SGH LTD v FC of T

Judges: Gleeson CJ
Gaudron J
McHugh J
Gummow J
Kirby J
Hayne J

Callinan J

Court:
High Court of Australia

MEDIA NEUTRAL CITATION: [2002] HCA 18

Judgment date: 1 May 2002

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Callinan J

111. The issue in this case is whether a building society ^[162] SGH Limited was established under a different name but it is convenient to refer to it as SGH Limited (``the applicant''). It is also now a company subject to the companies legislation. which was established on the initiative of the State of Queensland is the ``State'' within the meaning of s 114 of the Constitution as at the dates of the receipt of two payments from a contingency fund established by the State of Queensland, 5 July 1993 and 28 July 1993.

Facts

112. In 1976 a serious question arose as to the financial solvency of seven building

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societies in Queensland which had been incorporated under the Building Society Act 1886 (Q) (``the Act'').

113. The government of Queensland became concerned about the consequences to lenders to, and borrowers from these societies. It was also concerned about the impact which failure of these societies might have upon the confidence of investors in, and lenders to building societies generally. The State Government resolved to rescue the failing societies. The means adopted included the creation of a new building society, the applicant in these proceedings, which would be supported financially by the State Government Insurance Office (now Suncorp), a large and stable financial corporation established and owned by the State and accepted by the parties as the State for the purposes of s 114 of the Constitution. ^[163] State Government Insurance Office (Queensland) Act 1960 (Q) and Suncorp Insurance and Finance Act 1985 (Q). The intention was that the applicant would assume the liabilities and acquire the assets of the seven imperilled societies.

114. In order to achieve the government's purpose the Parliament of the State amended the Act by the Building Society Amendment Act 1976 (Q) (``the Amendment Act''). Section 38C of the Act as amended conferred upon the Registrar of Building Societies a power to direct that the engagements and property of one building society be transferred to another. Section 36A of the Act created a ``contingency fund'' to be held by the State for the protection of building society subscribers, contributors, lenders to, or depositors of money with building societies, to be funded by compulsory levies upon all building societies.

115. On 10 May 1976 not fewer than 100 persons qualified by the Rules of the applicant applied to the Registrar for the registration of the applicant under the Act. The application was granted and the fact of registration notified in the Queensland Government Gazette of 11 May 1976.

116. The Registrar of Building Societies then exercised power under s 38C (with the Treasurer's approval) to direct that all of the assets and liabilities of the seven unstable societies be transferred to the applicant.

117. Some financial support was provided by Suncorp on the instructions of the Treasurer of the State of Queensland to the applicant. The support, which was no doubt essential for the applicant to operate effectively, particularly in its early days, was nonetheless relatively modest: a loan of the order of $1 million; and a stand-by facility of $43 million being the sum of the liabilities assumed by the applicant.

118. The applicant thereafter operated as a building society between 1976 and 1985. It was obliged to, and did, make contributions to the contingency fund under the Act.

119. The Act was repealed by a new act enacted in 1985, the Building Societies Act 1985 (Q) (the ``new Act''). The funds in the contingency fund were transferred to a new contingency fund established under the new Act. The applicant remained a contributor to the new fund.

120. Presumably because the crisis in the building societies business had passed, the Building Societies Fund Act 1993 (Q) (``the disbursement Act'') provided for the disbursement of the fund. Pursuant to s 11 of the disbursement Act the amount of $23,002,000 was paid to the applicant. Subsequently it received the further sum of $2,011,095 as an ex gratia payment from the State pursuant to s 106 of the Financial Administration and Audit Act 1977 (Q). Pursuant to that Act its accounts were audited by the Auditor-General of Queensland. During the financial year ending 30 June 1994 the applicant carried on business in all respects as a conventional building society.

121. On 15 March 1995 the respondent assessed the applicant under the Income Tax Assessment Act 1936 (Cth) (``the ITAA'') for income tax on the two payments to which I have referred. The applicant objected to the assessments, asserting that it was the State within the meaning of s 114 of the Constitution. The objection was disallowed on 30 August 1999 on the grounds that the payments made to the applicant were bounties or subsidies assessable under s 26(g) of the ITAA, that the applicant was not the State within the meaning of s 114 of the Constitution, and that in any event, the tax was not a tax on property for the purposes of that section of the Constitution.

122. The applicant appealed against the disallowance of its objection to the Federal Court of Australia.

Proceedings in the High Court

123. Application was made for the removal of part of the matter into this Court pursuant to s 40 of the Judiciary Act 1903 (Cth). That application was granted and a case was stated

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for the consideration of the Full Court of this Court. The facts which were stated are essentially those that I have summarized. The two questions asked in the stated case are as follows:

• (a) whether SGH Limited is the ``State'' for the purposes of s 114 of the Constitution;
• (b) whether the tax in question is a ``tax on property'' for the purposes of s 114 of the Constitution.

