxpayer traded as a building company and in 1961 went into voluntary liquidation. Mr. Geary was appointed liquidator on 6 March 1961. During the years 1961, 1962 and 1963 the taxpayer incurred losses of $75,528. It then did not trade again till during the year ended 30 June 1968.
On 24 November 1966, a meeting of the creditors of the taxpayer approved a resolution for a scheme of arrangement between the creditors and the taxpayer under the Companies Act 1961 (as amended), sec. 181. The trustee for the scheme was Mr. J.E. Walker and the notice of the meeting given to the creditors pursuant to sec. 182 contained the following (inter alia):
``Limitation on Scheme
Mr. Walker is negotiating with relation to past trading losses of the company and if this negotiation is unsuccessful and if he does not receive at least $7,000 the scheme will be of no effect such that right of unsecured creditors will not be in any way affected.
General
Should the scheme be approved an order staying the winding up will be set through the Court and creditors can expect payment in proportion to the amounts owing to them within two months of approval of the scheme.''
The losses incurred by the taxpayer had thus obviously attracted the attention of someone desirous of turning them to advantage.
By the end of 1966 the negotiations, referred to in the notice under sec. 182 had apparently been successfully concluded for one finds that Mr. E.J. Kirby, solicitor for the taxpayer and also for the proposed purchaser of the ``tax losses'' E.A. Greenwood Limited, acknowledged at that time that he held the sum of $7,000 - being the price to be paid to the trustee for the scheme on the sale of the taxpayer as a tax loss company - and a deed poll was executed by E.A. Greenwood Limited and consented to by the trustee in the following terms:
``To all to whom these presents come E.A. Greenwood Limited sends greetings: -
1. WHEREAS K. Manning Pty. Limited (in voluntary liquidation) (hereinafter called `the Company') is a company duly incorporated under the Companies Act 1936 and
2. WHEREAS the Company has since or about the 6th March 1961 been in voluntary liquidation and
3. WHEREAS a Scheme of Arrangement between the Company and its Creditors has been propounded which said Scheme
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was duly approved by the said Creditors on the 24th November, 1966 and with respect to which said Scheme approval of the Supreme Court of New South Wales in Equity is being sought in Petition No..... of 1966 and4. WHEREAS it is proposed that an order be sought staying the winding up of the Company and
5. WHEREAS it is proposed that persons to be nominated by E.A. Greenwood Limited be appointed Directors of the Company and
6. WHEREAS it is proposed that the Company grant to E.A. Greenwood Limited an option to take up shares in the capital of the Company at par to an extent of not less than Seven thousand five hundred dollars ($7,500.00) and
7. WHEREAS it is proposed that E.A. Greenwood Limited should lend to the Company such moneys as are reasonably necessary to reinstate and re-establish the business and financial stability of the Company and
8. WHEREAS Messrs. E.J. Kirby & Company, solicitors of 247 George Street, Sydney are solicitors of the Company and of E.A. Greenwood Limited and
9. WHEREAS E.A. Greenwood Limited has paid to (solicitors) the sum of Seven thousand dollars ($7,000.00).
NOW THESE PRESENTS WITNESS:
(a) E.A. Greenwood Limited hereby convenants not to deal with the said sum of $7,000 save and except in accordance herewith.
(b) PROVIDED that the Scheme of Arrangement referred to in Recital 3 hereof is approved by the said Honourable Court and provided that the matters proposed in Recital 4, 6 and 7 and each of them are duly effected the said (solicitors) are hereby authorised and instructed to pay to John Edward Walker as Trustee for the said Scheme of Arrangement the said sum of $7,000 referred to in Recital 9 hereof.
(c) All documents which may be necessary for the purpose of effectuating all or any of the Recitals referred to in Clause (b) hereof shall be such documents as in the opinion of (solicitors) are those documents reasonably necessary therefor.
(d) John Edward Walker upon the signing of a consent hereto shall for all purposes of enforcement hereof be deemed to be a party hereto.''
