Slutzkin and Others v. Federal Commissioner of Taxation.Judges:
Supreme Court of New South Wales
Rath J.: These four appeals against assessment to income tax for year ending 30th June, 1969 were by consent heard together.
The appellants Alan Slutzkin, Rodney Isaac Rosenblum and Gordon D'Arcy Hapgood are trustees of four separate trusts in which the beneficiary is either the Mr. Slutzkin's son Lionel Richard Slutzkin or his daughter Wendy Frances Slutzkin.
The question for decision is whether the sale by the trustees of their shares in Frances Richard Holdings Pty. Limited (to which I shall refer as ``the Company'') to Cadiz Corporation Pty. Limited on 12th November, 1968 was void as against the Commissioner by virtue of sec. 260 of the Income Tax Assessment Act 1936 as amended. Section 260 of the Act reads as follows -
``Every contract, agreement, or arrangement made or entered into, orally or in writing, whether before or after the commencement of this Act, shall so far as it has or purports to have the purpose or effect of in any way, directly or indirectly -
- (a) altering the incidence of any income tax;
- (b) relieving any person from liability to pay any income tax or make any return;
- (c) defeating, evading, or avoiding any duty or liability imposed on any person by this Act; or
- (d) preventing the operation of this Act in any respect.
be absolutely void, as against the Commissioner or in regard to any proceeding under this Act, but without prejudice to such validity as it may have in any other respect or for any other purpose.''
The Company was incorporated in the Australian Capital Territory on 22nd April, 1964. Its authorised capital was £50,000 divided into 1,000 ``A'' ordinary shares of £1 each, 24,000 ``B'' ordinary shares of £1 each and 24,000 non-cumulative shares of £1 each. The only provisions in relation to the rights attaching to these shares that need to be noted are those in the articles of association relating to the ``A'' and ``B'' ordinary shares, which are as follows:
``5. The holders of `A' ordinary shares shall be entitled to vote at all meetings of the Company and such shares shall rank for dividend to the extent of 1/100th. (sic) part of the rate per annum of any dividend paid upon the `B' ordinary shares in the same year ended on the 30th June but shall not entitle the holders thereof to participate in the distribution of the surplus assets of the Company on winding up but shall rank as regards return of capital in priority to `B' ordinary shares only.
6. The holders of `B' ordinary shares shall not be entitled to vote at any meetings of the Company but shall be entitled to any dividend that the directors for the time being shall recommend and shall be entitled to participate in the distribution of surplus assets on a winding up of the Company.''
The articles of association provide that unless otherwise determined by a general meeting the number of directors shall be not less than two or more than five. The subscribers to the memorandum were Mr. Slutzkin and Mr. Rosenblum, each of whom agreed to take one ``A'' ordinary share. At the meeting of subscribers held on 27th April, 1964 Mr. Slutzkin, Mr. Hapgood and Wendy Frances Slutzkin were appointed directors, and they held that office until their resignation on 12th November, 1968. Mr. Hapgood was appointed one of the two secretaries of the Company, and one ``A'' share was alloted to each of the subscribers. At a meeting of directors on the same day three transfers of shares were tabled covering the purchase by the Company of shares in Alan Slutzkin & Co. Pty. Limited for a total consideration of £31,662.4.0 payable as to £5,800 in cash and as to balance on demand without interest. A transfer of Mr. Rosenblum's ``A'' share in the Company to Wendy Frances Slutzkin was approved. It was resolved to approve of the following applications for fully paid shares: Alan Slutzkin, 3 ``A'' shares; the three trustees, 60 ``B'' shares, represented by four certificates, each for 15 shares; and Alan Slutzkin, 500 non-cumulative preference shares. The only other allotment of shares prior to the resignation of directors on 12th November, 1968 was one for 125 preferred ordinary shares to twenty-five individuals on 22nd June, 1964. These shares
ATC 4022were transferred to Mr. Slutzkin in his own right on 20th March, 1967.
Mr. Slutzkin had two purposes in mind when he caused the Company to be formed. One was that its structure was such as to permit it to retain profits without liability for tax under Div. 7 of Part III of the Income Tax Assessment Act. It was not itself a trading company, but it held shares in Alan Slutzkin & Co. Pty. Limited, which was Mr. Slutzkin's trading company. The profits which the Company so retained could then be used through Mr. Slutzkin's group of companies as working capital. The other purpose of the Company's incorporation was to enable provision to be made for his children. For this purpose the trusts were formed, and the trustees applied for shares in the Company.
