Case U204
Members:PM Roach SM
Tribunal:
Administrative Appeals Tribunal
P.M. Roach (Senior Member)
The assessments
These references, heard together by consent, relate to the affairs of three applicants: a married couple and their son. I shall refer to the father, mother and son as F, M and S respectively. By reason of assessments (including, where appropriate, amended assessments) of income tax levied pursuant to the Income Tax Assessment Act 1936 ("the Tax Act") and of recoupment tax levied pursuant to the Income Tax Assessment Act 1936 ("the Tax Act") and of recoupment tax levied pursuant to the Taxation (Unpaid Company Tax) Assessment Act 1982 ["the T(UCT)A Act"], the applicants became liable to pay certain taxes. The taxes for which they so became liable became debts due to the Crown (sec. 208 of the Tax Act); if unpaid, could be sued for and recovered in any court of competent jurisdiction by the Commissioner (sec. 209 of the Tax Act); and the applicants were liable to pay interest on the taxes (including additional tax) from time to time unpaid after the time when they became due and payable at the rate of 10% per annum up to 13 February 1983 and at 20% per annum thereafter.
2. The liabilities so arising flowed out of transactions which took place in the month of July 1979. After excluding from consideration such tax liabilities (if any) as arose from other transactions, the increases in liability said to have been generated by the events of July 1979 were as follows:
3. As the references put in issue the operation of the Tax Act and the T(UCT)A Act in relation to the affairs of individuals, I propose to first make findings as to the circumstances of those individuals giving rise to and arising from, these assessments.
The applicants
4. F (born about 1912) and M (born about 1916) are a married couple. S (born 1945) is their son. S married in 1970 and resides with his wife and four children, who were born over the period 1973 to 1982. S was reared on a rural property in New South Wales which had been purchased by his parents in about 1951. From childhood, he assisted his parents in working the property, even to the point of neglecting his education, sometimes assisting for months in grazing stock on the road. In 1956 his father caused a company (YCO) to be incorporated and thereafter YCO carried on the business of farming and grazing, on the property known as Y and other lands. In 1966, when S attained the age of 21 years, he became the owner of the property Y but the property continued to be used in the business of YCO. After his marriage S and his wife moved out from the family home to establish an independent farming operation but their endeavours failed and, for a time, S worked as a miner. Ultimately, they returned to Y to reside there in the modest accommodation available. It comprised a weatherboard and fibro cottage with a galvanised iron roof, some 50-60 years old. The three generations resided in the home until the grandparents moved out into a cottage on a nearby property which they had purchased. That was in the late 1970s. Both families have continued to reside in those residences since that time. In the mid-1980s for a period of some two years, the income of S's family was supplemented by financial support from the Commonwealth.
5. In 1956, when YCO was incorporated, S was aged only 9 years. Notwithstanding that shares were allotted to him and to an older sister. The shares of the older sister were later transferred to the others with the result that, at all material times, the shareholding of YCO was distributed as follows:
Father Mother Son
$ $ $
Income tax 70,091.86 3,838.43 10,944.80
Additional tax
thereon (sec. 226) 42,055.11 2,303.05 4,832.00
Vendor Recoupment Tax 53,098.14 6,006.10 6,006.10
Income tax on deemed dividend 5,334.84 229.22 640.96
----------- ---------- ----------
$170,579.95 $12,376,80 $22,423.86
----------- ----------
6. Following incorporation, the farming business was carried out by YCO and by 1979 YCO was carrying on business on three properties: Y (where S and his family resided); and T (where F and M resided); and A. (I shall hereafter refer to T and A as if they comprised a single property.) Characteristics of the properties were as follows:
DSE Value Value
Property Area Rating 1979 1987
$ $
Y 1,527a 1,220 c.380,000 c.270,000
(618h)
T & A 1,480a 990 c.420,000+ c.300,000
(599h)
-------- -----
3,007a 2,210
(1,217h)
-------- -----
7. In its years of carrying on business as a breeder of livestock, YCO had built up its stockholdings to a point where market values substantially exceeded the values proper to be taken into account for the purposes of the Tax Act. In the month of July 1979 the relevant figures were as follows:
Market
Tax "values" value
No. 1 July 1979 July 1979 Difference
$ $ $
Sheep 710 715 21,300 20,585
Cattle 360 2,491 94,400 91,909
Horses 8 482 1,200 718
------ -------- --------
$3,688 $116,900 $113,212
------ -------- --------
8. At that time it was to be expected that the amount by which market value exceeded tax values would be brought to account upon disposal of the stock by sale or otherwise, unless the provisions of sec. 36A of the Tax Act were availed of.
The reorganisation
9. In the month of July 1979 there was a substantial restructuring of the affairs of the applicants: YCO sold 87 head of cattle in the marketplace; all other stock were transferred at market value to transferees representing the interests of the parents or of the son; and other entitlements, such as entitlements in respect of wheat, oats, wool, were divided up. In each instance YCO received full value: neither more nor less. The results at 31 July 1979 were presented in accounts of YCO as follows:
YCO PTY. LIMITED
Profit & Loss Account for the Period
1st July 1979 to 31st July 1979
$
By Sheep trading 20,584
Cattle trading 91,909
Horses trading 717
Wheat proceeds 5,403
Oats proceeds 3,000
Wool proceeds 8,745
Profit on sale of plant and vehicles 6,417
Electricity - private use 27
--------
$136,805
--------
To Bank charges 6.45
Depreciation 773.00
Interest paid 1,180.37
Rural electricity 111.74
Shearing and crutching 272.68
---------
$2,344.24
Net Profit for period, transferred to
profit and loss appropriation account 134,460.80
-----------
$136,805.04
-----------
YCO PTY. LIMITED
Profit and Loss Appropriation Account
at at 1st July 1979 to 31st July 1979
$ $
Dr. balance 1.7.79 538.37
Net profit 1.7.79-31.7.79 134,460.80
Transfer from retention 21,736.00 156,196.80
---------- -----------
Cr. balance 31.7.79 $155,658.43
- (It is to be noted that no provision was made in the balance sheet for any prospective or contingent liability to income tax by reason of the net profit of $134,460.80 which had appeared as the net profit for the period.)
10. The transferees were "family trusts" known as the F Trust No. 1 (controlled by F) and the S Trust No. 1 (controlled by S). Following the purchases by the respective trusts, the trusts have separately carried on in two parts the business previously carried on by YCO, although father and son co-operate in farm management, rendering assistance to each other as necessary. The S Trust No. 1 took over certain other interests (including some goat breeding activities) previously carried on by S on his own account independently of YCO.
The sale
11. On the advice of a Sydney solicitor, to whom the applicants had been introduced by their local accountant, they effected a sale on 31 July 1979 of the entire issued share capital in YCO for a sum of $151,170.43: $10,000 less than "Shareholders funds" as represented by the balance sheet of 31 July 1979.
Farming after July, 1979
12. Thereafter, the farming operations previously carried on by YCO continued as previously but under the control of the two trusts. It is to be noted that the opening values for stock for the trusts were not the artificial undervalues which had existed for YCO in accordance with the Tax Act but rather the much higher market values at which the respective trusts had purchased their stock. It is also to be noted that by 1 August 1979, or alternatively at least by 1 July 1980, everything had occurred which might have rendered void for income tax purposes what had been done, or so much of what had been done, by the applicants as was subject to the operation of sec. 260 of the Tax Act.
