Federal Commissioner of Taxation v. G.M. Swift & OrsJudges:
In 1979, 67-year-old Henry Swift, his wife, Cavell Lorraine, and their son Graham, operated a family farm on three blocks at Trangie, some 320 miles north-west of Sydney. The family had farmed there for nearly 30 years. In July of that year they decided to divide up the business so that Graham might operate with a greater degree of independence. The restructuring subsequently effected on legal and accounting advice involved, among other things, the sale of all shares in their family company, Yallaroi Pastoral Co. Pty. Ltd. (``YCO'') to a Sydney-based company called ``Shareholder Pty. Ltd.''. YCO was taken over with a tax liability generated by the disposal of its stock to trust companies associated with Mr and Mrs Swift Snr and their son respectively. That liability was never discharged.
Three-and-a-half years later, the Taxation (Unpaid Company Tax) Assessment Act 1982 (``TUCTA Act'') was passed and on 17 June 1983 each of the Swifts was assessed under the provisions of that Act to vendors recoupment tax in amounts totalling $65,110.34, representing ordinary company tax unpaid by YCO and additional tax for late payment.
Their objections to the assessments having been disallowed, the Swifts appealed to the Administrative Appeals Tribunal which exercised a dispensing power under subsec. 5(4) of the TUCTA Act and allowed the objections essentially on the basis that it was ``unreasonable'' that they should have to pay the tax so assessed. The Commissioner of Taxation now appeals to this Court against those decisions. Central to the appeals is the nature and scope of the dispensing power under subsec. 5(4).
Henry Claude Swift and his wife, Cavell Lorraine Swift, were born in 1912 and 1916 respectively. They had two children, a daughter and a son. Their son, Graham, was born on 4 January 1945. On his sixth birthday, on 4 January 1951, the family moved to a farming property called ``Yallaroi'' which Mr Swift had acquired at Trangie, some 320 miles north-west of Sydney. They farmed the land evidently as a husband and wife partnership, until 1956. In that year, acting on advice from accountants, Mr and Mrs Swift incorporated Yallaroi Pastoral Co. Pty. Ltd. in which they and the children were shareholders. From 1956 until 1979 the farming business was carried on by the company. Shareholdings, after a sale and transfer of shares from the daughter, and at all times material for present purposes were as follows:
H.C. Swift C.L. Swift G.M. Swift "A" class at $2 each 1,998 1 1 "C" class at 10 cents each NIL 4,500 4,500
In addition to Yallaroi which comprised some 2,442 acres, Mr Swift Snr acquired two other smaller properties in the area called Amaroo and Tandyana of 1,527 and 1,480 acres respectively.
Under family arrangements designed to avoid death duties and reduce the impact of gift duties, Graham Swift acquired Yallaroi from his father in 1966, the year he turned 21. In 1970 he married and moved away for three years but at the end of that time returned to Yallaroi and lived with his parents until they moved to another house on part of the adjoining Tandyana block. He and his family remained on Yallaroi. The Swifts continued to farm Yallaroi, Amaroo and Tandyana through the company until 1979. Throughout that time Mr Swift Snr held the controlling interest.
According to Graham Swift's evidence, which was not challenged or contradicted on this point, some difficulty arose between himself and his father because of his desire for greater independence. There was also some concern about the father's health, as he had suffered a heart attack in or about 1977. Father and son had discussions together and separately with their family accountant, Mr Ron Rich, about the possibility of effectively dividing the operation up between them. A major stumbling block that they perceived was that any disposal of the stock would be treated as a disposition at market value under the Income Tax Assessment
ATC 5103Act and would attract a significant liability which they would be unable to meet. In July 1979 the market value of livestock held by the company was $116,900 of which it was to be expected that some $113,212 would, under subsec. 36(1), be brought to account as income upon disposal unless sec. 36A could be invoked.
As a result of the consultations with Rich and advice from Jim Monson, a Sydney solicitor to whom they were introduced by Rich, the Swifts decided to enter into an arrangement whereby all but a small proportion of the stock would be sold to the corporate trustees of two trusts effectively controlled by father and son respectively. The balance of the stock would be disposed of on the open market to raise money to pay for legal and accounting fees involved in the transaction. The shares in the company were to be sold to a third party. With the company would go the tax liability generated by the disposal of the stock. In the event the company sold 87 head of cattle on the open market for $17,960.55. The remaining stock and other assets including wheat, oats and wool proceeds and plant and vehicles were transferred at market value to Karenina Pty. Ltd., as trustee of the H.C. Swift Trust No. 1. These trusts were each established in July 1979. The results of the transactions were presented in the YCO company accounts for the period 1 July 1979 to 31 July 1979 and in particular the profit and loss account, profit and loss appropriation account and the balance sheet as follows:
``YALLAROI PASTORAL CO. PTY LTD PROFIT & LOSS ACCOUNT for the Period 1st JULY 1979 to 31st JULY 1979$ 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 ------------ $136,805.04 ------------
YCO PTY. LIMITED
PROFIT AND LOSS APPROPRIATION ACCOUNT
as at 1st JULY 1979 to 31st JULY 1979$ $ 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 $155,658.43 --------------
YCO PTY LIMITED
BALANCE SHEET as at 31st JULY 1979
AUTHORISED CAPITAL$ $ Issued & Paid Up Capital 2000 `A' Class Shares @ $2.00 4,000 9000 `C' Class Shares @ $0.10 900 4,900.00 ------ Capital Reserve Account 612.00 Profit & Loss Appropriation Account 155,658.43 ------------- Shareholders Funds 161,170.43 ------------- ASSETS National Bank of Australasia Ltd. $161,170.43 --------------''
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 generated by the sale of the assets.
On 31 July 1979 the Swifts sold their entire shareholding in the company to what Graham Swift described as ``a company buying entrepreneur organised by Jim Monson and Ron Rich''. A sale agreement dated 2 August 1979 identified the purchaser of the shares as a company called ``Shareholder Pty Ltd''. The purchase price was $151,170.43 being precisely $10,000 less than the cash assets appearing in the company balance sheet and substantially representing the proceeds of sale of the stock, crops, plant and vehicles.