With the passage of time the Company ceased to serve either of these purposes. The Company did receive, by way of dividends, substantial profits, which it could retain without liability to Div. 7 tax; but amendments to the Income Tax Assessments Act by Act 110 of 1964, applicable to assessments in respect of years of assessments commencing on 1st July, 1965, had the result that further income received and retained would be liable to tax under Div. 7. Further, the profits which the Company did make and retain were sufficient for the provision for his children that Mr. Slutzkin then had in mind. In these circumstances he formed Macedon Holdings Pty. Limited, which was so constituted that it could receive the profits from Mr. Slutzkin's trading companies, and use them as working capital for the group, without liability for Div. 7 tax. The trustees as such did not hold shares in Macedon Holdings Pty. Limited. In the year ended 30th June, 1967 the Company disposed of its shares in Alan Slutzkin & Co. Pty. Limited to Macedon Holdings Pty. Limited.
Prior to that disposal the Company conducted virtually no other commercial activity, apart from holding the shares in the trading company. After that disposal, the Company conducted no other activity than the deposit or lending of its funds on short term or at call. Shortly prior to the transaction of 12th November, 1968 Mr. Slutzkin spoke to Mr. Rosenblum and said to him that he saw no purpose in retaining the Company, particularly as retention of the Company involved recurring accounting and other fees. Mr. Rosenblum said that in his opinion the most expedient way in which Mr. Slutzkin could in effect divest himself of the Company structure was to effect a sale of the whole of the issued capital of the Company for a purchase price approximately equivalent to the net tangible assets of the Company. Mr. Slutzkin then spoke to Mr. Hapgood, who told him that he did not oppose such a course of action.
Mr. Rosenblum gave the following evidence as to his conversation with Mr. Slutzkin: -
- Q. By the time when the partnership of Alan Slutzkin Enterprises commenced to carry on business, 1st July, 1967, the Frances Richard Holdings Company had really served its purpose and had no further purpose to serve, is that so?
- A. I would think that was so, Yes.
- Q. Did you give any consideration when you were reorganising or arranging for the reorganisation of Mr. Slutzkin's affairs as to what should be done or what might be done in relation to Frances Richard Holdings?
- A. I don't have any recollection of having done so at that time.
- Q. When was it, to the best of your recollection, that you first gave any consideration to, shall we say, the termination of Mr. Slutzkin's interest, and the other shareholders', in Frances Richard Holdings?
- A. Shortly before the acquisition or the sale by the trusts of their shares in Frances Richard Holdings I had had lunch with Mr. Slutzkin with whom I frequently - whom I frequently met socially and he said to me, ``What are we going to do with Frances Richard Holdings Pty. Limited?'' To use his words as best as I can recollect, he said, ``Joyce'' - that was his present wife - "has recently sold out her interests in her business and at our request Mauri Bros. & Thompson who were the purchasers, agreed to purchase Swari's Karen, I think it was Swari's Karen, but I wouldn't know how to spell it, which was the holding company for the trading company which Mauri Bros. & Thompson had purchased. Mauri Bros. had agreed to purchase this Company apparently at Mr. Slutzkin's request. I did not act on that particular transaction, and he said to me, ``Maybe we could get rid of Frances Richard Holdings in the same
ATC 4023way.'' Shortly before, perhaps four months I would say before, Cadiz Corporation had entered into its first dividend stripping, in the common terminology, dividend stripping transaction. And I said to Mr. Slutzkin that we might be able to organise for Cadiz Corporation to which Cadiz Holdings No. 2 had changed its name, to acquire the shares in Frances Richard Holdings Pty. Limited.
Mr. Rosenblum was a director of Cadiz Corporation Pty. Limited. Cadiz Holdings No. 2 Pty. Limited had previously acquired shares in Macedon Holdings Pty. Limited for the purpose of providing the latter company with public company status under Div. 7.
Mr. Slutzkin said in evidence that one of the matters he had in mind was that his daughter was approaching marriageable age and he wanted to have a dowry available for her, and that the Company seemed to him to be ``redundant''. No marriage was in fact in contemplation, and his son was only around twenty, but Mr. Slutzkin thought that it would be advantageous to take the money out of the Company, so that it could be invested in property instead of being on deposit.
This narrative of the circumstances leading to the decision to sell the shares in the Company shows that there was no urgent necessity for the sale, or for the taking of measures to avoid some impending income tax liability. As Mr. Slutzkin said, the Company was redundant. The significant shareholding was held by the trustees for his children, and the time had come when it would be expedient to realise the trustees' shares and re-invest the proceeds. The Company was serving no useful purpose except as a means of investment of the trust funds. The decision to realise the trust fund was not in itself inspired by any tax avoidance motive. The funds could have been left undistributed in the Company without any tax liability other than in respect of current income earned on those funds. There was an agreement reached in this regard by the parties to these appeals, which was reduced to writing in the following terms: ``It is agreed by the parties that if the two amounts shown in the balance sheet of Francis (sic) Richard Holdings Pty. Limited as at 25th October, 1968 namely capital profit reserve of $26,098.72 and profit and loss appropriation account $77,645.98 had remained in the company as undistributed profits then they would not have attracted any liability for tax as undistributed profits as the law stood at 12th November, 1968 subject to there being no obligation in terms of Div. 7 of the Act upon the Company to declare dividends out of the profits derived during the year ending 30th June, 1969 which profits would reflect the profits of $1,140.45 derived during the period 1st July, 1968 to 25th October, 1968.'' The proviso leaves as a possibility some avoidance of tax because the shares were sold, but I am satisfied that no such consideration was present to the minds of the trustees.
