Franklin's Selfserve Pty. Ltd. v. Federal Commissioner of Taxation.
Judges:Menzies J
Court:
High Court
Menzies J.: The court is here concerned with appeals by Franklin's Selfserve Pty. Limited against three income tax assessments upon income derived by the taxpayer during the years ended 31 July 1965, 31 July 1966 and 31 July 1967 respectively. By each assessment the Commissioner has disallowed certain of the taxpayer's deductions of losses, including losses of previous years, which the taxpayer contends were incurred by it and were deductible under the relevant provisions of the Income Tax and Social Services Contribution Assessment Act. The following table sets out the position as claimed by the taxpayer-
Year Ending 31 July
1965
Losses of previous years $
as claimed 1,698,144
Net Loss for year ending
31 July 1965 1,928,032
------------
Total Losses $3,626,176
1966
Losses of previous years $
as claimed 3,626,176
Net Income for year ending
31 July 1966 1,481,320
------------
Total Losses $2,144,856
1967
Losses of previous years
as claimed 2,144,856
Net Income for year ending
31 July 1967 541,200
------------
Total Losses $1,603,656
What the Commissioner did, was to disallow all the losses claimed as aforesaid although not disputing that there were trading losses of $1,698,144 prior to 1965.
The taxpayer was incorporated on 19 March 1946 as The New Era Construction Company Limited, but I am concerned with it only after 1960 when it had been brought into, what can be described with sufficient accuracy
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as, the Reid Murray Group of companies as a subsidiary of Reid Murray Holdings Limited, which I shall hereafter call ``R.M.H.'' and its name had been changed to Reid Murray Development (N.S.W.) Pty. Ltd. In this manifestation I shall call the taxpayer ``R.M.D.''The taxpayer remained as R.M.D. until 8 January 1965 when its name was changed to Franklin's Food Pty. Limited. It took its present name on 7 March 1967.
R.M.D. was primarily a land development company but it occupied a singular position among Reid Murray subsidiaries in New South Wales in that, not only did it have subsidiaries of its own, but it was used as a channel of communication between R.M.H. and the various New South Wales companies that were in the group. In particular R.M.D. requisitioned for the money that was required by the various Reid Murray companies in New South Wales for their enterprises, and money was transmitted to those companies through it. Moreover, it provided the other New South Wales companies with management services for which it charged management fees. As a development company R.M.D., in the years 1960 to 1965, did itself undertake many projects involving the expenditure of large sums of money. It bought land, provided engineering services, subdivided land, built home units and houses for sale and built one regional shopping centre. It operated on a large scale. R.M.D. always did its best to get cash in full from purchasers from it but in a number of cases, where to do so proved impossible, it took mortgages for the difference between the price and what was paid in cash for homes and units.
There were other isolated instances where, to serve some particular purpose, R.M.D. lent money upon mortgage. The total mortgage debts which became owing to it as aforesaid was in the order of $250,000. This was the limit of R.M.D.'s money lending, except a loan to another Reid Murray subsidiary, Real Property Development Pty. Ltd., hereafter called R.P.D., which will require close examination later.
The general picture is, therefore, of R.M.D. (1) buying land, providing surveying and engineering services necessary for its development, erecting buildings, selling land with buildings for cash where possible, and, in a comparatively small number of cases, taking mortgages for what purchasers could not pay in cash and (2) acting as the link between R.M.H. and companies in New South Wales in the Reid Murray Group and providing management services for these companies.
I pass now from the general to deal with a particular enterprise that can be referred to as the Dumas transaction. It is of central importance to these appeals because, from it, what the taxpayer claims to be a deductible loss of more than two and a half million dollars, arose. This transaction concerned the development of one area of land at Seven Hills and one area of land at Berala owned by Dumas Hotels Pty. Limited which proposed to erect on each area a hotel and a regional shopping centre. In an early stage of the negotiations between R.M.D. and Dumas Hotels Pty. Limited a proposal that R.M.D. should purchase a half interest in the land was entertained but abandoned. What was finally arranged was that Dumas Hotels Pty. Limited should be financed by the Reid Murray Group to pay for the construction of a hotel and shopping centre on each site and that R.M.D. should itself become the constructing contractor for the hotel and shopping centre to be constructed at Seven Hills. The transaction was eventually embodied in two documents; the first a mortgage given by Dumas Hotels Pty. Limited to R.P.D. dated 1 June 1960; the second a building contract between Dumas Hotels Pty. Limited and R.M.D. dated 10 May 1960. It had earlier been intended that R.M.D. should be the mortgagee to secure the finance to be provided for Dumas Hotels Pty. Limited, but, concern, on the part of the Reid Murray solicitors in New South Wales, lest R.M.D. might, in any proceedings upon the mortgage, be shown to have been an unregistered money lender because of the mortgage transactions already referred to, led to the substitution of R.P.D. for R.M.D. as mortgagee. R.P.D. was, at the time, a subsidiary of R.M.H., which had not itself lent any money. It is clear that, whatever the identity of the mortgagee, the necessary funds were to, and did, come from R.M.H.
From the mortgage and the building contract it appears (1) that one Reid Murray company, R.P.D., was providing Dumas Hotels Pty. Limited with the funds to cover the cost of erecting one hotel and shopping centre at Berala and one hotel and shopping centre at Seven Hills at thirteen percent interest
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together with five percent of the gross proceeds of the realisation of the two developed shopping centres; (2) that another Reid Murray company, Marsland, Barron and Walker Bros. Pty. Limited, estate agents, was to be the sole managing agent for the shops to comprise the shopping centre at Seven Hills; and (3) that R.M.D. was to build the hotel and shops at Seven Hills at cost plus ten percent. The mortgage was to secure payment of the principal moneys, viz. £279,234.8.0, to be paid upon the execution of the mortgage and further payments to the persons and in the amounts set out in cl. 37 of the mortgage deed. Clause 41 was as follows-``41. The Mortgagor covenants with the Mortgagee that the Mortgagor shall also pay to the Mortgagee in addition to the principal interest and all other moneys whatsoever payable hereunder a sum equal to £5 per centum of the gross realisation of the Berala Shops Site and the Seven Hills Shops Site and the improvements erected thereon such sum to be paid from the proceeds of the sales thereof as provided for in Clause 45 hereof or on a date two years from the date hereof whichever event or date shall first occur. `Gross realisation' shall mean the aggregate of the contract sale price of the Berala Shops and the contract sale price of the Seven Hills Shops or in case of any part thereof not having been sold at a date two years from the date hereof the value thereof as determined by a Valuer as provided for in Clause 45 hereof as the case may be.''
The principal moneys which R.P.D. advanced in accordance with the mortgage were provided by R.M.H., were paid to R.M.D., which, in turn, passed the moneys on to R.P.D. and debited it with principal and with interest. It seems that principal advanced exceeded £1,000,000.