Although the Tribunal found that the company received ``full value neither more not less'' for the assets sold to the two trustees, it seems clear that this occurred through an exchange of cheques in one ``big settlement'' at Mr Rich's office in Dubbo. The Tribunal found that following the sale of the shares in YCO, the Swifts continued to run their farms as before but through the two trustees.
On 13 December 1982 the Taxation (Unpaid Company Tax) Assessment Act 1982 (``TUCTA'') came into operation. On 6 January 1983 the Swifts were each sent a written notice by the Commissioner that he had assessed the taxable income of the company for the year of income ended 30 June 1980 at $134,460 giving rise to a tax liability of $61,851.60 and additional tax for late return of $3,202. The notice was sent as a preliminary to the raising of recoupment tax assessments and advised the recipients of their right to object to the assessment against the company. On 17 June 1983 vendor's recoupment tax assessments issued to the Swifts under the TUCTA Act. Mr Swift Snr was assessed to tax of $53,098.14 and Mrs Swift and Graham to $6,006.10 each, making up a total of $65,110.34 representing:
$ 1. Ordinary company tax 61,851.60 2. Additional Tax for late payment 3,442.62 3. Amount credited (187.68)
These assessments were paid in full on 20 July 1983 but objections lodged in respect of each of them in August 1983. They were disallowed on 21 September and on 3 February 1984 the Swifts requested that their objections be reference were transferred to a Taxation Board of Review. On 23 September 1985 the Commissioner complied with their requests and on 1 July 1987 the references were transferred to the Administrative Appeals Tribunal pursuant to the Taxation Boards of Review (Transfer of Jurisdiction) Act 1986. In each case the Commissioner had provided to the Board of Review a statement of reasons for the disallowance of the objections which followed a common form reflected in the reasons relating to Mr Swift Snr:
``As sub-section 5(1) of the Taxation (Unpaid Company Tax) Assessment Act 1982 is satisfied, under sub-section 8(1) of this Act, the taxpayer is liable to vendor's recoupment tax of $53,098.14 based upon the unpaid ordinary company tax due and payble by Yallaroi Pastoral Co. Pty Limited
ATC 5105in respect of the income year ended 30 June 1980.''
On 4 February 1983 the Swifts in their capacity as former directors of Yallaroi Pastoral Co. Pty. Limited wrote to the Deputy Commissioner of Taxation in New South Wales in the following terms:
``WE, HENRY CLAUDE SWIFT, CAVELL LORRAINE SWIFT and GRAHAM MAX SWIFT being all the persons who constituted the Board of Directors of the above company immediately before the last sale time as that term is defined in the Taxation (Unpaid Company Tax) Assessment Act (`the Act') HEREBY REQUEST you pursuant to Section 16 of the Act, that Section 16 of the Act apply in relation to the sale of the relevant shares in the above company.''
On 24 June 1983 assessments issued to Mr and Mrs Swift Snr and an amended assessment to Graham Swift pursuant to that request, bringing to account as part of their assessable income for the year ended 30 June 1981, deemed dividends from the company. The amounts were $17,710 in relation to Mr Swift Snr and $2,003 for Mrs Swift and Graham. Their liability to tax in that year was thereby increased by $5,334, $229.42 and $640.96 respectively. Objections were lodged by father and son on 26 August 1983 and disallowed on 8 January 1984. Requests for reference to the Taxation Board of Review were made on 3 February 1984 and referred on 28 November 1985. Subsequently, they too were transferred to the Administrative Appeals Tribunal.
On 4 November 1986 assessments issued against Mr and Mrs Swift and an amended assessment against Graham Swift in respect of the year ended 30 June 1980. In each case the assessment or amended assessment was accompanied by an adjustment sheet which was in common form, reflected in that which issued to Mr Swift Snr:
``TAXPAYER'S NAME: HENRY C. SWIFT YEAR OF INCOME: 1980 INCOME PREVIOUSLY ASSESSED: $ $ Attached is a notice of assessment made in 863 reliance of sections 260 and 44 of the Income Tax Assessment Act in respect of the sale of shares in Yallaroi Pastoral Co Pty Limited 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: YALLAROI PASTORAL CO PTY LTD TOTAL SHAREHOLDERS FUNDS 161,170 LESS PAID-UP CAPITAL 4,900 --------- SHARE PREMIT RESERVE PROFITS AVAILABLE FOR DISTRIBUTION 156,270 ---------- Shares held X Profits available ----------- Total Shares for distribution 1,998 X 156,270 issued ------- 2,450 = Amount included in assessable income 127,440 ---------- AMENDED TAXABLE INCOME 128,303 --------''
The amended taxable income for that year in relation to Mr Swift Snr was $128,303, for Mrs
ATC 5106Swift $15,500, and for Graham Swift, $30,927. The tax liabilities for the year ended 30 June 1980 pursuant to these assessments was calculated as follows:
H.C. Swift L.C. Swift G.M. Swift $ $ $ Taxable income 128,303.00 15,500.00 30,927.00* ------------ ------------ ------------ Primary Tax 70,091.86 3,838.43 10,944.80 Additional Tax for incorrect return 42,055.11 2,003.05 4,832.00 ------------ ------------- ------------ Total Tax 112,146.97 5,838.48 15,776.80
*Tax previously assessed at $16,512
Each of the sec. 260 assessments was accompanied by a letter in the following terms:
``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 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 [sic] 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 assessments 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.''
In the matters which are the subject of the appeal to this Court, the Tribunal was dealing only with the referred disallowance of objections to the TUCTA assessments for the year ended 30 June 1980 and the deemed dividend assessments for the year ended 30 June 1981. No reference in relation to the sec. 260 assessments was before it. Objections have been lodged in respect of these assessments but at the time of trial had not been determined.