The appellants were fully aware of the incidence of tax in relation to methods of realisation of the trust funds. There was no market for the sale of their shares. But they were in control of the Company, and could use that control to take the funds out of the Company. One means of doing this was to declare a dividend which would virtually exhaust the capital reserve and accumulated profits, but the consequences of this would be that the dividends would be taxable in their hands as trustees. Another possibility was to cause the Company to be placed in liquidation, but in this event the distribution of the Company's accumulated profits would be taxable in their hands. The appellants' object in adopting the course that led to the sale of shares on 12th November, 1968 was to receive a sum of money which would be virtually the value of the net assets of the Company, but which would not be subject to tax, as other available methods of realisation would be.
I shall now consider the steps by which this object was achieved. The conversation between Mr. Slutzkin and Mr. Rosenblum took place before 25th October, 1968 (that being the date of a balance sheet of the Company prepared for submission to Cadiz Corporation). The conversation probably occurred shortly before 14th October, 1968, because it was on that date, and after the decision to sell had been made, that Mr. Hapgood took action to recall a deposit of the Company. Though the details do not appear the decision was made by Mr. Slutzkin at or shortly after that conversation to offer to sell the whole shareholding of the Company to Cadiz Corporation for a price nearly equal to the value of the net tangible assets, and to have Mr. Rosenblum to communicate that offer to Cadiz Corporation, which, as Mr. Rosenblum knew, already had carried out a number of dividend stripping
ATC 4024operations. Mr. Slutzkin throughout acted as attorney for his daughter Wendy Frances Slutzkin, who took no active part in any of the dealings.
The balance sheet of the Company as at 30th June, 1968 showed deposits with Custom Credit Corporation Limited and Alliance Holdings Limited of $25,000.00 and $20,000.00 respectively, and a loan to Alan Slutzkin Enterprises of $68,000.00. The liabilities consisted of accrued expenses $355.05; provision for proposed dividend $965.58; provision for taxation $448.50; and a loan from Macedon Holdings Pty. Limited of $10,200.00. Mr. Hapgood wrote a letter on 14th October recalling the deposit with Custom Credit Corporation Limited. The recall of the deposit with Alliance Holdings Limited also took place in October. This deposit was recalled before the due date, with loss of interest for that reason. On 31st October the ``accrued expenses'' were paid, and the loan from Macedon Holdings Pty. Limited was repaid. The dividends were paid, though the date does not with any certainty appear.
Mr. Hapgood prepared a balance sheet as at 25th October which shows some minor anticipation of these moves. This balance sheet (apart from authorised capital) is as follows:
Issued Capital 5 A ordinary shares ............. 10.00 60 B ordinary shares ............. 120.00 125 preferred ordinary shares ..... 250.00 500 non-cumulative preference shares ........................ 1,000.00 --------- 1,380.00 Capital profits reserve ........... 26,098.72 Profit and loss appropriation account ...................... 77,645.98 ----------- $105,124.70 -----------
These funds are employed as follows: -
Current Assets Bank of New South Wales ............ 37,183.80 Loan Alan Slutzkin Enterprises ..... 68,000.00 ---------- 105,183.80 Less: Current Liabilities Provision for taxation .............. 790.50 ----------- $104,393.30 Add: Intangible Assets Formation Expenses .......... 731.40 ----------- $105,124.70 -----------
Mr. Hapgood informed Mr. Wallace, a director of Cadiz Corporation, of the contents of this balance sheet on 25th October, 1968. On the same date the appellants as trustees opened a bank account at the Bank of New South Wales, King and George Streets branch. This was the branch at which the Company had its bank account. On 5th November Cadiz Corporation resolved to acquire the shares in the Company.