It will be observed that under cl. 6 of the deed poll E.A. Greenwood Limited was to be given an option in respect of seventy-five per cent of the capital of the company and, of course, this would effectively limit further acquisition of shares in the company by Mr. and Mrs. Manning.
The Supreme Court in Equity approved of the scheme on 12 January 1967, and the order staying the winding up was made on 13 March 1967.
The Scheme of Arrangement cl. 4 provided as follows:
``The Trustee and the Directors of the Company (i.e. the taxpayer) and each of them prior to the commencement of this Scheme acknowledge that they and each of them warrant and covenant to comply with the provisions of this Scheme and to pass such resolutions as may be necessary to give full force and effect to the provisions thereof.
...
Clause 17. The management of the Company shall be vested in the Trustee who shall be entitled to receive reasonable remuneration therefor.
Clause 18. During the continuance of this Scheme the Trustee in addition to the powers vested in him by this Scheme and by any statute or rule of equity shall (until he shall otherwise notify the Company in writing) have all the powers of the directors of the company whether in pursuance of the Articles of Association, the Companies Act 1961 (as amended) or howsoever arising.''
Clause 19 provided that the provisions of the Scheme prevailed over the provisions of the Articles.
The Schedule to the Scheme showed Mr. Manning as a creditor and he would, as such, have received all notices and documents in respect of this Scheme, even if they did not otherwise come to his notice, but of course
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the whole scheme, involving as it did the handing over of the management of the company, required the consent and co-operation of Mr. and Mrs. Manning.It is thus plain at this point that arrangements between the trustee, the liquidator and the directors, Mr. and Mrs. Manning, have clearly been set in train, designed to give E.A. Greenwood Limited the benefit of the losses accumulated by the taxpayer.
Let me then go to the next events which indicated how that arrangement was put into effect. The minute book shows that on 4 July 1967, the annual meeting of the taxpayer was held and a resolution was passed that the retiring directors be reappointed for the ensuing year. Mr. and Mrs. Manning were present at this meeting, as was Mr. Walker, who signed the minutes as Chairman. Mr. and Mrs. Manning also signed the minutes. It is only a small point but this resolution was unnecessary - Mr. and Mrs. Manning would by virtue of their shareholdings at that time have continued on as directors without the necessity for any resolution. Article 64a. The substantial contention of the Commissioner in this case is that the facts lead to the inference that from the time the negotiations with E.A. Greenwood Limited in regard to the sale of the ``tax losses'' began, Mr. and Mrs. Manning thereafter did everything that was required of them by Mr. Walker, or the liquidator, in regard to bringing those negotiations to a satisfactory conclusion from the point of the taxpayer, and that they also co-operated in every way in ensuring that E.A. Greenwood Limited would get the full benefit of the bargain it had made with the taxpayer. The Commissioner makes the point that Mr. Manning was prepared to sign whatever was put in front of him by Mr. Walker.
On the same day an extraordinary general meeting was held at which the same persons were present and a resolution was passed as a special resolution, subdividing the 2,500 ``B'' class $2 shares both issued and unissued into 50,000 ``B'' class 10c shares. The minutes record, ``All shareholders present waived notice for the extraordinary general meeting''. The minutes bore the signatures of Mr. Walker and the Mannings. The register of members shows under date 4 July 1967, that Mr. Manning became the holder of 100 ``B'' class shares and his wife the holder of twenty such shares.
On 6 July a meeting of the taxpayer was held at which the Mannings were not present and the following events took place. The resignation of Mr. and Mrs. Manning as directors and the resignation of Mrs. Manning as secretary was tabled and Mr. Walker appointed three new directors, Mr. Lunzer, Mr. Kirby and Mr. Greenwood.
On 6 July 1967, Mr. Manning executed a transfer of fifty-two ``B'' class shares to E.A. Greenwood Limited and Mrs. Manning executed a transfer of her total holding namely twenty. The result was that Mr. Manning was left with forty-eight shares and E.A. Greenwood then held seventy-two. These transfers are duly recorded in the register of members but there is no evidence that any share certificate was ever issued to Mr. Manning.