Before turning to the Tribunal's reasons for decision, it is convenient to collect and set out some of the relevant statutory provisions. Subsection 3(1) of the TUCTA Act sets out definitions of various terms including the following:
```ordinary company tax', in relation to a company, means -
- (a) income tax assessed under the Assessment Act and levied upon the taxable income of the company, being income tax imposed as such by an Act; and
- (b) additional tax payable by the company under section 207 of the Assessment Act in relation to tax referred to in paragraph (a);
`primary taxable amount', in relation to a person, means an amount that is a primary taxable amount in relation to the person under section 5;
`vendor's taxable amount', in relation to person, means an amount that is a primary taxable amount or a secondary taxable amount in relation to the person;
`vendors recoupment tax' means tax assessed under this Act and imposed by the Taxation (Unpaid Company Tax - Vendors) Act 1982;
`eligible taxable amount', in relation to a person, means an amount that is a vendors taxable amount in relation to the person or is a promoters taxable amount in relation to an eligible promoters class in which the person is included;''
Subsection 5(1) sets out the circumstances in which a ``primary taxable amount'' shall be taken to exist in relation to a person. It is unnecessary to set them out verbatim here. They arise however, when 90% or more of the shares in a company have been sold for more than the difference between the asset value of the company and the sum of its pre-sale liabilities including liability to company tax. An assessment must have issued, the period for objection expired or any objection finalised and some or all of the company tax remain unpaid. There must have been some arrangement or transaction entered into that secured or achieved the result that at the relevant time the company was unable, having regard to its other debts, to pay to the Commissioner all the company tax due and payable by the company at that time. Alternatively, if the company ceased to exist it must have been unable, having regard to its other debts, to pay to the Commissioner all of the company tax that would have been due and payable immediately before it ceased to exist. It is also a requirement that if the company carried on a business immediately before the sale, other than a business consisting solely of deriving income from property, then it did not continue to carry on the business after the sale. The primary taxable amount which exists in relation to each vendor shareholder in those circumstances, is calculated on a pro rata formula set out in para. 5(1)(m).
Where a primary taxable amount that is also a vendor's taxable amount exists in relation to a person a liability to pay tax is created by sec. 8 of the TUCTA Act which provides inter alia;
``8(1) Subject to this Act, where at any time a vendors taxable amount exists in relation to a person, the person is liable to pay the tax imposed on that amount by the Taxation (Unpaid Company Tax - Vendors) Act 1982.''
Provision for notification of the company's tax assessment to persons likely to be liable to pay vendor's recoupment tax is made by sec. 18, which also confers on such persons the same rights of appeal under Div. 2 of Pt V of the Income Tax Assessment Act in relation to that liability as the company has.
Central to this appeal is the power of dispensation conferred on the Commissioner by subsec. 5(4) of the TUCTA Act in the following terms:
``5(4) 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
ATC 5108company 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.''
For comparative purposes, reference should also be made to subsec. 6(2) of the Act which, using a verbal formula similar to that in subsec. 5(4) provides for the deemed existence of a ``secondary taxable amount'' in relation to persons leading ultimately to liability for recoupment tax. The application of the section is conditioned upon a number of matters including in para. (c) that:
``(c) The Commissioner is of the opinion that, by reason of a circumstance mentioned in paragraph (b), it would be unreasonable that the relevant company or the trustee of the relevant trust estate, as the case may be, be liable to pay recoupment tax on the vendor's taxable amount.''
The Tribunal's reasons for decision
Having reviewed the evidence, the Tribunal turned to a consideration of what it called ``the pre-history of the TUCTA Act''. It referred to
Slutzkin v. F.C. of T. 77 ATC 4076; (1977) 140 C.L.R. 314. the enactment of the Crimes (Taxation Offences) Act 1980, passages from the Interim Report of the Royal Commission into the Activities of the Federated Ship Painters and Dockers Union, the enactment of Pt IVA of the Income Tax Assessment Act, the Treasurer's announcement of the proposed TUCTA Act and his second reading speech in relation to it. Under the heading ``the History of the Assessments'' the Tribunal quoted parts of a ruling published by the Commissioner of Taxation on 28 October 1983 setting out standards to be applied in considering the exercise of discretion under subsec. 5(4) and 6(18) of the TUCTA Act. In the relevant parts this ruling, IT 2063, provided:
``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
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 the 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 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
ATC 5109price 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.''
As part of this history reference was also made to
MacCormick v. F.C. of T. 84 ATC 4230; (1985) 158 C.L.R. 622 upholding the constitutional validity of the recoupment tax legislation and to the 1984 Annual Report of the Commissioner in which he referred to contentions that sec. 260 of the ITAA did not apply to the so-called bottom of the harbour cases. Other public statements on that topic by the Treasurer in 1984 and 1987 and the Commissioner in 1986 were quoted in part.
The first substantive question which the Tribunal posed for itself, was whether the assessments under the TUCTA Act and under sec. 260 of the ITAA could coexist in respect of the same circumstances and taxpayers. It concluded that no such result was intended by the Parliament in enacting the TUCTA Act. In any event, if sec. 260 applies to a transaction such as that now under consideration, it was the view of the Tribunal that it renders the transfer of shares void as against the Commissioner. That being so, there is no ``sale'' of shares to attract the application of the TUCTA Act. The sec. 260 assessments however, were not under review and the Tribunal could not affect their efficacy. Nevertheless it concluded that it was not bound to treat the sec. 260 assessment as valid. It held that on the evidence there was no scope for the application of sec. 260 and that the case fell ``within the authority of the decision of the High Court of Australia in Slutzkin...'' The Tribunal went on to say that ``all of the elements of sec. 5 of the T(UCT)A Act [with the possible exception of subsection (4) which has as yet to be considered] have been satisfied in relation to each of the Applicants''. It then turned to the dispensing discretion under subsec. 5(4). Accepting that it could review the exercise of that discretion on a reference under Pt V of the ITAA, the Tribunal noted that the subsection had a markedly different emphasis from sec. 265 of the ITAA. It involved a decision whether a liability should be imposed, not, as in sec. 265, whether enforcement of the liability would impose undue hardship. It found that the Commissioner's ruling on the application of the subsection was too narrowly based having regard to the width of the discretion.
Facts relevant to the exercise of the discretion were then reviewed:
``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 circumstances 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.''
Various other considerations to which the Tribunal also had regard were enumerated:
- (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. pa 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).