13. Before any adjustment was made by reason of the events of July 1979, the tax history of YCO was as follows:
Taxable income of YCO (1973-1979)
Year ended Gross income Taxable income Losses carried
30 June before carry forward
forward losses
$ $ $
1973 (13,723)
1974 23,085 9,705 (4,018)
1975 12,630 (942) (4,960)
1976 13,949 1,881 (3,079)
1977 26,009 4,632*
ATC 1143
1978 20,575 (2,631) (2,631)
1979 38,676 2,423 (208)
*Tax assessed on taxable income of $1,553.
14. The result of the trading operations for the two trusts presented on a similar basis was as follows:
- for the F Trust:
Year ended Gross income Taxable income Losses carried
30 June before carry forward
forward losses
$ $ $
1980 5,218 (9,288) (9,288)
1981 6,003 (1,509) (10,797)
1982 8,040 (1,885) (12,682)
1983 11,415 628 (12,054)
1984 12,577 (3,065) (8,989)
1985 15,155 6,226 (2,763)
1986 20,848 9,427
- for the S Trust:
Year ended Gross income Taxable income Losses carried
30 June before carry forward
forward losses
$ $ $
1980 21,247 (12,165) (12,165)
1981 55,736 17,235*
1982 27,740 (6,835) (6,835)
1983 17,423 (12,395) (19,230)
1984 42,383 7,881 (11,349)
1985 57,877 18,626*
1986 87,175 22,547*
*Sums of $5,070; $7,277; and $22,547 respectively were distributed to beneficiaries.
15. It appears from calculations which were placed in evidence that, if the same pattern of farming activity had been carried on by YCO to 30 June 1986 as was carried on by the trusts, the additional contributions by the families of the applicants to the public revenues of the community by way of tax would not have been greater than $35,000. In all probability they would have been much less than that. As the assessments in evidence under the T(UCT)A Act stand, the community claimed over $71,000 (cf. para. 2 and 17) payable in July 1983.
The T(UCT)A assessments
16. It was only after July 1979 that the Parliament of the Commonwealth set about a consideration of legislation to impose a new tax. It was intended to have the effect of making liable to taxation persons who, under existing legislation, would not be liable to make a contribution to public revenue by reason of having benefited from transactions proposed as appropriate for the imposition of the new tax. Those deliberations came to an end (so far as the applicants are concerned) in December 1982 with the passage of the Taxation (Unpaid Company Tax) Assessment Act 1982 and the Taxation (Unpaid Company Tax - Vendors) Act 1982.
17. Following the passage of that legislation by the post of 6 January 1983, the Commissioner gave notice to each of the applicants that he had assessed the taxable income of YCO for the year of income ended 30 June 1980 in the sum of $134,460; and that he had assessed tax on that sum in the amount
ATC 1144
of $61,851.60 and additional tax for late return in the sum of $3,202. By the same notice, the Commissioner advised the applicants:- (a) that "these notices are being served on you as a preliminary step towards the raising of recoupment tax assessments";
- (b) of their entitlement to object to the assessment of the company;
- (c) that "the raising of a recoupment tax assessment will be obviated by payment of the company's outstanding ordinary and undistributed profits tax liability which amounts to $72,742.60";
- (d) that, if that amount remained unpaid beyond 30 days from service of the notice, additional tax for late payment would begin to accrue;
- (e) that instalment arrangements for payment of that tax over a period of 12 months could be made in which case "no additional tax for late payment will be imposed", but that "this offer is only open to those former owners who do not seek to exercise their rights of objection against the company's assessment"; and
- (f) of their right as former owners to request that they be individually assessed to pay income tax as though the company had paid enough in dividends to eliminate its liability to undistributed profits tax.
18. In due course, on 17 June 1983, the Commissioner issued assessments against the individuals based on a calculation of unpaid company tax by YCO as follows:
$
Ordinary company tax 61,851.60
Additional tax for late payment 3,446.42
Amount credited (187.68)
----------
Unpaid ordinary tax $65,110.34
----------
19. The assessments against the individuals were in the following amounts:
$
Father 53,098.14
Mother 6,006.10
Son 6,006.10
----------
$65,110.34
----------
20. The amounts so assessed were paid in full on 20 July 1983.
21. Having been served with the assessments which issued on 17 June 1983, the applicants objected to the assessments on 18 August 1983. On 21 September of that year, the Commissioner disallowed the objections and the applicants responded by requesting reference to a Taxation Board of Review for review on 3 February 1984. Those requests were complied with by the Commissioner on 23 September 1985 and, as a result of the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986, responsibility for the determination of those references passed to this Tribunal on 1 July 1986.
22. On 24 June 1983, at the request of the applicants, the Commissioner issued assessments to the parents and an amended assessment to the son in which "deemed dividends" from YCO were brought to account in the sum of $17,710 against the father and $2,003 against each of the mother and son. The result of those assessments was to increase the liability of the applicants to tax by sums of $5,334.84, $229.22 and $640.96 respectively. The assessments so made were objected to by father and son by objections of 26 August 1983. (No objection was lodged on behalf of the mother. Having regard to the fact that only $229.27 in tax was involved, and to the fact that the text of the objection was presented over 62 pages of closely-spaced typing - measures made necessary by the inflexible and inappropriate procedures of the past - that is hardly surprising.) Upon the objections being disallowed on 9 January 1984, the applicants requested reference to a Taxation Board of Review for review on 3 February 1984 and on 28 November 1985 the Commissioner complied with those requests. On 1 July 1987, by force of the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986, responsibility for the determination of those objections also passed to this Tribunal.
The sec. 260 assessments
23. Then under date of 4 November 1986 [sic] the Commissioner issued fresh notices of assessment (or amended assessment, as appropriate) pursuant to the Tax Act against the applicants in relation to the income year ended 30 June 1980. The formal notices of assessment were accompanied by two other documents:
ATC 1145
first, a document described as "adjustment sheet" which was in terms particular to each of the applicants; and secondly, a standard form document of general application. The adjustment sheet (incorporating the figures for F) read as follows:ADJUSTMENT SHEET
$ $
"INCOME PREVIOUSLY ASSESSED": 863
"Attached is a notice of assessment made in
reliance of (sic) sections 260 and 44 of the
Income Tax Assessment Act in respect of the sale
of shares in (YCO) which took place on or about
the second day of August 1979. An amount of
$127,440 has been included in your assessable
income. The precise calculation is as follows:
ADD
TARGET COMPANY: YCO PTY. LTD.
Total shareholders funds 161,170
Less paid-up capital 4,900
-------
Profits available for distribution 156,270
-------
Shares held/Total shares X Profits
available for distribution 1,998/2,450 X 156,270
issued
= Amount included in assessable income 127,440
--------
AMENDED TAXABLE INCOME $128,303*
--------
*The figures for mother and son increased income previously assessed (sic) from $1,085 by $14,415 to $15,500; and from $16,512 by $14,415 to $30,927 respectively."