Mr. Manning thus retained a beneficial interest in two-fifths of the shares in the taxpayer carrying voting rights and the rights to dividend and capital as referred to in para. (d) and (e) of sec. 80A(1). The reason for the subdivision of the shares is readily understandable. While Mr. Manning held five shares and Mrs. Manning held one it would not be possible to arrange a transfer which would leave Mr. Manning with a beneficial interest in two-fifths - one could either have a fifty-fifty division or a division leaving two-thirds to E.A. Greenwood Limited and one-third to Mr. Manning. The subdivision of the shares enabled the necessary two-fifths proportion to be achieved.
At the meeting of 6 July 1967, the trustee, Mr. Walker, tabled an option, executed by him, giving E.A. Greenwood Limited the option to take up unissued shares in the company at par on allotment at any time within ten years. At the same meeting Mr. Walker gave notice, under cl. 18 of the Scheme, that he ceased as from that date to exercise the powers of the Board. The practical situation thus arrived at, was that directors nominated by E.A. Greenwood Limited became directors of the taxpayer (in accordance with cl. 5 of the deed poll of 22 August 1966), Mr. and Mrs. Manning ceased to be directors, and E.A. Greenwood
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Limited had both the majority shareholding and the exclusive right of acquisition of the unissued shares in the taxpayer. It was thus in a position, through its subsidiary, the taxpayer, to reap the benefits of any profits which might be made by the latter, and it in fact did this. I shall refer shortly to evidence as to how the profit made by E.A. Greenwood (N.S.W.) Pty. Limited in the year of income, 1963, was in fact dealt with. But the substantial significance of the events I have set out was that the taxpayer, if it made a profit, could, under sec. 80A, claim to deduct the losses, made in the earlier years, from its income whilstever Mr. Manning held the beneficial interest in two-fifths of the shares.On 23 August 1967, the taxpayer changed its name to E.A. Greenwood (N.S.W.) Pty. Limited.
It can be seen thus far that the conclusion to which I earlier referred as being open at the time of the execution of the deed poll on 22 December 1966 - namely that there was an arrangement between the directors and the trustee of the Scheme, either directly or through the liquidator Mr. Geary in regard to the sale of the tax losses - has by the subsequent events been fully confirmed, and the precise nature of the arrangement can be seen, at least so far as the detail involved in its implementation is concerned.
It is appropriate now to consider what happened after Mr. Manning had, on 6 July 1967, transferred shares so as to leave his own holding at two-fifths of the total shareholding.
The evidence shows that in the years 1968, 1969, 1970 and 1971, he received through the post proxies in respect of each annual meeting of the taxpayer. The secretary of the company during those years, Mr. Whipp - he was appointed on 6 July 1967, by resolution of the directors, Mr. Lunzer, Mr. Kirby and Mr. Greenwood - gave evidence that he prepared the proxies, posted them, received them on return and tabled them at the annual general meeting. The evidence also shows that during the years 1972, 1973, 1974 and 1975 the same procedure was followed, this time under the guidance of Mr. Brittain, who was the secretary of the company during those years and also a director. Each of the proxy forms when sent off to Mr. Manning by Mr. Whipp or Mr. Brittain respectively were complete in so far as it specified the person to be appointed proxy. It only required Mr. Manning's signature and its return to make it a valid appointment so far as form was concerned. Those proxy forms sent by Mr. Whipp specified Mr. Lunzer or failing him Mr. Whipp as proxies, whilst those sent by Mr. Brittain specified Mr.Lunzer or failing him Mr. Brittain. In two cases Mr. Manning's signature was witnessed. In the case of an extraordinary meeting held on 20 July 1967, at which the resolution changing the name of the taxpayer from K. Manning Pty. Limited to E.A. Greenwood (N.S.W.) Pty. Limited, it appears that the proxy signed by Mr. Manning could have had the date of the meeting inserted into it after the signing.
