Gregrhon Investments Pty. Limited & Ors v. Federal Commissioner of Taxation.

Lee J

Supreme Court of New South Wales

Judgment date: Judgment handed down 19 December 1986.

Lee J.

In the three cases before me which are being heard together, the appellants are appealing, pursuant to sec. 187 of the Income Tax Assessment Act 1936 as amended, against the disallowance by the Commissioner of objections made by them to amended assessments issued on 29 October 1984. Each assessment relates to the year ended 30 June 1980. The Commissioner had previously assessed the appellants on taxable income as follows:

      Mr Norman C. Clough          $37,468.00
      Mrs Nancye J. Clough         $20,670.00
      Gregrhon Investments Pty.
        Limited                    $ 2,242.96

The amended assessment increased the taxable income of each appellant by the following amounts:

      Mr Norman C. Clough        $297,736.00
      Mrs Nancye J. Clough       $297,736.00
      Gregrhon Investments Pty.
        Limited                  $148,766.00

The appellants had disclosed in their returns (upon which the original assessments were made) a sale by them of their shares in a company Detail Furniture Company Pty. Ltd. In each case the Commissioner appended to the amended assessment an adjustment sheet which specified the amount by which the taxable income of the appellant was being increased, and stated:

``Amended Income Tax Adjustment sheet

Taxable income as previously advised

Attached is a notice of amended assessment made in reliance of ss 260, 44, 47(2B) and 108 of the Income Tax Assessment Act in respect of the sale of shares in Detail Furniture Co Pty Ltd which took place on or about 4th day of March 1960.

ATC 4908

The profits available for distribution in respect of all shares in the company are calculated as follows:

      Total Shareholders Funds         $744,346
      Less Paid Up Capital                  108
      Amount Available for
        Distribution                   $744,238

In accordance with the rights attached to the (here the Commissioner referred to the shares held by the particular appellant under consideration) $X has been included in your assessable income.''

The question raised in the case is the application of sec. 260 of the Income Tax Assessment Act to the transaction which took place about 4 March 1980 and resulted (inter alia) in the transfer of the shares in Detail Furniture Company Pty. Ltd. to a company called Shareholder Pty. Ltd.

The appellants, Mr N.C. Clough, Mrs N.J. Clough and Gregrhon Investments Pty. Limited (to whom I shall hereafter refer as Gregrhon) were the sole shareholders in the company, Detail Furniture Company Pty. Limited (hereafter referred to as Detail) which was incorporated in 1964 and which had carried on the business as a manufacturer of cabinets and furniture. Mr and Mrs Clough were directors of Detail and also controlled Gregrhon Investments Pty. Limited. The sale of Detail's products was carried on by a partnership, Detail Furniture Sales, being a partnership between Gregrhon and Mrs Clough. Mr and Mrs Clough each held two ordinary $2 shares and Gregrhon held 50 X-class $2 shares in Detail, so that the paid up capital of the company was thus $108. Nothing turns on the rights attaching to the respective shares. The company, which had traded successfully at Padstow and later at Peakhurst, obtained in 1977 a contract to renovate the Wentworth Hotel in Sydney and that resulted in a very substantial increase in the business of the company and in the gross profits compared to previous years. By the end of 1979, the contract for the hotel was nearing completion and Mr Clough, who in relation to his wife may be regarded as the dominant director and shareholder - Mrs Clough made clear in her evidence that she left the transfer of the shares entirely to her husband and Mr Gelder - discussed with his accountant, Mr Gelder, the matter of the sale of the company. At that time there were many companies willing to purchase or to provide purchasers for companies which had current profits or accumulated profits or reserves. There has been placed before the Court a number of advertisements which appeared in the publication The Chartered Accountant in Australia, and the following are illustrative of the kind of advertisements being presented:

``Business wanted with accumulated profits and reserves, trading and non-trading.''

``Companies purchased with reserves, profits, or emerging income, trading or non-trading.''

``Companies purchased with reserves, profits, or emerging income, trading or non-trading.''

The evidence, as I have said, shows that Detail at that time was making substantial profits and these profits were liable in its hands to tax at 46 cents in the dollar. Accumulation of profits of course, and subsequent declaration of a dividend, would result in the shareholders becoming liable to tax on the amount received. Mr and Mrs Clough had purchased land at Forster and had built retirement units thereon and had bought a further block with the intention of building another block of units. They needed funds to enable them to complete the purchase of the second block and go ahead with the building and as Mr Clough said in his evidence, he would have difficulty ``in paying the tax in that period of time''.

As a result of discussion between Mr Clough and Mr Gelder, which involved consideration of advertisements of the kind to which I have earlier referred, Mr Gelder approached a Mr Goldspink who was at that time active in the business of purchasing of companies. The evidence shows that Mr Gelder had in 1979 been approached by a firm called Allied which was interested in purchasing profitable companies and in February 1980 he was supplied with a folder containing the form of agreement and other documents to be used in such a transaction. The form of the agreement contained in the folder was in many respects in accord with the agreement provided by Mr Goldspink to Mr Gelder but it had no provision for a payment of the company's cash assets to a third party as in Mr Goldspink's agreement. Mr Goldspink in a letter dated 7 January 1980 wrote as follows:

ATC 4909

``We confirm our offer to purchase all the issued capital of your corporate client in the cabinet making industry at the figure related to you. Further, please find enclosed a corporate questionnaire to be completed and returned to us together with a statement, balance sheet and a set of Memorandum and Articles of Association.''

The evidence discloses that Detail had been offered by Mr Gelder for sale to Mr Goldspink (as agent) on the basis that its net tangible assets were of the order of $500,000 and that Mr Goldspink would be paid a fee of $33,000, but as will be seen the net tangible assets were considerably higher, namely $744,346 and this became the sale price after deducting Mr Goldspink's fee which remained the same. Mr Gelder filled out the corporate questionnaire and supplied to Mr Goldspink an operating statement for the period 1 July 1979 to 3 March 1980. That operating statement showed that the operating net profit for the period was $604,445 and that the unappropriated profits brought forward from 1 July 1979 were $127,131. A balance sheet was also supplied showing the paid-up capital as $108, the capital profits reserve at $12,662 and the retained profits at $731,576 making a total of $744,346 which was expressed to be ``cash at bank''. The figures I have just mentioned were repeated in the questionnaire and no liabilities were shown. Whilst this was being done, Mr and Mrs Clough on 1 February 1980 with the assistance of Mr Gelder, formed a company called Trazian Pty. Limited in which Mr and Mrs Clough were shareholders and directors. Gregrhon did not become a shareholder. The evidence shows that Detail then passed a resolution to sell and Trazian agreed to purchase the business of Detail and of the partnership for a consideration equal to the book value of the net tangible assets of the company ($744,346) with no value being placed on the goodwill, Trazian to take over liabilities. Although Mr Clough was not aware of the detail of the transaction, Mr Gelder's evidence made clear that the arrangement was one under which Mr and Mrs Clough and Gregrhon Investments were to provide Trazian with the funds necessary to purchase the business. Mr Gelder's evidence showed that the amount paid on 4 March 1980 by Trazian for Detail's business was $738,846.16, which allowing for the fact that at the time of settlement there was $5,500 standing to the credit of Detail's account, gives a total figure of $744,346.59. Trazian began carrying on business on 19 February 1980, not having as yet paid Detail for Detail's business and Detail carried on no business after 4 March 1980.

The sale of the shares in Detail by the appellants was embodied in an agreement made between the appellants and the company, Shareholder Pty. Ltd. (hereafter called Shareholder) which, as the evidence showed, was controlled by a Mr Wynyard, brother of Mr Goldspink. The fact that the purchaser was to be Shareholder was only made known to the Cloughs and Mr Gelder on 4 March 1980 (or the day before?) when Mr Gelder received the agreement for the sale of the shares prepared by Mr Goldspink and containing the information as to Detail's assets, etc., supplied to him by Mr Gelder. The agreement provided that the appellants were to be paid as follows for their shares: Mr and Mrs Clough $284,538 each, and Gregrhon $142,270 making a total of $711,346. The agreement set out that the date to which income tax had been paid or provided was 30 June 1979 and the evidence showed that Mr and Mrs Clough expected to bear the liability to pay the tax for that year. The agreement also provided that the date to which Div. 7 tax had been paid or provided was 30 April 1979 and the agreement made express reference (cl. 4) that no provision had been made in the accounts for any income tax that might become payable in respect of income after 1 July 1979. One of the terms of the agreement (cl. 3(iv)) was that a bank cheque in the sum of $744,346 was to be paid to the nominee of the purchaser therein described, this being a company, Lockwing Pty. Ltd. which, as the evidence again showed, was also under the control of Mr Wynyard. One further clause in the agreement must be noted, namely cl. 8(a) which reads ``the purchaser hereby warrants to the vendors and it is a term and condition of this deed that the purchaser will (a) not whether directly or indirectly and whether by means of a loan guarantee or the provision of security or otherwise cause the Company (Detail) to give any financial assistance for the purpose of or in connection with the purchase of the shares of any of them''. In the events that happened the very agreement itself by requiring the payment of $744,346 by Detail to Lockwing had the effect that the cash assets of Detail were used to

ATC 4910

fund the payment of the purchase price for the shares, and I will deal a little later with the significance of this.

Settlement of the matter took place on 4 March 1980 at the Rural Bank, Riverwood which was the bank of the Cloughs, Gregrhon and Detail. The settlement involved cheques drawn on the Bank of New Zealand, George St, Sydney, where Shareholder and Lockwing had accounts, the Rural Bank, Hunter St and the Rural Bank, Riverwood where Mr and Mrs Clough, Gregrhon and Detail had accounts. Mr Gelder attended at the bank at Riverwood. Mr Ray was manager at that bank and he was present. A Mr Davoren, a representative of Mr Goldspink was present. Mr Ray gave evidence before me and his evidence shows that he had received instructions from the Rural Bank, Hunter St in respect of a telegraphic transfer of funds from that branch to his branch and an instruction that the funds being telegraphed were not to be released until funds were made available to Lockwing, of $744,346. Mr Ray became aware that a company, Transia Corporation Ltd., was supplying funds for three bank cheques ultimately drawn in favour of the appellants but Mr and Mrs Clough and Mr Gelder did not know this. Apart from Mr Ray's evidence as to how the transaction was dealt with I have had placed before me statements of evidence by Mr Hall, an officer of the Bank of New Zealand, George St, Sydney and Mr Kesby, branch accountant of the Hunter St branch of the Rural Bank. It would be unnecessarily tedious to go through the detail of the transfer of the appellants' shares to Shareholder and the resignation of the Cloughs, all on 4 March 1980 and the detail of the banking entries which were made on 4 March. For present purposes it is sufficient to describe the events which took place at the respective banks as follows:

  • 1. On 4 March 1980 the Bank of New Zealand, George St Branch, received a telex from its Brisbane office on the order of Transia Corporation Ltd., which was obviously the financier of Shareholder's purchase of the shares, that the George St branch issue three bank cheques as follows:
    • (a) $284,538 to Norman C. Clough;
    • (b) $284,538 to Nancye J. Clough;
    • (c) $142,270 to Gregrhon Investments Pty. Limited.