24. In that way, the Commissioner explained the figures which now appeared in the formal notices of assessment as follows:
Father Mother Son Total
$ $ $ $
Taxable income 128,303.00 15,500.00 30,927.00* 174,727.00
-----------------------------------------------------------
Tax 70,091.86 3,838.43 10,944.80 84,875.09
Additional tax for
incorrect return 42,055.11 2,003.05 4,832.00 52,890.16
-----------------------------------------------------------
112,146.97 5,838.48 15,776.80 137,765.25
*Tax previously assessed on $16,512.00.
25. As a result the applicants became liable for debts to the Crown in sums of $112,146.97; $6,131.48; and $11,351.42 from early December 1986 (1 December 1986 for the son and 8 December 1986 for his parents), and thereafter to pay interest at the rate of 20% per annum until payment.
26. The standard form letter provided as follows:
"APPLICATION OF SECTION 260 IN PRE-TAX COMPANY PROFIT STRIPPING CASES
This advice has been prepared for the information of taxpayers who were vendor-shareholders of companies stripped of pre-tax profits. On the basis of legal advice received following recent High Court
ATC 1146
decisions, vendor-shareholders are being assessed on the gross proceeds from the sale of their shares in reliance on section 260 of the Income Tax Assessment Act.Section 260 applies to make void as against the Commissioner a contract, agreement or arrangement made or entered into on or before 27 May 1981 to the extent to which it has or purports to have the effect of altering the incidence of income tax or of relieving any person from liability to pay any income tax.
The effect of section 260, in the context of pre-tax company profit stripping, is that the purported sale of the company shares is void as against the Commissioner so that the gross proceeds from the sale of shares are assessable as a dividend. Notices of assessment and adjustment sheets will reflect the inclusion of a dividend in assessable income. Adjustment sheets will detail the calculation of that dividend.
APPLICATION OF SECTION 260 AND TAXATION (UNPAID COMPANY TAX) ASSESSMENT ACT
In many instances vendor-shareholders will have, under the Taxation (Unpaid Company Tax) Assessment Act, made tax payments reflective of the stripped companies' liabilities for primary company tax and undistributed profits tax (Division 7). The section 260 assessments will call on vendor-shareholders to pay tax on company profits effectively distributed to them in the course of the whole arrangement, without adjustment for payments made under the Taxation (Unpaid Company Tax) legislation. This aspect has previously been brought to the Government's attention and it has indicated that, as necessary, any `doubling-up' elements that might arise as a result of the application of section 260 will be eliminated.
RECOVERY OF OUTSTANDING TAX
There are a number of cases awaiting hearing by the Courts later this year which involve the issue of assessments to vendor-shareholders of pre-tax profit strip companies in reliance of section 260. Pending the outcome of those cases, it is not proposed to take legal recovery action in respect of assessments that are now issuing. However, additional tax for late payment will accrue from the due date of each assessment."
The pre-history of the T(UCT)A Act
27. For reasons which should become clear I am quite satisfied that the T(UCT)A Act was enacted in order to overcome a "mischief". To understand what that "mischief" was, it is appropriate to consider what preceded the legislation.
28. The starting point is the unanimous decision of the High Court of Australia as constituted by Barwick C.J., Stephen and Aickin JJ. in
Slutzkin & Ors v. F.C. of T. 77 ATC 4076; (1976-1977) 140 C.L.R. 314. It was a case which arose out of transactions which took place in November 1968. The decision was handed down on 25 February 1977. Barwick C.J. set forth in narrative form the "essential facts of the case". In doing so he said (at ATC p. 4078; C.L.R. pp. 316-317):
"The shareholders of... (`the Company') in the year, 1968,..., held their shares in trust for the children of Alan Slutzkin. The Company had functioned in part as a means of retaining profits made by a holding Company, Alan Slutzkin & Co. Pty. Ltd., such retained profits being intended for use as working capital in a group of companies controlled by Mr Alan Slutzkin. For the rest the Company was a means whereby Mr Slutzkin made provision for his children.
On 12th November 1968, all the shareholders transferred their shares to a purchaser for a cash payment. It appears that in the year in which the share sales were made, the Company had ceased to serve these purposes so that Mr Slutzkin determined and all the shareholders agreed that its assets should be realised and reinvested. The method chosen to effect this purpose was a sale by the shareholders in collaboration of all their shares for cash, and the redeployment by them of the proceeds of the sale of the shares.
Immediately prior to the transfer of the shares the Company had a total liability to shareholders of $1,380, a capital profit reserve of $26,098, and a profit and loss appropriation account of $77,645.98. The Company had no liabilities though provision was made in its accounts for taxation in the sum of $790.50.
ATC 1147
The liquid situation of the Company had been brought about by the calling in, in one instance at the cost of the loss of some interest, of deposits made by the Company... Former indebtedness, including some liabilities for dividends, had been paid. This state of the Company's finances had been effected with a view to presenting the Company as having liquid assets and no liabilities. I assume for the purpose of these reasons that this had been done at least with the concurrence, if not on the initiative, of all the shareholders acting in concert.
A company known as Cadiz Corporation Pty. Ltd. was known to be willing to buy the whole of the shares in the Company for cash, provided that the Company's assets were liquid and its liabilities nil. Cadiz Corporation Pty. Ltd., either by itself or through allied companies, had engaged in operations which have come to be known as dividend stripping: and in fact its interest in offering to purchase all the shares in the Company was to conduct such an operation in the affairs of the Company when it had possession of that shareholding.
On 12th November 1968, all the shareholders signed an agreement with Cadiz Corporation Pty. Ltd. and a Mr Wallace by which they agreed to sell all their shares in the Company, the greater part to Cadiz Corporation Pty. Ltd. and one share to Mr Wallace for the total sum of $104,393.30. This sum may be taken to be substantially the amount of the Company's assets.
On 12th November the share transactions were completed. Appropriate share transfers were signed, approved by the directors of the Company, the resignation of the existing directors accepted and new directors appointed. Bank cheques were handed over, one for $103,133.30 in favour of Mr Slutzkin, Mr Rosenblum and Mr Hapgood, one for $1,258.00 in favour of Mr Slutzkin and one for $2.00 in favour of Miss Slutzkin who had held one share."
29. His Honour then recorded that the Commissioner had assessed the appellants to tax "on the basis that that transaction was void" by reason of sec. 260 of the Income Tax Assessment Act 1936 ("the Act") and that "the money received by the appellants was in truth a dividend paid by the Company to the appellants".
30. His Honour continued (at ATC p. 4079; C.L.R. pp. 318-319):
"On these facts I should have thought it was clear beyond argument that the receipt by the appellants of the proceeds of the sale of the shares formerly held by them in the Company was not taxable. By no manner of torture of the language of the decided cases would the sale of the shares by the appellants, albeit in unison with the other shareholders in the Company, fall within the operation of sec. 260 of the Act. It was no more than a realisation by them of the benefit of their shareholding in a way which would not attract tax. 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."