In considering whether there was within sec. 80B(5)(b) and (c) any arrangement entered into by Mr. Manning for the purpose of enabling the taxpayer to have the benefit of the losses, it is, of course, a matter of great significance as to whether the continued holding of the shares by Mr. Manning was as a bona fide shareholder in the company or a pseudo shareholder, a shareholder in name only, and, of course, the conduct of the shareholder in regard to the attendance at meetings and the use of proxies can throw much light upon this position. On the face of it, the regular despatch of the signed proxy form by the shareholder to the company would seem to indicate that interest in the company's affairs which would be expected of a bona fide shareholder. In cross-examination of Mr. Brittain the following appears:
``Q. Why did you want proxies from Mr. Manning?
A. Because I believe that that was the only subsidiary company we had with a minority shareholder that from my own point of view as company secretary it was vital at least he be given the opportunity to be represented. I did not anticipate he be represented by proxies but be represented by coming in personally, but he chose to sign proxies and that is his choice.''
It is to be observed, however, that the Articles of Association of the company incorporated Reg. 45 of Table A and two members personally present were necessary
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to form a quorum. As Mr. Manning and E.A. Greenwood Limited were the only shareholders Mr. Manning's presence was necessary at meetings. Of course, mistakes can always be made by a company secretary, but Mr. Brittain asserted in his evidence that he had ``a very meticulous attitude towards meetings'' and the despatch of proxies when no purpose would be served by them so far as the meeting itself was concerned, and their due return by Mr. Manning, might possibly be taken to be indicative of an arrangement rather to make it appear to all who might inquire, that Mr. Manning was of course treated by the company as an actual shareholder having an interest in the affairs of the company and was in fact in every respect an interested shareholder in the company.Of course, the whole picture presented by the evidence must be looked at, and standing alone the error in holding meetings without the proper quorum could have no significance. But when one looks at the whole of the evidence, I think the proper conclusion is that the proxies were nothing more than a device employed by those representing the taxpayer to make it appear that Mr. Manning was a real not merely a nominal shareholder and was still actively interested in the taxpayer and thus to make it more difficult for the Commissioner to assert that there was any arrangement within sec. 80B(5), or that Mr. Manning's retention of the shareholding was essentially for the purpose of giving the taxpayer the full benefit it could get under sec. 80 and 80A of the losses it had accumulated. As will be seen, Mr. Manning never received a dividend nor any copies of financial statements.
The evidence is clear that the totality of Mr. Manning's connection with the company after July 1967 lay in his signing and despatching the proxy forms to the taxpayer. In his evidence he said that after the liquidation in 1963 he had, with a view to providing money for his creditors, sold his home, which was in Newcastle where the taxpayer company had always traded. He had then gone to New Guinea for twelve months and on his return had established a home for himself and his family in Sydney. He knew, as he stated in his evidence, that the shares he held in the taxpayer were worthless and the inference is inescapable, in my view, that his interest in and connection with the taxpayer had to all intents and purposes ceased.
As I stated earlier, Mr. Manning's recollection of events had been severely affected by an illness which befell him in 1972 and in the result one does not have the benefit of evidence as to his dealings and conversations with Mr. Geary, the liquidator, and Mr. Walker, the trustee, from which one could make a decision as to whether or not there was an arrangement within the meaning of sec. 80B. He himself did not ever remember meeting Mr. Walker. He thought it was Mr. Geary, the liquidator, with whom he had dealt with regard to the sale of the company as a loss company. There is, I should observe, nothing from which one could satisfactorily conclude that he ever dealt with the directors of the taxpayer. However notwithstanding his lapse of memory, his evidence in cross-examination throws substantial light upon the nature of his participation in the events I have recounted, and the probability of his being a party to an arrangement directed to ensuring that the bargain involving the payment of $7,000 by E.A. Greenwood Limited to the trustee, and the transfer of the shares to it, and the retention of a two-fifth holding by Mr. Manning, would in fact achieve a tax benefit for the taxpayer in regard to the losses. Despite his absence of recollection as to precise events one did have the benefit of the fact that he was undoubtedly honest, and concerned at the time of the liquidation to help his creditors in every way he could, and one can therefore place reliance upon his statements as to what his attitude at all relevant times was and draw important conclusions from that.