Reliance upon any personal characteristics of the taxpayers other than those expressly mentioned was disclaimed, as was any consideration arising out of their present financial hardship or the circumstance that they might be seriously and adversely affected by the continuing existence of the sec. 260 assessments. The Tribunal concluded:
``Having regard to the circumstances relating to the sale of the shares and the other circumstances which I have mentioned as relevant, and especially the circumstances that the reorganization 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.''
The Tribunal thereupon ordered that the decisions of the Commissioner upon the objections under review be varied and that the objections be allowed.
Grounds of appeal
Each of the appeals is brought in the original jurisdiction of this Court pursuant to sec. 44 of the Administrative Appeals Tribunal Act and is limited by that section to an appeal on a question of law. The question as identified in each of the notices of appeal is:
``Whether the Tribunal, in finding that it was unreasonable that a primary taxable amount should be taken to exist or to have existed in relation to the respondent, has correctly exercised the discretion conferred by section 5(4) of the Taxation (Unpaid Company Tax) Assessment Act 1982 having regard to the matters set out therein.''
Thus stated the question does not necessarily constitute or give rise to questions of law. The exercise of a statutory discretion may lead to differing results depending upon the weight accorded to relevant factors by the decision-maker. Each result may be perfectly lawful reflecting a proper exercise of the discretion if not one that is ``correct'' in the eyes of all its beholders. However, the grounds of appeal attacked the Tribunal's exercise of its discretion under subsec. 5(4) for taking into account irrelevant matters and failing to take into account relevant considerations and as such raised questions which can be characterised as questions of law. As amended at the hearing, they are as follows:
``4. That in exercising the discretion conferred by s. 5(4) of the Taxation (Unpaid Company Tax) Assessment Act 1982 -
- (a) The Tribunal erred in law in giving weight to extraneous or irrelevant matter namely:
- (i) the respondent's age;
- (ii) the respondent's condition in life;
- (iii) that the respondent was not a person of commercial or fiscal sophistication;
- (iv) that the respondent was a person who placed his trust in commercial
ATC 5111and fiscal matters in the hands of a qualified chartered accountant and that upon his advice he consulted with and acted upon the advice of a solicitor who arranged for the sale of his shares in Yallaroi in circumstances which later exposed him to liability to vendors recoupment tax;
- (v) that the profit derived by Yallaroi during the year ended 30 June 1980 had been exceptionally high;
- (vi) that the extent of the profit generated by Yallaroi was a consequence of the restructuring of the affairs of the respondent's family;
- (vii) that the sale by the respondent of his shares in Yallaroi was a by-product of the re-organisation of the affairs of the respondent's family;
- (viii) that the respondent did nothing to bring about the situation whereby Yallaroi was unable to pay its tax when assessed;
- (ix) that the respondent was not privy to the `fraudulent' proposals of the purchasers of the shares in Yallaroi;
- (x) that the financial benefit received by the respondent from the sale of the shares in Yallaroi could only be realised over many years;
- (xi) that nothing was done by the respondent to artificially enlarge the profit derived by Yallaroi and thereby increase the advantage to him.
- (b) The Tribunal erred in law in failing to take into account as relevant matters the following:
- (a) the policy of the Taxation (Unpaid Company Tax) Assessment Act 1982 and the fiscal consequences of what happened;
- (b) that the respondents sold their shares in circumstances to which the Act applied; and
- (c) that the respondents received a tax benefit from the sale.
- (c) The Tribunal erred in acting under a wrong principle namely, that upon its proper construction, the occasion for the exercise of the Commissioner's discretion is not limited to the case when a person and closely associated persons have not in any way benefited from the evasion giving rise to the recoupment tax liability in question and instead should have acted upon the principle that the exercise of the discretion was so limited.''
The last ground in para. (c) was not pressed at the hearing. Each of the respondents filed a notice of contention raising matters of law said to have been erroneously decided against the respondents by the Tribunal, but did not seek any discharge or variation of the decisions actually made. The matters of law referred to were identified in the notices as follows:
``(a) Whether the Tribunal erred in Law in failing to conclude... from the continued existence of an assessment (`the section 260 assessment') made by the applicant against the respondent in reliance on sections 260 and 44 of the Income Tax Assessment Act 1936... in relation to the respondent's sale in August, 1979 of shares in the company known as Yallaroi Pastoral Co. Pty. Limited (`Yallaroi') that, for the purposes of the review being conducted by the Tribunal, such assessment had been duly made and that the amount and the particulars thereof were correct;
(b) Whether the Tribunal, in exercising the discretion conferred by paragraph 5(4)(a) of the Taxation (Unpaid Company Tax) Assessment Act 1982... erred in failing to take into account the following factors, or any of them, namely:
- (i) the conclusively presumed liability of the respondent, as at the time of making the assessments the subject of review by the Tribunal... to be assessed for income tax under the section 260 assessment;
- (ii) the effects on the respondent of the existence of the section 260 assessment concurrently with the T(UCT)A assessments;
- (iii) facts, matters and circumstances other than those `existing prior to the making of the [T(UCT)A] assessments'.''
Tribunal's review function
Subsection 43(1) of the Administrative Appeals Tribunal Act provides inter alia that ``for the purpose of reviewing a decision the Tribunal may exercise all the powers and discretions that are conferred by any relevant enactment on the person who made the decision...''. The Tribunal had, in this case, the same discretion as is conferred on the Commissioner by subsec. 5(4) of the TUCTA Act. Its duty in the exercise of that discretion was not limited to a consideration of the matters that were before the Commissioner, nor to a determination whether his decision was the correct or preferable one. It was, rather, bound to consider the relevant facts proved on the evidence before it and to decide on the basis of those facts what was the correct or preferable decision -
Drake v. Minister for Immigration and Ethnic Affairs (1979) 24 A.L.R. 577 at p. 589 (Bowen C.J. and Deane J.):
Nevistic v. Minister for Immigration and Ethnic Affairs (1981) 34 A.L.R. 639 at p. 640 (Franki J.);
Commonwealth of Australia v. Ford (1986) 65 A.L.R. 323 at p. 328 (Wilcox J.);
Freeman v. Secretary of Department of Social Security (1988) 15 ALD 671 (Davies J.);
Fletcher v. F.C. of T. 88 ATC 4834 at pp. 4846-4847; (1988) 84 A.L.R. 295 at p. 306 (Full Court). In that process it was neither entitled nor required to place weight upon the fact that the Commissioner had exercised his discretion in a particular way -
Collins v. Minister for Immigration and Ethnic Affairs (1981) 36 A.L.R. 598 at p. 603 (Full Court).