The Company at this stage still had one asset that had not been converted to cash, namely the loan to Alan Slutzkin Enterprises. Alan Slutzkin Enterprises had its account also at the King and George Streets branch of the Bank of New South Wales. On 7th November Mr. Slutzkin telephoned the manager, whose diary note of the conversation is as follows: -
``Alan Slutzkin Enterprises (7.11.68) Credit $8,827
Mr. Slutzkin by telephone advises that he is selling a family company knows as Francis Richard Holdings Pty. Ltd. for $105,000 cash to Cadiz Holdings who bank at our Wales Branch - settlement next Tuesday. Slutzkin Enterprises owes Francis Richard Holdings Pty. Ltd. $68,000 which he wishes to repay and which will cause a debit on the account of Alan Slutzkin Enterprises. However, on settlement and on receipt of the $105,000 from Cadiz Holdings, it is his intention to credit at least $30,000 - possibly more - back to the account of Alan Slutzkin Enterprises. The balance of the funds receivable will be invested in certain trusts for his children. On conclusion of the operation he anticipates that the account of Alan Slutzkin Enterprises would be overdrawn $20/25,000 which he says would be run right off from trade by the end of the year. We have agreed to see him through these transactions. He will get in touch with us
ATC 4025again early next week when final figures are available, and at that time he will be requesting the issue of a bank cheque in connection with the deal; the amount thereof to be advised later.''
The reference to ``final figures'' being available in the following week is a reference to certain figures being prepared by Mr. Hapgood, presumably (though there is no direct evidence) in collaboration with Mr. Wallace of Cadiz Corporation. The settlement of the agreement for the sale of the shares was to take place at the Bank of New South Wales, King and George Streets branch on 12th November, and Mr. Hapgood and Mr. Slutzkin attended at the branch and saw the manager shortly before the settlement. Mr. Hapgood took to the bank with him a document which he had written setting out all the cheque movements that would occur. The purpose of seeing the bank manager was to explain to the manager what was going to transpire at the settlement, ten minutes or a quarter of an hour later. This handwritten document is as follows: -
``Frances Richard Holdings P/L. Cheque movements on Tuesday - 12.11.68. Balance as at 11.11.68 ............... 37,183.80 Dep. ex A. Slutzkin Enterprises ................ 68,000.00 ---------- 105,183.80 Bank cheque - Cadiz Corp. Ltd. .................... 103,744.70 Balance on completion .................. $1,439.10 ----------- Bank cheques from Cadiz Corp. Ltd. to A. Slutzkin ........................... 1,258.00 WF ...................................... 2.00 (As trustees) Slutzkin Rosenblum & Hapgood .................. 103,133.30 ----------- $104,393.30 ----------- Cheques from Slutzkin Rosenblum Hapgood to A. Slutzkin re L.R.S. ................. 18,000.00 Alliance Ltd. re W.F.S. ................52,000.00 Alan Slutzkin Enterprises re L.R.S. ........................... 33,000.00
Certificate will be required from the bank certifying and if necessary freezing balance at $105,183.80.
Change of authority form.Karen ........ 10,000 A.S. ......... 20,000 S.R.N. ....... 33,600 ------- $63,600 -------''
The bank manager's diary note indicates that at least some of these figures were supplied to him. It reads as follows: -
``Alan Slutzkin Enterprises (12.11.68) Credit $8,386
Referring to diary memo. 7th November, Mr. Slutzkin called today with Mr. Hapgood. The transactions involved are as follows: -Alan Slutzkin Enterprises ..... Debt $68,000 Frances Richard Holdings Pty. Ltd. .............. Credit $68,000
Certificate of balance for Frances Richard Holdings Pty. Ltd. to be issued after above credit - the balance then being credit $105,183.30. The share capital of Frances Richard Holdings is being sold and three cheques will be received: -$103,133.30 for credit Slutzkin, Rosenblum & Hapgood $1,258.00 for credit Alan Slutzkin $2.00 for credit Wendy Slutzkin
Fresh authority will be handed in to cover future operations on the account of Frances Richard Holdings Pty. Ltd. After the above transactions are completed, there will be transferred to the account of Alan Slutzkin Enterprises: -$33,600 from Slutzkin, Rosenblum & Hapgood $20,000 from A.S. Slutzkin from his personal account which is with the C.B.C. $10,000 from J. Karen Pty. Ltd.
These credits will place the account of Alan Slutzkin Enterprises back in order so that the accommodation mentioned in diary memo 7.11.68 now will not be required.''
J. Karen Pty. Limited was one of the partners in Alan Slutzkin Enterprises.
A written agreement for the sale of the shares bears date 12th November, 1968. Mr. Rosenblum said in evidence that the parties exchanged parts of the agreement at the bank.
ATC 4026This does not appear to be entirely accurate, because the vendors' copy is signed by all parties. Mr. Wallace brought the seal of Cadiz Corporation to the bank, and that company may have executed the agreement there. But it seems clear that, whatever the circumstances of execution of the agreement, its becoming an operative contract was the first business of parties at the settlement, which was attended by Messrs. Slutzkin, Rosenblum, Hapgood, Wallace and a representative from the bank of Cadiz Corporation.