``Q. You did have some conversation with somebody about the selling of the company as a loss company, did you not?
A. Apparently I must have had. I thought it was Mr. Geary but that is all I know.
Q. Mr. Geary was the liquidator? A. Yes.
Q. Would it be fair to say that you agreed that you would do anything that you were requested to do to enable the losses to be sold? A. To help the creditors, yes.
Q. Moreover, that you would do nothing at all in relation to the company unless you were asked to do it by the person
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handling the sale of the losses? A. I would say that, yes....
Q. Following your agreement that you would do anything requested and do nothing more unless requested you did certain things at the behest of either Mr. Geary or Mr. Walker, do you recall that?
A. Yes, I do.''
He was then shown his signature to minutes of 4 July 1967, stating that the retiring directors were reappointed and was unable to give any explanation as to why this should be when it was unnecessary for there to be reappointment. He signed those minutes, and the point being made was that he was merely ``going along'' with what was being asked of him. He was shown the minute of 6 July recording the resignation of himself and his wife.
``Q. I take it if you did so sign it was because you were requested to by Mr. Walker in accordance with this agreement that you had with him? A. I would say so.
...''
In regard to the transfer of the fifty-two shares -
``Q. Might I take it that you transferred fifty-two shares and no more as part of this arrangement that you do everything that was asked of you and nothing unless asked of you? A. I must have.''
Mr. Manning made plain throughout that his memory did not permit him to say that there was any actual arrangement that he could remember, but the following appears:
``Q. However, you were prepared to do anything and to refrain from doing anything so long as the losses could be saleable, is that right? A. Yes, I would.
Q. Everything you did so was in accordance with that arrangement? A. Well it must have been.''
Further on:
``Q. Your one wish was to put the losses in a vendible state so that they could be worth something to somebody and you said you were willing to do whatever was necessary for that and not to do anything unless it was required of you in relation to the company. And do I take it that vesting the management in the trustee was again another step in this arrangement which you had so that the creditors could receive the largest benefit possible? A. As I said before I would have done anything for the creditors.
Q. And may we put it the other way, that you certainly would not have done anything which would have jeopardised the vendibility of the losses? A. No, I would not have.
Q. And also that you would not have done anything which would jeopardise the use of the losses after they were sold? A. Well I do not understand enough about it. Most probably at the time but I do not think I would have.
Q. And quite apart from agreeing to do anything you, I suggest, entrusted Mr. Walker either directly or through Mr. Geary, entrusted him with power on your behalf to do all such things as may be necessary for the sale of the company as a loss company? A. I entrusted Mr. Geary implicitly.
Q. But you entrusted him to act on your behalf to do those things? A. Yes, I did.''
He was then shown a letter of 25 January 1972, addressed to the Deputy Commissioner of Taxation and signed by himself in the following terms:
``I held beneficially and absolutely for my own benefit five ordinary `B' class shares of $2.00 each fully paid in the capital of E.A. Greenwood (N.S.W.) Pty. Limited (formerly K. Manning Pty. Limited) during the whole of the period from 30 June 1959 to 30 June 1967, inclusive. On 4 July 1967, the five ordinary `B' class shares of $2.00 each were subdivided by special resolution into 100 ordinary `B' class shares of 10c each fully paid. On 6 July 1967, I sold fifty-two of the ordinary `B' class 10c shares to E.A. Greenwood Limited and I continue to hold forty-eight ordinary `B' class shares of 10c each.
I have continued to hold the forty-eight ordinary `B' class shares of 10c each in the capital of the Company for my own absolute and sole benefit. I have not entered into any contract, agreement or arrangement in any way affecting my ownership of three shares or my right to sell, transfer or assign such shares.''