In the absence of any statutory direction, the Tribunal is not bound to apply the administrative policies by which the exercise of the discretion under review is regulated at the primary decision-making level. In particular, it was not bound in this case to apply Taxation Ruling IT 2063 to which reference has already been made. It is generally entitled to take administrative policy into account as a relevant factor in the achievement, inter alia, of a desirable consistency in decision-making - Drake v. Minister for Immigration and Ethnic Affairs (supra) at p. 591. For as Brennan J. said in
Re Drake and Minister for Immigration and Ethnic Affairs (No. 2) (1979) 2 ALD 634 at p. 639:
``Inconsistency is not merely inelegant: it brings the process of deciding into disrepute, suggesting an arbitrariness which is incompatible with commonly accepted notions of justice.''
That observation is subject to the caveat that decision-makers can be consistently wrong or consistently unjust and that consistency is safely sought by reference to policy only when the policy is appropriate and acceptable - Nevistic v. Minister for Immigration and Ethnic Affairs (supra) at p. 646 (Deane J.). This does not involve the Tribunal in reviewing policy or deciding what policy a primary decision-maker should adopt -
Re Aston (1985) 4 A.A.R. 65 at p. 76 (Davies J.). And, as in that case, which involved the exercise of a discretion to limit the terms of fishing licences under a national quota scheme, a policy which is developed in the political arena after consultation with the relevant industry ought generally to be given great weight. Taxation Ruling IT 2063 does not appear to be in that category. Nevertheless, the magnitude of the task involved in carrying out original decision-making and supervising and regulating the exercise of delegated authority under the taxation laws, is a powerful indicator that appropriate guidelines are essential for the avoidance of administrative chaos and for the achievement of reasonable consistency. The need to maintain the perception and reality of equal treatment is an important factor in the administration of all laws and not least in those relating to taxation. But such considerations go to the weight to be attributed to policy and that is ultimately a matter for the Tribunal - Nevistic v. Minister for Immigration and Ethnic Affairs (supra) at p. 647 (Deane J.); Re Aston (supra) at p. 78 (Davies). It is said to be essential that the Tribunal be fully informed of reasons for any policy involved in a decision under review, Otherwise, instead of subjecting it to rational analysis and assisting in the development of principled yet flexible decision-making, the Tribunal may ``intervene incongruously to disrupt the due course administration'' -
Commonwealth of Australia v. El Hassan (1985) 62 A.L.R. 305 at p. 316 (Burchett J.). That I take to be an exhortation to the parties seeking to invoke the relevant policy rather than an indication that the Tribunal should initiate its own inquiry into policies affecting the decision under review.
The function of the Court
The function of the Court on an appeal under subsec. 44(1) of the Administrative Appeals Tribunal Act is limited to resolving the question
ATC 5113or questions of law upon which the appeal is brought. In so doing it exercises a narrower jurisdiction than that previously conferred on the Supreme Courts of the States by sec. 196 of the Income Tax Assessment Act which allowed for appeals from Taxation Boards of Review on matters ``involving a question of law'' and thus, upon identification of a question of law, conferred jurisdiction in respect of the whole of the disputed decision -
Committee of Direction of Fruit Marketing v. Australian Postal Commission (1979) 37 F.L.R. 457 at p. 467 (Northrop J.);
Brown v. Repatriation Commission (1985) 60 A.L.R. 289 at p. 291 (Full Court);
Waterford v. Commonwealth of Australia (1987) 71 A.L.R. 673 at p. 689 (Brennan J.);
F.C. of T. v. Brixius 87 ATC 4963 at pp. 4966-4967; (1987) 16 F.C.R. 359 at p. 363 (Full Court);
TNT Skypak International (Aust.) Pty. Ltd. v. F.C. of T. 88 ATC 4279 at pp. 4280-4281; (1988) 82 A.L.R. 175 at p. 178 (Gummow J.).
The proper approach to the exercise of the jurisdiction under sec. 44(1) is one of restraint, recognising that only in exceptional circumstances, as when an error of law is identified, should the Court intervene -
Blackwood Hodge (Australia) Pty. Ltd. v. Collector of Customs (N.S.W.) (1980) 47 F.C.R. 131 at p. 145 (Fisher J.);
F.C. of T. v. Cainero 88 ATC 4427 (Foster). The guiding principle was succinctly stated in the judgment of the Full Court in Repatriation Commission v. Thompson (1988) 82 A.L.R. 352 at p. 357:
``the nature of the task of this Court is clear. It is to leave to the tribunal of fact decisions as to the facts and to interfere only when the identified error is one of law.''
The characterisation of a question as one of ``law'' is not uncommonly attended with difficulty particularly where the interpretation or application of statutes is concerned - see generally TNT Skypak v. F.C. of T. (supra) at ATC p. 4284; A.L.R. p. 182 (Gummow J.); Collector of Customs v. Bell Basic Industries Ltd. (1988) 83 A.L.R. 251 at p. 260 (French J.). But there is no error of law simply in making a wrong finding of fact - Waterford v. Commonwealth (supra) at p. 689 (Brennan J.). The complaint that a decision is against the evidence or the weight of the evidence does not involve any such question unless there was no material before the Tribunal on which the conclusion it reached could be properly based - Collins v. Minister for Immigration and Ethnic Affairs (supra) at p. 601; Blackwood Hodge (Australia) Pty. Ltd. v. Collector of Customs (N.S.W.) (supra) at p. 132 (Smithers J.), p. 155 (Sheppard J.).