This agreement is made between the appellants and Wendy Frances Slutzkin as vendors, and Cadiz Corporation and Mr. Wallace as purchasers. By it the vendors agreed to sell all their shares in the Company for $104,393.30, contributed as to $104,391.30 by Cadiz Corporation and as to $2 by Mr. Wallace. The vendors warrant that on completion the Company shall have no liabilities other than those disclosed in the balance sheet prepared by Messrs. Watkins Scott & Co. (which was Mr. Hapgood's firm). This is the balance sheet as at 25th October, 1968. The vendors agreed that from and including the date of completion until the purchasers become registered as the holders of the shares they will exercise their voting power in such manner as the purchasers shall direct. There are other provisions of the agreement, but they are not material.
After the agreement became effective, the share transfers were signed. Then a meeting of the directors of the Company was held. The minutes of this meeting had been previously prepared by the accountants for Cadiz Corporation, and were probably brought to the bank by Mr. Wallace. According to these minutes the order of business was as follows. Five transfers of shares were approved. Four of these were to Cadiz Corporation. These consisted of three transfers by Mr. Slutzkin of shares held in his own right, and one by the appellants as trustees. The fifth was a transfer by Wendy Slutzkin to Mr. Wallace of her one ``A'' ordinary share. Mr. Rosenblum and Mr. Wallace were then appointed directors. The resignations of Messrs. Slutzkin and Hapgood as directors of the Company were next accepted. There is evidence that the order of resignations and appointments was different and more complex than the simple routine set out in the minutes; but whatever was done it effectively substituted Messrs. Wallace and Rosenblum as directors in place of Messrs. Slutzkin and Hapgood and Miss Slutzkin. The order in the minutes, whereby there were for a moment five directors,would be in conformity with the articles of association. The next steps were the resignation of Mr. Slutzkin as manager, the resignation of Mr. Hapgood as secretary and the appointment of Mr. Wallace as secretary. At this or some prior point of time three bank cheques were handed over by Mr. Wallace in payment of the shares, one in favour of the appellants for $103,133.30, the second in favour of Mr. Slutzkin for $1,258.00 and the third in favour of Miss Slutzkin for $2.
According to the evidence Mr. Slutzkin and Mr. Hapgood then left the part of the banking chamber where the meeting of directors was being held for the purpose of banking the payment cheques. Mr. Rosenblum and Mr. Wallace proceeded with the further business of the directors' meeting. By this stage the transactions culminating in the sale of the shares had come to an end, and the subsequent activities of the Company and Cadiz Corporation were no part of any arrangement to which the appellants as trustees were parties, or of the implementation of any such arrangement. What did in fact occur is what was described in evidence as a dividend stripping operation. Mr. Rosenblum was concerned in that operation as a director of Cadiz Corporation and as one of the new directors of the Company, but not as one of the trustees. He had in fact taken counsel's opinion on the propriety of his acting in his many capacities. I am satisfied that his various capacities were separately pursued, and that there is no significance, in relation to the application of sec. 260, in his being concerned both before and after the sale of shares as a director of Cadiz Corporation in preparation for and in the performance of the dividend stripping operation. The position might be different if the appellants as trustees, or Messrs. Slutzkin and Hapgood as directors of the Company, had formed a company to which the shares were to be sold and which was to finance its purchase of the shares by the dividend stripping operation. Where there are such circumstances the scope of the arrangement, the purpose or effect of which is to be determined, may be wider, and extend beyond the actual sale of the shares. This was the type of situation considered in
F.C. of T. v. Ellers 72 ATC 4033; (1972) 128 C.L.R. 602 and in
Bell v. F.C. of T. (1953) 87 C.L.R. 548. Again, the position might be different where
ATC 4027after the sale of shares there are other connected dealings involving the parties, even though the purchaser of the shares is independent and acting in its own interests. This was the type of situation considered in
Newton v. F.C. of T. (1958) A.C. 450 and
Hancock v. F.C. of T. (1961) 108 C.L.R. 258. In the present case, not only is Cadiz Corporation a completely independent company, acting solely in its own business interests, and in the course of one of its normal commercial activities, but also its activities after the sale of shares are unrelated to any activities of the appellants. Upon the sale taking place none of the vendors has any further interest either in the Company or in Cadiz Corporation, and is interested only in the disposal of the purchase money received. For its part the Company carries on business thereafter under its new management. By way of contrast the vendors of the shares in Newton's case (above) remained vitally interested in the companies declaring the dividends, and the arrangement was such as to protect that interest. The taxpayer in Hancock's case (above) not only remained interested in the company that declared the dividend, but acquired control and virtual ownership of it as the final step in the arrangement.