31. Stephen J. (as he then was) said (at ATC p. 4081; C.L.R. pp. 321-322):
"It is a simple enough case, an instance of shareholders in a company wishing to be rid of their investment and, to that end, electing to sell their shares rather than to place the company in liquidation. Had they opted for liquidation or had they otherwise, as by way of dividend declaration, sought to receive the fruits of the great surplus of assets over liabilities which reposed in the company a heavy tax liability would have been incurred. Instead they decided to sell their shares, which comprised the whole of the company's issued capital, and proceeded to give effect to that decision. This is, in substance, all they did or, for that matter, needed to do.
ATC 1148
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 connection 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 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. The reasons for judgment of the other members of the Court and the citations of authority which they contain amply demonstrate this to be the case."
32. Aickin J. reached the same conclusion and expressed agreement with the reasons of the Chief Justice.
33. Much later, by the Crimes (Taxation Offences) Act 1980, assented to on 4 December 1980, the Parliament legislated to constitute as an offence, the entering into of "an arrangement or transaction for the purpose, or for the purposes which included the purpose, of securing, either generally or for a limited period, that a company... will be unable, or will be likely to be unable, having regard the other debts of the company..., to pay (income tax) payable by the company...". Penalties provided for were imprisonment for up to ten years, or a fine of up to $100,000, or both.
34. Then Costigan Q.C., sitting as a Royal Commissioner appointed by the Commonwealth and by the State of Victoria to enquire into "The Activities of the Federated Ship Painters and Dockers' Union", in an Interim Report (Number 3 published on 18 December 1981) said:
Chapter 2
Slutzkin Rides Again
"2.01 The Commission's investigations into the Federated Ship Painters and Dockers' Union has led it, to the surprise of many, to the tax avoidance industry. This industry has developed in Australia, particularly over the last five years, at a rate far in excess of any other industry and has brought with it profits comparable only to the heady days of the Victorian gold rush. Unfortunately this industry carried with it a serious detriment to the interests of the government and the Australian community. The detriment was twofold: in the first place it diverted from the Treasury tax which would prima facie be payable on income of taxpayers, in the second place it diverted the tax payable by those engaged in that industry. The amounts involved are very large indeed, amounting to many hundreds of millions of dollars per year or more. The impact on the community a class of people, almost invariably the highest earners, who pay little or no tax and make no contribution in that way as citizens to their fair share of community costs. In addition it has made more difficult for
ATC 1149
government the task of providing for the community as a whole a more equitable and reduced taxation burden.2.02 It is common amongst those who discuss these matters to point to various decisions of the High Court as an explanation for vast activity in this industry. The architects of the new industry have a particular affection for Slutzkin and others v. The Federal Commissioner of Taxation 140 C.L.R. 314. The judgments of the High Court in that case have been dissected by those in the industry with an attention to detail which would have done credit to the mediaeval theologians. A new expression entered the Australian idiom: `to do a Slutzkin' became the ambition of those citizens who wished to enter the non-taxpaying class. The great talents of a range of lawyers, accountants and businessmen were directed, in a quite non-productive way so far as the community was concerned, to creating artificial situations which were then said to achieve respectability by reference to Slutzkin...
2.03 Nothing I have said should be taken as suggesting that the Slutzkin case was wrongly decided as a matter of law. On the facts presented to the Court in that case the decision was correct...
2.04 Following Slutzkin it seems that many contrived situations have come into existence... A scheme was devised which gained superficial support from the decision in Slutzkin's case but which I preferred to describe in public sessions of the Commission as fraudulent. The substance of the scheme can be described shortly. Two companies are brought into existence (or shelf companies acquired) to facilitate the scheme's execution: one is a finance company, the other is a purchasing company. Agreements are made between the purchasing company and the shareholders of the target company (i.e. the company which has income in its hands) whereby the shares are sold for a percentage (say 90 percent) of the income generated by the target company. If the income is, for example, $1,000,000 then the shares are sold for $900,000. Settlement takes place with all parties including bank managers being present. The directors of the target company (being either the shareholders in it or their representatives) on receipt of the bank cheque being the purchase price of the shares immediately change the bank authority of the target company so that such bank account can be at once operated by the agent of the purchasing company. That agent then causes the target company to transfer $1 million to the finance company which in turn transfers the same $1 million to the purchasing company. That company then applies $900,000 to purchase bank cheques to be handed over to the original shareholders in exchange for their shares and the remaining $100,000 is paid to the promoters of the scheme. All relevant shares are transferred. The entire transaction is completed within minutes.
2.05 In the result the target company is left with its income of $1 million but now has no assets save for the `loan' due to it by the finance company. It has new shareholders and directors, both of whom are closely connected with the directors and shareholders of the finance company. The `loan' is not repaid and in fact the finance company is sold to another company. This company fails to submit annual returns and other returns required by the Companies Act. Notices are sent out by the Corporate Affairs Office. There is no compliance with these notices save for the response that the directors and company secretary `are not known at this address'. This information should cause no surprise. The names are false. The addresses are false. In at least one significant company the directors are painters and dockers. In due course the Corporate Affairs office loses patience and the finance company is struck off. The `loan' to the original target company remains unpaid. The company records disappear.
2.06 The device adopted by the promoters of these schemes bears no resemblance to the facts presented to the Court in Slutzkin's case. It is a deliberate attempt by the promoters to avoid the payment of tax by the use of fraudulent, illegal and dishonest techniques...."
35. Then, with effect from 24 May 1981, the Income Tax Assessment Act 1936 was amended by introducing Pt IVA to take effect in succession to sec. 260 of that Act.
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36. By a Ministerial Statement in the form of a press release issued on 25 July 1982 - some five years after the decision in Slutzkin and some 14 years after the sale to which that decision related - the Treasurer of the Commonwealth announced the intention of his Government
"to bring before the next sitting of the Parliament special legislation to recover from vendor shareholders the company tax that was evaded in `bottom-of-the-harbour' strips of untaxed company profits, carried out before the Crimes (Taxation Offences) Act 1980 made such conduct a specific criminal offence under Commonwealth law."
In doing so he said (inter alia):
"We have decided on this course of action because of the essentially fraudulent nature of much of the conduct involved."
"The legislation will be directed against people who have in effect taken off with monies which should have been paid as tax to the Treasury."
"Bottom-of-the-harbour schemes have gone beyond legal avoidance of taxation and represent illegal evasion of tax."
"It is quite clear that the community regards as totally abhorrent and unacceptable, a situation in which a relatively few people have been able to make personal profit from connection with procedures that left the companies concerned without funds to meet a company tax liability existing under the law applicable at the time."
"Whatever the technicalities may be, these strips of untaxed company profits were fraudulent in nature on the part of at least one person concerned in each transaction. So far as the tax law is concerned they did not involve legal avoidance of tax but represented illegal evasion."
"The evaded tax is payable by the company concerned, and the participants knew when the company was sold that the profits then derived had an income tax liability attaching to them. Although a company and its owners are separate legal entities there can be compelling reasons, as in the present case, for proceeding on the basis of who in reality benefited at the expense of the revenue."
"Shareholders who sold their shares to those offering their services as strippers received in cash an amount equal to the accumulated funds of the company (including the amount that ought to have been set aside as legally payable company tax) reduced by such fee as was charged by the stripper or promoter. In other words, the legal forms should not blind us to the reality that the vendor shareholders took off with tax moneys that ought to have been paid to the Treasury."