The question whether misattribution of weight to a relevant factor could amount to an error of law occasioned some divergence of view in
Tabag v. Minister for Immigration and Ethnic Affairs (1982) 45 A.L.R. 705. Woodward J. said that the weight to be given to a relevant consideration would rarely involve any question of law. However, in a limiting case, the attribution of very little weight to a matter deserving of much could come so close to ignoring a relevant consideration as to amount to an error of law. In so saying, his Honour allowed that once error of law is found it will not necessarily result in an appeal being allowed. Keely J. did not think it open to the Court to allow an appeal on the basis that the Tribunal attached undue importance to some matter or failed to have due regard to another (at p. 715). And Jenkinson J., with whom Woodward J. expressly differed on this point, was prepared to say that misattribution of weight to a relevant consideration resulting in a wrong or unjust decision would not necessarily involve error of law (at p. 726). In F.C. of T. v. Brixius (supra) at ATC 4969; F.C.R. p. 366, the Full Court accepted that the application by the Tribunal of the relevant principle of law was ``very much a matter of fact and degree'' as was the weight to be attached to relevant considerations. Their Honours quoted and approved the observation of Diplock L.J. in
R. v. Deputy Industrial Injuries Commissioner; Ex parte Moore (1965) 1 Q.B. 456 at p. 488.
``If it (the evidence) is capable of having any probative value, the weight to be attached to it is a matter for the person to whom Parliament has entrusted the responsibility of deciding the issue. The supervisory jurisdiction of the High Court does not entitle it to usurp this responsibility and to substitute its own view for his.''
In Repatriation Commission v. Thompson (supra) at p. 358, the Court made clear that if a relevant factor is taken into account no error is shown should the Tribunal have given less weight to it than would the Court.
This discussion and the cases mentioned turn upon the phrase ``question of law'' which
ATC 5114confines the jurisdiction of the Federal Court in an appeal from the Tribunal. The existence of the limiting case, adverted to by Woodward J. derives support from the general discussion of judicial review for failure to consider relevant factors in
Minister for Aboriginal Affairs v. Peko-Wallsend Limited (1985) 162 C.L.R. 24. Mason J., with whom Gibbs C.J., Deane and Dawson JJ. agreed, observed at p. 41 that in the absence of any statutory indication of the weight to be given to various considerations it is generally for the decision-maker and not the Court to determine the appropriate weight to be given to matters that are required to be taken into account in exercising the statutory power. His Honour went on to offer the following qualification:
``I say `generally' because both principle and authority indicate that in some circumstances a court may set aside an administrative decision which has failed to give adequate weight to a relevant factor of great importance, or has given excessive weight to a relevant factor of no great importance. The preferred ground on which this is done, however, is not the failure to take into account relevant considerations or the taking into account of irrelevant considerations, but that the decision is `manifestly unreasonable'.''
The importance of restraint was nevertheless addressed at p. 42 where his Honour said that in the context of administrative law a court should proceed with caution when reviewing an administrative decision on the ground that it does not give proper weight to relevant factors, lest it exceed its supervisory role by reviewing the decision on its merits. I would not regard those observations as conflicting with Brixius and Thompson, for in neither was the Full Court addressing the limiting case of a decision said to be so unreasonable as to reflect error of law.
As a further expression of the restraint to be applied by the Court in the exercise of its jurisdiction under subsec. 44(1), I respectfully adopt the observations made by Lockhart J. in
Politis v. F.C. of T. 88 ATC 5029 at p. 5032. There his Honour deprecated the growing tendency in appeals under sec. 44(1) for the Court to be asked to construe the Tribunal's reasons ``minutely and finely and with an eye keenly attuned to the perception of error''. He went on to say:
``the Court should approach its task sensibly and in a balanced way not reading passages from the reasons for decision in isolation from others to which they may be related or taking particular passages out of the context of the reasons as a whole.''
The discretion under subsec. 5(4) of the TUCTA Act
Contrary to its literal reading, subsec. 5(4) does not simply attach a legal consequence to a defined state of the Commissioner's mind. It is functional, conferring a dispensing power to be exercised in the light of enumerated circumstances and by reference to a criterion of reasonableness. That is a relative term which, taken by itself, imports a requirement to consider the circumstances of the case as a whole -
R. v. Archdall and Roskruge; Ex parte Carrigan (1928) 41 C.L.R. 128 at p. 136;
Opera House Investment Pty. Ltd. v. Devon Buildings Pty. Ltd. (1936) 55 C.L.R. 110 at p. 116 (Latham C.J.), at p. 117 (Starke J.). In R. v. Archdall (supra), which involved the construction of the phrase ``without reasonable cause or excuse'' in a provision of the Crimes Act 1914, Higgins J. said at p. 140:
``As so often happens in recent legislation, such an issue as `reasonableness' is left to the tribunal, without any guidance from the Legislature; and the tribunal has to weigh all the circumstances in order to decide the issue for itself in each particular case. It is not a question of law; it is rather a question of general social standards.''
The word ``unreasonable'' as used in subsec. 5(4) is substantially indeterminate in its operation. In Stone's Human Law and Human Justice (1965) it was said (at p. 301), that such terms go little beyond restating the problem of justice. But that observation was qualified:
``Not that these notions leave matters quite at large. First, neither `justice' nor, say, `reason', is wholly indeterminate, each conveys to the hearer at least the mood and flavour of what is meant.''
A similar device is used in sec. 99A of the Income Tax Assessment Act 1936. That section and sec. 99 provide for the liability of a trustee to taxation in respect of trust income to which no beneficiary is presently entitled. In such a case sec. 99 will impose liability to tax as though the income of the trustee were that of an
ATC 5115individual, not subject to any deduction. But it does not apply if sec. 99A which imposes a prescribed (and generally higher) rate, applies. Subsection 99A(2) provides that the section will not apply if in various circumstances which are enumerated ``the Commissioner is of the opinion that it would be unreasonable that the section should apply in relation to that trust estate in relation to that year of income''. Subsection (3) sets out various factors to which the Commissioner is to have regard in forming his opinion.
In its original form as enacted in 1964, subsec. (2) had a wider range not being limited in its application to any particular cases and was expressed thus:
``This section does not apply in relation to a trust estate (other than a trust estate referred to in the last preceding sub-section) in relation to a year of income if the Commissioner is of the opinion that it would be unreasonable that this section should apply in relation to that trust estate in relation to that year of income.''