    Those bank cheques representing the purchase price of the shares were delivered by Mr Hall to Mr Kesby at the Rural Bank, Hunter St branch, who credited them to the latter bank's ``Sundry Branches Account''.

  • 2. The total sum of $711,346 was transmitted by telegraphic transfer to the Rural Bank's Riverwood branch for credit to ``Suspense Account Customers''.
  • 3. Three cheques prepared by Mr Ray were drawn on ``Suspense Account Customers'' at the Rural Bank, Riverwood branch as follows:
    • (a) $284,538 to Norman C. Clough signed by N.C. and N.J. Clough;
    • (b) $284,538 to Nancye J. Clough signed by N.J. Clough;
    • (c) $142,270 to Gregrhon Investments Pty. Limited signed by N.C. Clough.
  • 4. The three cheques totalling $711,346 referred to in 3 were deposited into the account of Trazian Pty. Limited at its account at the Riverwood branch.
  • 5. Trazian Pty. Limited drew a cheque for $738,846.16 in repayment of its debt to Detail Furniture Company Pty. Ltd. and this cheque was deposited into Detail's account at the Riverwood branch of the Rural Bank. That cheque was prepared by Mr Gelder and signed by Mr Clough. The deposit slip was prepared by Mr Ray and signed by Mr Gelder.
  • 6. Detail, in accordance with the directions of the purchaser Shareholder, drew a cheque representing its assets and payable to Lockwing, for $744,346. This cheque was prepared by Mr Gelder, signed by Mr Clough and handed to Mr Davoren on settlement.

Mr and Mrs Clough and Mr Gelder were present at the Riverwood branch with Mr Ray when steps 2, 3 and 4 occurred. Mr Davoren representing Mr Goldspink was also present. The following steps were then taken but the evidence is that neither the appellants nor Mr Gelder played any part therein, nor were they present.

  • 7. The proceeds of that cheque for $744,346 were sent (presumably on Mr

    ATC 4911

    Mr Davoren's instructions) by telegraphic transfer from the Rural Bank's Riverwood branch to the Rural Bank's Hunter St branch and those proceeds arrived some 45 minutes after the telegraphic transfer referred to in 2.
  • 8. The Rural Bank's Hunter St branch then issued in favour of Lockwing a bank cheque $744,346. That cheque was received by Mrs Martin, an employee of Shareholder Pty. Limited, from Mr Boyden who represented Transia in the transaction.
  • 9. Lockwing then deposited in its account with the Bank of New Zealand, George St, Sydney, the Rural Bank cheque, the deposit slip being signed by Mrs Martin.
  • 10. Mrs Martin next drew a cheque on behalf of Lockwing Pty. Limited in favour of Shareholder Pty. Limited for $744,346 which Shareholder then deposited into its account with the Bank of New Zealand, George St. The deposit slip was signed by Mrs Martin. Mrs Martin on behalf of Shareholder then drew a series of cheques as follows:
          Transia Corporation Ltd.       $713,480
          John W. Wynyard
            Trust Account                     250
          Telokin Pty. Ltd                  6,259
          Corporate Consultants
            International Ltd.              2,933
          B.I. Rosenfeld Trust Account      1,067
          R.L. Goldspink & Co.
            Trust Account                   3,000
          R.L. Goldspink & Co.
            Trust Account                  15,779
          Shareholder Pty. Ltd.             1,578

Mrs Martin's evidence shows that Mr Wynyard had ``some ownership'' of Corporate Consultants International Ltd. and that this firm was an agent of Shareholder. Telokin Pty. Ltd. had received a ``dealer's commission'' but its position in the transaction is not explained. Mr Gelder admitted that he received a $3,000 commission from Mr Goldspink, but he said that this did not occur until after the transaction had been completed, and that he had never expected to receive anything from Mr Goldspink. The document which Mrs Martin produced and which showed the instructions she was given in regard to the cheques required for the transaction, discloses on its face that the appellants as the shareholders of Detail were to be paid $711,346 and that there was to be a commission or commissions of $33,000. Mrs Martin explained that the reason Transia received $713,480 and not just $711,346 was that $2,134 was Transia's ``finance fee''. The proper inference in my view is that Transia loaned Shareholder $711,346. The effect of the above transactions is shown in the diagram handed up to the Court at an early stage of the proceedings and reproduced here:

                           TRANSIA CORPORATION
                           /|\              |
                            |               |
                            |               |
                        $713,480        $711,346
                            |               |
                            |              \|/
                          SHAREHOLDER PTY. LTD.
                        ->                   \
                       /                      \
                      /                        \
                     /                          \
                 $744,346                    $711,346
                   /                              \
                  /                                \
           LOCKWING                                 \
           PTY. LTD.                                 \
              /|\                             N.C. CLOUGH ($284,538)
               |                              N.J. CLOUGH ($284,538)
           $744,346                           GREGRHON INVESTMENTS PTY. LTD.
               |                                          ($142,270)
        DETAIL FURNITURE                                       /
          CO. PTY. LTD                                        /
              /|\                                         $711,346
               |                                            /
               \                                           /
                \                                         /
                 \                                       /
                  \                                     /
                   \                                   /
                    \                                 /
                     \                            TRAZIAN
                    $738,846.16                   PTY. LTD
                       \                           /

ATC 4912

Quite plainly, Transia has recouped its initial outlay and Detail has lost the whole of its cash assets - it has no other assets. The amount of $738,846.16 which went from Trazian to Detail has been explained earlier, the fact being that there was $5,500 standing to the credit of Detail's account at the time the cheque was made out which thus produced a total figure of $744,346.59.

In the result then, Mr and Mrs Clough after the transaction found themselves as directors and shareholders of Trazian, carrying on the same business that Detail and the partnership had previously carried on. Trazian owed them money equal to the amount which they had lent to it to purchase Detail. Each of them had owed money to Detail, Mr Clough $153,484.98, Mrs Clough $125,433 and Gregrhon $143,000 and as Trazian had taken over Detail's business and liabilities, these debts were reduced and in the case of Gregrhon discharged (virtually), by the loans made by the appellants to Trazian. The money received by the appellants for their shares was the equivalent of the entire net operating profit of Detail plus its accumulated profits, less $33,000, Mr Goldspink's stated fee.

The Commissioner has assessed the appellants upon the footing that sec. 260 strikes down the sale of their shares to Shareholder and that the payment of the sum of $744,346 by Detail to Lockwing at the direction of Shareholder renders that sum (less $108 paid-up capital) taxable in the hands of the appellants under sec. 44, 47 or 108 of the Income Tax Assessment Act in the same proportions as they divided up the sum of $711,346 purchase price of their shares.

The appellants claim here that the transaction or arrangement to which they had been parties with Shareholder begins and ends with the sale of the shares as per the agreement. They deny any knowledge of the intentions of Mr Goldspink, Shareholder, Lockwing, Transia or anyone acting for them as to what would be the ultimate consequence of what was done on 4 March 1980 so far as Detail was concerned. The appellants' essential claim is that they saw the opportunity to sell the company for a price which on any view was an excellent price, and that any tax liability of the company referable to its profit-making capacity, and any potential tax liability of theirs in respect of such profits would become the concern of the company purchasing the shares, namely Shareholder, and those who controlled that company. It is put on their behalf that they were under no duty to the Commissioner to make enquiries of Shareholder as to why the cheque required by the agreement was to be made out to Lockwing and not Shareholder, and that they merely sold their shares in accordance with the agreement which the purchaser, through Mr Goldspink, had prepared. They had played no part in drafting the terms of that agreement. The appellants further claim that the setting up of Trazian to take over Detail's business had nothing to do with Shareholder was not involved in any way in that aspect. The appellants accordingly claim that the transaction of sale of the shares merely gave rise to a payment to them of the purchase price of shares which was a capital payment, and which accordingly did not attract any tax and that they were not parties to any other ``contract agreement or arrangement'' within sec. 260. The appellants rely upon
Slutzkin & Ors v. F.C. of T. 77 ATC 4076; (1977-1978) 140 C.L.R. 314.

The Commissioner whilst not conceding the application of Slutzkin's case to the transaction advanced by the appellants puts forward an entirely different view of the events which occurred. The claim is made that from all the

ATC 4913

facts in the case the Court will infer that the relevant ``contract agreement or arrangement'' for the purposes of sec. 260 was one under which Detail would sell to Trazian all its assets and take over its liabilities, the shareholders of Detail would transfer their shares to Shareholder, and the directors of Detail would cause all the assets of Detail, namely $744,346 to be paid to Lockwing as nominee of Shareholder, thereby enabling Lockwing through Shareholder to return Transia's outlay and achieving the result that the cash assets of Detail were used to pay the purchase price for the appellants' shares. The appellants after the transaction had, in loans made to Trazian, the equivalent of Detail's profits and reserves less $33,000 paid to Mr Goldspink. Reliance was placed upon the telegraphic transfer between the Rural Bank at Hunter St and the Rural Bank at Riverwood requiring as it did that the funds transferred to Riverwood were only to be made available for use by the Cloughs provided there was a telegraphic transfer return of $744,346 on behalf of Lockwing. It was this step, known to Mr Ray, the bank manager at the Riverwood Branch of the Rural Bank, which ensured that the funds released by Transia would be immediately recouped. It is claimed that the undoubted effect of the transaction as carried through, including the flow of funds, was that Detail was rendered unable to pay any tax liability which might fall upon it (as I have said, it had no assets apart from its cash assets) for the 1980 tax year, and that the Cloughs were freed from any future liability to pay tax on any distribution that Detail might make to avoid Div. 7 tax. (No distribution to avoid Div. 7 tax was in fact required to be made before 1 April 1981.)