The Dumas transaction proceeded and the projects were eventually completed. Dumas Hotels Pty. Limited, however, defaulted under its mortgage and threatened to invoke the Money Lenders and Infants Loans Act 1941 (N.S.W.) as amended, to protect itself against proceedings under the mortgage threatened by R.P.D. At this point negotiations with Dumas Hotels Pty. Limited were taken out of the hands of R.M.D. and R.P.D. and were carried on by R.M.H. itself. In the result, and after prolonged negotiation, an arrangement was made bringing into the transaction as mortgagee, in place of R.P.D., another Reid Murray subsidiary, Reid Murray Acceptance Limited, hereafter called ``R.M.A.'', which was registered as a money lender. What happened was that R.M.H. gave R.M.A. a cheque for the amount owing by Dumas Hotels Pty. Limited to R.P.D.; R.M.A., upon the direction of Dumas Hotels Pty. Limited, gave one cheque to R.P.D. in satisfaction of the liability of Dumas Hotels Pty. Limited to it and another cheque to Classic Radio and Television Pty. Limited-another Reid Murray company-and R.P.D. and Classic Radio and Television Pty. Limited each gave a cheque to R.M.H. for the same amount that it had received from R.M.A. By reason of what happened, R.M.A. took the position of R.P.D. as the creditor of Dumas Hotels Pty. Limited, but R.P.D., instead of paying its debt to R.M.D., made an advance to R.M.H. of the same amount as the debt. By reason, therefore, of a round of cheques, while R.M.H.'s bank account stood as it had in the beginning, and R.P.D. continued to owe R.M.D. as before, both R.P.D. and Classic Radio and Television Pty. Limited became creditors of R.M.H., and Dumas Hotels Pty. Limited became a debtor of R.M.A., to whom R.P.D. transferred the mortgage. It seems clear that R.M.H.'s banker, which at this time controlled outgoings from the R.M.H. account, was ready to meet a cheque, the proceeds of which would come back into the account, but was not prepared to meet a cheque which might deplete the account, even if the payment of that cheque would augment the account of R.M.D. It was significant that R.M.H. and R.M.D. banked with different banks. The whole transaction which I have outlined indicates clearly enough that neither R.M.D. nor R.P.D. was in a position to exercise an independent judgment in relation to the intercompany transactions, and that, what was done, was done at the will of R.M.H. which, for its own purposes, juggled accounts between its subsidiaries.
It is by virtue of the non-payment of what the taxpayer claims were the loans made by R.M.D. to R.P.D. in connection with the Dumas transaction, and of interest thereon, that the taxpayer contends that, in its manifestation as R.M.D., it lost money advanced and interest which were losses available as deductions in the year 1965 and, to the extent
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not availed of in that a year, as deductions in the following years 1966 and 1967.Before pursuing further the history of what occurred between R.M.H. and R.P.D., it is convenient to notice that the foregoing losses are not the only losses with which the court is concerned in these appeals.
A small sum of $41,400 was, as the appellant contends, lost when R.P.D. failed to pay management fees properly debited to its account for services rendered by R.M.H. The deductibility of this loss-by virtue of a writing off as a bad debt-is in question as will appear hereafter.
Apart from the Dumas transaction, however, R.M.D. had trading losses amounting to $1,698,144 made up as follows-
year ended 31 August 1962 : $865,190
year ended 31 August 1963 : $793,528
11 months ended 31 July 1964 : $39,426.
The existence of these losses is not in dispute but their deductibility is. This is a matter for later consideration.
The date of 1 October 1964 is of some significance. By that date R.M.D. was about to become bound by a scheme of arrangement with its unsecured creditors who were owed £2,160,449. This scheme was approved by the Supreme Court of New South Wales on 6 October 1964, when it came into force. The scheme provided for an advisory committee and a company manager. Clauses 16 and 20 were as follows-
``16. Subject to the provisions of this Scheme and in particular to clause 2 hereof the Committee and the Company Manager shall apply the proceeds of any realisation of assets all moneys received in the course of or concurrently with the sale of the issued shares in the capital of the Company (after payment thereout of all sums payable out of such moneys or otherwise pursuant to the Agreement relating to the sale of such shares) together with all other moneys coming into their or his hands as follows-
(a) first in payment of any debts which would be entitled to priority in payment if a winding up order were to be made against the Company at the commencement date;
(b) secondly in discharge of the debts costs and expenses incurred in the preparation and approval of this Scheme;
(c) thirdly in payment of the proper costs and disbursements of the Committee and the Company Manager together with the costs and expenses incurred in and about the administration of this Scheme and all costs charges and liabilities incurred for the purpose of carrying on business after the fixed date;
(d) fourthly in payment of creditors in respect of liabilities properly incurred by the Company or the Company Manager after the fixed date;
(e) fifthly in payment of any creditors other than those specified in (a) and (d) herein who shall receive the balance undistributed pro rata according to the amount of their respective debts.
Notwithstanding any suspension of payment of principal moneys, interest which would otherwise become due to any unsecured creditor (other than in respect of a liability described in paragraph (d) shall continue to accrue until the fixed date, but thereafter no interest shall accrue or be deemed to accrue to any unsecured creditor.''
``20. The Committee or the Company Manager may procure the sale of not less than 75% of the issued shares in the capital of the Company and on such terms and conditions as may be thought fit by them. The price which is offered to the Committee or the Company Manager for the said shares and is considered by the Committee to be the best obtainable shall be accepted by the creditors of the Company and after the payment of 3d. per share to the shareholders the proceeds of sale shall be distributed in accordance with clause 16 hereof as if they were an asset of the Company. If any document concerned with the sale of the said shares provides for all moneys received as proceeds of or otherwise in the course of or concurrently with the sale of the said shares (subject to payment of the sum of 3d. per share to the shareholders and payment of all other sums payable pursuant to the provisions contained in such document) to be paid to the three members of the Committee appointed by the Liquidators as Trustees for the Creditors of the Company, then any undistributed moneys arising from the sale of the assets of the Company and any unrealised assets of the Company shall
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be transferred to such Trustees to be held by them on behalf of the Creditors of the Company as contemplated by this Scheme of Arrangement and following completion of the sale each creditor shall be deemed to have released the Company from any unsecured debt then owed by the Company to him and shall be entitled only to claim from such Trustees the distributions to which he is entitled pursuant to clause 16. The said Trustees shall to the extent of all moneys in or coming into their hands be bound to pay claims of Creditors and observe the provisions of clauses 14 and 16, and clause 15 shall apply, in each such case, as if the expressions the `Committee' and `Company Manager', except where the context otherwise requires, referred to the said Trustees.''
It was in anticipation of the coming into operation of the scheme of arrangement that certain steps were taken by R.M.D. on 1 October. It disposed of most of its assets to Lustre Hosiery Pty. Limited-another Reid Murray subsidiary-at a fair valuation, but this did not include the total of the debts owing by R.P.D. of £1,526,458.8.5. It was thought that the assignment of this debt might involve the payment of stamp duty and a different course was followed with respect to it. This course was to accept from R.P.D. the sum of £251,415 in full satisfaction. This figure was arrived at by the liquidators of R.M.H.-it having gone into liquidation on 23 April 1963-as the value of the only asset which R.P.D. had, viz. the debt owing to it by R.M.H. incurred in the manner already described. The payment from R.P.D. to R.M.D. was received ``in full and final satisfaction of the debt of £1,526,458.8.5.'' On the same day, but after the receipt of the sum of £251,415, the directors of R.M.D. resolved to write off the balance of £1,275,043. In the journal of R.M.D., under date of 1 October 1964, and as one of over thirty entries under that date, this entry appears-
``Owing by Subsidiary
Companies 1,285,219.3.10
Murray Join &
H'work P/L 5,177.6.2
Real Property
Dev. P/L 1,275,043.8.5
Ward Develop-
ments P/L 4,998.9.3
Loss on Disposal.