On a challenge to its constitutional validity in
Giris Pty. Ltd. v. F.C. of T. 69 ATC 4015; (1969) 119 C.L.R. 365, various observations were made concerning its operation. The subsection was held to be constitutionally valid and opinions formed pursuant to it not impervious to judicial review. But the discretion conferred upon the Commissioner was seen by some members of the court as being of extraordinary width. It was variously described as ``a legislative discretion'', ``a function of the legislature rarely delegated to an official'' (at ATC p. 4017; C.L.R. p. 372, Barwick C.J.), conferring ``an extraordinary responsibility'' and ``an extraordinary responsibility'' and ``an acknowledgement by the legislature of its inability to make laws laying down prospectively what will give rise to a particular taxation liability'' (at ATC p. 4022; C.L.R. pp. 380-381, Menzies J.). Windeyer J. referred to the absence of any ``absolute, precise or objectively determinable tests of what is here reasonable or unreasonable'' (at p. 382). The great difficulty facing the Commissioner in identifying his task in the exercise of the discretion was emphasised by both Kitto and Owen JJ. As to the interpretation of the word ``unreasonable'', Barwick C.J. said at ATC p. 4017; C.L.R. p. 372:
``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, and 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.''
Windeyer J. acknowledged the deep roots of the concept in the common law and the power of a court to say whether a particular decision is or is not within the bounds of reason. But his Honour went on to comment at ATC p. 4024; C.L.R. p. 384:
``in cases of that kind, the circumstances in which the question arises provide criteria for its solution. Here the Commissioner's discretion is apparently at large.''
There were nevertheless broadly stated limits on the Commissioner's discretion:
``I assume that he is to be guided and controlled by the policy and purpose of the enactment, so far as that is manifest in it. That would exclude from his consideration any matter which it would be unlawful for him to take as a criterion, such as the State of residence of a trustee or of the beneficiaries of a trust. It would also, I think, exclude all merely fanciful and prejudiced tests which were hypothetically suggested in argument, such as vocation, religion, colour of skin or hair. Nevertheless the statute seems to allow great latitude to the Commissioner in forming his opinion.''
In a later single judge decision,
Perron v. F.C. of T. 72 ATC 4169; (1972) 128 C.L.R. 595, Stephen J. had occasion to consider the operation of subsec. 99A(2). In that case the income of the trust estate to which no beneficiary was presently entitled was so large
ATC 5116as to attract a higher rate under sec. 99 than under sec. 99A. The appeal against an assessment raised under sec. 99 was dismissed, his Honour noting in so doing, that it was accepted in Giris' case that the formation of the Commissioner's opinion was subject only to a quite limited degree of judicial scrutiny. At ATC pp. 4172-4173; C.L.R. p. 600 his Honour said of that case:
``Implicit in the judgments of McTiernan, Kitto, Menzies and Owen JJ. is the view that a wide variety of considerations might be taken into account by the Commissioner and Windeyer J. described the Commissioner's discretion as `apparently at large', controlled only by the manifest policy and purpose of the enactment, so that unconstitutional or fanciful and prejudicial criteria must be excluded.''
D.F.C. of T. v. Truhold Benefit Pty. Ltd. 85 ATC 4298; (1985) 158 C.L.R. 678, the High Court rejected arguments that subsec. 6(2) of the TUCTA Act was invalid as imposing liability to tax in an arbitrary manner and dealing with the word ``unreasonable'' as there used, said that:
``Unreasonableness is a relative concept and the application requires the consideration of all the relevant circumstances.''
(ATC p. 4303; C.L.R. p. 687)
And as to the limitation on the discretion which might attract judicial review:
``The Commissioner is to be guided and controlled by the policy and purpose of the enactment and, whatever the width of his discretion, it is not unexaminable should be exceed the limits which may be discerned from its provisions.''
(ATC p. 4303; C.L.R. p. 687)
The only reported decision on subsec. 5(4) appears to be Marsh v. F.C. of T. 85 ATC 4345 in which Ryan J. in the Supreme Court of Queensland held that the Commissioner was required by the subsection to have regard to the matters set out therein in considering whether it is unreasonable that the primary taxable amount should be taken to exist in relation to the applicants.
Subject to the requirement that the Commissioner have regard to the circumstances mentioned in the subsection, his discretion and that of the Tribunal is as wide as the scope and purpose of the Act. But the ``legislative'' character and extraordinary width of this dispensing authority marks it as an element of the legislative scheme not to be disregarded in the definition of its scope and purpose. It is notably less confined by the need to refer to particular circumstances than sec. 99A of the ITAA. The strong statements in Giris about the width of the discretion under that provision cannot have been lost on the draftsman of subsec. 5(4).
The primary purpose of the TUCTA Act is to collect company tax which has been evaded. In the service of that purpose it creates liabilities in respect of transactions which pre-dated its enactment and provides for their imposition on persons who may have committed no offence, participated in no fraud and who were at all material times acting within the law. And there may be persons who are liable under the Act although they have received little or no benefit from the transaction in question. Instead of endeavouring to spell out the circumstances in which burdens imposed by the legislation might be lifted, the Parliament has provided for a dispensation that is capable of exercise by reference to the widest range of factors. In this context, the scope and purpose of the Act can be seen as the collection of company tax subject to a dispensing power. The dispensing power is incidental and ancillary to the primary object of the legislation. On the spectrum of cases in which it could conceivably be exercised, there will be a threshold beyond which it would defeat the primary object of the legislation. It is unnecessary to define that threshold for present purposes. The discretion cannot, however, be limited to the case where a person has not in any way benefited from the evasion giving rise to the recoupment tax liability. And in this respect ground 4(c) of the grounds of appeal was rightly abandoned. The absence of such a simply expressed limitation from the language of subsec. 5(4) is indicative of the absence of any such legislative intention. That is not to say that it is not open to consider whether a person claiming dispensation under the subsection benefited from the sale of shares in the subject company. But, it is not, as a general rule, conclusive.