"The legislation will require each vendor shareholder to pay an amount equal to his or her share of the evaded company tax. The special tax would, of course, be refunded to the vendor shareholders if it should happen that, after this special tax has in relation to a particular company produced for the public purse an amount equivalent to the evaded company tax, proceeding against the promoter under the general law were to secure payment of the amount of the company tax itself."
"The situations to which the special legislation will relate are those in which the shareholders in a company have together sold their shares in the company for a price that made it evident that company tax on profits that had by then arisen would not be paid."
37. In so finding I have had regard to the report appearing in The Sydney Morning Herald newspaper of 26 July 1982. That is not a course I would ordinarily contemplate even with a newspaper such as The Sydney Morning Herald which widely enjoys a high reputation for accuracy in reporting. I do so only because, later, when addressing the House of Representatives and tabling an Explanatory Memorandum, the Treasurer again referred to the press release saying that the Bill of which he was then speaking:
"The basic measures contained in the Bill were fore-shadowed by me in some detail in a prior statement made 25th July, 1982..."
38. In due course the Treasurer introduced to the House of Representatives a T(UCT)A Bill. On moving the Second Reading on 23 September 1982, he said that the objective was to:
"establish and uphold a fair system of taxation."
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"Today, the Government complements its earlier proscription of schemes to evade the payment of legally payable company tax by a Bill that will recover evaded company tax from the principal beneficiaries of earlier evasion of that kind."
39. In that Second Reading Speech the Treasurer emphasised:
"that the measures are designed and will operate only, to collect evaded company tax..." (would) `operate only where there has been an arrangement that had the effect that the company was rendered unable to pay its company tax...' (would) "apply only where the vendor-shareholder and other former owners actually derived benefit from the evasion of the company's tax... the test is one that fits into legal terms the concept that the sale price for the company was such that it was evident that company tax on the amount of the then apparent profits would not be paid."
He stated that provision would be made by amendment or a further Bill to place some liability on promoters and other strippers. He also noted:
"among further provisions of note are measures... to give the Commissioner of Taxation authority not to pursue liability in particular circumstances, including where a person's liability under the legislation is of under $100."
40. On 21 October 1982 the Treasurer, in speaking to the Second Reading of the Bill which was to become the T(UCT)A Act, described it as replacing the earlier Bill, saying:
"The revised Bill not only covers the same ground as the earlier Bill, but extends its scope to require promoters of these schemes also to effect some recoupment of the evaded tax."
41. On 13 December 1982 the Bill received the Royal Assent and took effect immediately (sec. 2) as the Taxation (Unpaid Company Tax) Assessment Act No. 119 of 1982. It was to apply only to sales made after 1 January 1972.
The history of the assessments
42. Following the passage of the T(UCT)A Act, not only have assessments issued against the applicants pursuant to that legislation and also pursuant to sec. 260 of the Tax Act but, it is contended, there have been a number of other material developments relevant to these applications.
43. By a Ruling published on 28 October 1983, Taxation Ruling IT 2063, the Commissioner stated standards to be applied by his officers in considering the exercise of discretions pursuant to sec. 5(4) and 6(18) of the T(UCT)A Act. He said:
"While this ruling has been prepared with former owners of public companies in mind, the principles that it expresses are also applicable in respect of private companies"
(cl. 3).
Having dealt with the power to grant relief from recoupment tax liability where the amount is less than $100, the Commissioner went on to say:
"8. Apart from `under $100' cases, the legislation does not specify the circumstances in which the particular subsections will apply. However, the broad principle that emerges from the legislation as a whole is that a person should be granted relief where that person and closely associated persons have not in any way benefited from the evasion giving rise to the recoupment liability in question. This will mean that the circumstances of particular cases will need to be examined to ascertain whether a benefit was enjoyed.
9. The situations in which it may be possible to establish that no benefit was enjoyed will vary considerably. It is not practicable, therefore, to lay down hard and fast rules as to the various circumstances in which the relieving power will be exercised. However, the examples outlined below are illustrative of situations where the granting of relief could be expected.
Example 1
A person acquired shares in a public company through a stock exchange. Subsequently some of the subsidiaries of that public company were stripped of pre-tax profits. However, no dividends or other benefits were thereafter received from the company and the shares are now worthless.
Example 2
A person, who held shares in a public company at the time some of its subsidiaries
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were stripped of pre-tax profits, has sold those shares at the then ruling market price and, having enjoyed no other benefits from the evasion in the meantime, at a time when the market price did not reflect any benefit in relation to the stripping of the subsidiaries.10. Generally speaking, it is accepted that where shares have been sold shortly after the stripping of the subsidiary the market price would not reflect any benefit. Conversely, where shares have been disposed of as a result of a takeover, and the takeover price represents a valuation of the company that has taken into account the benefit which accrued to it from evasion of the tax liabilities of the subsidiaries, exercise of the relieving power ordinarily would not be appropriate. In other words, the situation would be one where a benefit from the evasion has flowed to the vendor in the price received for the shares. Between these two extremes the question of benefit can only be determined by the facts of the case. In forming an opinion, regard needs to be had to such factors as movement in the market price of the shares in question, movement in the share market generally, public announcements, accounting records and reports, issues of bonus shares and rights issues, participation in the management of the company, the level of dividends paid and the use made by the company of its benefit from the evasion."
It is to be noted that the examples given only relate to the application of sec. 6(18).
44. In his Annual Report to the Treasurer in relation to the year of income ended 30 June 1983 (presented December 1983), the Commissioner reported on the passage of the T(UCT)A Act and the appointment of special prosecutors under the Special Prosecutors Act 1982.
45. On 10 April 1984 a Full Bench of the High Court of Australia handed down its decision in
MacCormick v. F.C. of T.; Camad Investments Pty. Ltd. & Ors v. F.C. of T. 84 ATC 4230; (1985) 158 C.L.R. 622 in which the High Court upheld the constitutional validity of the recoupment tax legislation.
46. In the next Annual Report made by the Commissioner (October 1984), he reported on contentions that sec. 260 of the Tax Act could apply to "bottom-of-the-harbour" cases. The report concluded:
"The Attorney-General subsequently gave legal advice that there were sufficient chances of success (under s. 260) to warrant the matter being tested in the Courts."
"My predecessor and I accepted this legal advice..."
As a result, a number of assessments pursuant to sec. 260 issued on 26 September 1984.
47. That was followed by a public statement by the Treasurer made 30 October 1984 on the subject of the "doubling-up" of tax liabilities that may result from the application of sec. 260 of the Tax Act and assessments issued to vendor shareholders under the T(UCT)A Act.
He said:
"The Government would, as necessary, act to eliminate `doubling up' elements."
"It is not proposed to take legal recovery action in respect of these cases pending the outcome of the representative cases presently before the Courts. However, additional tax for late payment will accrue."
48. The sec. 260 assessments against the applicants issued on 4 November 1986.
49. The Commissioner's Annual Report to 30 June 1986 (November 1986) gave notice that from May 1986 his office was proceeding with a major project to issue sec. 260 assessments against the vendor shareholders of stripped companies.