Counsel for the Commissioner contends that, notwithstanding that the appellants may have known nothing of the actual purpose of Shareholder in requiring the agreement in regard to the sale of the shares to be structured as it was, and notwithstanding that they claim that they knew nothing of the movement of funds in a circle from Transia back to Transia, as shown on the diagram, they could none the less, because of their deliberate abstention from enquiry, be fixed with knowledge sufficient to permit a conclusion that they were parties with Shareholder to the transaction which had the effect of giving to the appellants, without any payment of tax thereon, the benefit of the profits of Detail. The Commissioner then relied strongly upon
Bell v. F.C. of T. (1951-1953) 87 C.L.R. 548;
Newton v. F.C. of T. (1958) 98 C.L.R. 1;
Hancock v. F.C. of T. (1959-1961) 108 C.L.R. 258 and
Mayfield v. C. of T. (No. 2) (1961) 108 C.L.R. 323 to found the claim that the appellants were taxable on the amount of $744,346 less $108, being the amount of Detail's profits.

One thus has two clearly discernible contexts to which to direct attention in the search for the ``contract agreement or arrangement'' which was ``entered into'' by the appellants within the meaning of sec. 260 and it is now necessary to look at each context individually and determine whether any liability in the appellants to be assessed to tax arises under either or both. Firstly, the assumption will be made that the appellants did enter into whatever ``contract agreement or arrangement'' is deducible from the particular context under consideration, and then secondly, the operation of sec. 260 in relation to that context will be considered and a determination made as to whether or not the appellants thereby are liable to pay the tax assessed. The final matter for consideration will then be an examination of the evidence as to the appellants' knowledge and intentions, so as to enable the particular ``contract agreement or arrangement'' in fact ``entered into'' by the appellants to be identified.

The first context to be considered is limited to the events already described leading up to the execution of the written agreement, the written agreement itself, and the banking transactions in which the appellants and Mr Gelder their accountant actually engaged on 4 March 1980. The payment of the purchase price of the shares was as earlier set out, made to the appellants by the bank cheques drawn on the Bank of New Zealand, the funds from which may be said to be represented by the three cheques drawn from the suspense account by Mr Ray, which they received on settlement and which were deposited to Trazian's account. The only ``contract agreement or arrangement'' between the appellants and Shareholder discernible from the whole of the evidence presently being considered is the agreement involved in the written agreement under which they were to receive payment for their shares from Shareholder (which unknown to them was being financed by Transia). The loan of those moneys to Trazian, so that it might complete its

ATC 4914

purchase of the non-cash assets of Detail and carry on the business that Detail would have carried on had nothing to do with Shareholder. The agreement, according to counsel for the appellants, was one which admittedly had the effect of avoiding tax in the sense that the appellants were able to receive, as a capital sum not liable to tax, the purchase money and to hand over to Shareholder, as Detail's new shareholder the worry, so to speak, involved in Detail having to pay tax and later make a distribution. The source of the payment for the purchase price of the shares was, so far as the appellants were concerned, Shareholder or someone financing it, and there was no perceivable relationship or identity between the agreement giving rise to that payment and the distributable profits of Detail, so as notionally to convert the receipt of the purchase price into receipt of income taxable in the appellants' hands as happened in Bell, Hancock and Mayfield (supra). The present facts being considered are limited to the agreement for the sale of the shares and the fact that that agreement aimed to achieve receipt of a capital sum that would not be taxable does not of itself bring sec. 260 into operation. That in my view follows from Slutzkin's case which was followed in
Hennessey v. F.C. of T. (1974) 5 A.T.R. 179 and
Harrison v. F.C. of T. 77 ATC 4144; (1977) A.T.R. 1144 and also from the reasoning in Bell, Hancock and Mayfield (supra). The following two references from Slutzkin's case are particularly appropriate to the facts of the present case:

``It may be granted that a purchaser of the shares could not have been found willing to pay the price in cash, which in fact was agreed to be paid, unless the Company had made its assets liquid and itself free of debt: and that all shareholders were willing to sell their shares. It may also be granted that to obtain the benefit of the shareholding by way of dividend or by liquidation would have rendered the shareholders liable to tax in respect of the money thus received. But the choice of the form of transaction by which a taxpayer obtains the benefit of his assets is a matter for him: he is quite entitled to choose that form of transaction which will not subject him to tax, or subject him only to less tax than some other form of transaction might do,
I.R. Commrs v. Duke of Westminster (1936) A.C. 1, too easily forgotten, is still basic in this area of the law. There is no room in that area for any doctrine of economic equivalence.''

per Barwick C.J. in Slutzkin & Ors. v. F.C. of T. at ATC p. 4079; C.L.R. p. 319. The choice which the appellants made in the present case was to sell their shares in Detail and thus necessarily, rid themselves of all liability for tax deriving from their being shareholders in Detail. The remarks of Stephen J. in Slutzkin's case at ATC p. 4081; C.L.R. p. 322 are particularly relied upon by the appellants:

``They had, it is true, readied the company for a sale at maximum advantage. The company's assets had largely consisted of deposits with public companies and before sale these were called in and liabilities were paid off, the only remaining debit item on the balance sheet, apart from issued capital, being a modest provision for income tax. The taking of these steps made the company's issued capital a more attractive asset in the market place since it then represented virtually liquid assets; to one class of buyer, known as dividend strippers, it would be particularly attractive. It was to just such a buyer that the sale was made for cash and the banking of the cheques representing the sale price received by each of the vendor shareholders constituted, according to the unchallenged finding of the learned trial judge, the end of the transaction in which the taxpayers were involved. They were in no way interested in what occurred to the company after they sold their shares.

No doubt the taxpayers were astute to adopt the particular means they did in bringing to an end their connexion with the company; no doubt they appreciated the tax advantages which such a course offered. But this in itself reveals no purpose or effect such as that of which sec. 260 speaks: a purpose or effect of altering the incidence of tax, of relieving from liability to pay tax, of defeating, evading or avoiding liability imposed by the taxing legislation or of in any respect preventing the operating of that legislation. The company's shares were assets of a capital nature and to realise their value, converting it to cash, would in itself attract no tax; their sale effected no alteration in the incidence of, nor any relief from liability to pay tax, nor was liability to

ATC 4915

tax evaded or avoided; the operation of the legislation was not prevented. At most what was done was consciously to refrain from taking a course which, had it been taken, would then, for the first time, have brought into existence a situation whose features would have subjected the appellants to liability to pay tax. But it is not to this that sec. 260 is directed.''

It is true that there are differences between the facts of this case and Slutzkin's case, even in regard to the confined context which I am considering now. Detail was an operating company whereas the relevant company in Slutzkin's case was a redundant company. There was no tax problem as such in Slutzkin's case, whereas in the present case large operating profits of the company did postulate, if not tax problems, at least significantly heavy tax liability either on the company, or on its shareholders if a distribution was made (Mr Gelder p. 57). Again in Slutzkin's case, there was no use of the company's funds to finance the purchase of the shares, but this is of no significance for present purposes, as the agreement being considered at this moment does not establish such a payment. The agreement being considered stops short of demonstrating that the funds for the purchase of the shares did in fact derive from the distributable profits. The appellants, under the written agreement for the sale of the shares, were entitled to expect payment from a source on the side of Shareholder, and such a payment was made to them by the bank cheques drawn on the Bank of New Zealand in circumstances which I have earlier referred to. There was nothing to indicate the use of the company's funds as purchase money for the shares. In Slutzkin again, there was no intention as here, on the part of the vendor shareholders to set up a similar company and trade as before but this cannot bring sec. 260 into operation. The motives of the purchaser in regard to the disposal of the moneys received on the sale of the shares are a matter for him and whether he squanders the price or deals with it to make a profit, the receipt of the purchase price is still a capital receipt. In the result, if all that the Commissioner can rely upon as the relevant ``contract agreement or arrangement'' bringing sec. 260 into operation, is the agreement for the sale of the shares - with or without the setting up of Trazian to take over Detail's business - it seems to me that he must fail. In coming to this conclusion, I am mindful of the fact that in
F.C. of T. v. Gulland 85 ATC 4765; (1985) 62 A.L.R. 545 Gibbs C.J. after referring to Newton v. F.C. of T. (1958) 98 C.L.R. 8 did say at ATC p. 4771; A.L.R. p. 552:

``The question, according to this test, is whether the arrangement, on its face, must necessarily be labelled as a means to avoid tax. That test is a useful one, and it has often been applied, but it does not provide a guide to the decision of every case.''

(My emphasis)

(The other members of the Court also make clear the importance of tax avoidance appearing on the face of the arrangement.) His Honour then referred to what may be described as the ``choice'' principle upon which Barwick C.J. had observed in Slutzkin's case in the passage just quoted, and then mentioned
Cridland v. F.C. of T. 77 ATC 4538; (1977) 16 A.L.R. 355, and Slutzkin as well as other cases in which the choice principle can be seen to operate. That principle goes back to
F.C. of T. v. Purcell (1920-1921) 29 C.L.R. 464 and the remarks of Gavan Duffy and Starke JJ. in regard to the predecessor to sec. 260 are particularly apt here:

``If a person actually disposed of income producing property to another so as to reduce the burden of taxation, the Act contemplates that the new owner should pay the tax. The incidence of the tax and the burden of the tax fall precisely as the Act intends, namely upon the new owner. But any agreement which directly or indirectly throws a burden upon a person who is not liable to pay it is within the ambit of s 53.''

An examination of the judgments of the Judges who formed the majority in Gulland's case does not persuade me that inroads have been made upon that principle in the case of a sale of shares, and in my view it still permits a taxpayer to sell his shares and sever his connection with a company whenever he wishes to without being liable to pay tax on the money he receives (excluding of course, cases of share trading and cases within sec. 25A). I will deal later with the evidence in the case showing the appellants' knowledge and understanding of the transaction into which they considered they were entering.

ATC 4916

The second context is one which includes the events leading up to the signing of the written agreement, that agreement itself, the banking transactions in which the appellants were engaged and the movement of the funds as shown on the diagram earlier depicted.

