Adelaide Stevedoring Co Ltd v Federal Commissioner of Taxation

(1961) 106 CLR 658
35 ALJR 305

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(Judgment by: Taylor J)

Between: Adelaide Stevedoring Co Ltd
And: Federal Commissioner of Taxation

Court:

Judge:
Taylor J

Subject References:
Income tax (Cth)

Judgment date: 14 November 1961

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Judgment by:
Taylor J

The question which arises on the statement of agreed facts in this case is whether the appellant company (hereinafter referred to as the taxpayer) was on 31st July 1958 a "subsidiary of a public company" within the meaning of s. 105 (4) (b) of the Income Tax and Social Services Contribution Assessment Act 1936-1957 (Cth). The taxpayer maintains that it was not and that its assessment to income tax based upon income derived during the year which ended on that date was excessive inasmuch as it was based upon the rate of tax prescribed for public companies. (at p659)

On the relevant date the paid-up capital of the taxpayer consisted of 65,000 shares of 1 pound each and there were nine shareholders in all. But some of these shareholders held their shares in trust for each of two companies which also were shareholders, namely John Darling & Son Proprietary Limited and Elder Smith & Company Limited, and also for other persons who were not shareholders. In the ultimate analysis the beneficial ownership of the shares was as appears in par. (8) of the statement of admitted facts. From this paragraph it will be seen that John Darling and Son Proprietary Limited and Elder Smith & Company Limited together had, by reason of the aggregate of their beneficial ownership of shares (43,334), the capacity to control the taxpayer. But, as was pointed out by its counsel, it is apparent that there were a number of combinations of persons, omitting either one or other of the named companies, of whom, by reason of their aggregate holdings, the same thing might be said. It should be added that neither of the companies specified was, on the relevant date, a private company. (at p660)

The problem, of course, is what is meant by the provisions of s. 105 (4) (b) of the Act. In terms they specify that: "a company is a subsidiary of a public company if, by reason of the beneficial ownership of the shares, the control of the company is in the hands of one or more companies none of which is a private company". For the taxpayer it is asserted that the sub-section has no application in the circumstances of this case. It is not sufficient, it is said, in order to attract the operation of the provision, that it should appear merely that the aggregate of the voting rights of the two companies in question, by virtue of their beneficial ownership, represented more than half the votes exercisable at a general meeting; on the authority of Adelaide Motors Ltd. v. Federal Commissioner of Taxation (1942) 66 CLR 436 ; and Federal Commissioner of Taxation v. West Australian Tanners and Fellmongers Ltd. (1945) 70 CLR 623 it is said that it must appear that the taxpayer was, in fact, controlled by virtue of such a preponderance of voting rights. In other words the test, it is asserted, is not capacity to control but control actually and effectively exercised by reason of such a capacity. It was for this reason that evidence was adduced to establish that there had, in fact, been no de facto control of the taxpayer by the two companies mentioned to the exclusion of the other persons beneficially entitled. (at p660)

At first sight, the test proposed on behalf of the taxpayer seems out of keeping with the general notion underlying s. 105. Leaving aside for the moment the case of a so-called subsidiary company, a company is a private company if it is not a company in which the public are substantially interested and, on the last day of the year of income, it is a company of any one or more of the descriptions specified in sub-ss. (1) (a) to (1) (f). Sub-section (1) (a), in particular, specifies a company all the issued shares of which are held by not more than twenty persons. Each of the other sub-sections formulate as the test either a capacity in a limited number of persons to control the company by a specified preponderance of voting power, or, the holding by a limited number of persons of a specified preponderance of the paid-up capital. Sub-section (1) (f) adds to these provisions as a further test a capacity in a limited number of persons to control the company by any means whatever. But none of those provisions applies in the case of a company which is, by definition, a subsidiary of a public company and it would, it seems to me, produce a somewhat strange result if, pursuant to sub-s. (2) (b), the question whether a company is or is not a subsidiary company were to be ascertained by enquiring as to the manner in which, on the relevant date, the company was actually controlled and not merely by reference to an existing capacity to control. But on the authority of the two cases referred to it is contended that "the control of the company" cannot be said to be "in the hands of one or more companies" merely because such companies, by virtue of their aggregate beneficial ownership of shares have the capacity to control; it is "in their hands", it is said, only if and when it appears that such capacity was, in fact, exercised. (at p661)