The report said (inter alia):
"On legal advice, the s. 260 assessments call on vendor shareholders to pay tax on company profits effectively distributed to them in the course of the whole arrangement, without adjustment for payment made under the recoupment tax legislation. This aspect was brought to the Government's attention at the time the initial assessments issued in September 1984."
50. On 19 December 1986 the first such case based on sec. 260 assessments under the Tax Act was heard and determined in the Supreme Court of New South Wales (
Gregrhon Investments Pty. Limited & Ors v. F.C. of T. 86 ATC 4906). The taxpayer was successful but
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the decision is subject to appeal to a Full Bench of the Federal Court of Australia.51. On 16 April 1987 the Treasurer issued a further public statement confirming that:
"The Government has decided to act as necessary to eliminate any doubling up of tax liabilities that may result from the application of s. 260 of the income tax law in assessments issued to vendor shareholders in bottom-of-the-harbour cases."
In that statement he went on to say:
"Although the Government is still examining the question of whether specific legislation should be enacted to eliminate these doubling up elements or whether relief might be provided by administrative action, the basic principles to be adopted in determining the amount that vendor shareholders are to be called on to pay under the s. 260 assessments have now been decided."
52. Such statements in the name of "the Government" cannot bind the Parliament and do not alter the law which must be applied by this Tribunal [cf.
Fitzgerald v. Muldoon (1976) 2 N.Z.L.R. 615]. However, all of the matters mentioned in para. 27-51 do shed light on the question as to what it was that the Parliament intended to do when it enacted the T(UCT)A Act.
Co-existing assessments - either or both?
53. The first question to be determined is whether the Parliament by the enactment of both the Income Tax Assessment Act 1936 and the Taxation (Unpaid Company Tax) Assessment Act 1982 intended that assessments under both Acts arising out of the same circumstances should coexist. Such assessments could coexist because they impose taxes on different subject matter. In MacCormick (ante) their Honours considered an argument that there was an insufficient connection between the relevant target company and its profits and the persons liable to pay recoupment tax in relation to that company. Their Honours (Gibbs C.J., Wilson, Deane and Dawson JJ.) said of that (at p. 637):
"But recoupment tax is not a tax upon company profits. Company tax is such a tax but the basis upon which liability for recoupment tax is imposed is that the company tax is irrecoverable. Recoupment tax is in each instance a tax upon a transaction which resulted in a company being stripped of its assets so as to be unable to pay company tax. The transaction is the subject of the recoupment tax and the objects are those specified persons who are regarded by the legislature as having taken part in or benefited from the transaction directly or indirectly... Nor does it matter that the recoupment tax is quantified by reference to the overdue company tax. That does not make the subject of the recoupment tax the same as the subject of the company tax."
That being so, if the obligations can coexist, each assessment creates a distinct and separate debt due to the Crown.
54. However, I am satisfied that the Parliament intended no such result and that, when the T(UCT)A legislation was being considered, it was proposed on the basis that the Parliament was being asked to enact legislation to impose a tax upon vendors arising out of circumstances not giving rise to any tax liability in those vendors.
Dual assessments: which prevails?
55. The second question is as to how any possible inconsistency between the Tax Act and the T(UCT)A Act is to be resolved (cf. sec. 4(1) T(UCT)A Act). I am satisfied that, where the appropriate circumstances exist for the application of sec. 260 of the Tax Act, there is no scope for the application of the T(UCT)A Act. That is because the application of sec. 260 is premised upon a transfer of shares being "void, as against the Commissioner" so that the sum of money flowing into the hands of the taxpayers as a price receivable by them as vendors can be considered to be a dividend received by them as shareholders who at all material times continued to be shareholders [
Newton v. F.C. of T. (1958) 98 C.L.R. 1]. That being so when, for the purposes of sec. 260 of the Tax Act, the transaction is "void against the Commissioner", it follows that there is no "sale" such as could attract the operation of the T(UCT)A Act.
The conclusiveness of assessments
56. The third question is whether this Tribunal in these proceedings, being seised only of jurisdiction in relation to the T(UCT)A assessments, must conclude from the continued
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existence of sec. 260 assessments under the Tax Act (as proved by the evidence) that they are valid (cf. sec. 177 Tax Act) and, in consequence, hold that the T(UCT)A assessments are bad as being inconsistent with the subsisting and valid sec. 260 assessments. I think not. It is true that this Tribunal has no jurisdiction over the sec. 260 assessments. Nothing this Tribunal says about them can effect the efficacy of those assessments as creating a present and enforceable liability in the applicants to pay tax to the Crown. Those sec. 260 assessments will be valid and enforceable unless and until they are set aside by competent authority. Such an authority may be the Federal Court of Australia or this Tribunal, acting in accordance with the authority conferred by Pt V of the Tax Act (cf.F.J. Bloemen Pty. Ltd. v. F.C. of T. 81 ATC 4280; (1980-1981) 147 C.L.R. 360). In that regard it is to be noted that, neither in this case nor in any other, is it necessary that the issue as to the validity and efficacy of T(UCT)A assessments and sec. 260 assessments be resolved contemporaneously or by the same authority. However, in my view, it does not follow that, because the Tribunal has no authority in relation to the existing sec. 260 assessments that, for the purpose of determining whether the T(UCT)A assessments are excessive, I should hold for that purpose that the sec. 260 assessments are valid.
The sec. 260 assessments
57. The fourth question is whether, upon the evidence before me, I am persuaded that there is any scope for the application of sec. 260. Upon the evidence I am satisfied that there is no such basis. In my view the case clearly falls within the authority of the decision of the High Court of Australia in Slutzkin (ante).
The T(UCT)A assessments
58. Having so found, I conclude that all of the elements of sec. 5 of the T(UCT)A Act [with the possible exception of subsec. (4) which has as yet to be considered] have been satisfied in relation to each of the applicants.
A discretion to tax
59. When the T(UCT)A legislation was passed, the Parliament at several points expressly enacted provisions which could have the effect of relieving persons from a liability to recoupment tax which otherwise would have arisen. Vendors could be relieved from what would otherwise have been an obligation to pay a primary taxable amount by sec. 5(4) and a secondary taxable amount by sec. 6(18). Promoters and other persons who were liable as promoters or who might be liable as contributors to promoters' recoupment tax could be relieved of liability pursuant to the provisions of sec. 11. Further, courts of competent jurisdiction could determine "on just and equitable grounds" the respective proportions of the amount of the promoters' recoupment tax that might be recovered in contribution proceedings (sec. 10).
60. In relation to promoters, and persons liable as if they were promoters, sec. 11 provided that the Federal Court might make a declaration "that, by reason of special circumstances, it is not just and equitable..." that a person be included in the eligible promoter's class. The making of such an order would have consequential effects for other members of the eligible promoter's class.
61. In relation to persons liable, or who might be liable, as vendors, save that sec. 5(4) relates to a primary taxable amount and sec. 6(18) to a secondary taxable amount, the subsections are in common terms. Each provides that, whether or not liability to the primary or secondary taxable amount (as the case may be) shall be taken to exist or to have existed in relation to a vendor, depends upon a determination by the Commissioner. That determination is as to whether he
"considers it unreasonable that the... amount should be taken to exist or to have existed in relation to the person."