124. When the matter came on for hearing in this Court, the parties, and those states which intervened, were all directed to complete their arguments on the first question following which the Court retired and reconvened to announce that it was in a position to answer the first question, in the negative, that reasons for this answer would be given later, and that, accordingly it was unnecessary to consider the second question.

125. Section 114 of the Constitution is as follows:

``A State shall not, without the consent of the Parliament of the Commonwealth, raise or maintain any naval or military force, or impose any tax on property of any kind belonging to the Commonwealth, nor shall the Commonwealth impose any tax on property of any kind belonging to a State.''

126. Section 26(g) of the ITAA provides as follows:

``Subject to section 25B, the assessable income of a taxpayer shall include -

• ...
• (g) any bounty or subsidy received in or in relation to the carrying on of a business (other than subsidy received under an agreement entered into under an Act relating to the search for petroleum), and such bounty or subsidy shall be deemed to be part of the proceeds of that business.''

127. The parties are agreed that the question whether a corporation of the applicant's kind may be characterised as the State for constitutional purposes may only be answered by examining the particular characteristics of the corporation in question in order to discern the degree and extent of governmental purpose, participation, and benefit in and from the corporation and its activities.

128. In Inglis v Commonwealth Trading Bank of Australia ^[164] (1969) 119 CLR 334 at 337-338. Kitto J said:

``The decisive question is not whether the activities and functions with which the respondent is endowed are traditionally governmental in character... The question is rather what intention appears from the provisions relating to the respondent in the relevant statute: is it, on the one hand, an intention that the Commonwealth shall operate in a particular field through a corporation created for the purpose; or is it, on the other hand, an intention to put into the field a corporation to perform its functions independently of the Commonwealth, that is to say otherwise than as a Commonwealth instrument, so that the concept of a Commonwealth activity cannot realistically be applied to that which the corporation does?''

129. The observations of his Honour, although directed in terms to a creature of the Commonwealth, apply with equal, if not greater force to a creature of the State. The words ``peace, welfare and good government'' which are to be found in s 2 of the Constitution Act 1867 (Q) are very wide, and do not have to be construed by reference to specific heads of power of the kind conferred by s 51 of the Constitution upon the Commonwealth. Almost from the inception of colonial government in this country a somewhat different view had been taken of the activities upon which a colony or a State might embark, from those conventionally undertaken by or on behalf of the State of the United Kingdom. The colonies and their successors, the States, have for example always had a heavy involvement in the construction and operation of public transport, particularly railways, and from time to time have engaged in a wide variety of banking businesses. Accordingly, little assistance is likely to be derived in this country from an identification and characterization (as a commercial or public one) of the actual activity in which the corporation is engaged, particularly if it is a corporation of the State.

130. The most recent case in this Court in which a like question to the one which arises here was considered, is DFC of T v State Bank of New South Wales . ^[165] 92 ATC 4079 ; (1991-1992) 174 CLR 219. From that case a number of principles can be distilled: that the integrity especially the financial integrity, of each of the polities of the Commonwealth is so

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important that s 114 should be given no narrow construction; that accordingly, in an appropriate case a corporation, as an agency or instrumentality of one of these polities, may be sufficiently close to it to be identified with, and therefore be the State within s 114 of the Constitution; that particular Rules stated in other, related but not identical contexts, such as the doctrine of the immunity of a body from suit by reason of the shield of the Crown, do not apply to, or influence the resolution of an issue arising under s 114; and, ``State'' should generally be given the same meaning throughout the Constitution, for example as it has in s 75 thereof.

131. In the past, this Court has tended to look for six particular aspects or attributes of a relevant corporation with a view to discerning the true character of the corporation in question for the purposes of s 114 of the Constitution. The parties are agreed that such an exercise is appropriate here, although they differ as to the importance to be attached to the presence or absence of various of these aspects or attributes. The matters that have tended to influence the Court in the past are these: ^[166] Bank of NSW v The Commonwealth (1948) 76 CLR 1 at 274 ; Inglis v The Commonwealth Bank of Australia (1969) 119 CLR 334 at 339 ; Superannuation Fund Investment Trust v Commr of Stamps (SA) 79 ATC 4429 ; (1979) 145 CLR 330 ; State Bank of New South Wales v Commonwealth Savings Bank of Australia (1986) 161 CLR 639 ; DFC of T v State Bank of New South Wales 92 ATC 4079 ; (1991-1992) 174 CLR 219 . the absence or otherwise of corporators; an explicit obligation of the corporation to conduct its affairs to the greatest advantage of the relevant polity; the participation of the executive government in the process of formulating policy and making decisions; the right or otherwise of the government to appoint directors, and the source of, and responsibility for their remuneration; the destination of profits; and, the obligation or otherwise of the Auditor-General to audit the accounts of the corporation.