One of the questions raised for determination in Adelaide Motors Ltd. v. Federal Commissioner of Taxation (1942) 66 CLR 436 was whether the taxpayer in that case was or was not a company "under the control of not more than seven persons" within the meaning of s. 103 (1) of the Act as it then stood. But by sub-s. (2) (c) a company was "deemed under the control of any persons where the major portion of the voting power or the majority of the shares is held by those persons and nominees of those persons or where the control is, by any other means whatever, in the hands of those persons". The obvious difficulties of this latter provision were discussed in the case and reference was made to judicial criticisms in England concerning a substantially similar provision. It is unnecessary to reiterate what was then said. But it is of some importance to point out that the test which was first of all formulated by s. 103 (1) was understood to be related to actual control, and not merely to capacity to control. Accordingly sub-s. (2) (c) became "unintelligible if, according to the Act, the control of the company may be deemed to be in any of a number of groups of shareholders not exceeding seven persons, and as in this case, in several thousands of such groups": per Starke J. (1942) 66 CLR, at p 451. In these circumstances it was held that, notwithstanding the literal content of the deeming provisions of sub-s. (2) (c), a company did not answer the description of a company "which is under the control of not more than seven persons" unless it appeared that there was a de facto control by such a group. The same view was taken in Federal Commissioner of Taxation v. West Australian Tanners and Fellmongers Ltd. (1945) 70 CLR 623 where the decision in the earlier case was interpreted "as giving to par. (c) of s. 103 (2) in its application to the definition of 'private company' in s. 103 (1) an operation which may perhaps be compendiously stated as follows.

The paragraph applies where a group or groups exist holding the major portion of the voting power of a company or the majority of the shares, if, in addition, there is an actual control of the company by one of the groups, and there is such an actual control whenever there is only one such group who hold the major portion of the voting power or the majority of the shares" (1945) 70 CLR, at p 634. (at p662)

It will be seen that the problem with which the Court was confronted in these two cases differed substantially from that which now arises. There the deeming provision which fell to be construed was ancillary to a provision which formulated as a test actual and effective control existing in a limited number of persons. And if the deeming provisions were to be read literally its effect would have been, in the circumstances of the earlier case, to deem some thousands of different groups of persons to be in control of the company. It was for this reason that it was held, in the language of Starke J., that: "In terms the section only refers to a company which is under the control of not more than seven persons; it contemplates and provides for a single group of not more than seven persons of whom it can be established that they, and no other, control the company. Those persons may control the company because they have the major portion of the voting power, the majority of the shares may be held by them or their nominees, or the control is by any other means whatever in their hands" (1942) 66 CLR, at pp 450, 451. (at p662)

The provisions which led to the difficulties which these cases demonstrated were discarded in 1948, when by the Income Tax Assessment Act of that year s. 103 was repealed and a new section substituted. According to this section "private company" meant inter alia, "a company in which the major portion of the voting power is capable of being exercised by one person or by persons not more than seven in number... but is not a subsidiary of a public company". Then in 1951 this provision was repealed and s. 103A, which in all material respects is identical with the present s. 105, was enacted. But at all times the definition of a subsidiary company has remained the same and, with some force, the taxpayer contends that, as a provision ancillary to the main provisions of s. 103 as it stood prior to 1948 (and as ancillary to the provisions of s. 31A introduced by Act No. 18 of 1934), the expression "if... the control of the company is in the hands of one or more companies none of which is a private company" must have been taken to contemplate actual control and not merely capacity or joint capacity to control. Then, it is said, the provision has been deliberately re-enacted from time to time in the same form and it must be presumed to have been so re-enacted consistently with the same meaning. But it was re-enacted in 1948, and on later occasions, in an entirely different context and one which, I think, requires me to hold that the control of a company is in the hands of one or more companies when, by reason of the beneficial ownership of shares, that company or those companies, acting together, have the capacity to control the firstmentioned company. There are, in my view, a number of reasons for adopting this construction.

First of all, the critical expression "if by reason of the beneficial ownership of the shares, the control of the company is in the hands of one or more companies" is, even when considered by itself, singularly appropriate to describe an existing capacity to control by means of a preponderance of voting rights (cf. W. P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation (1957) 100 CLR 66 , at p 84 and Inland Revenue Commissioners v. Harton Coal Co. Ltd. (1960) 1 Ch 563, at p 578). Further, there is nothing in the provision which requires us to seek or find, in addition, de facto control. Secondly, such a construction is not only consistent with the general notion of capacity to control which is a determining factor for the purposes of the leading provisions of s. 105, but it would be inconsistent with the general tenor of those provisions to treat sub-s. (4) (b) as requiring an enquiry as to actual control. Finally, it should be observed, the question whether a company is or is not a private company is to be determined by ascertaining whether the company answers any one of the several specified descriptions on the last day of the year of income. This was not so prior to 1948 but it has been the case ever since the amending Act of that year. This, it seems to me, is a further indication that s. 105 is concerned generally, not with actual control on a specified date, but rather with the general shareholding structure of the company and with an existing capacity to control at that time. The cumulative effect of these considerations leave me in no doubt that the provision should be construed as I have already indicated. Upon that construction it is, of course, of no consequence that capacity to control may be found in a number of different groups; it is sufficient if, as here, capacity to control is found to exist in two companies neither of which was a private company on the material date. Accordingly, I am of the opinion that the appeal should be dismissed. (at p664)