Book Debts- 1,285,219.3.10
Sub Coys. being effect
of assignment to
Lustre Hosiery P/L''
It is this that the appellant relies upon as the writing off in the books of R.M.D. of the sum of £1,275,043 owed to it by R.P.D. as a bad debt.
I turn now to the share holding in R.M.D. up to 31 July 1968. At the time of the takeover already referred to, R.M.H. became the holder of seventy-five thousand ordinary shares and continued to hold such shares until 30 November 1964 when they were transferred to Franklin's Pty. Ltd. On 31 July 1961 Major 8 (Holdings) Pty. Limited-another Reid Murray company which I shall call ``Major 8''-became the holder of three twenty percent cumulative preference shares and continued to hold such shares until 30 November 1964. On 30 November 1964 two of these shares were transferred to Franklin's Pty. Ltd., but on 8 June 1965 Major 8's holding of one preference share was increased to two. This latter transaction must be dealt with in due course. An order for the liquidation of Major 8 was made on 8 August 1963. The purchases, on 30 November 1964 by Franklin's Pty. Limited of two preference shares from Major 8 in liquidation, and seventy-five thousand ordinary shares from R.M.H. in liquidation, were made by an agreement with the shareholders of R.M.D. and the purchase price of £30,000 was to be paid, not to the shareholders themselves, but to the trustees referred to in cl. 20 of the scheme of arrangement. The purchase was on the basis that most of the assets and most of the liabilities of R.M.D. had been got rid of by the happenings on 1 October and 6 October 1964, and that the moneys which had been received had been dealt with in accordance with cl. 16 of the scheme of arrangement. However, it was a condition of the agreement that the company should, by 30 November, be without assets and without liabilities and by that date those concerned thought that this position had been reached, apart from land tax which was dealt with as a separate matter, R.M.D. had, in effect, been reduced to what is commonly described as a tax loss company and no doubt it was in the minds of those concerned that its losses available as income tax deductions included £1,275,043.8.5, the balance of the amount which had been owed by R.P.D. To help secure the taxation deductions, to which it
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was hoped the losses incurred by R.M.D. would give rise, the selling shareholders covenanted as follows-``The Shareholders hereby covenant and agree that for a period of four (4) years from the date of completion and except as and when approved by the Purchaser they shall not transfer sell hypothecate mortgage or otherwise dispose of or deal with any of the shares in the capital of the Company at any time and from time to time held by them. The Shareholders shall not be dissolved for a period of at least four (4) years from the date hereof without first obtaining the approval in writing of the Purchaser.''
However, all was not plain sailing. In the first place changes were made in the Act in relation to the deduction of losses of past years; in the second place it was discovered that the tax losses of R.M.D. might prove larger than had been anticipated when the purchase price of £30,000 had been arrived at. The conjunction of these circumstances led to some bargaining between the liquidators of R.M.H. and Major 8, on the one hand, and Franklin's Pty. Limited on the other, eventuating in a further agreement of 8 June 1965, to which I will come later.
The course I propose to follow now is to set out the changes in the shareholding of the taxpayer that occurred after 30 November 1964, and to examine later why it was that these changes did occur. It will be recalled that until 30 November 1964 the shares were held as follows- Major 8, three preference shares with votes, and R.M.H. 75,000 ordinary shares without votes. On this date Major 8 transferred two of its preference shares to Franklin's Pty. Limited, and R.M.H. transferred its holding of 75,000 ordinary shares to Franklin's Pty. Limited.
On 23 December 1964 there was a reduction of capital. The ordinary capital of £75,000 was reduced to three shares of one pound each and, until 8 June 1965, the capital of the company was three preference shares-one held by Major 8 in liquidation and two held by Franklin's Pty. Limited, and three ordinary shares held by Franklin's Pty. Limited. On 8 June 1965 the issued capital of the company was increased to five preference shares-two held by Major 8 in liquidation and three by Franklin's Pty. Limited. The ordinary share capital of five shares of one pound each was held as to two by R.M.H. in liquidation and as to three by Franklin's Pty. Limited. On 19 February 1967 the shareholding of Franklin's Pty. Limited, both preference and ordinary, was transferred to D. F. Nominees Pty. Limited. On 31 July 1968, 24,900 ordinary shares were issued to N. H. Hill Pty. Limited, a company associated with the taxpayer.
At all times material the only rights to participation in profits or assets to which the holders of the preference shares were entitled were cumulative preferential dividends at the rate of twenty percent per annum and to rank in the winding up, as regards capital and arrears of dividends, in priority to ordinary shares. Such shareholders had, however, exclusive voting rights and no member of the company was entitled to vote in respect of any shares other than preference shares.
The following is a summary of the shareholding in the taxpayer for the years ended 31 August 1962 to 31 July 1967 inclusive-
SHAREHOLDING IN THE TAXPAYER COMPANY
20%
Cumulative
Preference Ordinary
Shares Shares
(Votes) (No Votes)
Years Ending 31 August
1962, 31 August 1963
& 11 months ending
31 July 1964.
Major 8 3 -
R.M.H. - 75,000
--- --------
3 75,000
--- --------
Year Ending 31 July 1965
1.8.64-30.11.64
Major 8 3 -
R.M.H. - 75,000
--- --------
3 75,000
--- --------
30.11.64-23.12.64
Major 8 1 -
Franklin's Pty. Ltd. 2 75,000
--- --------
3 75,000
The deductibility of losses of previous years was, in the year 1964, governed by sec. 80 of the Income Tax and Social Services Contribution Assessment Act 1936-1963. This section authorises the deduction of losses of previous years subject to the provisions therein appearing and subject, in particular, to sub-sec. (5) which was as follows-
``Notwithstanding any other provision of this section, in the case of a taxpayer which is a private company within the meaning of Division 7 of this Part, no loss incurred by the company in any year prior to the year of income shall be an allowable deduction unless the company establishes to the satisfaction of the Commissioner that, on the last day of the year of income, shares of the company carrying not less than twenty-five per centum of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than twenty-five per centum of the voting power on the last day of the year in which the loss was incurred.''
The effect of sub-sec. (5) was that, in order to obtain the deduction which the section authorised, a private company had to satisfy the Commissioner that, on the last day of both the year of loss and of the year of income, shares carrying not less than twenty-five percent of the voting power were beneficially held by the same persons. This limitation is subject to special provisions in the event of the death of shareholders or the transfer by shareholders of their shares to companies.
On 23 November 1964 an amendment of the Act came into force by reason of Act No. 110 of 1964, which applied only to the year ending 30 June 1966 and following years. Sections 80A, 80B and 80C were added.
On 14 December 1965 the provisions of the Act in relation to the deduction of the losses of previous years were further amended by Act No. 103 of 1965. Thereafter the conditions for the bringing into account of such losses were as set out in the elaborate provisions of sec. 80A, 80B, 80C and 80D of the Act as so amended.