132. As will appear, only one of those questions may be answered in an unqualified way here in favour of the applicant, and that is the last. The accounts are subject to audit by the Auditor-General of Queensland.

133. Whilst the Act was amended to enable effect to be given to the scheme for the effective absorption of the imperilled building societies by and into the applicant, no separate Act to enable it to be incorporated was enacted. The applicant was established under the Act and became amenable to it in the same way as all other surviving building societies.

134. Neither the Act nor the objects of the applicant itself require it to conduct its affairs to the advantage of the State of Queensland, or of Suncorp, or to serve any other public interest.

135. The government has no say, certainly not any direct say, in the formulation of policy, or the conduct of the business of the society, although it does have a capacity to control the Board, a matter upon which the applicant relies, and which will require some further consideration. The point may however be made that the applicant's dealings with Suncorp as a lender and the provider of a stand-by facility were ordinary commercial dealings in respect of which the applicant paid interest and fees.

136. The possibility of a high degree of control by Suncorp arises in this way. Suncorp has power to appoint and remove three of the six directors for which the Rules make provision, and in particular it appoints the chairman who has a casting vote, as well as a deliberative vote. Suncorp was, at the material times, the owner of and had control of all ``B'' class shares which were voting shares. The other shares, ``A'' class shares, were held by a large number of shareholders, being persons who lent money to the society but whose votes could not prevent the appointment by Suncorp of three of the directors, including the chairman.

137. No dividend or any other funds surplus to the applicant's requirements were payable to Suncorp or to the State. As I have said, interest and fees on an ordinary commercial basis however, were. Neither the State nor Suncorp directly invested any of its funds in the applicant, and ``A'' class shareholders had rights to dividends, and subject to a qualification to which I will refer, any surplus of assets over liabilities on its winding up.

138. The only question to be answered, as I have said, in an unqualified way favourable to the applicant is that its accounts are subject to audit by the Auditor-General of Queensland.

139. The applicant seeks to deal with the answers to the questions usually asked in this type of case and generally so far answered adversely to it, in a number of ways.

140. As to the absence of corporators the applicant submits that their mere presence does not provide an indication that it is not relevantly the State: that in principle, a statutory corporation limited by shares, but all of which are vested in the State should have no different characterization from a statutory corporation without share capital. The problem for the applicant here however is that the shares are not entirely vested in the State. Statutory

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corporations, the applicant submits, may enter into contractual arrangements with others which confer rights to profit or control which are the functional equivalent of shares. This argument does not carry very much weight. It is the nature of the legal personality itself, and not its capacity to interact and deal with other legal personalities which defines its true nature. And I do not accept, as submitted, that a true statutory corporation which is the State would not at least endanger its status if it were to issue a new class of shares to its employees for the purpose of providing incentive payments by way of dividend.

141. The applicant further submitted that the rights attaching to the ``A'' class shares being redeemable or withdrawable shares of the kind conditionally issued to depositors with a building society, were of limited strength or scope. This was so, the applicant argued, because the ``A'' class shareholders had no right to vote at a general meeting unless the meeting were an annual general meeting for a year in which there had been a loss from the transactions of the society. Similarly, the applicant referred to the Rules of the society which ensured that the directors, in respect of whose election the ``A'' class shareholders may vote, remained a permanent minority whilst Suncorp had at least $1 million advanced to the society. Furthermore, the ``A'' class shareholders could only receive a dividend if the directors so resolved, and the directors being the appointees of Suncorp were unlikely so to resolve.

142. I do not think there is great force in these submissions in this case. Prudent lenders to corporations very often insist upon some measure of control, albeit perhaps at some risk of liability if the corporation fails, ^[167] See the definition of ``director'' in the Corporations Law (Cth) s 9, which covered persons not validly appointed as a director, but who acted in the position of director, or in accordance with whose instructions or wishes the directors of the company or body were accustomed to act. whilst money is outstanding, in order to better protect their loans or outstandings. And even though the majority of the directors might effectively be controlled by Suncorp they nonetheless are bound to comply with their obligations under the Rules and the Act. Those who choose to become ``A'' class shareholders do so voluntarily and in the knowledge that the Rules will define their rights to vote, to dividends and otherwise.