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It was received by the Commissioner at a time when he, the Commissioner, was looking into the question of the taxpayer's income during 1968 and Mr. Manning's ownership of a two-fifths interest in the shares at that time.
``Q. Did you compile that letter? A. No.
Q. You say No? A. Yes.
Q. Who did? A. I have no idea.
Q. Was this again something which was placed before you for your signature to send? A. I just cannot recall. I am sorry, I wish I could but I cannot.
Q. Well it is certainly not your terminology is it? A. No, it is not.
Q. And you yourself did not have any direct correspondence at that stage with the Commissioner of Taxation? A. No.
...
Q. So all you can say is that that is your signature but you did not compose the letter which is addressed to the Deputy Commissioner and you know nothing about it? A. That is all I can say.
Q. And would it be fair to say that from your knowledge of your own actions that you signed that again as a flow-on from this arrangement as to the sale of the losses? A. Yes.''
Once again one has positive evidence of Mr. Manning's co-operation in steps taken no doubt by those representing the interest of the taxpayer and E.A. Greenwood Limited designed to achieve for the taxpayer the full benefit from a tax point of view of the losses made in the earlier years. He was asked:
``Q. Have you ever been paid any dividend in respect of the shares that continued to be registered in your name?
A. No.
Q. Did you expect to be? A. I don't know.
Q. Well do you recall in 1972 that you were asked that, did you expect to receive any return of capital and your reply was `No, I do not expect it'. Do you recall that in 1972 you said you did not expect to? A. Yes, I did.
Q. That was the truth, was it not? A. Yes.
Q. And you did not expect to receive any dividend on those shares? A. Well I said No, it must have been No.
...
Q. Well in 1972 I suggest the question was put to you, `Have you received any copies of financial statements?' and your reply was `No'? A. And that will be right.''
A little later he said:
``No, all I was concerned with was that I never hear from them again, that was all I was interested in, just to leave me alone with it, that's all.
Q. At what point of time are you speaking of that you say that was your feeling, your attitude, after the transfer of shares or at a later stage or what? A. Right from the beginning actually. We just did not think we would hear any more about it. I was not aware of what was going on what would go on, and all we wanted was to forget it.
Q. And this of course was in keeping with the arrangement that you had that you would do anything and refrain from doing anything to enable the slate to be cleaned? A. Yes.
Q. And the losses sold? A. Yes.
Q. So that you could then close the door on this sad portion of your life and forget K. Manning Pty. Limited forever.''
It is proper to point out that in re-examination Mr. Manning asserted that he ``never made a deal with Mr. Walker or anybody else'' and added ``well I do not recall that I ever met Mr. Walker but obviously I must have if my signature is there (meaning the minutes) but I certainly do not ever recall making any arrangement with anybody at all for anything to do apart from selling the losses of the company. Maybe I am not very clear''. Mr. Manning's denials of making any arrangement must be understood against both his acknowledgment that he had no memory one way or the other and the other answers he gave in cross-examination, and there is a body of evidence pointing - in my view quite clearly - to his being a participant in a plan arranged by Mr. Walker and those representing the interests of the taxpayer and E.A. Greenwood Limited, designed to ensure that the sale of
ATC 4049
the losses could be taken advantage of to the full by the taxpayer (and indirectly E.A. Greenwood Limited). It is appropriate in this regard to refer to the cross-examination of Mr. Brittain and the matter of the profit made by the taxpayer in 1968:``Q. So that having made the profit in the year 1968, very little activity in 1969, the fruits of that profit were then lent back to the holding company? A. That is not accounting terminology but in essence what you are saying is correct.
Q. What terminology would you prefer to use? A. For a start I do not know what the trading operation was. I know it resulted in debtors or unpaid accounts for some period. Once again it was not my period of time. If it was a cash operation the cash would have resulted in minimum profit surpluses at some subsequent date after consideration of the - expected to pay a dividend based on the accumulative losses based on any profit generated, - decision must have been taken by the holding company board to make a loan from the particular subsidiary involved to the holding company. The use of the money subsequently has been, no doubt, as you any, in normal working capital.