Having stated the facts in a general way and having indicated the legislation relating to the deduction of losses in previous years in force at the various relevant times, it is convenient to deal separately with the issues that appeared upon the hearing of the appeal. I should, perhaps, say here that I am concerned with sec. 51 and 63 of the Act as well as the particular provisions already mentioned. Although counsel for the taxpayer did refer to sec. 52, it appeared that the real contentions were based upon the sections I have mentioned.
The first group of issues relates to the debt of £1,526,458.8.5, shown in the taxpayer's books as owing to it by R.P.D. If the loss which the taxpayer suffered because this debt was not paid in full was not an allowable deduction (1) by virtue of sec. 51 of the Act, or (2) because the writing off which occurred on 1 October 1964 did not give rise
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to an allowable deduction by virtue of sec. 63 of the Act, then £1,275,043, the amount not paid, requires no further consideration in the circumstances here for sec. 80 of the Act applies only to losses ascertained by deducting assessable income from allowable deductions. Did then the sum of £1,275,043 become an allowable deduction?In considering this, both for the purposes of sec. 51 and sec. 63, it is material to determine whether the taxpayer was, up to January 1961 when lending to Dumas ceased, carrying on the business of lending money and whether the loan of $2,141,740, made by the taxpayer to R.P.D. for the purpose of making advances to Dumas, was in the ordinary course of the taxpayer's money lending business so that the loss of what was lent would be a revenue, rather than a capital, loss. I cannot find either factor affirmatively. I am not satisfied that the various mortgage transactions with purchases from the taxpayer, to which I have already referred and which were, in fact, granted to secure outstanding balances of purchase money, do, of themselves, establish that the taxpayer was carrying on the business of money lending, but, if they did, I am satisfied that the particular loan made by the taxpayer to R.P.D. with which I am concerned was a transaction altogether outside that money lending business. The course followed was no more than a means whereby money passed by R.M.H. to its subsidiary R.P.D., although, it was no doubt the case, that the means adopted to transfer this money did, in the result, create a debt owing by R.P.D. to the taxpayer. I cannot find, however, that this debt arose as part of the taxpayer's carrying on business as a money lender. It was an isolated transaction of a very special character undertaken at the behest of the company to which it was a subsidiary and the debt which arose is not to be regarded as occurring in the conduct of any money lending business in which the taxpayer was otherwise engaged by virtue of its taking mortgages from purchasers. It seems to me that the loss of the principal sum of $2,141,740, or any part of that sum, was not a revenue loss; it was a loss of capital.
In the circumstances I cannot find affirmatively that the sum of £1,275,043 with which I am concerned, or any part of it, was an allowable deduction by virtue of sec. 51 of the Act. Upon my findings it has not been shown to be otherwise than a capital loss.
The so-called writing off, it will be remembered, is shown in the taxpayer's books of account as occurring on 1 October 1964. What had been decided by the taxpayer was to accept £251,415, not on account of the debt owing, but, in full and final satisfaction of the debt of £1,526,458.8.5; it was further decided to write off the difference, namely £1,275,043. The entry which was made was not accurate, but I do not base my decision upon its inaccuracy. It is probable too that the entry was not made until long after 1 October 1964, but again it is not necessary to make a positive finding that this was so. It is sufficient for me to find, as I do, that, in accordance with what had been decided, the entry was made subsequently to the receipt of the £251,415, and it was what the maker of the entry regarded as a balance that was written off as a bad debt.
What then is the position under sec. 63 of the Act? There might have been no difficulty in its application had the £251,415 been taken on account, leaving a balance which, having regard to the scheme of arrangement as a whole and of the benefits that the taxpayer was obtaining thereunder, was properly to be regarded as a bad debt. It was, however, regarded as necessary to the effective operation of the scheme of arrangement and the plan which it embodied that the taxpayer should be denuded of assets and liabilities and it was for this reason that the payment was taken in full discharge of the liability. I must, I think, proceed on the basis that the whole debt was extinguished before any writing off was attempted and that, in truth, there never was a balance of £1,275,043 which could constitute a bad debt. Accordingly, what occurred could not give rise to an allowable deduction by virtue of sec. 63 of the Act. I need not, therefore, consider whether a writing off in October could provide any deduction in respect of an income year closing earlier. See
Point v. F.C. of T., 70 ATC 4021.
For the foregoing reasons I find that the sum of £1,275,043 was not an allowable deduction either under sec. 51 or sec. 63.
It is to be recalled, however, that the taxpayer did have past losses as follows-
year ended 31 August 1962 : $865,190
year ended 31 August 1963 : $793,528
11 months ended 31 July 1964 : $39,426.
It was conceded by the Commissioner that, apart from the provisions of sec. 80(5) of the
ATC 4089
Act, the taxpayer would have been entitled to a deduction for these past losses in respect of the 1965 tax year. It has already been seen that, up to 8 August 1963, when it was wound up as insolvent, Major 8 held the three issued preference shares in the taxpayer and that these shares carried exclusive voting rights. Major 8 was also registered as the holder of two preference shares on 31 July 1965. If Major 8 held those shares beneficially, then the requirements of sec. 80(5) were met and the Commissioner could not have been otherwise than satisfied for the purposes of the sub-section. The contention of counsel for the Commissioner was, however, that the company did not, and could not, establish to the satisfaction of the Commissioner that the two preference shares held by Major 8 on 31 July 1965 were held beneficially because that company, being insolvent, had been wound-up on 8 August 1963 with the consequence that the shares registered in its name were no longer held by the company beneficially.I.R. Commrs. v. Olive Mill Ltd. (in liq.) (1963) 2 All E.R. 130 was cited in support of this contention. In that case one question was whether a company was the subsidiary of another company. The test there to be applied was whether the parent company was, at the critical date, the beneficial owner of not less than three-quarters of the capital of the subsidiary company. While holding such a fraction of shares the parent company had gone into voluntary liquidation and Buckley J., relying upon observations of James L.J. and Mellish L.J. in
Re Oriental Inland Steam Navigation Co., Ex parte Scinde Railway Co. (1874) L.R. 9Ch. App. 557, held that, upon its liquidation, the parent company had ceased to be the beneficial holder of the shares which it held in the subsidiary because, by the liquidation, the beneficial interest was taken out of the company. In that case the holding company was not insolvent and the decision does, of course, afford weighty support for the Commissioner's contention. Of even greater weight are the observations of James L.J. and Mellish L.J. in the earlier case. The relevant statutory provisions in relation to the liquidation of Major 8 are to be found in the Companies Act, 1961 (Vic.) sec. 227, 230(4), 233, 244 and 247. My problem here, however, is what is meant by the words ``beneficially held'' in sec. 80(5) of the Act and not in any other provision, and I do find in the section itself an indication that a trustee who holds for cestuis que trust nevertheless holds beneficially for the purposes of the section. Thus in sub-sec. 6 of sec. 80 there is a reference to shares ``beneficially held by the trustee''. I am encouraged, by what I think underlies the provisions of sub-sec. 6, to think that what the section is concerned with is a continuing identity of interest such as there is, for instance, between a shareholder and the person who, upon his death, becomes his trustee, notwithstanding that he holds for beneficiaries. In the context here, I do not consider that this identity of interest ceases when a shareholder, which is a company, goes into liquidation. Even if a company, being insolvent, goes into liquidation, I find difficulty in regarding the company itself as trustee for anybody, notwithstanding that it can no longer employ its assets in its business, nor dispose of them. The assets must be held for the purpose of its own liquidation in accordance with statute. Of course its assets have to be realised by the liquidator and distributed among the company's creditors but this is done in accordance with elaborate statutory provisions for bringing about the result for which the statute provides. The matter is not left to the application of general law relating to trustees and cestuis que trust. Furthermore, the realisation of the assets of a company which was insolvent may nevertheless produce a surplus and in that event contributories would be entitled to that surplus. Perhaps, indeed, the company could be given a fresh lease of life. To regard a company in liquidation as, in any strict sense, a trustee for creditors and contributories, would, I think, be inconsistent with
Livingstone's case (1965) A.C. 694. Of course a liquidator may have vested in himself the assets of the company in liquidation, including the shares, and such a step would produce an entirely different situation for the purposes of sec. 80(5); cf. In
re Farrow's Bank, Limited (1921) 2 Ch. 164. I have not been persuaded, however, that liquidation, of itself, deprives the company in liquidation of the beneficial holding of its shares. They are available for the purposes of its winding up.