Such an exercise of discretion on the part of the Commissioner in favour of a person might be exercised in the course of considering whether or not any assessment should issue or might be exercised after assessment, most probably in the course of considering an objection. Whenever any such discretion is so exercised in favour of a taxpayer, the exercise is not likely to be exposed to any public review. Nor need the considerations relevant to the exercise of discretion be considered, or identified, or otherwise stated.
62. Any such exercise of discretion by the Commissioner, provided that it is not in favour of the taxpayer, is open to review before this Tribunal exercising the powers conferred on it
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by sec. 193 of the Tax Act. Its responsibility is to so exercise those powers and functions as to determine whether the assessment before it is correct and, if not, to give effect to what is, in the opinion of the Tribunal, the correct decision. As Smithers J. said inDrake v. Minister for Immigration and Ethnic Affairs (1979) 2 ALD 60 at. p. 77:
"It might be thought that it would be open to the Administrative Appeals Tribunal not to decide for itself whether a decision made by an administrator was the right decision which ought to have been made in the circumstances but rather to satisfy itself that the decision of the administrator was one which an administrator acting reasonably might have made. But to do this would be to review the reasons for the decision rather than the decision itself. It is the actual decision which by virtue of s. 25(1) and (4) of the Administrative Appeals Tribunal Act the Tribunal is authorized and required to review. The duty of the Tribunal is to satisfy itself whether a decision in respect of which an application for review is duly instituted is a decision which in its view, was objectively, the right one to be made."
63. In these matters, the applicants request that the Tribunal reviews the Commissioner's exercise of discretion pursuant to sec. 5(4) of the T(UCT)A Act. That subsection provides:
"Where a primary taxable amount exists or existed in relation to a person in relation to an amount of company tax payable by a company and -
- (a) the Commissioner, having regard to -
- (i) circumstances relating to the sale of the shares or the interest in shares to which the primary taxable amount relates;
- (ii) circumstances, whether occurring before or after that sale, that caused or contributed to the failure of the company to pay that company tax; and
- (iii) such other circumstances as the Commissioner considers relevant,
considers it unreasonable that the primary taxable amount should be taken to exist or to have existed in relation to the person; or
- (b) if the primary taxable amount is less than $100 - the Commissioner considers that the primary taxable amount should not be taken to exist or to have existed in relation to the person.
the primary taxable amount shall not be taken to exist or to have existed in relation to the person."
At the outset, it can be observed:
A. that even the decision not to recover a primary taxable amount less than $100 is made subject to an exercise of discretion;
B. that there is no power to grant partial relief; and
C. that, by force of sec. 4(1) of the T(UCT)A Act, sec. 5(4) has a function which is quite independent of sec. 265 of the Assessment Act.
64. Section 265(1) (so far as is material) provides:
"In any case where it is shown to the satisfaction of [the Tax Relief] Board... that -
- (a) a taxpayer has suffered such a loss or is in such circumstances; or
- (b) owing to the death of a person, who, if he had lived, would have been liable to pay tax, the dependants of that person are in such circumstances,
that the exaction of the full amount of tax will entail serious hardship, the Board may release the taxpayer or the trustee of the estate of the deceased person (as the case may be) wholly or in part from his liability..."
From that it will be seen that sec. 265 of the Assessment Act is directed to granting relief from payment of a tax liability imposed in accordance with the will of Parliament. Section 265 confers a power, and with it a responsibility, to grant relief from such duly imposed liability on grounds of hardship. Section 5(4) of the T(UCT)A Act has a markedly different emphasis. The exercise of discretion in that regard is directed to the determination as to whether a liability exists: not as to whether enforcement of the liability would impose undue hardship.
65. When the Commissioner issued his Ruling (Taxation Ruling IT 2063) in October
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1983, thereby giving instructions to his staff as to the manner of exercise of discretion, he acknowledged that in relation to secondary taxable amounts the discretion had been exercised in respect of shareholders in a number of public companies that had sold subsidiaries to pre-tax profit-strippers.The Ruling proposed that the only other persons to be relieved from liability would be those "who have not in any way benefited from the evasion...".
66. I am not persuaded that the Ruling does accurately reflect the principles laid down by the Parliament or the intention of the Parliament. Prior to the passage of the T(UCT)A Act many persons no doubt bought and sold shares in public companies without having the least awareness that either the company or its subsidiaries might have been involved in any conduct which would fall within the scope of future legislation such as the T(UCT)A legislation. None the less, persons buying and selling in such circumstances would ordinarily take the advantages and accept the risks inherent in dealing in the shares of companies the full extent of whose rights and obligations could not be known to them. Vendors selling on the Stock Exchange do not usually warrant the tax status of the company in which they are selling shares. In those circumstances, it is no more harsh to impose a tax liability - whether recoupment tax or any other - upon the company to the detriment of its existing shareholders than it is to impose the liability on its former shareholders. But, assuming that the company is to be relieved from liability by force of sec. 6(2) of the T(UCT)A Act, it by no means follows that the question whether "a benefit from the evasion has flowed to the vendor" is to be measured as simply as the Ruling proposes.
67. However, whether that be so or not, I find nothing in the Ruling which sheds any light on the question of what the Parliament as to the exercise of discretion under sec. 5(4)(a), despite the reference to the fact that "the principles that it expresses are also applicable in respect of private companies". In my opinion the notion that the discretion is only to be exercised in favour of a taxpayer where "that person and closely associated persons have not in any way benefited from the evasion giving rise to the recoupment liability in question" is too narrow. That is particularly so in relation to sec. 5(4) because the possibility of liability for most is postulated upon a sale by the taxpayer as a vendor for a price which exceeds the figure determined by the application of the statutory formula.
68. I therefore turn to a consideration of the terms of sec. 5(4) in order to try to glean from a consideration of its terms some insight into the expectations of the Parliament. This much is at least clear: the Parliament intended that, where the Commissioner considered it
"unreasonable that the primary taxable amount should be taken to exist or to have existed in relation to the person, (then it) shall not be taken to exist or to have existed in relation to the person."
69. The subsection provides that the discretion should be exercised, having regard to:
"(1) circumstances relating to the sale of the shares...
(2) circumstances... that caused or contributed to the failure of the company to pay that company tax; and
(3) such other circumstances as the Commissioner considers relevant."
It was not contended for the applicants that there were any particular circumstances in the second category which ought to have been taken into consideration. However, even so, the other provisions make it clear that the exercise of discretion is in no way close-confined although it must be exercised in a responsible and judicious manner. It is, in the words of Barwick C.J. in
Giris Pty. Ltd. v. F.C. of T. 69 ATC 4015; (1968-1969) 119 C.L.R. 365, a "discretion in the nature of a dispensing power...".