I shall, however, deal with the subsequent events, partly for the sake of completeness in my review of the facts, but mainly and relevantly to demonstrate the point made above that the subsequent events were unrelated to any arrangement that could fall within sec. 260.
The appellants paid into their bank account the cheque for $103,133.30 and then drew the following cheques on the account: - (a) cheque for $18,000.00 in favour of Mr. Slutzkin, by way of repayment on behalf of Trust No. 2 for Lionel Richard Slutzkin in respect of an advance previously made by him to that trust; (b) cheque for $52,000.00 by way of interest bearing deposit with Alliance Holdings Limited for the benefit of the trusts of Wendy Frances Slutzkin; (c) cheque for $26,000.00 in favour of Alan Slutzkin Enterprises by way of interest bearing deposit at call for and on behalf of Lionel Richard Slutzkin Trust No. 1; and a cheque for $7,400.00 in favour of Alan Slutzkin Enterprises by way of interest bearing deposit at call for and on behalf of Lionel Richard Slutzkin Trust No. 2.
After Mr. Slutzkin and Mr. Hapgood left the meeting of the Company at the bank, the meeting continued with Mr. Rosenblum and Mr. Wallace, and the following business was transacted. It was resolved that the bank be advised of a joint authority given to Mr. Rosenblum and Mr. Wallace, and that an extraordinary general meeting be called to reorganise the share capital of the Company into one class of ordinary shares and to make consequential amendments to the Company's articles.
A number of other meetings were then held in the banking chamber, with Mr. Rosenblum and Mr. Wallace in attendance. The first was a meeting of shareholders of the Company to pass the special resolution relating to the capital structure of the Company. Mr. Rosenblum attended by the authority under seal of Cadiz Corporation as its representative, and Mr. Wallace attended by right of his one share. There followed this a meeting of directors recommending one dividend absorbing $26,098.72 appropriated from the capital profits reserve account, and another absorbing $77,645.98 appropriated from accumulated profits. The shareholders, represented as before, declared dividends in accordance with this recommendation.
Mr. Rosenblum and Mr. Wallace signed a cheque on the Company's account, and received a bank cheque in exchange for $103,744.70. This cheque was handed to the representative of the City House branch of the bank, and was deposited to the credit of Cadiz Corporation at that branch on the same day. The result for the day, in respect of operations on Cadiz Corporation's account, is that its credit balance fell from $1639.84 to $936.64. There was of course a short period of time, between the drawing of a cheque by Cadiz Corporation for the purchase price, and the payment into its account of the dividend cheque, when its account was considerably overdrawn in fact. The bank had, at Mr. Rosenblum's request, agreed to this temporary overdraft on 7th November.
Prior to the sale of the shares Cadiz Corporation had found a buyer of the shares after their acquisition, and it was apparently originally intended that the second sale would take place without delay. But for some reason which did not clearly appear, the agreement for the second sale was not entered into until 27th November, 1968. By this agreement Cadiz
ATC 4028Corporation agreed to sell the whole of the issued capital of the Company to the new purchasers for $6,831.96. The Company's balance sheet at this time showed the position of the shareholders' funds as follows: -
``Current Assets Cash at bank ................. $1,439.10 Intangibles Formation expenses - at cost ....................... 731.40 --------- $2,170.50 Less liabilities Provision for income tax ......................790.50 --------- $1,380.00''
In the agreement the Company declared that as at the date of completion it had made an excess distribution within the provisions of sec. 106 of the Income Tax Assessments Act for the year ended 30th June, 1968 in the sum of $103,056.00, and had been in relation to that year of income a private company for the purposes of the Act. It was the effect of the state of affairs so declared that gave a value to the Company for the purchasers in excess of the shareholders' funds. The result for Cadiz Corporation, as calculated by Mr. Wallace was a profit of $6,183.36, subject to expenses.
For sec. 260 to apply, there must be found a ``contract, agreement, or arrangement.'' There is here the contract of sale of 12th November, 1968, and that is a subject matter to which the section could apply. But there is a wider transaction involved, commencing with the approach on behalf of the appellants to Cadiz Corporation, and culminating with the sale itself. It is consistent with the authorities to have regard to ``the purpose or effect'' of this wider transaction. In Newton's case ((1958) A.C. 450) Lord Denning, delivering the judgment of the Privy Council, said (at p.465); ``Their Lordships are of opinion that the word 'arrangement' is apt to describe something less than a binding contract or agreement, something in the nature of an understanding between two or more persons - a plan arranged between them which may not be enforceable at law. But it must in this section comprehend, not only the initial plan but also all the transactions by which it is carried into effect - all the transactions, that is, which have the effect of avoiding taxation, be they conveyances, transfers or anything else. It would be useless for the Commissioner to avoid the arrangement and leave the transactions still standing.'' In the present case the final transaction in the arrangement was the approval by the Company of the transfers. The earlier transactions commence with the steps taken to convert the assets of the Company to cash as required by Cadiz Corporation.