The sort of problem that arose in I.R. Commrs. v. Olive Mill Limited (supra) was considered in two other cases,
Pritchard v. M. H. Builders (Wilmslow), Ltd. (1969) 2 All E.R. 670, and
Rudewa Estates Limited v. Stamp Duties Commissioner (1966) E.A. 576. In the latter case the court thought that the Olive Mill decision was an unjustified
ATC 4090
extension of the principles of Re Oriental Inland Steam Navigation Co. (supra) because, in the later case, the company was not insolvent. It seems to me, however, that once a company is in liquidation the statutory provisions apply whether it be solvent or insolvent and it is not an easy distinction to say that if a company is insolvent it has ceased to have a beneficial interest in its assets, but, if it is not, it continues to do so. In each case it is for the liquidator to carry out the statutory scheme of liquidation, to pay creditors and to divide any surplus that there may be among contributories. Whether or not there may be a surplus hardly seems to me to bear upon the relationship between the company in liquidation and its assets.The same problem has been discussed by a learned authority writing before and after the Olive Mill decision. See British Tax Review 1960 at p. 79; British Tax Review 1963 at p. 312; British Tax Review 1967 at p. 1; and British Tax Review 1968 at p. 51. In the later articles the author feels that there are grave difficulties in accepting the Olive Mill decision and I agree. This court did consider the meaning of the words ``beneficially held'' in sec. 80(5) in
Dalgety Downs Pastoral Company Pty. Limited v. F.C. of T. (1952) 86 C.L.R. 335, particularly at pp. 341 and 342, where is was said-
``Dixon J. so held in
Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation (1949) 78 C.L.R. 353, basing his conclusion upon the view that in the terminology of company law shares are said to be `held' by the person who is registered as a shareholder in respect thereof, and that sec. 80(5), being concerned with voting power, should be treated as using that terminology. We share this view. Indeed it is not too much to say that the verb `hold' and its variants, when used in relation to shares in companies, normally refers to the legal ownership of the shares according to the register of members. The Companies Acts of the United Kingdom and of the several States of the Commonwealth have uniformly used the word in this sense, and common usage has followed their example. Before a different meaning is accepted, some justification must be found in the context, or the subject-matter. No such justification is provided by the fact that `held' is modified by the adverb `beneficially'. This word serves more naturally the purpose of excluding the case of a holding for the benefit of others than the purpose of so broadening the meaning of the word `held' beyond the particular significance which it normally has in relation to shares as to make it equivalent to `owned' in the most general sense of that word.''
As I have said, I do not think that, from the date of its liquidation, Major 8 held its shares in the taxpayer ``for the benefit of others''. They were held for the purpose of its liquidation in accordance with the statute. Had the shares been sold, the liquidator would have held the proceeds simply as part of the realisation of the company's assets to be dealt with in accordance with law.
Having examined the authorities cited, not to control the language of sec. 80(5) but to inform myself of the principles to be applied, I have come to the conclusion that I would be going further than the statute warrants were I to hold that, for the purposes of sec. 80(5), a company which owns shares beneficially in another company ceases, upon its liquidation, to own those shares beneficially. These shares remain the property of the company and the beneficial interest is not, by virtue of the liquidation, vested in any other person or persons. If I were wrong about this, how would sec. 80(5) apply to a company, the tax year of which ended on 30 June, but against which a winding up order was made on 1 September following upon a petition presented on the preceding 1 June? Surely in such a case sec. 80(5) would require the position to be ascertained on 30 June.
Accordingly, the trading losses made by the taxpayer in the years 1962, 1963 and 1964 totalling $1,698,144 (£849,072) were, I think, in the circumstances which I have stated, losses available for deduction in the tax year 1965, notwithstanding the provisions of sec. 80(5). This conclusion, of course, requires the amendment of the assessment for that year.
I must, however, go further because the whole of the sum of $1,698,144 (£849,072) was not needed to cover the taxpayer's assessable income of the tax year 1965 and there would, accordingly, be a balance of loss to be carried forward in the event of the amended legislation authorising the deduction in subsequent years of such loss carried forward.
The next matter for consideration is the legislation applicable to the tax year 1966. It is sec. 80A and 80D of the Act. At one
ATC 4091
time during the hearing there was some discussion about the applicability of sec. 80C but it became common ground that sec. 80D, and not sec. 80C, was the one of the alternative sections to be applied in accordance with sec. 80C(4). I should, however, before examining this legislation, refer to certain matters that would be involved in its application.Firstly, it is convenient to recall what appears in more detail earlier, namely the shareholding in the taxpayer at the relevant times. During the years of loss the three issued preference shares were held by Major 8 and the 75,000 issued ordinary shares were held by R.M.H. During the tax year 1966 there were five issued preference shares; two held by Major 8 and three by Franklin's Pty. Ltd.; and five issued ordinary shares held two by R.M.H. and three by Franklin's Pty. Ltd. This change of shareholding came about as follows. The agreement of 8 June 1965 was made between the taxpayer, R.M.H. (in liquidation, Major 8 (in liquidation), Franklin's Pty. Ltd. and the three trustees of the scheme of arrangement. This agreement provided for the issue by the taxpayer of shares as follows-
Major 8 1 preference share
Franklin's Pty. Ltd. 1 preference share
R.M.H. 2 ordinary shares
so that there were five shares of each category issued and Franklin's Pty. Ltd. held three of each, Major 8 held two preference shares and R.M.H. two ordinary shares. This agreement followed the enactment and was made in contemplation of the change in the law made by Act 110 of 1964, sec. 17, introducing sec. 80A applicable to income of the year of income commencing on or after 1 July 1965. The agreement was, no doubt, intended to benefit those interested in the liquidation of R.M.H. and Major 8 and Franklin's Pty. Ltd. The interest of Franklin's Pty. Ltd. was to secure that the shareholding of the taxpayer would entitle it to deductions for losses of past years. The interest of R.M.H. (in liquidation) and Major 8 (in liquidation) was to obtain payments additional to those which had been received under the original agreement of 30 November 1964. This was partly due to the belief that the deductible losses were greater than had been anticipated. I need not trouble with the details of this. In the upshot, those representing the company in liquidation were in a very strong position in bargaining with Franklin's Pty. Ltd. as to the terms upon which further shares in the taxpayer would be taken. In the event, Major 8 Holdings was to receive $1,000 for taking up one preference share. The position in relation to R.M.H. is more complicated, but it amounted to an agreement to pay to the trustees of the scheme of arrangement of R.M.H. a sum of money calculated by reference to the amount of tax losses which it was hoped would, by virtue of what was being done, become available to the taxpayer as deductions from its income. In short, the trustees were to receive two and sixpence in the pound for specified tax losses to be claimed by the taxpayer as a deduction from its assessable income for each tax year commencing with the year ending 31 July 1966, but this payment was subject to limiting provisions in the event of the Commissioner disallowing the deductions claimed.