70. I accept the contention of the solicitor for the applicants that the nature of the discretion was aptly described by his Honour later in the same reasons for decision. He said at ATC pp. 4017-4018; C.L.R. pp. 372-373:
"It would also follow from my interpretation of the section that the Commissioner is in substance able to choose whether the trust income will be taxed at one rate rather than another, or perhaps, more accurately, assessed under one section rather than another. He is able to make the
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choice in exercise of what, for want of a more precise expression, I shall call a legislative discretion: he can apply one section rather than the other if he thinks it unreasonable to apply the latter of them. I have been unable to find any content for the word `unreasonable' in the context of the two sections except considerations of a kind upon which a legislature acts in deciding whether an enactment or its particular terms are or are not unreasonable having regard to the interests of the public generally, of the citizen to be affected, of the revenue and of the requirements of those policies, political, economic and fiscal which the Parliament is prepared to sanction. Some facts are specified for the Commissioner's attention in arriving at his opinion as to unreasonableness but he is given no hint of what bearing any or all of them ought to have or may have on his judgment. In addition, he is required to have regard to any facts which he thinks appropriate to be considered in relation to the formation of his opinion. This view of the discretion gives to the Commissioner a wide charter which it might have been thought he was ill-equipped to exercise. What he is required to decide, in my opinion, is in truth a function of the legislature, rarely delegated to an official. Its repose in the Commissioner means that the citizen cannot know when disposing of his affairs what the impact upon him or them the law regarding the taxation of income will make: and unless the Commissioner is required to disclose the factual basis of his opinion as to unreasonableness, the taxpayer will not know after he is assessed upon what factual basis he was required to pay the tax imposed. But the wisdom of creating this somewhat unusual situation and the dangers inherent therein are of no concern to the Court, though they might well be to the Parliament, if the features to which I have called attention do not lead to invalidity.However, in my opinion, the Commissioner is under a duty in each case to form an opinion and the taxpayer is entitled to be informed of it, and upon the taxpayer's request, the Commissioner should inform the taxpayer of the facts he has taken into account in reaching his conclusion."
71. Accepting as I do that it is appropriate under the T(UCT)A Act to consider that sec. 5(4) conferred on the Commissioner "a wide charter", it must at least be acknowledged that it was to be expected that in the hierarchy of the Commissioner's office, the discretion would come to be exercised with substantial consistency; that the exercise of discretion would be in accordance with the Commissioner's Ruling; and that the citizens who did not enjoy the benefit of a favourable exercise of discretion could look to the Commissioner's published Ruling as providing a statement of the principles upon which the discretion had been exercised. For reasons which I have already indicated, I regard the published Ruling as quite unhelpful in relation to sec. 5(4).
72. Be that as it may, the applicants, being dissatisfied with the failure of the Commissioner to exercise his discretion in their favour, have sought a review of the Commissioner's exercise of that discretion in proceedings before this Tribunal. As to the exercise of discretion by this Tribunal, it can be said that, as the Tribunal stands outside the hierarchical structure of the Commissioner's office, an exercise of discretion by this Tribunal will be independent. But on the other hand, as the Tribunal has no proclaimed guidelines other than the terms of the T(UCT)A Act to guide it as to the exercise of the discretion, there is a danger of inconsistency in the exercise of discretion.
73. Despite the disadvantage of the risk of inconsistency in decision-making there is one particular advantage which arises in the process of review before this Tribunal. It is that the review is conducted in the presence of both parties; the decision is only made after both parties have had full opportunity to be heard as to the facts and as to their reasons for or against the exercise of discretion; and the findings of fact underlying, and the reasons for, the decision are set forth so that they may be considered by the parties and, if appropriate, upon appeal and, if made available for publication, also by the public but, in that case, subject to non-disclosure of the identity of the taxpayers. All of those considerations apply whatever may be the result of the application.
74. Against that background I now proceed to consider the question whether any, and possibly all, of these applicants should be held
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not liable to pay vendor recoupment tax in these circumstances.75. So far as the parents are concerned, as neither gave evidence, I can only have regard to matters established by the other evidence: their ages; their condition in life as a married couple whose lives have been spent on a modest farming property in a somewhat remote rural area; and the circumstance that, over many years, they have derived only modest incomes (whether derived directly or through a company or trust) as primary producers. As to the son, I have regard to similar considerations of age and circumstance. In this case I find that he is not a person of commercial or fiscal sophistication. However, I find that he, and also his parents, were persons who placed their trust in commercial and fiscal matters in the hands of a qualified chartered accountant and that, on his recommendation, they consulted with and acted upon the advice of a Sydney solicitor who arranged for them the sale of their shares in circumstances which later exposed them to liability to vendor recoupment tax.
76. I also have regard to the following considerations:
- (a) that the profit of the company for the year of income ended 30 June 1980 was exceptionally high and was the product of many years of income-earning activity coming to be considered as taxable income in one year;
- (b) that the fact that profit was generated to that extent at that time was a consequence of restructuring the affairs of the family and not merely of a desire on the part of shareholders to realise their shareholding on a "cum dividend" basis before the taxing of the company;
- (c) that the sale was a by-product of the reorganisation of family affairs instead of the reorganisation only being effected in order to make possible the sale;
- (d) that they did nothing to bring about a situation whereby the company could not pay its tax when assessed;
- (e) that they were not privy to the "fraudulent" proposals of their purchasers as to the operation of the company following their sale of its shares;
- (f) that although vendors in trading and manufacturing concerns gained almost immediately a financial benefit approximating the tax due by the company (less the promoter's "fee" and costs), for taxpayers such as these applicants the same benefit can only be realised over many years (cf. para. 15);
- (g) that nothing was done by any of the applicants to increase their advantage such as could have brought about an artificially enlarged profit to the company to date of sale with consequent reduced profits from operations of future years (such as would have arisen if the stock had been sold and purchased at above market value).
77. I do not take into account any personal characteristics of the parties other than those mentioned; any consideration arising by way of present financial hardship (if any); or the circumstance that the applicants may have been, and may continue to be, seriously and adversely affected by the continuing existence of sec. 260 assessments. Further, the only considerations to be taken into account are those existing prior to the making of the assessments.
78. The question is difficult. But for sec. 5(4), in my view the applicants are clearly liable. On the other hand, sec. 5(4) does provide that some persons who, but for that subsection, would be liable to vendor recoupment tax are not to be liable for that tax.
79. I bear it in mind that a consequence of the exercise of discretion in favour of the applicants may be that the tax payable as "promoter's taxable amount" will be substantially increased [sec. 7(2)(j) and (k)]; and that the definition of "eligible promoter's class" is so broad [sec. 7(8)] that a large number of persons may be affected. However, in that regard I also bear it in mind that sec. 11 provides that if "by reason of special circumstances, it is not just and equitable... that the person be included in the eligible promoter's class" the Federal Court may make a declaration relieving that person from liability sec. 11(6); and that sec. 10 makes provision for liability to be apportioned between contributers from the eligible promoter's class in such manner "as the Court considers just and equitable".
80. Having regard to the circumstances relating to the sale of the shares and the other circumstances which I have mentioned as
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relevant, and especially the circumstances that the reorganisation which generated the profit was not carried out only to "do a Slutzkin", I am satisfied that, in this instance, it is "unreasonable that the primary taxable amount should be taken to exist or to have existed in relation to" any of the applicants.81. I gratefully acknowledge the assistance of thorough argument and analysis from both counsel for the Commissioner and the solicitor to the applicants.
82. The order of the Tribunal will be that the decision of the Commissioner upon the objections under review be varied and that the objections be allowed.
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