This second context to which attention is now to be directed is one in which the only inference open is that there has been devised, by what I will refer to as the Shareholder interests, a plan which proffers an apparently genuine agreement for the sale of the shares, but which from the series of transactions - movements of funds - demonstrated by the evidence brings into existence a tax avoidance scheme with a wholly different emphasis from the tax avoidance arising from the mere execution by the appellants of the written agreement, which, as I have explained above, does not bring sec. 260 into operation so as to make the appellants liable under the assessments. In order to determine how sec. 260 operates in this second context, I make the assumption to which I have earlier referred, namely that Mr and Mrs Clough were parties to an agreement or arrangement - it will be convenient to refer to it as an arrangement - that their shares would be transferred and the funds of Detail would be disposed of so that the end result would be that they would receive the benefit of Detail's profits, for if there were no such arrangement then this second context need not be considered. In other words, this second context is to be considered from the standpoint that the written agreement for the sale of the shares is not the agreement or the whole agreement or arrangement upon which sec. 260 is called upon to operate but that there is a wider arrangement going beyond that involved in the written agreement. One asks oneself then, what consequence flows from the fact that the parties have executed the written agreement but the facts of the case show a wider arrangement.

On the footing that the appellants and the Shareholder interests were involved in the transaction in the way shown in the written agreement and in the diagram, it is plain beyond argument that the effect of the transaction (viewed objectively) was to prevent Detail being able to pay its tax for the year ended 30 June 1980, and the inference is inescapable that it was the clear intention of the parties to the transaction that that should be so. What was being done amounted to a course of conduct by the parties, in concert, inevitably having the consequence of preventing a taxpayer, namely Detail, from being able to pay tax that would become due. On the assumption being made that the transaction under consideration was one to which both appellants and the Shareholder interests were parties, the evidence plainly discloses that the intention was to give the vendor shareholders the benefit of Detail's profits without the necessity for any declaration of dividend and without the necessity for Detail or the appellants paying any tax on those profits, the Shareholder interests to receive $33,000 out of them. The payment out by Mr Clough of Detail's cash assets to Lockwing at the direction of Shareholder as per the written agreement amounted to a defiance by Mr Clough, as a director of Detail, of the spirit and purpose of sec. 67 of the Companies Act, and the Shareholder interests both planned and joined in that defiance. It was, at the very least, an unlawful reduction of capital.

The case here is an unusual one - one usually would not see such blatant tax avoidance or evasion as the Shareholder interests plainly devised, but its novelty should not prevent sec. 260 doing the work which in my view its very wide words were intended to do, if the fact be that the appellants were parties with the Shareholder interests to that avoidance or evasion. In virtually all of the cases in which sec. 260 has been applied, including Gulland, the taxpayer, in concert with others, has under an ``arrangement'' made with the other party established real transactions which had legal effect and tax consequences and sec. 260 has then struck down so much of the arrangement avoiding tax as is necessary to expose the taxpayer to the liability for tax which such transactions have been able to avoid. In the present case the novelty is that it is the one total transaction which is to be regarded as the ``arrangement made or entered into'' within sec. 260. The arrangement proved to have been made in the context being considered, is not aptly described as an arrangement ``to liberate'' Detail's profits as Dixon C.J. described the ``arrangement'' made in Hancock's case - the arrangement here proved is an arrangement more correctly described as one under which the appellants and Shareholder in concert, were to ``make off'' with Detail's profits, the

ATC 4917

appellants keeping $711,346 and the Shareholder interests getting $33,000 without the appellants, Detail or Shareholder paying tax thereon. It would be tax avoidance in its most heinous form and it would be surprising in my view, if sec. 260 did not operate to avoid the arrangement.

On the assumption being made that the appellants were parties to the transaction, it is plain from what was done that it was the intention of the parties that no consideration should pass from Shareholder to the appellants in respect of the transfer of the shares which the appellants were making to Shareholder, or, if you like, that the intention was that any consideration passing from the Shareholder interests would immediately be recouped to them out of Detail's profits by the various cheque movements disclosed. The essence of the scheme was that the Shareholder interests although appearing to pay, would in fact pay nothing for the shares and that the appellants would be left with Detail's profits less $33,000 paid to the Shareholder interests.

On any view the ``purpose or effect'' of the transaction, within sec. 260, was to deprive Detail of its profits $744,346 and leave the appellants in possession of $744,346 less $33,000 paid to the Shareholder interests, without the appellants paying any tax thereon. The words ``purpose or effect'' in sec. 260 were considered by the Privy Council in Newton v. F.C. of T. (1958) 98 C.L.R. 1 at p.8:

``The word `purpose' means, not motive, but the effect which it is sought to achieve - the end in view. The word `effect' means the end accomplished or achieved.''

In Hancock's case at p. 270 Fullagar J. (whose decision was affirmed on appeal) said:

``The first question is whether the transaction which I have described, and the parties to which were Rowdell and the Hancocks and Mulga Downs, constituted or involved, within the meaning of s. 260 of the Assessment Act, a `contract agreement or arrangement' which had the purpose or effect of avoiding any liability imposed on Mr George Hancock by the Act. This is ultimately a question of fact, but it depends in no way on the credibility of witnesses. There is no conflict of evidence, and there is no witness whom I disbelieve. It is simply a matter of inference from the nature and result of the transaction itself and from all the surrounding circumstances.''

The ``effect'' of the transaction was also in my view ``to prevent the operation of the Act'' within sec. 260(1)(d) in regard to Detail's tax liability and the appellants' tax liability on any distribution of profits. In Hancock's case, Dixon C.J. at p. 278 said:

``The expression `preventing the operation of the Act in any respect' is generally regarded as difficult, but I treat it as simply meaning the operation which the Act would have in a given case if it were not for the contract agreement or arrangement made for the purpose (or having the effect) of preventing it. It is the operation of the Act in relation to the distribution and taxability of the profits of a private company that in part the plan was designed to `prevent'.''

One is reminded pointedly of the words of Lord Denning in Newton's case (supra) at p. 8, where his Lordship said:

``In order to bring the arrangement within the section you must be able to predicate - by looking at the overt acts by which it was implemented - that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge that the transactions are capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax, then the arrangement does not come within the section.''

Gibbs C.J. in F.C. of T. v. Gulland 85 ATC 4765; (1985) 62 A.L.R. 545 at ATC pp. 4773-4774; A.L.R. p. 555 cited their Lordship's observation, and in coming to the conclusion that sec. 260 applied to the facts before him, placed weight on the fact that the arrangements made ``bear on their face an indication of a purpose to avoid tax''.

In the present case, the arrangement disclosed (on the basis that the appellants were party to the transaction carried out) was an arrangement whose sole purpose was tax avoidance. Detail was to be stripped and left unable to pay tax and although Shareholder, as Detail's new shareholder, received (per Lockwing) Detail's profits the whole purpose of the scheme was that the appellants, without

ATC 4918

paying tax, would get the benefit of those profits. By no stretch of imagination could it be classed as an ordinary commercial dealing.

Given then that sec. 260 applies to the transaction which it is assumed the appellants entered into with Shareholder, in what way does it make the appellants liable to the tax claimed in the assessment? Once again, the explanation of the operation of sec. 260 given by Dixon C.J. inHancock's case at pp. 279-280 adapted to the facts of the present case supplies the answer to that question. The facts in that case were that the shares in M.D. Pty. Ltd. were held by the members of the Lefroy and Hancock families. In February 1949 W suggested to one of the Hancocks that Rowdell Pty. Ltd., a company which W and his wife owned and which traded in shares and investments, might buy all the shares in M.D. Pty. Ltd. W proposed that Rowdell Pty. Ltd., while holder in the shares in M.D. Pty. Ltd., should by distribution take the accumulated profits (which would be offset in calculating taxable income of Rowdell Pty. Ltd. by the subsequent share-trading loss) of the latter and then resell all the shares to the Hancocks at a reduced price consequential upon the loss of assets representing the withdrawn profits. The head of the Hancock family who had always wished his family to be the only persons interested in a property owned by M.D. Pty. Ltd., readily agreed to the suggestion. W's suggestion was in substance carried out and after the purchase of the shares by Rowdell Pty. Ltd. a distribution of £50,000 was made, which meant that no tax under Div. 7 of the Income Tax Assessment Act was payable. Although prima facie £50,000 went into the assessable income of Rowdell Pty. Ltd., yet the pro tanto inclusion in the assessable income of that figure was answered by the loss that company would be shown to make on a comparison between the price at which it bought the shares from the Lefroys and the Hancocks and the much lower price at which it had resold them to the Hancocks. The Hancock's shares were purchased by Rowdell Pty. Ltd. for £23,500 and all issued shares were sold to the Hancocks for £21,000, so that the Hancocks received £2,500 in money. The Commissioner sought to add to the appellant's assessable income an amount equal to their share of the £50,000 profits distributed, and Dixon C.J., Kitto and Windeyer JJ. (Menzies J. dissenting) held that he was correct in doing so. At p. 281 Dixon C.J. said:

``The critical object the scheme or plan had in view was to produce without tax the very result which subject to tax could have been obtained by applying, under his direction, George Hancock's share of the distributable fund less the £2,500 received in cash in or towards the acquisition of the Lefroy shares. Why should not all intermediate steps be disregarded in pursuance of s. 260?''

The reason why that object was ``critical'' had been explained by the Chief Justice at p. 280:

``Indeed the point of the whole arrangement that has been considered void as against the Commissioner was to effect a liberation of the fund of profits without incurring tax and at the same time by means of the fund liberated to acquire the shares of the Lefroys.''