On behalf of the Commissioner it was submitted that the deed of 8 June 1965 and the allotment of two ordinary shares to R.M.H. and one preference share to Major 8 would be void against the Commissioner by reason of the provisions of sec. 260 of the Act.
There can, I think, be no doubt that the taxpayer and Franklin's Pty. Ltd. entered into the agreement in order to obtain deductions of past losses by the taxpayer which, as matters stood, would not be allowed and Franklin's Pty. Ltd. was prepared to pay a price to those who were concerned with R.M.H. and Major 8 to obtain their adherence to the agreement and their willingness to take further shares in the taxpayer. It seems to me that there was, prima facie, an arrangement to which sec. 260 applied and, in accordance with
Newton v. F.C. of T. (1958) A.C. 450, the issue of shares to Major 8 and R.M.H. was void against the Commissioner. In a judgment which, no doubt, will be regarded primarily as an attempt to elucidate a somewhat complicated series of facts, it is no doubt necessary to express legal conclusions but, for the conclusion which I have just expressed, I do not propose to do more than cite authorities which seem to me to support it. They are Newton v. F.C. of T. (supra);
Hancock v. F.C. of T. (1959-1961) 108 C.L.R. 258;
Peate v. F.C. of T. (1962-64) 111 C.L.R. 443, (1967) A.C. 308. The whole purpose and object of the deed was to obtain for the taxpayer a taxation advantage at a price which Franklin's Pty. Ltd. were prepared
ATC 4092
to pay to its representatives R.M.H. and Major 8.I should, perhaps, say that I do not regard
Cecil Bros. Pty. Ltd. v. F.C. of T. (1962-64) 111 C.L.R. 430, as deciding that the operation of sec. 260 cannot destroy, as against the Commissioner, the basis upon which a taxpayer claims a deduction (cf.
Elmiger v. Commr. of I.R. (N.Z.), 14 A.T.D. 271& 477 at pp. 271 and 477;
Wisheart v. Commr. of I.R., 69 ATC 6040; and
Hooker-Rex Pty. Ltd. v. F.C. of T., 70 ATC 4033). Furthermore, I do not regard my decision in
Ellers Motors (Sales) Pty. Ltd. and Others v. F.C. of T., 70 ATC 4008, as inconsistent with my present conclusion. There, as I saw it, a course indicated by the statute as one which the taxpayer might, within a limited time, take for its own advantage, was followed by the taxpayer within that time; here the taxpayer and the other parties to the agreement, after hard bargaining, re-opened a long since concluded transaction to arrange for the avoidance of the operation of a tax subsequently imposed. The elaborate arrangement here made to re-open a past transaction and re-organise the shareholding in the taxpayer and those party thereto seems to me to fall precisely within the words and intent of sec. 260.
Although I have come to the conclusion that sec. 260 applies to the agreement of 8 June, 1965, I should make it clear that I do not accede to the argument advanced on behalf of the Commissioner that the agreement itself and the allotment of the two ordinary shares to R.M.H. pursuant thereto was no more than a sham or subject to some condition which, in the circumstances, did not entitle R.M.H. to be regarded as the beneficial holder of the shares. The point made is that a holding by R.M.H. of two ordinary shares in the taxpayer would-in the absence of any variation of shareholding-entitle it to two-fifths of any dividend if and when declared and two-fifths of the capital returned upon a reduction of capital or upon a liquidation. It was argued convincingly enough that Franklin's Pty. Ltd. had no intention whatever of allowing R.M.H. to take two-thirds of the profitable trading in which it was intended that the taxpayer should engage. As a matter of fact, when the time came for a distribution of profits by the taxpayer, as it did in 1968-after a profit of $4,500,000 in the three years ended 31 July 1967-what happened was that the taxpayer issued 24,900 shares to an associated company, N. F. Hill Pty. Ltd., with a consequence that, when a dividend of $700,000 was declared, R.M.H. received $60 and no more. That sum represented its proper proportion after the new issue. I have, however, no doubt that it was always intended that a course, such as was followed, would be followed, and, indeed, on 30 November 1964 there was an agreement-known to the liquidators of R.M.H.-between the taxpayer and Franklin's Stores Pty. Ltd. providing for the latter subscribing for 24,900 shares of £1 each at par. The mere fact that what happened had been contemplated, and, in a measure, provided for, does not seem to me to involve the conclusion that R.M.H. entered into a sham transaction on 8 June 1965 or that the shares which it took in the taxpayer, pursuant thereto, were not taken by it beneficially. They were, of course, taken at par, which was then a figure well below their real value, for the taxpayer had already made substantial profits, but they were taken with the knowledge that other shares could be issued which would substantially reduce their value but without modifying the rights which they carried. What had been expected occurred in 1968 and, after taking legal advice, the liquidators of R.M.H. decided against taking any proceedings to stop the new issue of shares to N. F. Hill Pty. Ltd. In the result the most that I can gather from the course of events just narrated in favour of the Commissioner is what I regard as unnecessary support for the conclusion that the main purpose of Franklin's Pty. Ltd. taking shares in the taxpayer was to obtain the benefit of its past losses as taxation deductions against income which it hoped to make in subsequent years. The Commissioner was not entitled to conclude that, in the event of a dividend being declared, a reduction of capital effected, or a winding up instituted, the holders of the shares in question would receive less than full satisfaction of the rights which the shares carried. I do not think that the probability or improbability of a declaration of dividend, a reduction of capital or a liquidation was a matter for estimation by the Commissioner.
My conclusion that the arrangement in June 1965, involving the issue of shares by the taxpayer to Major 8 and R.M.H., is, by virtue of sec. 260, void against the Commissioner insofar as it had the purpose and effect of relieving the taxpayer from liability to pay tax upon a taxable income arrived at by deducting losses
ATC 4093
of past years which without the arrangement would not have been deductible, carries with it the consequence that I cannot find that the Commissioner ought to have been satisfied that the requirements-if I may so call them -of sec. 80A were met and that the taxpayer's objections to the Commissioner's refusal to be so satisfied were improperly disallowed. It follows that, if I am right about the application of sec. 260, the appeals Nos. 1 and 2 of 1969 fail.I have decided, however, that, in a case such as this, I should go further and consider whether, if the Commissioner is bound to accept the validity of the share issues made by the taxpayer in June 1965, the deductions claimed should have been allowed by virtue of sec. 80 and 80D. It is also necessary to take into account sec. 80B(5) introduced by sec. 21 of the Act 103 of 1965.