There is an alternative approach which may be more consistent with the observation of Lord Denning (p. 465) that the ``whole set of words denotes concerted action to an end - the end of avoiding tax.'' No doubt Cadiz Corporation was in the business of dividend stripping in order to assist people to avoid tax, and in this sense it is proper to look at the arrangement in which it as well as the taxpayers were parties. But the persons in this case who were directly interested to avoid the taxation liability in question were the shareholders in the Company. The Company itself can also be regarded as equally involved in the shareholders' planning. On this approach the arrangement is among the shareholders and the Company, and again commences with the moves to convert the Company's assets into cash and ends with the approval by the Company of the share transfers to Cadiz Corporation and its nominee Mr. Wallace. Whichever view of the arrangement is taken, its purpose or effect will in my opinion be the same.
Lord Denning said (p. 465) that ``the section is not concerned with the motives of individuals. It is not concerned with their desire to avoid tax, but only with the means which they employ to do it. It affects every `contract, agreement or arrangement' (which their Lordships will henceforward refer to compendiously as `arrangement') which has the purpose or effect of avoiding tax. In applying the section you must, by the very words of it, look at the arrangement itself and see which is its effect - which it does - irrespective of the motives of the persons who made it. Williams J. put it well when he said: `The purpose of a contract, agreement or arrangement must be what it is intended to effect and that intention must be ascertained from its terms. Those terms may be oral or written or may have to be inferred from the circumstances but, when they have been ascertained, their purpose must be what they effect.'''
The Privy Council in
Ashton and anor. v. Commr. of I.R. (N.Z.) (75 ATC 6001; (1975) 1 W.L.R. 1615) after quoting this passage go on to say (ATC p. 6005; W.L.R. p. 1621): ``These observations of Lord Denning in relation to sec. 260 of the Australian Act are equally applicable to sec. 108'' (of the New Zealand Act). "The passage he cited from the judgment of Williams J. in Newton in the High Court of Australia (96 C.L.R. 578 at p. 630) was preceded by the following - `During the argument of the present appeals the meaning of the words ``purpose or effect'' received considerable discussion. The words are in the alternative but they do not appear to me to have any real difference in meaning'. Their Lordships agree. If an arrangement has a particular purpose, then that will be its intended effect. If it has a particular effect, then that will be its purpose." They quote what Lord Denning added, namely: ``In order to bring the arrangement within the section you must be able to predicate - by looking at the overt acts by which it was implemented - that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge that the transactions are capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax, then the arrangement does not come within the section.'' Their Lordships comment: ``If Lord Denning meant that one can derive guidance as to the purpose or effect of the arrangement from the conduct of the parties after it has been made their Lordships cannot agree... Whether the purpose or effect of the arrangement was that stated in sec. 108 must in their Lordships' opinion be determined only by reference to the arrangement and not by reference to the parties' subsequent conduct'' (ATC p. 6005; W.L.R. p. 1621).
No criticism is passed by their Lordships upon this later statement of Lord Denning: ``Applying these principles to the present case, the first question is - Was there an arrangement? The answer is: `Yes'. The whole complicated series of transactions must have been the result of a concerted plan; and the nature of the plan is to be ascertained by the overt acts done in pursuance of it'' (p. 466). With the greatest respect, it seems to me that Lord Denning is saying that the terms of the arrangement may be inferred from the overt acts of the parties. To the same effect are the words quoted earlier: ``The whole set of words denotes concerted action to an end'' and Lord Denning's later observation (p. 467): ``The whole of the transactions shows that there was concerted action to an end - and that one of the ends sought to be achieved was the avoidance of liability for tax.''
I have already said that in the present case the appellants were desirous of obtaining for themselves the reserves and profits of the Company, and were aware of the taxation consequences of achieving their object by a declaration of dividends or liquidation. Mr. Slutzkin and Mr. Rosenblum took counsel's advice as to the taxation consequences of a sale of shares to Cadiz Corporation, and it is obvious that the sale was made with the object of obtaining an amount equivalent to those reserves and profits, but without the tax consequences of the alternative methods.