143. The last point in regard to this aspect of the matter that the applicant makes, is that, because the applicant would have the ability to repay its depositors who are also its ``A'' class shareholders it could thereby extinguish their rights as shareholders and accordingly deny them any right to participate in a division of a surplus on a winding up. It is unlikely that the directors could, as a matter of law, in those circumstances, extinguish the ``A'' class shareholder's right to participate. ^[168] The general rule is that directors are bound to act solely in the interests of the shareholders as a whole and not for a class of shareholders. See Pilmer & Ors v The Duke Group (In Liq) & Ors (2001) 19 ACLC 1,172 at 1,177 [ 18]; (2001) 75 ALJR 1067 at 1071 [ 18]; 180 ALR 249 at 255 . Whether that is so it is unnecessary to decide finally because such a decision would shed no light upon whether the applicant, which has voluntary shareholders who are deemed to know the Rules and to have agreed to them, is the State or not.

144. The next matter which the applicant emphasises is the existence of the right of Suncorp (whilst it had at least $1 million on loan) to appoint three directors and to nominate which directors might be elected chairman and deputy chairman. The applicant submits that this is an especially significant matter because the chairman had a casting vote, in addition to a deliberative vote. This capacity to control the composition of the Board was reinforced by two other provisions of the Rules: one rendering a director appointed by Suncorp exempt from an obligation to retire by rotation or from removal from office at any general meeting; and another, which provided that a quorum of a meeting of directors was three including two of those appointed by Suncorp.

145. It is right, in my opinion, in deciding a case of this kind to look to the outer limits of the rights and obligations of the relevant parties under the relevant enactment and rules, rather than to the extent to which, in practice, rights might be exercised or liabilities assumed. The provisions in the Rules to which I just referred do indeed give Suncorp a significant capacity to control the applicant but only whilst its loan to the applicant is outstanding. I do not see this as far removed however from conventional commercial arrangements which entitle a lender to view, for example, on a regular basis, a borrower's management accounts, and to insist upon the taking of remedial and other steps by the Board of a borrower, if the ratio of annual earnings to interest payable or net tangible assets to liabilities falls below a certain level. Special provisions to give assurance or protection to a lender whilst a debt is outstanding have nothing to say about the true nature of a corporation for the purposes of s 114 of the Constitution.

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146. Whilst the applicant accepts that the corporation's activities did not have a public character in the sense that the society was not, at the relevant dates, serving any particular public purposes, it submits that it was nonetheless established as a matter of government policy to inject stability into the business of building societies, and, no doubt, into the building industry in the State of Queensland as well. That does not however mean that the applicant is a State, rather than a business corporation. Much legislation is enacted with commercial objectives in mind. Legislation under which other legal personalities for example, co-operatives, may be established were enacted for similar purposes so that the public, might derive benefits, such as the encouragement of particular primary industries, the closer settlement of the areas in which their affairs were to be conducted, and the enhancement of a State's economy or a section of it, by the establishment, before modern competition policies were pursued, effectively of single purchasing and selling desks. Such co- operatives were no more constitutional manifestations of the States, than the applicant is here.

147. The applicant submits that there is a close financial relationship between Suncorp and it. But as I have pointed out the financial support provided, although no doubt very useful, indeed essential at the time, was by way of a loan and related facility, and not investment, and was provided on ordinary commercial terms. The other matter relied on, the fact that the Board (albeit dominated as it is by nominees of Suncorp) has the power to determine the direction of earnings is not unique and is of no great weight in the circumstances.

148. The last matter, that the applicant's financial statements were required to be audited by the Auditor-General under the Financial Administration and Audit Act 1977 (Q), is a relevant consideration. The requirement arises however, only because of the extended definitions of a ``controlled entity'' and of a ``public sector entity'' contained in that Act. Although relevant, this matter is certainly not decisive, and assumes relatively little significance in the light of the factors that point in the other direction.

149. The applicant concluded its argument by urging that Suncorp has a high degree of control over the applicant, and a degree of control which is inconsistent with its characterization as other than a corporation performing functions of the State. To put the matter this way is to do little more than summarize the other propositions on which the applicant relies, and which I have rejected for the reasons I have given. Had the State wished to operate as the State in the building society business then it could, and almost certainly would have chosen to do so by a vehicle different from the applicant, differently established, by a vehicle exclusively owned and operated by the State, free of others having real rights which must be acknowledged and observed, and employing funds directly invested rather than lent by the State. Nor do I think it irrelevant that the connexion and financial arrangements of the applicant are not with the State directly, but with a corporation in turn created by the State.

150. It is for these reasons that I joined with the other members of the Court in answering the first question in the negative, and in the orders pronounced by the Chief Justice.

ORDER

1) The questions reserved for consideration by the Full Court are answered as follows:

• Question (a): Whether SGH Limited is the ``State'' for the purposes of s 114 of the Constitution?
• Answer: No.
• Question (b): Whether the tax in question is a ``tax on property'' for the purposes of s 114 of the Constitution?
• Answer: Unnecessary to answer.

2) Costs to be determined by the Justice dealing with the further conduct of the cause.