The critical object in the present case was to produce without tax the very result, which subject to tax, would have been obtained if Mr Clough, acting for the other two appellants (as the evidence proves he was), had signed a cheque or cheques paying Detail's profits over to the appellants as its then shareholders - and the appellants had then passed $33,000 to the Shareholder interests. Why should not all the intermediate steps be disregarded in pursuance of sec. 260? In Hancock's case the Chief Justice went on at p. 281 to explain further the true nature of the annihilating effect of sec. 260:

``The view I have expressed depends in no respect upon tracing the identity of moneys employed in the steps taken to reach the result. When the purpose is to assess a taxpayer who has reached a situation which but for a scheme swept away by s. 260 would or might spell liability to tax, it does not appear to me to be necessary to trace the identity of moneys as if one were seeking to identity in an investment trust funds that had been misapplied. Section 260 is directed against the validity of arrangements designed to avoid taxation where, but for the cover the arrangement would give, taxation would fall. The resource of ingenious minds to avoid revenue laws has always proved inexhaustible and for that reason it is neither possible nor safe to say in advance what must be found, after a

ATC 4919

scheme is struck down under s. 260, before a consequential assessment can be justified. But it seems to me that what matters must be the resulting financial situation, one of change if not invariably of betterment, and the factors which would but for the void scheme have made it taxable. These factors will depend on general conceptions of what is taxable as income, but seldom, I should have thought, would the actual tracing of moneys be the test of that liability. For example, when Watson's company actually bought and paid for the Lefroy shares, to finance the payment it was necessary to use the proceeds of bonds which the company had `bought on credit' from Mulga Downs Pty. Ltd. for the purpose and resold for cash, and also to depend to some extent upon some moneys belonging to Watson's company. That does not seem to me to matter. It was all balanced out afterwards, of course, and was only part of the financial expedients for carrying that part of the plan through. It does not seem to me to matter at all. what interim financial expedients were resorted to or which moneys or whose credit was used in the course of carrying out the transaction. It is the result that exposes the taxpayer to liability: a result necessarily involving the employment by the taxpayer of a distribution of the profit fund. The means, if otherwise they could be considered significant upon a question of ultimate liability, would be swept away like other parts of the `arrangement' and the steps by which it was carried into effect. In the present case the only difficulty, as it seems to me, lies in the form in which the appellant George Hancock derived in the end the greater part of benefit of the transaction, namely shares, the Lefroy shares. But for the reasons that I have given that should not be regarded as inconsistent with his having derived income, once the disguising elements of the `arrangement' are stripped away under s. 260.''

(The emphasis is mine.)

It is also appropriate to quote from the judgment of Walsh J. in
F.C. of T. v. Ellers Motor Sales Pty. Ltd. & Ors 72 ATC 4033; (1971-1972) 128 C.L.R. 602 at ATC p. 4042; C.L.R. p. 620 for that was a case where the profits of the company had left the company and an equivalent amount was found in the hands of the former shareholders. His Honour said:

``Subject to certain arguments to the contrary which have yet to be considered, this appears to me to be an arrangement of the kind to which sec. 260 should be applied, so as to enable the Commissioner to assess tax on the former shareholders in Harcourt as if they had remained its shareholders, in accordance with the principles as to the operation of sec. 260 established in such cases as Bell v. F.C. of T. (1953) 87 C.L.R. 548, F.C. of T. v. Newton (1957) 96 C.L.R. 577, and on appeal to the Privy Council 98 C.L.R. 1, and Hancock v. F.C. of T. (1961) 108 C.L.R. 258. According to those authorities it is appropriate to look at the end result of the transaction from the point of view of Harcourt and from the point of view of Harcourt and the point of view of those who were its shareholders before the transfer of the shares to Holdings. The end result was that the profits had gone out from Harcourt and that an equivalent amount had come into the hands of its shareholders. To adopt the phrase used by Fullagar J. in Newton's case (1957) 96 C.L.R. at p. 656, it may be said in my opinion that `the only real money' which figured in the transactions was Harcourt's money. The loan from the bank to Ellers, the loan from Ellers to Holdings, the use by Holdings of the credit so obtained to pay for the shares, the use of the dividend received by Holdings of to pay pack the loan obtained from Ellers and the use by him of that money to repay the bank were all steps in the transaction which, although they were `genuine' and although on the face of them they effected transfers of assets (the Harcourt shares) in exchange for a price, did not prevent the end result from being, as it was intended to be, that the Harcourt profits found their way into the hands of those who had been its shareholders. It does not matter that the payment for the shares was made (by means of borrowed money) before the dividend was actually received by Holdings.''

Reference may also be made to
Mayfield v. F.C. of T. (No.2) (1961) 108 C.L.R. 323 in which Hancock v.F.C. of T. was applied. That case involved the sale of a company's business to a new company, the sale of shares to outside purchasers using temporary accommodation

ATC 4920

and a declaration of a dividend providing the purchasers with funds to pay out the overdraft. Section 260 operated to treat the shareholders as if in receipt of a dividend. In the present case, the ``liberation'' of the funds of Detail by the cheque drawn in favour of Lockwing on Detail's account for $744,346 and signed by Mr Clough, provided the means by which the appellants acquired the purchase money for the shares which they transferred. Just as the distribution by Mulga Downs of its profits to Rowdell (which was taxable as a dividend although in the circumstances tax was not payable) was, because of its identity with the purchase money for Lefroy's shares, treated as if it were a distribution to the Hancocks, i.e. the transfer of shares was treated as not having taken place, so the payment of $744,346 (less $108) is to be regarded as a distribution of Detail's profits to the appellants, for sec. 260 notionally strikes down the transfer of the shares so as to produce that result. Counsel for the appellants has contended that this application of sec. 260 is not permitted because it amounts to a conversion of the real facts proved into fictional facts. It is well established that sec. 260 is an annihilating provision and not a charging provision which enables the Commissioner to ignore the arrangement to which it applies but which does not permit him to substitute a new and fictitious set of facts in its place (F.C. of T. v. Gulland 85 ATC 4765 at p. 4,771; (1985) 62 A.L.R. 545 at p. 552). In my view, counsel's criticism is not a valid criticism for all that is being done is to consider not just the liberation of Detail's profits to its new shareholder, Shareholder Pty. Ltd. (per Lockwing) but to look also at the same time to the end result so far as the receipt by the appellants of the purchase money for their shares is concerned, and that is at the very heart of the proposition expounded by the Court in Newton v. F.C. of T., Bell v. F.C. of T., Hancock v. F.C. of T. and Mayfield v. F.C. of T.

One asks oneself then, upon what basis a liability for tax on that amount of $744,346 which on any view was a payment out of Detail's profits (less $108) can be imposed on the appellants. In the present case, the ``substantial identity between what the Company distributed and what the members received'' is sufficient as Menzies J. put it at p. 334 in Mayfield (No.2), and it is plain beyond argument, in my view, that that identity exists. In my view, the appellants, like the Hancocks, are to be taxed upon the amount which, but for the tax avoiding arrangement involving the payment by Detail to Shareholder (per Lockwing), would have been paid to the appellants themselves. In the context of the theory of the operation of sec. 260 as expounded by Dixon C.J., one then asks whether any tax burden would have fallen upon Shareholder under the Act, and that requires it to be established that there was such a burden. Counsel for the Commissioner has submitted that the amount $744,346 (less $108) paid to Shareholder was taxable either under sec. 44, 47 or 108 of the Income Tax Assessment Act, and for the reasons I now set out I am of the view that it was taxable under sec. 47 and 108.

In my view, sec. 44 does not operate to make the payment taxable as a dividend; before that section can operate it must be shown that there has been a dividend ``paid to him by the Company out of the profits''. ``Dividend'' is defined to include:

  • (a) any distribution made by a company to any of its shareholders, whether in money or other property;
  • (b)...
  • (c)...

F.C. of T. v. Blakeley (1951) 82 C.L.R. 388 a company which had made profits but had not declared a dividend ceased to carry on business, and the shareholders without any action being taken by the company, simply divided the profits between themselves. It was held that sec. 44 did not apply and that sec. 47 could not apply because there was no distribution by the liquidator. Section 47 however was amended by sec. 10 of Act No. 85 of 1967 by inserting two new paragraphs:

``(2A) Where-

  • (a) the business of a company has been, or is in the course of being, discontinued otherwise than in the course of a winding up of the company under any law relating to companies;
  • (b) in connexion with the discontinuance, any moneys of the company have been or other property of the company has been, on or after 19 October 1967, distributed, otherwise than by the company, to shareholders of the company; and

    ATC 4921

  • (c) the moneys or other property so distributed are not, for the purposes of this Act, dividends,

the distribution shall, subject to sub-section (2B), be deemed to be, for the purposes of this section, a distribution to the shareholders by a liquidator in the course of winding up the company.

(2B) Where-

  • (a) sub-section (2A) would, but for this sub-section, apply in relation to any moneys or other property of a company distributed to shareholders of the company; and
  • (b) the company is not dissolved within a period of 3 years after the distribution, or within such further period as the Commissioner allows,

sub-section (2A) shall not apply, and shall be deemed never to have applied, in relation to those moneys or that other property, and those moneys or that other property so distributed shall, for the purposes of this Act, be deemed to be dividends paid by the company to the shareholders out of profits derived by it.''

It is plain from an examination of the Parliamentary debate in the House of Representatives Vol. H. of R. 57 pp. 1555-2874, 1967 that these amendments were inserted specifically to overcome the decision in Blakeley's case, and Hansard may be looked at in order to determine the mischief to which the amendment was directed (
F.C. of T. v. Whitfords Beach Pty. Ltd. (1981-1982) 150 C.L.R. 355 per Mason J. at p. 373;
Fairfield Municipal Council v. McGrath (1984) 2 N.S.W.L.R. 247;
BCE & BLF of N.S.W. v. Minister for Industrial Relations & Anor (1985) 1 N.S.W.L.R. 197 at pp. 203-206) where the cases are collected. The Minister on the second reading said (1987):

``As to liquidations, the position is that distributions made by a liquidator in the course of a formal liquidation are taxable in the hands of shareholders to the extent that they are made out of income. Some companies are not, however, formally liquidated. Shareholders wishing to wind up a company sometimes merely take possession of the company's tangible assets, collect and retain debts due to it and discharge debts due to it and discharge debts due by it, and then treat the company as wound up. Where these informal procedures are followed, distributions made out of income of the company are not taxable although they would be if made in the course of a formal liquidation.

The bill proposes that distributions made in these informal liquidations will in future be taxed in the same way as distributions in an orthodox liquidation.''

At p. 2235 Mr St John, Member for Warringah made the observation in regard to the Minister's remarks just quoted:

``That latter quotation as I say, was directed towards Blakeley's case, and the amendments in question are designed to overcome the effect of that case.''