Having regard to the decision which I have reached, that, notwithstanding the decision in the Olive Mill case, the commencement of liquidation did not transfer to some other person or persons the beneficial interest which Major 8 and R.M.H. had in the shares which they held in the taxpayer and that the agreement of 8 June 1965 was not subject to any condition which deprived those companies of the beneficial interest in the shares then issued to them, the real dispute between the parties is whether the Commissioner was bound to find compliance with sec. 80A(1)(d) or, in practical terms, whether R.M.H. and Major 8 had, at all times during the tax year 1966, by virtue of their beneficial holding of shares, the right to receive not less than two-fifths of any dividends that might be paid by the taxpayer. R.M.H. did, of course, hold two of the five ordinary shares issued and, prima facie, it had the right to receive two-fifths of any dividend that might be declared by the company during the tax year upon ordinary shares. Furthermore, Major 8 had two of five issued preference shares. It is at this point, however, that it is necessary to refer to sec. 80D of the Act which ``applies in relation to sec. 80A of this Act for the purposes of determining whether a loss, or part of a loss, incurred by a company in a year before the year of income is to be taken into account for the purposes of sec. 80''. The section is awkwardly constructed. It deals first in detail with voting power and provides by sub-sec. (2)-
``For the purposes of section eighty A of this Act as affected by section eighty B of this Act, where at any time, whether before or after the commencement of this section, a person had, or has, a voting interest in a company and at that time that company had, or has, a voting interest in another company, that person shall be deemed to have had, or to have, at that time a voting interest in that other company (in addition to any other voting interest that that person may have had, or may have, at that time in that other company) that bears to the voting interest that the first-mentioned company had, or has, at that time in that other company the same proportion as the voting interest that that person had, or has, at that time in the first-mentioned company bears to the total of the voting interests that persons had, or have, at that time, apart from this sub-section, in the first-mentioned company.''
Then follow sub-sec. (3), (4) and (5)(b) as follows-
``(3) In ascertaining for the purposes of the last preceding sub-section the extent of the voting interest that a company had, or has, at any time in another company, there shall be taken into account any voting interest that the first-mentioned company is to be deemed to have had, or to have, at that time in that other company by any other application or applications of that sub-section.
(4) In addition to the operation of the last two preceding sub-sections in relation to voting interests, those sub-sections also have effect in relation to dividend interests and capital interests in like manner as they have effect in relation to voting interests.
(5) In this section-
......
(b) a reference to a person having had, or having, at any time a dividend interest in a company shall be read as a reference to the person having been, or being, at that time the beneficial owner of shares in the company that carried, or carry, at that time any right to receive dividends that might have been, or may be, paid by the company and the extent of the dividend interest shall be taken to have been, or to be, the fraction of any dividends that might have been or may be, paid by the company that would have been, or would be, received in respect of those shares.''
ATC 4094
In the years of loss R.M.H. held all the ordinary shares in the taxpayer and Major 8 held all the preference shares. The first enquiry is, therefore, whether in the tax year 1966 R.M.H. and Major 8 beneficially held shares in the taxpayer carrying the right to two-fifths of any dividend that might be declared.
Dealing first with ordinary shares, the effect of sec. 80D is that, in the years of loss, I must look not merely to R.M.H. but to all the individuals who directly, or by shareholding in other companies, held shares in R.M.H. In the tax year, again, I must look through R.M.H. to individuals who were then shareholders in accordance with the formula. By the tax year, however, R.M.H. had but two-fifths of the ordinary shares, and, unless there had been no change in the shareholding, direct or indirect, in R.M.H., it cannot be predicated that, upon performing the ``looking through'' process required by sec. 80D, the shareholders in the years of loss continued to have, directly or indirectly, two-fifths of the shares entitling them to ordinary dividends. This cannot be said because it has been proved that there were intermediate changes of shareholding, including shares held by other companies in R.M.H.
Turning now to preference shares, the fact is that all preference shares in the years of loss were held by Major 8, whose shares were held as follows-
20% Cumulative
Preference Ordinary
Shares Shares
(Votes) (No Vote)
F. W. Miller 1 -
I. R. L. Harper 1 -
C. S. Coleman 1 -
R.M.H. - 35,000
--- --------
3 35,000
--- --------
In the tax year, prima facie, Major 8 was entitled to two-fifths of the preference dividends because it held two of the five issued shares, but, again, it cannot be said that there were not intermediate changes in shareholding according to the sec. 80D formula and therefore it cannot be said, for the purposes of the Act, that the two shares beneficially held by Major 8 in the taxpayer during the tax year did entitle it to two-fifths of such preference dividends as might be declared so as to ensure compliance with sec. 80A.
It follows that I cannot say that the Commissioner must have been satisfied that there had been compliance with sec. 80A(1)(d) as affected by sec. 80D. Indeed, it seems to me that his decision that there had not been compliance with that provision was correct.
There is a further matter which was argued and with which I think I ought to deal, although it is of importance only if I am wrong in deciding, as I have, that the shares in the taxpayer of Major 8 and R.M.H., acquired by virtue of the agreement of 8 June 1965, were not held beneficially for the purposes of sec. 80A and 80D. The problem concerns sec. 80B(5) and its application to the income of the taxpayer during the tax years 1966 and 1967. The sub-section is as follows-
``80B(5) Where-
(a) a person who beneficially owned any shares in the company at all times during the year in which the loss was incurred also beneficially owned shares in the company at any time (in this sub-section referred to as `the relevant time') during the year of income;
(b) before or during the year of income, that person entered into a contract, agreement or arrangement, or granted or was granted a right, power or option (including a contingent right, power or option), that, in any way, directly or indirectly, related to, affected, or depended for its operation on-
(i) the beneficial interest of that person in the last-mentioned shares, or the value of that interest;
(ii) the right of that person to sell, or otherwise dispose of, that interest, or any such sale or other disposition;
(iii) any rights carried by those shares, or the exercise of any such rights; or
(iv) any dividends that might be paid, or any distribution of capital that might be made, in respect of those shares, or the payment of any such dividends or the making of any such distribution of capital; and
(c) the contract, agreement or arrangement was entered into, or the right, power or option was granted, for the purpose, or for purposes that included the purpose, of enabling the company to take into account for the purposes of section eighty
ATC 4095
of this Act a loss that the company had incurred in a year before the year in which the contract, agreement or arrangement was entered into or the right, power or option was granted or a loss that the company might incur in that last-mentioned year,the Commissioner may, subject to the succeeding provisions of this section, treat those shares as not having been beneficially owned by that person at the relevant time.''