It follows from this reasoning that the arrangement is necessarily labelled (to use Lord Denning's words) as a means to avoid tax, unless the transactions are capable of explanation by reference to ordinary business or family dealing. In Ashton's case, the Privy Council said (ATC p. 6006; W.L.R. p. 1622); ``An arrangement which can properly be regarded as an ordinary business of family dealing is not to be regarded as entered into for the purpose or to have the effect of tax avoidance even though that ordinary dealing may result in less tax being paid than would otherwise be exigible.'' The arrangement was not a family dealing; and the question therefore is whether it can properly be regarded as an ordinary business dealing. It was a business dealing, and a lawful and effective one, apart from the operation of sec. 260. But was it ordinary? Were there nothing more to the arrangement than a sale of shares, it would perhaps be ordinary, even though the purchaser intended to take the profits out of the Company. It may not be enough to take the arrangement out of the ``ordinary'' class that the purchaser is able to pay the price it does because its structure is such that it can take advantage of certain tax concessions. It was such an arrangement that was held in
Hennessey v. F.C. of T. 75 ATC 4007 not to fall within sec. 260. But that case turned on its own special facts. Leave to appeal to the High Court of Australia was refused on the ground that no question of law was involved. I do not think that the arrangement I am concerned with can ``properly'' be regarded as an ``ordinary''
ATC 4030business dealing. It is not simply a case of a shareholder selling his shares. For the dealing to be carried through, the other shareholders have to be involved and persuaded to sell their shares also. No doubt little persuasion was needed, but it was essential that the purchaser have absolute control over the Company. No problem could be allowed to arise as to any oppressive conduct after sale by the purchaser upon other shareholders. The Company itself had to be involved in the arrangement, because its assets were to be converted into cash. Throughout the transactions the appellants, each in his own way, had parts of the plan to implement. Mr. Slutzkin was the author of the plan, and it was for him to decide that the Company no longer served any useful purpose for him, either in his business affairs, or in the affairs of the trusts. In addition he had to make arrangements for the repayment of the loan from the Company to Alan Slutzkin Enterprises. Mr. Hapgood had to call in the deposits, have accrued expenses and a dividend paid, and provide Cadiz Corporation with a balance sheet showing that the Company was almost in a fully liquid position. Mr. Rosenblum had to interest Cadiz Corporation in the deal, ascertain its requirements, and steer the whole transaction to completion. The final stage of the arrangement was not merely the handing over of share transfers and the payment of the price, but involved a meeting of the Company at which the transfers were approved, new directors were appointed, and the old directors resigned. At the same time the management of the Company passed to Cadiz Corporation. These features seem to me to take the arrangement out of the class of ordinary business dealings. I may add that the examples given in Newton's case ((1958) A.C. at p. 466) and in
Mangin v. Commr. of I.R. (N.Z.) (70 ATC 6001 at pp. 6005-6007; (1971) A.C. 739 at p. 751) do not suggest that any liberal view is being taken of ``ordinary'' in this connection. The cases of W.P. Keighery Pty. Ltd. v. C. of T. (100 C.L.R. 66) and F.C. of T. v. Casuarina Pty. Ltd.(71 ATC 4068; 127 C.L.R. 62) appear to stand on a special footing, and their principles are not relevant to the position of the appellants. It is true that dividend stripping was a business operation at the time, as this case and Hennessey's case (above) show; but whatever consequences this may have for companies doing such business, it does not, on the facts of this case, have the effect that the arrangement to which the appellants were a party was an ordinary business dealing.
The fact that there was no imminent tax liability is not relevant. There was no such liability in Hancock's case (above), but sec. 260 was held to apply. In Newton's case (above) it was also pointed out that the motor companies (whose imminent liability to additional tax under Div. 7 led to the arrangement to avoid tax) could have escaped that liability by being turned into non-private companies (p.466). In Newton's case the Privy Council said (p. 464) that they ``are clearly of opinion that the word `avoid' is used in its ordinary sense - in the sense in which a person is said to avoid something which is about to happen to him. He takes steps to get out of the way of it. It is this meaning of `avoid' which gives the clue to the meaning of `liability imposed'. To `avoid liability imposed' on you means to take steps to get out of the reach of a liability which is about to fall on you''. For my decision to be consistent with this statement, I must regard the appellants as having determined to take the profits out of the Company, and then to have taken steps to get out of reach of a liability which would fall on them if they took those profits by means of an ordinary business dealing. This approach is supported by Hancock's case and in Ashton's case (above) it was a decision by the taxpayers to form a new partnership, and to set up family trusts that led them to the tax avoiding arrangement.
I am therefore of the opinion that there is in this case an arrangement which has the purpose or effect of avoiding liability imposed on the appellants by the Act, and that in so far as it has that purpose or effect, it is absolutely void as against the Commissioner. The result is that the agreement for the sale of the shares, and the sale of the shares, are void, as against the Commissioner. The appellants remain therefore as shareholders of the Company and were such shareholders when the dividend was declared. In these circumstances the money received by them is not purchase money, and is income derived by them, which is assessable to tax (Ashton's case, above, at p. 6006 ATC; p. 1622 W.L.R.; Hancock's case, above, at p. 281).
In my opinion these appeals should be dismissed.