In my view, the words ``otherwise than by the company'' in sec. (2A)(b) have the effect that the payment by Detail of $744,346 to Lockwing at the direction of Shareholder is deemed to be a dividend paid to Shareholder, as the shareholder of Detail, under the section. Detail's business was within sec. (2A)(a) ``discontinued otherwise than in the course of a winding up'' and para. (c) applies. Subsection (2B) would then operate to deem the moneys so distributed to be dividends paid by the Company because Detail was not dissolved within a period of three years after the distribution in accordance with subsec. (2B)(b) nor did the Commissioner allow further time.

The stripping of a company of its cash assets by its shareholders under a scheme such as the one under consideration here was perhaps not the sort of conduct that was envisaged when the Act was amended but such a scheme is so plainly within the words of subsec. (2A) ``otherwise than by the company'' that it does not admit of argument in my view. In the result then, the payment to Lockwing at the direction of Shareholder of Detail's profits is a deemed dividend paid to Shareholder under sec. 47 and taxable. Further, the payment to Lockwing at the direction of Shareholder could also be held to be a distribution ``for the individual benefit'' of Shareholder within sec. 108 so as to make it a deemed dividend within that section and taxable.

In the result then I am of the opinion that if the appellants were parties to the transaction

ATC 4922

disclosed in the agreement and the diagram, sec. 260 applies and the Commissioner's assessment is properly founded upon sec. 47 and 108 of the Act.

I do not consider that the conclusion I have arrived at gives to sec. 260 an operation which is to be regarded as in any way at variance with the operation given to it in the decided cases. It is merely the application of the established construction of sec. 260 to a state of affairs involving an arrangement, under which profits of a company have been appropriated by shareholders with the express intention of not paying tax upon those profits.

The critical question then, upon which the appellants' liability to pay the tax assessed depends, is whether the appellants were in fact parties to an arrangement to strip Detail of its assets and make them available to the appellants with a fee of $33,000 being paid to the Shareholder interests, for an arrangement within sec. 260, although less than a binding contract or agreement, must be consensual (
F.C. of T. v. Lutovi Investments Pty. Ltd. 78 ATC 4708; (1978) 140 C.L.R. 434 at ATC pp. 4712-4713; C.L.R. p. 444). If they were, then for the reasons I have given, they were liable pursuant to sec. 47 and 108 to pay tax on the amount of Detail's profits. If they were not, then no tax was payable as I have earlier explained - there was merely a bona fide sale of shares as far as they were concerned (Slutzkin's case). I therefore turn now to the evidence given in the case.

I am satisfied that the parties to the written agreement for the sale of shares, namely the appellants on the one hand and, what I have referred to as the Shareholder interests on the other side, were at all relevant times at arm's length and that the extent of the appellants' knowledge of what was being done, and what was intended to be done was only such as may be inferred from the terms of the written agreement itself. In speaking of knowledge in this context, I am intending to refer to the extent of the knowledge of both Mr and Mrs Clough and, accountant Mr Gelder and Mr Ray the bank manager. The appellants expected to receive the purchase price of $711,346 for their shares as stated in the written agreement and intended that the transaction should result in the whole of Detail's assets being under the control of Shareholder as would be expected. I am satisfied that they had no knowledge at all as to what Shareholder or Lockwing might do with those assets. They expected that, as a result of the agreement, Mr Goldspink would receive a payment of $33,000. I am satisfied that they had no conception at all that the Shareholder interests would dispose of the company's assets as it did, or that the transaction would have the result that Detail's assets would be the source of the purchase price of the shares which they sold. In this regard it is not unimportant to recall that the agreement for sale of the shares in cl. 8(a) gave an express warranty that the purchaser would not bring it about that the company would give any financial assistance for the purpose of, or in connection with, the purchase of the shares.

The evidence shows that at the time the transaction was entered into there was a continuity of advertisements, some in The Chartered Accountant in Australia, in regard to the purchase of companies with current or accumulated profits, and that tax avoidance schemes were very prominent in the minds of both the accountancy profession and shareholders in private companies. The evidence shows that Mr Gelder made an enquiry about the reputation of Mr Goldspink in order to satisfy himself that he was dealing with a reputable person, and the result of his enquiry was favourable to Mr Goldspink. The evidence also shows that Mr Gelder had earlier received from Mr Goldspink a copy of an opinion of a Queen's Counsel of acknowledged eminence and integrity answering in the negative the question whether the shareholders of a private company with substantial revenue reserves might safely collectively sell their holdings in that company without being at risk that the sale proceeds or any part thereof would form part of their respective assessable incomes. It was drawn to counsel's attention that a condition of any such sale would be that the assets of the company would first be realised and turned into cash or its equivalent such as a bank cheque. Counsel's opinion made clear that the negative answer was applicable to all situations other than resale of shares for a profit (sec. 26(2) (now sec. 25A)) or sales of shares by share trader. Counsel cited Slutzkin & Ors v. F.C. of T. 77 ATC 4076; (1976-1977) 140 C.L.R. 314 as the authority for this advice. Having seen Mr Gelder in the witness box, I consider that the proper inference to draw from all the facts is that he would genuinely regard

ATC 4923

that opinion as reinforcing the propriety of what he was advising his clients to do.

There is nothing to indicate any belief in Mr Gelder or Mr and Mrs Clough that the transaction they were entering into was dishonest or in any way fraudulent on the Taxation Commissioner or that it would result in Detail's assets being the source of the purchase money for the shares. Mr Gelder's evidence was, that before the settlement on 4 March 1980 he rang Mr Ray, the bank manager, ``just to assure that there would be clear funds available for the settlement from the purchaser'' (42). Their sole concern was to receive capital moneys for their shares, sever their relationship with Detail and be relieved of whatever tax problems it had. I am satisfied that they suspected that the Shareholder interests had at least something in mind regarding tax avoidance in view of the price which those interests were prepared to pay for the shares in Detail, and I shall deal more fully with this in a moment. There is no evidence that at the settlement either Mr and Mrs Clough or Mr Gelder were aware of the significance of what was being done in regard to the movements of funds, and they were not present when the Shareholder interests made the final movements; the conclusion to be drawn is that they were at all times wholly unaware that what was being done was to bring about the result shown on the diagram. Mr Ray, the bank manager who handled the banking aspect of the transaction for the appellants, including the telegraphic transfer of funds, saw nothing abnormal and stated that the transaction for the sale of the shares followed ordinary banking practice. My conclusion from the evidence is that nothing at the settlement roused or ought to have aroused the suspicion of the appellants that they might be then and there becoming involved in an ingenious tax avoidance scheme having the consequence that Detail was in reality paying the purchase price of the appellants' shares. There is no evidence from which to conclude that the Shareholder interests ever divulged any of their intentions to the appellants or to Mr Gelder and, the fact that the intention to strip Detail of its assets and leave it as a mere husk unable to pay its tax and to use those assets as the source for payment of the shares was at all relevant times known only to those on Shareholder's side who were controlling the transaction. It is apparent beyond argument that the object of the whole scheme, so far as the Shareholder interests were concerned, was to strip Detail of its assets and so arrange a transaction that the assets would be made over to the appellants in apparent payment for the appellants' shares. It is also to be said that there is no evidence that the Shareholder interests ever knew of the establishment by the Cloughs of Trazian Pty. Limited, nor of the intention of the Cloughs to have that company purchase the non-cash assets of Detail and carry on Detail's business as before, but that aspect of the evidence does not in my view play any significant part in this case.

The Commissioner in the present case seeks to make up for the deficiency of evidence of knowledge in the appellants by relying upon two separate lines of reasoning which in certain circumstances result in the law imputing knowledge where it has not been proved to exist and I shall shortly refer to the authorities in this regard. But first let me refer to some features of the evidence which both demonstrate that the appellants expressly refrained from making enquiries and which explain their attitude to the transaction.

Mr Clough was cross-examined as to whether he considered it strange that he should be getting the price for the shares that he was, in view of the potential tax liability in Detail:

``Q. It occurred to you at the time, did it not, that there was something strange about the fact that somebody was prepared to pay you this money for your shares in this company? A. Yes.


Q. May we take it that you thought at the time that it was in your interests not to enquire further as to what the explanation might be? A. Yes.


Q. May we take it that it was your own judgment, that the less you knew about it the better? A. Yes.''

He was then questioned in regard to signing the cheque for $744,346 in favour of Lockwing:

``Q. Did it occur to you as a possibility of what Lockwing would do with the money that it would send it around in a circle? A. I

ATC 4924

never even considered what they would do with the money.


Q. Did you ask Mr Goldspink whether the company was giving financial assistance in connection with the purchase of its own shares? A, I didn't ask. I believe the sale of the company, the sale of the shares of the company was a legitimate transaction; as a consequence of those advertisements in the accounting journal and so forth, advertised every day of the week - every month, I was assured it was quite legal and bona fide.

Q. That amount represented the whole of the assets of Detail Furniture Company Pty. Limited on that day, didn't it? A. Yes.


Q. Do you know who Lockwing Pty. Limited was? A. No.

Q. Did you care who Lockwing Pty. Limited was? A. No.

Q. Is this the position: That on 4 March you signed a cheque which paid over the whole of the assets of Detail Furniture Company Pty. Ltd. to Lockwing Pty. Ltd. neither knowing nor caring why that was being done?

A. That is right.


Q. Did it occur to you that there might be some connection between that payment of money and the puzzling willingness of the purchaser of the shares in the company to pay such money for them? A. No.''

Mr Clough made it clear that he left it to Mr Gelder ``to make whatever arrangements needed to be made about the financing of this transaction'' and his background as a cabinet maker does not suggest that he would be alive to the practical and legal steps to be taken in the sale of a company. He said he did not know where the purchase money of the shares was coming from. He knew little of the setting up of Trazian to take over Detail, although the evidence discloses that the minutes of the meeting of 11 February 1980 stated that he and his wife had indicated that sufficient funds would be provided by themselves and Gregrhon to finance the purchase by Trazian of the business of Detail. He denied that he knew the funds were going around in a circle.

``Q. You acted on the basis that after you sold your shares in the company its affairs were no further any concern of yours? A. Yes.


Q. What did you think was going to happen to that tax liability? (meaning the liability of Detail once Shareholder had acquired it) A. I did not know, I had no idea what the proposal was of the new purchasers. I believe that how they arranged it or whatever it was at the time, I frankly was not interested in it. I had too many other problems of my own to be worried about what it was the purchasers might have done, even though in hindsight it might have been wiser.

Q. Am I to understand you by doing this, you were freeing yourself of any liability, is that what you understood? A. Yes, that is right.''