This provision was introduced by sec. 21 of Act No. 103 of 1965 and, by virtue of sec. 44, sub-sec. 5 and 6 of that Act, it applies to the 1966 year of income in relation to contracts or arrangements entered into after 28 October 1965 and to the 1967 year of income. The point made on behalf of the Commissioner is that sec. 80B(5) applies in respect of the 1966 and 1967 years and that it was open to the Commissioner, in the exercise of his discretion, to treat the shares acquired by Major 8 and R.M.H., pursuant to the agreement of 8 June 1965, as not having been beneficially owned by those companies during the 1967 year of income, and, of the preference shares acquired by Major 8, as not having been beneficially owned by that company during the earlier year as well.
The agreement of 30 November 1964, to which I have referred-it is the agreement relating to the purchase of shares in the taxpayer by Franklin's Pty. Ltd. and ``the shareholders'' therein referred to were, of course, Major 8 and R.M.H.-contained cl. 5 as follows-
``The Shareholders hereby covenant and agree that for a period of four (4) years from the date of completion and except as and when approved by the Purchaser they shall not transfer sell hypothecate mortgage or otherwise dispose of or deal with any of the shares in the capital of the Company at any time and from time to time held by them. The Shareholders shall not be dissolved for a period of at least four (4) years from the date hereof without first obtaining the approval in writing of the Purchaser.''
By a deed dated 30 June 1966, made by the parties to the foregoing agreement, it was agreed as follows-
``The parties hereto hereby mutually rescind clause 5 of the Principal Deed and hereby release and discharge each other from all obligations and liabilities therein contained.
It is hereby expressly declared that such rescission shall be without prejudice to the other provisions of the Principal Deed and that the said Deed shall henceforth be read as if the said clause had never appeared therein.''
The question is whether, in these circumstances, sec. 80B(5) authorised the Commissioner to treat the shares acquired by Major 8 and R.M.H. in 1965 and held in the years of income 1966 and 1967 as not having been held beneficially. No doubt the rescission was effected so that sec. 80B(5) would not apply in respect of the year of income 1967 because there was, no doubt, a well founded apprehension that cl. 5 would be regarded as an agreement within sec. 80B(5)(b). The question is, however, whether it, i.e. the rescinding agreement, is, of itself, of the character of an agreement within sec. 80B(5).
1. It was-on the footing that I am wrong in holding, upon other grounds, that the shares in question were not beneficially held-an agreement entered into by persons holding beneficially the shares governed by the agreement of 30 November 1964.
2. It was an agreement entered into during or before the years of income 1966 and 1967.
3. It was an agreement entered into for the purpose of enabling the taxpayer to take into account, for the purposes of sec. 80, a loss that the taxpayer had incurred in a year before the year in which the agreement was entered into.
The critical question is, therefore-at least so far as the 1966 year is concerned-whether the rescission of cl. 5 of the agreement of 30 November 1964 did itself relate to or affect (1) the beneficial interest of the shareholders, or either of them, in the shares acquired by them pursuant to the agreement of 30 November 1964, or (2) the right of the shareholders, or either of them, to sell or otherwise dispose of the beneficial interest in those shares. Until its rescission the shareholders were prevented by their agreement from transferring, selling, mortgaging or otherwise disposing of, or dealing with, their shares. This restriction did relate to, or affect, the beneficial interest of the shareholders in the shares or the value of that interest, or the right to sell or dispose of that interest. Clause 5 was, therefore, an agreement falling within sec. 80B(5)(b). It
ATC 4096
seems to me that the destruction of the restriction so imposed by making another agreement did affect the rights of the shareholders in relation to the matters within sec. 80B(5)(b) and so was itself an agreement falling within the provisions of that sub-section. The sub-section is not confined to agreements imposing restrictions; an agreement removing a restriction against selling, for instance, obviously affects the right to sell.For the taxpayer it was argued that sec. 80B(5)(c) cannot be given its literal interpretation and ought to be confined to agreements directed towards enabling a company to utilise its losses having the effect of restricting or limiting the real or effective beneficial ownership of shares, i.e. having an adverse effect upon beneficial rights. It was also argued that the provision only applied to an agreement which had a continuing effect upon the matters referred to in sec. 80B(5)(b), (i) to (iv). Accordingly, it was sought to draw the conclusion that the agreement of 30 June 1966 was not within its terms. I agree, of course, that the provision applies only when it is made with the purpose of obtaining as a tax deduction the losses of a previous year. This, it seems to me, was the purpose of the making of the agreement of 30 June 1966 because the existence of cl. 5 of the original agreement would have been a bar to the deduction of losses against the income of the year 1967. I have found no reason for inferring any more extensive purpose than that for which the sub-section itself provides. Whether or not the provision can be given its full literal meaning in all circumstances I do not attempt to decide, but I cannot, in the face of the language used, confine its operations to agreements imposing limitations of the sort described in sec. 80B(5)(b), (i) to (iv). All that is necessary is that the agreement should relate to, or affect, these matters. Moreover, if continuity in the operation of an agreement be a feature essential to the operation of sec. 80B(5)(c) - as was contended on behalf of the taxpayer - it is clear enough that the rescission of cl. 5 of the original agreement meant that, for the future, it did not operate.
Accordingly, I uphold the Commissioner's contentions with regard to sec. 80B(5) and consider that, apart from all else, the Commissioner was entitled thereunder to treat the shares in question as not having been beneficially owned by the shareholders in the relevant sense in the tax years 1966 and 1967; i.e. the two ordinary shares held by R.M.H. and the two preference shares held by Major 8 as not having been so held in the 1967 year of income, and the two preference shares held by Major 8 as not having been beneficially held in the 1966 year of income.
In relation to the 1967 tax year the Commissioner did rely upon cl. 5 of the agreement of 30 November 1964 and the agreement of 8 June 1965 in addition to the rescission agreement of 30 June 1966 to bring into operation the provisions of sec. 80B(5). In view, however, of my conclusion about the last agreement, there is no need for me to go further and to determine the correctness of the Commissioner's further contention, although I am disposed to regard it as correct-at least as regards the agreement of 30 November 1964-and as requiring the application of sec. 80B(5), even if the rescission agreement itself were not as I have decided that it is.
In the result I allow the appeal in part in relation to the assessment of tax upon income derived by the taxpayer during the year ended 31 July 1965 and remit that assessment to the Commissioner for amendment to allow the trading losses of the years ended 31 August 1962, 31 August 1963 and eleven months ended 31 July 1964 as deduction in respect of the 1965 tax year. I dismiss the appeals in relation to the assessment of tax for income derived during the years ended 31 July 1966 and 31 July 1967 respectively.
I have been in doubt as to what order I should make as to costs. All the appeals were heard together and the taxpayer has succeeded to a limited extent in one appeal and failed in the others. The apportionment of the costs of the appeal in which the taxpayer has partially succeeded would, I think, be an almost impossible task and, upon the whole, I have come to the conclusion that I should order the taxpayer to pay one-half of the Commissioner's costs of all the appeals.
ORDER:
No. 1 of 1969 Appeal dismissed. No. 2 of 1969 Appeal dismissed. No. 5 of 1970 Appeal allowed. Assessment for the year ended 31 July 1965 remitted to Commissioner for amendment to allow as deductible in that year trading losses of the years ended 31 August 1962, 31 August 1963, and eleven months ended 31 July 1964.
Order that the taxpayer pay one-half of the Commissioner's costs of the three appeals.
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