Q. That is an interest-free loan I take it? A. I think all movements of money between subsidiaries are interest-free.
Q. So that the sole benefit of the profits which the company gained in 1968 apart from that tax which has been said, the sole benefit of those profits have been in the holding company or in companies in the group? A. I would think that is correct, yes.
Q. Because they have enjoyed the fruits interest-free? A. As I say all loans between subsidiary companies -
Q. Just answer my question please? A. Yes.''
Mr. Manning, as I said earlier, has received no dividend from the taxpayer in respect of the profit it made.
From the foregoing, the following inference may be drawn: The clear intention of E.A. Greenwood Limited in entering into the agreement to pay $7,000, as referred to in the scheme of arrangement and the deed poll of 26 December 1966, was to achieve the ultimate control of the taxpayer with a view to taking advantage pursuant to sec. 80 and 80A of the losses it had incurred. Mr. Manning, whether he dealt directly with Mr. Walker or through Mr. Geary, knew that the losses had a value to a purchaser because of their tax significance and that it was in the interest of the creditors of his company, the taxpayer, that they be sold. Mr. Manning was a businessman and I think the probability is high that he would have had knowledge of the significance of the losses in the hands of a ``purchaser'' and would have been aware of the necessity for him to retain the holding specified in sec. 80A, if the ``purchaser'' was to receive full value for the moneys which it was paying out for the losses. Even if that is not correct, it would have been natural for him to have co-operated to the full in ensuring that the sale went through in order that the creditors of the taxpayer could get the benefit of the $7,000 that was available for the losses. It is highly probable that the ``purchaser'' would not have been interested in a purchase of the losses unless there was an indication in advance of a willingness in Mr. Manning to do whatever was necessary to ensure that the tax advantage capable of being enjoyed in respect of the losses was in fact ultimately enjoyed by the taxpayer. Mr. Manning's actions at every point, were actions that needed to be taken if the taxpayer was to get the benefit of those losses. The inference is open that there was an arrangement entered into with Mr. Walker, directly or through Mr. Geary, that Mr. Manning would dispose finally of his interest in the taxpayer by selling the losses, but that in that regard he would at all times do whatever he was asked to do to preserve for the taxpayer and E.A. Greenwood Limited the full advantage from a taxation point of view of the sale. The arrangement in my view, was on foot at least from the time when it was decided to have the scheme of arrangement approved by the Court and it continued certainly up to the time when Mr. Manning's memory failed him in 1972. I have referred to Mr. Manning having, as late as January 1972, signed a letter, not of his own composition - obviously prepared to benefit the taxpayer in its claim to have the losses deducted from its income. The inference that the arrangement was as stated is, in this case, a strong one and
ATC 4050
in addition it can the more readily be drawn when the fact is that the taxpayer has not called any evidence from Mr. Walker or Mr. Geary, who - or one of whom - might be expected to have had a complete knowledge of all that went on in regard to the sale of the losses.Cooper Brookes (Wollongong) Pty. Ltd. v. F.C. of T. 77 ATC 4415 at pp. 4435-36 and on appeal in the judgment of Fisher J. 79 ATC 4398 at p. 4414.
Such an arrangement implemented as it was, in my view, within sec. 80B(5). It was an arrangement which ``depended for its operation'' on Mr. Manning having the beneficial interest in the shares in the year of income, as he in fact did, viz. two-fifths of the shares, it ``related'' to those shares and it ``affected'' his beneficial interest in those shares. It was an agreement in which it was implicit that he would at all times retain a two-fifths interest in the shares and would not sell his shares so as to have less then two-fifths of the total shares and it thus affected his ``right to sell''. To the extent that the arrangement contemplated that Mr. Manning would take no benefit himself from his shareholding by way of dividend, it ``affected his right'' to ``dividends that might be paid''.