He acknowledged that he regarded the whole transaction, i.e. the sale of the shares, and the setting up of the new company Trazian ``as a formality'' - as he, as a layman, well might - and he firmly maintained that he thought that by severing his connection with Detail and its tax liability he would be better placed financially in regard to the building of the home units at Forster. It is Mr Gelder's evidence that the Cloughs were in fact better placed financially after the transaction because of the substantial moneys owed them by Trazian compared to their being in debt to Detail. He said there was a need for them to realise some of their assets.

Mr Gelder acknowledged that he made no enquiry as to who the persons associated with Shareholder were. He was cross-examined in regard to his understanding of the payment by Detail to Lockwing:

``Q. Apart from being a gift or a loan, what else could it have been? A. Well, it could have been for any number of things. I do not know why the purchaser required payment to be made to Lockwing Pty. Ltd.

Q. You were not aware whether Lockwing Pty. Ltd. was a company of any substance? A. No.


Q. Did it occur to you as a possibility of what Lockwing would do with the money

ATC 4925

that it would send it around in a circle? A. I never even considered what they would do with the money.


Q. Did it occur to you as a possibility that this payment was being used to give financial assistance in connection with the purchase of the shares in Detail Furniture Company Pty. Ltd.? A. I didn't. As I say, I never considered what the purpose was.


Q. Did you consider that the less you knew about the details of it the better? A. Well, I knew that was an element in the Slutzkin's decision that it was better not to enquire as to the possible use of the company afterwards, but I still didn't believe that what happened to the company was going to happen.

Q. Leaving aside whether or not that is something in the Slutzkin decision your state of mind on that day was that you regarded it best not to enquire as to what would happen to the company after it was sold? A. Well, the point is that it is only by virtue of the fact that it was a consideration in the Slutzkin case, but I had no qualms, I wasn't concerned - I didn't see any red lights there at all.

Q. It was your view that it was better not to enquire into the details? A. Not that I was concerned - yes, yes.

Q. Was it because you considered it was better not to enquire too closely into the details that you did not raise the subject of whether the moneys of the company were being used to finance the purchase of its shares with Mr Goldspink? A. I mean, no, in that that wasn't a consideration.''

I pause here to make an observation in regard to Mr Gelder's reference to Slutzkin's case. It is a misreading of Slutzkin's case to suggest that a purchaser on a sale of shares will more effectively avoid the consequence of sec. 260 if he does not make any enquiries. When Stephen J. in his judgment in Slutzkin's case at ATC p. 4081; C.L.R. p. 322 said: ``They were in no way interested in what occurred to the company after they sold their shares'' he merely meant that the purchaser's sole interest was in getting their money for the shares and the transaction did not go beyond that as far as they were concerned. I am quite satisfied from the whole of Mr Gelder's evidence that his answers to the questions just given above, are not to be taken as an implied admission that he suspected let alone could see plainly what was going to be done but are to be taken to mean merely that he thought Slutzkin's case did give some protection if enquiries were not made. Indeed the answers given by Mr Gelder, in my view, are rather to be taken as an indication of his ignorance as to what was about to happen and as to the limits to which tax avoiders would go in order to avoid tax. He simply did not understand what could be done by an enthusiastic tax avoider when the agreement for the sale of shares provided for the assets of the company not just to be made available to the new shareholder by bank cheque or authority to operate the account, but to be paid over to a nominee of the new shareholder.

There is every reason to assume that Mr Clough's view on the significance of enquiry was as misguided as Mr Gelder's, but again it was misguidedness against a background not of awareness or a suspicion that Detail's assets would pay for the shares being sold but of ignorance as to what measures the purchasers might adopt on their side to gain profit from the transaction. This conclusion is reinforced in my view by the fact that Mr Gelder made a direct enquiry as to the bona fides and standing of Mr Goldspink and received a favourable reply:

``Q. What then did it matter to you whether or not the purchaser of the shares in the company or the agent was reputable? A. Well, because there were a number of companies advertised in the accounting journals and so forth for companies with accumulated profits and current year profits. Goldspink wasn't advertised in those journals. I had no knowledge of the fellow previously; I just wanted to satisfy myself mainly that he knew what he was doing and that he was a reputable person.


Q. Why did it matter to you that the purchaser was reputable or not reputable? A. I have endeavoured to tell you.''

Mr Gelder was aware that at the settlement at the bank, Mr Davoren, Mr Goldspink's representative, received the cheque drawn on Detail's account in favour of Lockwing. But I conclude that he attached no special

ATC 4926

significance to that, even if it may have been negligent or foolish of him not to have done so. If this transaction had occurred at a later time when tax avoidance schemes of this nature were well known to the general public, the conclusion to be drawn may have been quite different.

He was asked:

``Q. It is the fact, isn't it, that this transaction was entered into mainly for taxation purposes? A. Could I answer that by saying that was the major consideration.''

It should be repeated here that neither Mr Gelder nor the Cloughs have ever been other than entirely frank in acknowledging that the purpose of selling the shares to Shareholder - as they intended the transaction to be - was to receive a capital sum, i.e. non-taxable, as the purchase price (Slutzkin's case). They intended thus to avoid the worry, as I said earlier, that they would need to give attention to the fact that Detail would have to pay tax on its profits and (although I am sure it was a wholly secondary consideration) that later on they as its shareholders would, if a distribution was made, and Mr Gelder in saying what I have just quoted was plainly referring to that.

From the foregoing there can be no doubt that the appellants did not in any way address their minds to the question or seek to ascertain what the Shareholder interests had in mind to do that would make it worthwhile for them to pay the price which they did for the appellants' shares, and in addition the appellants consciously refrained from making enquiries.

Counsel for the Commissioner contends that the circumstance surrounding the payment of the purchase price of the shares and the payment out to Lockwing at Shareholder's direction were of such a nature as to put any person, whether director of a company or not, upon notice that there was some scheme on foot involving a disposal of Detail's assets which had tax avoidance as its object and that the appellants cannot dissociate themselves from what in fact was done by Shareholder to achieve its purpose.

Counsel for the Commissioner as I have said, put this proposition on two bases: the first in reference to the cheque for $744,346 drawn in favour of Lockwing and signed by Mr Clough in his capacity as a director of Detail. Counsel cited
Selangor United Rubber Estates Limited v. Cradock (No. 3) (1968) 1 W.L.R. 1555 where Ungoed-Thomas J. considered inter alia the position of directors as trustees of their company's funds (pp. 1574-1578). That was a case in which action was brought by the Board of Trade in the name of the plaintiff company which was in liquidation, under a statutory power conferred by sec. 169(4) of the Companies Act, 1948 replaced by sec. 37 of the Companies Act, 1967,, against two directors seeking orders that the two directors pay to the official receiver certain funds of the company of which they had wrongly disposed. Ungoed-Thomas J. at p. 1577 said:

``So, in my view, in general as in this case, a credit in a company's bank account which the directors are authorised to operated are moneys of the company under the control of those directors and are held by them on trust for the company in accordance with its purpose.''

At p. 1578 he said:

``In my view, a director acting in a transaction on the direction of a stranger is fixed with the stranger's knowledge of the nature of that transaction.''

(See also
Korak Rubber Co. v. Burden (1972) 1 W.L.R. 602 as to the duties of a bank paying out on a cheque drawn by directors on company funds.) Counsel for the Commissioner submits that in the present case the payment by Mr Clough, as a director, of the whole of the company's cash assets to Shareholder per Lockwing without any enquiry as to why this was being done - it was said that it should have been done by making a bank cheque payable to Shareholder, or appointing it a signatory to Detail's bank account was sufficient to fix the appellants, both of whom were directors, with knowledge of the overall scheme in fact carried out and that sec. 260 could then be made to operate upon it. In my view, this proposition cannot be upheld. One may confidently agree with counsel for the Commissioner that there are many areas of law in which knowledge is imputed to a person, although there is in fact no knowledge, and that that then enables another to enforce against that person some duty for the breach of which he will be liable. One sees this constantly in the law of trusts, in the law of negligence, in the

ATC 4927

law of banker and customer and, as Selangor United Rubber Estates Limited v. Cradock (No. 3) shows, in the law of director and company, to mention but some areas of the law. But the law goes no further than to impute knowledge and then fasten the relevant liability by reference to that knowledge. Knowledge of a transaction and entering into a transaction are wholly different. The principle of law upon which the Commissioner seeks to rely at this point is one which has to do with a director's liability to the company as trustee of the company's funds, and I find it quite impossible to apply that principle so as to bring about the result that a taxpayer's presumed knowledge of a tax avoiding scheme contemplated by the other party makes him a party to that scheme for taxation purposes, even though the taxpayer neither involves himself in nor acquiesces, in any way, in that avoidance. In my opinion it must be shown, before sec. 260 can operate, that the taxpayer who has received the assessment was a real, not a notional, party to the arrangement which gives rise to the assessment. In my view, the mere fact that Mr and Mrs Clough have paid the cash assets of the company to Lockwing does not alone, or with the other evidence, prove that they were parties to the tax avoidance scheme devised and implemented by the Shareholder interests.

Counsel then sought to rely upon the proposition, well known in the law, that where a man wilfully refuses to make himself aware of fact which if enquired into would show that he was acting unlawfully, the law will infer that he has the knowledge which he refuses to make available to himself. Reliance is placed upon
The Zamora No. 1 (1921) A.C. 812 which was an appeal by a company against the condemning of its steamship ``The Zamora'' captured in 1915 whilst carrying a complete cargo of contraband to an enemy destination. The claim was made that because the managing director of the company who had arranged the shipment did not actually know that it was contraband, that was sufficient to prevent the ship being seized in prize. Lord Sumner delivering the judgment of the Privy Council said:

``Their Lordships have been invited to read this as saying that Mr Banck is not proved to have known the contraband character of the adventure; that is he did not know, because he did not want to know, he was within his rights and owed no duty to the belligerents to inform himself; and that The Zamora is condemned contrary to the passage above cited from The Hakan (1918) 1 A.C. 148, 155 upon a legal presumption arising solely and arbitrarily from the fact the whole cargo was contraband. It may be that in his anxiety not to state more than he found against Mr Banck, the learned President appeared to state something less, but there are two senses in which a man is said not to know something because he does not want to know it. A thing may be troublesome to learn, and the knowledge of it, when acquired, may be uninteresting or distasteful. To refuse to know any more about the subject or anything at all is then a wilful but a real ignorance. On the other hand, a man is said not to know because he does not want to know, where the substance of the thing is borne in upon his mind with a conviction that full details or precise proofs may be dangerous, because they may embarrass his denials or compromise his protests. In such a case he flatters himself that where ignorance is safe, `tis folly to be wise; but there he is wrong, for he had been put upon notice and his further ignorance, even though actual and complete, is a mere affectation and disguise. It is in the latter sense that their Lordships take the President's words. So far from finding that Mr Banck was devoid of knowledge of the contraband character of the adventure, he thought, and they agree, that Mr Banck understood it very well, so well that he knew where to draw the judicious line between scanty but sufficient information and undeniable complicity. Knowledge being proved, no opinion need by expressed as to the effect of presumptions in the present case.''