There may of course be irrelevant factors which lie quite outside the framework of the Act, and which, if taken into account, would stamp a decision based upon them as arbitrary,
ATC 5117fanciful or manifestly unreasonable. And it is on this basis that the Commissioner's attack is largely founded.
The attack on the Tribunal's findings
The Tribunal's listing of various matters taken into account by it in deciding whether to exercise the discretion in favour of the applicants, embodies various findings of fact. In summary they were as follows:
- 1. Mr and Mrs Swift Snr are an elderly couple who have spent their working lives on a modest farming property in a remote rural area.
- 2. They have over many years derived only modest incomes as primary producers.
- 3. They and their son lacked any commercial or fiscal sophistication.
- 4. They and their son placed their trust in their qualified chartered accountant and on his recommendation consulted with and acted upon the advice of a Sydney solicitor who arranged the sale of shares in Yallaroi Pastoral Co. Pty. Ltd. in circumstances which later exposed them to liability to vendor recoupment tax.
- 5. The profit generated by the disposal of the company's stock in 1979 resulted from the restructuring of family arrangements and not from any desire on the part of the Swifts to realise their shareholding on a ``cum dividend'' basis before the taxing of the company.
- 6. The sale of the shares was incidental to and not the purpose of the family restructuring.
- 7. The Swifts were not privy to the fraudulent designs of the purchasers of their shares and did nothing to bring about the situation that the company could not pay its tax when assessed.
- 8. The Swifts gained no immediate financial benefit from the transaction, such benefit as they gained being only realised over many years.
- 9. They did nothing in the transaction to artificially enlarge the profit of the company to date of sale as would have occurred if the stock had been sold and purchased at above market value.
Whatever criticism may be made of those findings and in particular those in para. 8, which were the subject of some debate, they are findings on matters of fact and in my opinion cannot be impeached in these proceedings.
The principal thrust of the Commissioner's attack upon the decision under review was that the Tribunal's exercise of the discretion under subsec. 5(4) was based upon a variety of irrelevant factors. Matters personal to the Swifts, their age, condition in life, lack of commercial sophistication and reliance upon professional advice, were said to have nothing to do with the dispensing power. But the Tribunal's reasons in relation to these matters should not be dealt with piecemeal. They must be read in a sensible and balanced way not taking some passages in isolation from others to which they relate - Politis v. F.C. of T. (supra) at p. 5032. In particular the reference to personal factors cannot be disentangled from the consideration of their objectives in entering the transaction that they did and the nature of their participation in it. And if those latter matters, against the background of their personal attributes and history, contribute to some moral or normative element in the assessment, that these applicants do not ``deserve'' to be subjected to liability for vendors recoupment tax, it cannot be said that such a judgment falls outside the extraordinary wide discretion under subsec. 5(4). It may well be that the assessment is, in the language of Higgins J. in R. v. Archdall (supra), not even a question of law, but rather ``a question of general social standards''. And, accepting the correctness of the findings of fact, it cannot be said that such considerations as the source of the ``profit'' for the year ended 30 June 1980, its derivation as by-product of the restructuring of family affairs and the deferred realisation of financial benefits from the transaction, were irrelevant. Further, in my opinion, it is appropriate to take into account the fact that the applicants were not privy to any fraud and did nothing to bring about the situation whereby the company was unable to pay its tax when assessed. And while consideration of the possibility that the Swifts did not derive as great an advantage as they could have by selling the stock at above market value, might be of marginal importance it cannot be excluded from consideration on
ATC 5118logical grounds. Taken in isolation any one of the matters to which I have referred might be open to the criticism that it is insufficient to support the exercise of the discretion. Taken together, they covered the bulk of the salient features of the case sufficient to leave open a judgment in favour of the dispensation.
In saying that, I accept that the Tribunal appears in its reasons to have placed greatest weight upon the fact, as it found, that the sale of the company's shares was carried out in order to effect a reorganisation of family arrangements and not merely to dispose of an unwanted tax liability. Accepting, as I do, that that is a relevant consideration, the weight to be attributed to it was a matter for the Tribunal and did not involve any question of law. In particular, it did not give rise to the limiting case of manifest unreasonableness adverted to by Mason J. in the Peko-Wallsend case.
It may be said that the Tribunal's exercise of its discretion has undermined the objectives of the Act. If that be so, then it is for the legislature to consider confining the dispensing power. But the conflict between the primary purpose of collecting evaded company tax and the ancillary function of dispensation has not risen here to such a level that the primary purpose is defeated. Any dispensation under subsec. 5(4) will necessarily undermine the primary purpose, for tax which might have been collected will not be collected. That is an inescapable consequence of the operation of subsec. 5(4). Its invocation by the Tribunal in this case has not, in my opinion, involved the crossing of that threshold beyond which the exercise of the discretion falls outside the scope and objects of the Act.
The Commissioner has also complained that the Tribunal failed to take account of certain relevant factors. The first of these is the policy of the TUCTA Act and the consequences of the share sale. As to that I am satisfied that the Tribunal made its decision against a background, which it set out, of the history and policy of the Act including references to relevant portions of the second reading speech. And the fiscal consequences of the transaction were adverted to in the review of the evidence. There was a tax liability in the company as a result of the disposal of stock and that liability was not met. The complaint that the Tribunal failed to consider that the Swifts sold their shares in circumstances to which the Act applied is difficult to understand. It was a matter made explicit by the Tribunal when it said ``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''. And although the matter was not expressly referred to in the exercise of the discretion under subsec. 5(4), it was implicit for the discretion is conditional upon the existence of a primary taxable amount in relation to the relevant person.
Finally it is said that the Tribunal failed to take into account that the respondents received a tax benefit from the sale. But this was expressly mentioned in connection with the exercise of the discretion when the Tribunal held that the benefit gained by the Swifts could only be realised over many years. The factual correctness of that observation as I have already made clear, cannot be the subject of enquiry in these proceedings.
In conclusion and for the preceding reasons, I am of the opinion that the Tribunal's decision should not be disturbed and the appeals will be dismissed. Having regard to the conclusion at which I have arrived, it is unnecessary to deal with the matters raised in the Notice of Contention.