The final matter to be considered is whether it has been shown that the ``purpose'' or a ``purpose'' of Mr. Manning, was, within sec. 80B(5)(c), to enable the taxpayer to take into account the losses of the earlier years. As pointed out earlier in this judgment, the ``purpose'' is that of the shareholder holding the relevant beneficial interest, and in this case the very nature of the arrangement which is to be inferred from all the evidence itself points to the fact that at least one of Mr. Manning's purposes was that of enabling the taxpayer to get the full benefit of the tax advantage involved in the losses. The purpose of Mr. Manning and the arrangement itself are inextricably bound up with each other. It is proper to point out that Mr. Manning was a businessman and in all probability not only knew exactly what was required of him in order to ensure that the taxpayer got the benefit of the losses, but positively intended that what he was doing should result in tangible taxation benefit to the taxpayer if a profit was made. Even if it should be said that Mr. Manning, in entering into the arrangement, was not precisely aware of the full implications and ramifications of the scheme contemplated by Mr. Walker and the directors of E.A. Greenwood Limited, it can still fairly be assumed that at least one of his purposes would be to ensure that the ``purchaser'' obtained the full benefit of its purchase. The ``purchaser'', E.A. Greenwood Limited, could only obtain the full benefit of its purchase if Mr. Manning's shareholding in the taxpayer was such as to give the latter the advantages available under sec. 80 and 80A of the Act in relation to the losses from the earlier years and, in my view, Mr. Manning's actions point strongly to him having intended that that end should be achieved. He co-operated at all stages with Mr. Walker and those representing the taxpayer and as I have said the purpose of E.A. Greenwood Limited in purchasing the losses and obtaining control of the taxpayer is plain for all to see. In F.C. of T. v. Cooper Brookes (Wollongong) Pty. Ltd., Fisher J. 79 ATC 4398 at p. 4416 referred to the fact that in K. Porter & Co. Pty. Ltd. v. F.C. of T. 77 ATC 4472, Stephen and Murphy JJ. ``relied on the following facts to hold that there was a `purpose' falling within sec. 80B(5)(c) namely, awareness or knowledge on the part of the continuing shareholders of the purpose of the scheme involved combined with actions by them necessary to the scheme's success. This was enough to make the purpose of the scheme's promoters, which was clear, their purpose''. That is the situation in this case.
In regard to the requirement that the ``purpose'' referred to in sec. 80B(5)(c) is the purpose of the shareholder holding the two-fifths beneficial interest, it was submitted that all that one had here was the sale and a retention of a two-fifths interest and that Aickin J. in F.C. of T. v. Students World (Australia) Pty. Ltd. 78 ATC 4040 at pp. 4052-4053; (1978) 52 A.L.J.R. 298 at 306 had stressed that one could not infer the relevant purpose from the mere fact of a sale which left forty per cent of the holding with the shareholder who had held such shares in the year of loss.
This submission disregards the entirety of the evidence in the case and focuses only on one feature of it. A conclusion, by inference, from all the circumstances, that the shareholder had the purpose required by the
ATC 4051
section is just as much open as is a conclusion that an arrangement within the section was entered into.I do not understand Aickin J.'s observation to be in any way inconsistent with the view I have formed, nor in any way to preclude me from forming the conclusion which I have as to the purpose of the shareholder. It is to be borne in mind that in F.C. of T. v. Students World (Australia) Pty. Ltd., the only ``arrangement'' with which the Court was concerned was one claimed to be contained in a document, and there was an express finding based on the sworn testimony given in the case that there was in fact no arrangement that the shareholder would not dispose of her residual shareholding or that she would not receive dividends on the retained shares.
In the present case then, an arrangement within sec. 80B having a purpose of the kind referred to in para. (c) has been established and, accordingly, the Commissioner made no error in exercising the power given to him to treat Mr. Manning's shares during the year of income as not being beneficially owned by him. He was thus correct in not taking the losses into account as deductions from the taxpayer's income. The amended assessment was thus correct and is confirmed. The appeal is dismissed and the appellant is to pay the respondent's costs.
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