He Kaw The v. The Queen (1985) 60 A.L.R. 449 Gibbs C.J. in discussing the element of knowledge involved in possession of drugs for the purposes of a prosecution under the Customs Act, 1901 sec. 233B said at p.457:

``On any view of the effect of the section, if the suspicions of an incoming traveller are aroused and he deliberately refrains from making any enquiries for fear that he may learn the truth, his wilful compliance may be treated as equivalent to knowledge. If he is given a bag or parcel to carry into

ATC 4928

Australia in suspicious circumstances, or if there is something suspicious about the appearance, feel or weight of his own baggage, and he deliberately fails to enquire further, the jury may well be satisfied that he wilfully shut his eyes to the probability that he is carrying narcotics and for that reason should be treated as having the necessary guilty knowledge.''

But before the concept embodied in these quotations can avail the Commissioner, the circumstances must be such that it can be said in regard to Mr Clough or Mr Gelder, that ``the substance of the thing is borne in upon his mind'' as Lord Sumner put it, or that ``he wilfully shut his eyes to the probability that...'' as Gibbs C.J. put it. Of course it is for the appellants to prove that they did not have that particular state of mind, but for the Commissioner to succeed it must appear to the Court that the very thing that happened, that is the stripping of Detail's assets for the purpose of paying the purchase price for the shares was present to the minds of Mr and Mrs Clough or Mr Gelder as a course the Shareholder interests might take, and that for that reason they set their minds against making any enquiries. For it is only when that state of affairs is established that one can avail oneself of the appellants' ``knowledge'' to establish the critical matter that must be established, viz. that the appellants and the Shareholder interests did act in concert in the scheme to strip Detail. If one can take the appellants to have ``known'' in the sense used in The Zamora (supra) that Detail's assets might provide the source for payment of the purchase price of the shares, the Commissioner would succeed even though the appellants may not have known the precise manner in which that would be done. That knowledge in association with their willingness to part with their shares, would then be all would be required to establish that they ``entered into an arrangement'' under sec. 260, which had the purpose and effect of avoiding tax. The appellants would then, as I have explained earlier, be entering into an arrangement whose object was to make over to them the benefit of the profits of Detail. But if all that the appellants derived from the circumstances relating to the sale of their shares including their complete ignorance in regard to the companies Shareholder Pty. Ltd. and Lockwing Pty. Ltd., was that the Shareholder interests must be intending, at some time, some tax avoidance scheme (the nature of which the appellants could not perceive) so that they, the Shareholder interests, would not be left in the same tax position as Detail and as the appellants themselves would be if there were no sale of shares, that would not advance the Commissioner's cause, because it would provide no evidence that the appellants entered into the arrangement postulated by the Commissioner.

It is well to remember that tax avoidance has been practised over many many years, with some schemes proving successful and others not, and it will no doubt continue to be practised. The observation of Dixon C.J. in Hancock v. F.C. of T. (1961-1962) 108 C.L.R. 258 at p. 281 is pertinent here:

``The resource of ingenious minds to avoid revenue laws has always proved inexhaustible and for that reason it is neither possible nor safe to say in advance what must be found, after a scheme is struck down under s. 260, before a consequential assessment can be justified.''

The appellants did not perceive what was to be done, nor were the circumstances such, in their minds, that they considered they should concern themselves whether the Shareholder interests could not could not devise a scheme that would successfully save those interests from paying tax. In short, the circumstances of the sale of the shares to Shareholder as seen through the appellants' eyes, including the terms of the agreement may have suggested tax avoidance in some way in the future, but that was all. Looking back on the transaction after it has been completed, it may well be said that Mr Gelder was naive indeed in not being suspicious of the payment by Detail to Lockwing which the written agreement required, but naivete and even folly are a long way away from the giving of consent to a transaction designed by another. ``No unexpressed intentions of a shammer will affect the rights of the party deceived'' as Lord Diplock put it in
Snook v. London and West Riding Investment Ltd. (1967) 2 Q.B. 786.It is always appropriate to remind oneself that hindsight is 6/6 vision; and that that vision is not to be attributed to persons, in the position of the appellants, dealing with strangers in a transaction which at all times they considered to be a bona fide sale of shares.

ATC 4929

I have earlier set out the evidence upon which I base my conclusion that the appellants only ever regarded the transaction as one of sale of their shares for a proper - excellent, if you like - price and I am not satisfied that the appellants had any real knowledge or suspicion of what was to happen other than that the Shareholder interests intended at some unspecified time after the settlement, to put some scheme of tax avoidance into operation, the nature of which they were not aware.

If the fact be as I have found it to be that the sole interest of the appellants was in selling their shares and receiving the purchase price therefor - and starting all over again with a new company Trazian - does it matter that they had knowledge of the kind I have just described? In my view, the answer must be No. In Slutzkin's case the vendor-shareholder was held to be not in any way implicated in any arrangement involving the subsequent declaration of a dividend by the company in which he had held shares, so as to attract sec. 260, yet he knew, it seems, that the purchaser was a company which had engaged in dividend stripping and that quite plainly the price he was receiving for his share pointed to some tax avoidance being in the offing - it was in fact ``dividend stripping'' in that case. But the vendor shareholder was there, as here, entitled not to be interested, if I may put it that way, because his concern or interest was no more than to part from the company in which he was shareholder and make a sale of his shares to a purchaser who would pay him a sum which in law was a capital sum and not income liable to tax. That is what the appellants here thought they were getting and indeed thought they got. The fact that the appellants, after the transaction when all the mechanism of the scheme put into operation by the Shareholder interests has been brought to their attention, find it impossible to suggest what ``friendly'' or ``benign'' taxation avoidance scheme (if I may put it that way) the Shareholder interests might have engaged in in order to make the transaction profitable to them, is a factor for consideration but it is in no sense decisive of the state of their knowledge. The (written) agreement for the sale of the shares was the only ``agreement or arrangement'' within sec. 260 that was made between the appellants and the Shareholder interests, as in Slutzkin (supra), Harrison (supra) and Hennessey (supra) and there was no other agreement or arrangement. In
Hennessey v. F.C. of T. (1974) 5 A.T.R. 179 at pp. 185-186, Zelling J. faced a problem not dissimilar to the one I am concerned with here. He was concerned with a case where a question arose as to what inference should be drawn in regard to the knowledge of an accountant Mr Malone, who was directly involved on behalf of the vendor-shareholders of which he was one, in a transaction involving a sale of shares. His Honour said:

``I accept Malone's evidence that he was not familiar with the mechanics of dividend stripping. All he knew was that there was a market for such companies interstate and that those companies had expertise which he did not have. Mr Legoe laid great stress on the fact that Mr Malone was a public accountant and must have known or be taken to know how the purchasers would deal with such a company when they acquired it. I am satisfied that his practice as a public accountant had not given him that knowledge and that he was telling the truth in his evidence on that point.

It is quite true in finding facts sufficient to support an arrangement within meaning of s. 260 one can have regard to subsequent events. If all one knew in this case was that these subsequent events had taken place, it would have been a possible, but not a necessary inference, depending on the view taken by the tribunal of fact, that the subsequent events showed that they were in the contemplation of the parties when they made their original arrangement and that they therefore formed part of the arrangement between the parties. That is not this case. We know from the evidence, which I accept, that Malone made enquiry as to what was to happen afterwards and was told in effect it was no business of his, that Sticpewich and his co-director had not made up their minds as to what they would do, and that Malone neither knew of nor assented to nor ratified later any of the events after 26 November 1969. I therefore find that none of those events formed part of any arrangement between Malone and the purchaser company or its directors nor can they be attributed to Malone so as to found the necessary elements required to bring the transaction within the ambit of s. 260 of the Income Tax Assessment Act. It is true that

ATC 4930

in one sense the test is objective and not subjective but before one can apply that test one has to ascertain what the arrangement was: see the judgment of William J. in
F.C. of T. v. Newton (1957) 96 C.L.R. 577 at 630, 7 AITR 1 at 38 where his Honour said: `The purpose of a contract, agreement or arrangement must be what it is intended to effect and that intention must be ascertained from its terms. These terms may be oral or written or may have to be inferred from the circumstances but when they have been ascertained, their purpose must be what they effect'. (The emphasis is mine.)''

The appellants in the present case in my view bona fide believed that the sale of the shares did no more than pass any liability for tax to Shareholder and whether Shareholder could devise means to pay less tax than they the appellants would have had to pay if Detail had made a distribution was a matter that did not concern them. They had no knowledge that the company's profits would be used to pay for their shares. In my view they cannot, under sec. 260, be made parties to a tax avoidance scheme, devised by another, of which they were not aware.

It is appropriate to point out, before leaving the case, that the conclusion that sec. 260 does not fix the appellants with a liability to tax on the money they received on the sale of their shares to Shareholder Pty. Ltd. does not mean that the transaction has not brought tax consequences upon them arising from Detail Furniture Company Pty. Ltd. having been stripped of its assets and left unable to pay its tax. The evidence in the case shows that a recoupment tax assessment was raised by the Commissioner pursuant to the provisions of the Taxation (Unpaid Company Tax) Assessment Act, 1982, and the appellants have in fact paid in tax the sum of $337,291.20 being the tax payable by Detail and the whole of its operating profits and undistributed profits for the year ending 30 June 1980.

The order of the Court in each case is that the appeal is allowed and the amended assessment of the Commissioner is set aside. The Commissioner is to pay the appellants' costs.

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