Case M63

Judges: HP Stevens Ch

CF Fairleigh QC

JR Harrowell M

Court:
No. 1 Board of Review

Judgment date: 4 September 1980.

C.F. Fairleigh Q.C. (Member)

The income as returned by the trustees of a superannuation fund for the several years ended 30 June 1975, 1976, 1977 and 1978 was adjusted by the Commissioner disallowing the exemption from income tax which (subject to various qualifications) is granted by sec. 23F(15) of the Income Tax Assessment Act .

2. The assessments bring in as assessable income pursuant to the Commissioner's opinion under sec. 23F(16) the dividends ($3,240, $2,700, $4,725 and $3,755 respectively) paid to those trustees by a proprietary company (i.e. a ``private'' company) upon shares held by the trustees in that company.

3. In each instance there was an objection to the assessment, a decision of the Commissioner disallowing the objection, and a reference of the decision to this Board for


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review. The notices of assessment were dated (1974-1975 year) 9 June 1976, (1975-1976 year) 5 August 1977, (1976-1977 and 1977-1978 years) 15 May 1979.

4. The evidence, parol and documentary, has been summarised in the reasons of the Chairman, Mr. H.P. Stevens, and so I shall have little call to recite any part thereof. I adopt the Chairman's findings of fact and his qualifications on the acceptance of parol evidence.

5. At all times two of the three trustees of the fund were a man and his wife who were the incorporating shareholders of the company, and they were its directors and were employed by it. The third trustee was first one accountant acting for the company, and, later, his successor.

6. The stated object of the deed which sets up the superannuation fund at 11 August 1958 was superannuation benefits for ``eligible employees''.

7. The only employees admitted as eligible employees to take the benefits of the deed from August 1958 to 26 November 1976 were the said man and his wife, at the latter date his (or their) son, an employee then of two years standing was admitted as an eligible employee. Apparently the only other employee whose membership was contemplated was a ``senior executive'' employed from 1960 and retired in 1979 at 50 years of age. The witness (the man aforesaid) said in effect that that executive was not invited to join the fund because of his chronic ill-health; and that female employees were not regarded as career employees.

8. The outstanding feature of this ``employees'' superannuation fund is that apart from the man and his wife, and their son (and possibly their daughter) no employee was ever given any opportunity to consider applying for membership. The existence of the fund appears to have been withheld from all others.

9. No useful purpose is served by considering the past decisions of Boards of Review on the facts of the cases before them. Boards of Review cannot lay down a new principle of law, nor can they enlarge or restrict an existing principle of law, as a Board is only an administrative body. As is said in Seminars on Evidence at p. 25 even a court has to make a finding ``on the evidence in the individual case unhampered by any knowledge of the findings of fact made in other cases, however similar''. Windeyer J. remarked in
M.P. Metals Pty. Ltd. v. F.C. of T. (1967-68) 117 C.L.R. 631 at p. 639 that it is futile to try to decide the case by observations made about other facts (although his Honour was also there concerned with other Acts). Even where there is a judgment there are dangers in selecting a phrase from it on a factual situation and regarding it as the solution of questions whether something is or is not within the provisions of a statute (
Ransom v. Higgs (1974) 50 T.C. 1 at p. 91 ;
G.C. Kreglinger v. New Patagonia Meat Cold Storage Co. Ltd. (1914) A.C. 25 at p. 40 ;
Ogden Industries Ltd. v. Lucas (1969) 1 All E.R. 121 at p. 124 ).

10. Of course, there are limitations on the words of sec. 23F(16)(f) viz. ``any other matters that the Commissioner considers relevant''. At the same time it is necessary to remember that the rule of construction known as ejusdem generis ``ought to be applied with great caution'' (per Rigby L.J.
Smelting Co. of Australia Ltd. v. Commr. of I.R. (1897) 1 Q.B. 175 at p. 182 ). The doctrine known as that of ejusdem generis has ``frequently led to wrong conclusions'' (per Rigby L.J.
Anderson v. Anderson (1895) 1 Q.B. 749 at p. 755 cited by Astbury J. in
Re Ellwood (1927) 1 Ch. 455 at p. 461 ).

11. It will be noted that in sec. 23F(16) the circumstances of the issue of shares occur expressly in para. (e) thereof, and by implication in para. (b). The present significance of para. (f) thereof is that the relevance of the circumstances of acquisition of the shares is not confined to those set out in para. (b) and (e) of sec. 23F(16).

12. An issue of shares is the result of a contract made between the company and the allottee. Not even a court in a suit by one of those against the other has power to remodel a contract, if it has been freely negotiated and entered into without either fraudulent or unconscionable conduct by either party. (
Galbraith v. Mitchenall Estates Ltd. (1964) 2 All E.R. 653 ;
Alexander Thorn v. The Mayor and Commonalty of London (1976) 1 App. Cas. 120 ). Certainly, those who assume complete control of a company's business


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must remember that they are not at liberty to sacrifice the interests which they are bound to protect and, while ostensibly acting for the company, divert in their own favour business which should properly belong to the company which they represent (
Cook v. Deeks (1916) A.C. 554 at p. 563 ); so also the majority is not permitted to oppress the minority ( ibid . p. 564) say by a favourable share issue for a selected group of shareholders unless in accordance with the powers contained in Articles of Association (
Industrial Equity Ltd. & ors. v. Blackburn & Ors. (1977) 137 C.L.R. 567 ;
Kathleen Investments (Australia) Ltd. v. The Australian Atomic Energy Commission & Anor. (1978) 139 C.L.R. 117 ;
Harlowe's Nominees Pty. Ltd. v. Woodside (Lakes Entrance) Oil Co. N.L. & Anor. (1967-68) 121 C.L.R. 483 ;
Esplanade Developments Ltd. v. Dinive Holdings Pty. Ltd. (1980) CLC ¶ 40-637 ).

13. As the decision was reversed on appeal it seems, with respect, that an instance of an improper application of a general provision such as sec. 23F(16)(f) is given by
Finance Facilities Pty. Ltd. v. F.C. of T. 71 ATC 4082, 4225 ; (1971) 127 C.L.R. 106 ; per Gibbs J. at pp. 4091; 126: ``... the Commissioner is entitled to consider the fact that, although a case comes within the words of (the) paragraph... it only does so because the parties have implemented a scheme... and to form the view that although the scheme was lawful and proper it was nevertheless an artifice designed to take advantage of a loophole in the Act, and acting on that view to refuse to allow (something) which the Act leaves within his discretion to allow or withhold''.

14. With respect, it seems that the correct application of such a general provision is shown by a passage from the judgment of Windeyer J. in Finance Facilities (pp/ 4229; 135) viz.: ``But the discretion must be exercised bona fide having regard to the policy and purpose of the statute conferring the authority and the duties of the officer to whom it was given: it may not be exercised for the promotion of some end foreign to that policy and purpose or those duties.''

15. The tables which are set out in the reasons of the Chairman do not, in my opinion, indicate that there is a disentitling circumstance under any of the paragraphs of sec. 23F(16); neither does the manner of acquisition of shares by the trustees of the fund. In the years in issue the dividend has been pro rata for all issued shares and that cannot be a disentitling factor, even though in earlier years the fund shares were getting more or less than that; nor do I see a disentitling factor in the present articles (i.e. the classes of shares and preferential rights) or in the percentage of issued shares as held by the trustees of the fund. These matters singly or cumulatively do not indicate to me that dividends from the company for the benefit of beneficiaries under a superannuation fund are improperly escaping tax because of the existence of the superannuation fund so as to bring sec. 23F(16)(f) into operation.

16. The existence of a superannuation fund is not proved by the fact of a deed which sets up such a fund; nor by the Commissioner's acceptance of the deed as being in accord with statutory provisions. The operations of a firm or of a company or of fund trustees are shown by what is done, rather than by what the constating document says may be done (cf.
Cappid Pty. Ltd. v. F.C. of T. 71 ATC 4121 at p. 4124; (1971) 127 C.L.R. 140 at p. 154 ).

17. As a matter of form sec. 23F is directed to a trust for a class of persons (employees) i.e. there should be a fund held for a class in the equity sense; and cf. sec. 23(ja). A fund which is maintained by the employer with several employees, but solely for the benefit of a man and his wife, in reality the ones with the right to hire and fire (even though their child may later be admitted to the benefits) to the exclusion of all other employees is debatably a superannuation fund within the concept of sec. 23F. It is probably desirable to add that I am not saying that what is commonly called a one-man superannuation fund will fail; a genuine class trust may initially, so also at some later time, have only one person as its beneficiary. Furthermore sec. 82AAE envisages the existence of a superannuation fund for the benefit of one or a few employees. The ability of that one person, or of a man and his wife to determine the fund at will and to invest in non-trustee securities is a significant factor for the purposes of sec. 23F(16)(f); cf.
Purcell v. D.F.C. of T. (1920) 28 C.L.R. 77 at p. 90 where Isaacs J. said


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``... the so-called equitable property of a cestui que trust is commensurate with the relief which a Court of equity would decree in his favour, that the power of a cestui que trust (or all the cestuis que trust, if of one mind) to determine the trust and take the property into their own hands, is dependent on their being sui juris ( scil. and not merely contingently entitled) are propositions that are really fundamental''.

18. Section 23F(15) and (16) restricts the Commissioner (and restricts the Board of Review) to the choice of allowing as exempt from assessment in any year which is in issue all or none of the dividends so paid to the trustees of the superannuation fund; yet those sections give no guide as to quantum. One question which arises, though not raised by either party is whether sec. 82AAE is in pari materia in the present circumstances so as to provide some assistance in the application of the generalities which are set out in sec. 23F(16). I think that sec. 82AAE should be looked at as being a legislative guide as to quantum in the present circumstances; more particularly where there is not a superannuation fund for employees generally (cf. sec. 82AAC) conducted by trustees who are independent of the beneficiaries of the fund, and independent of those who have the power to hire and fire employees, and where the balance of the trust fund (after allowing for the public securities investment provision) is not given even minimum protection, let alone the security of investment which is normal for trust funds, but is left available for the day to day use of those who have that right to hire and fire employees. However, if I do disregard sec. 82AAE completely, then the present circumstances, as outlined above, convince me, on the ordinary civil standard of probabilities, that there is not a bona fide superannuation fund for employees within the concept of sec. 23F and therefore by application of sec. 23F(16)(f) (and sec. 193 for a Board of Review) I conclude that the dividends in issue as paid should not be exempt from assessment.

19. Thereupon in my opinion the Commissioner's opinion formed pursuant to sec. 23F(16) has not been shown to be erroneous; so also if it were left to one member of a Board of Review to form a binding opinion under sec. 23F(16) (in combination with sec. 193(1)) I would form the same opinion as that which was formed by the Commissioner; and so I would confirm each of the assessments.


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