Federal Commissioner of Taxation v. Casuarina Pty. Ltd.

Members: Barwick CJ
McTiernan J
Owen J

Walsh J
Gibbs J

Tribunal:
High Court (Full Court)

Decision date: Judgment handed down 23 April 1971.

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Walsh J.: In these two appeals the Commissioner of Taxation, herein called the appellant, seeks to have set aside the orders made by Windeyer J. in two appeals heard by him pursuant to sec. 187 of the Income Tax Assessment Act 1936-1968 (Cth) (the Act). The present respondent, herein called Casuarina, succeeded before his Honour in its challenge to two assessments in respect of the year of income which ended on 30 June 1968. His Honour set aside those assessments which had been made on the basis that Casuarina was, in relation to that year of income, a private company for the purposes of Div. 7 of Part III of the Act. He ordered in one of the appeals heard by him that the assessment be remitted to the appellant with liberty to him to issue an assessment of tax payable by Casuarina, on the basis that it was in the year in question a public company. The appellant seeks to have Casuarina's appeals from the disallowance of its objections dismissed and the assessments restored.

The facts are fully set out in the reasons for judgment given by Windeyer J., which are reported in 44 A.L.J.R. 299. Although it has been submitted that in some respects his Honour's findings are not accurate or are incomplete, I am of opinion that it has not been shown, in relation to any question of fact upon which a decision in these appeals will depend, that the view taken by his Honour was not warranted by the evidence or was erroneous. Reference must be made later to some particular submissions made to this Court as to matters of fact, but at this point the following facts may be stated.

In and before the year 1967 a company called Lex Sternberg Motors Pty. Limited, herein called Sternberg Motors, carried on the business of selling motor cars. It was controlled by Mr. Lex Sternberg, as was another company formed by him called Hesso Pty. Limited, herein called Hesso which became a shareholder in Sternberg Motors. Casuarina was formed by a firm of accountants in Melbourne and was incorporated on 12 April 1967. It was then entirely controlled by the accountants. A little earlier the accountants had formed a company called Forum Holdings Limited, herein called Forum, which was incorporated on 17 February 1967. The accountants who controlled it intended that it would become a public company within the meaning of the Act, by becoming a subsidiary of a public company or companies. On 19 April 1967, 4,995 shares in Forum were allotted to W.B. & H. Nominees Pty. Limited, herein called Nominees. A few days later Nominees transferred 1,300 of its shares in Forum to each of three other companies. Two of those other companies were, without

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ATC 4073

doubt, public companies within the meaning of the Act. It is said that the evidence did not show whether or not the third of them was also a public company. But this is immaterial because, in any event, there were two public companies which between them held 2,600 out of the 5,000 issued shares in Forum. The residue of the 4,995 shares held by Nominees, together with five subscribers' shares held by it, remained with it, so that it had 1,100 shares in Forum.

His Honour found that the acquisition by the public companies of the shares in Forum was pursuant to an arrangement or understanding arrived at before Forum was incorporated. One of the partners in the firm of accountants was a director in each of the three companies which acquired shares from Nominees. His Honour did not state expressly by whom the arrangement or understanding that those companies should acquire shares in Forum was made. But he found that Forum was brought into existence in order that, having become a public company, it would be able to give that character to other companies which for tax purposes desired to obtain that character and which could do so (it was considered) by becoming subsidiaries of Forum. No doubt it was upon the suggestion and persuasion of the accountant, who was a director of the public companies, that they acquired shares in Forum. But it is not in dispute that each of them owned beneficially the shares acquired by it. It was disputed on behalf of the appellant that Forum was a public company within the meaning of Div. 7. But this was not on the ground that its shareholders were not beneficial owners of the shares held by them. It was on the ground that the directors of Forum had power at any time to allot additional shares and thus to bring about the result that the shares held by the public companies became less than one-half of the issued shares. That submission depends upon a construction of sec. 103A(4) of the Act which will have to be considered later, in dealing with submissions that Casuarina itself was not within the meaning of that provision a subsidiary of a public company. It is sufficient at this point to say that I agree with the conclusion of Windeyer J. that throughout the year of income in question and at the end of that year Forum was a subsidiary of a public company, within the meaning of sec. 103A(4).

His Honour said that the events relevant to the appeals began early in 1967 when Mr. Sternberg sought advice as to how Sternberg Motors could avoid, at least for a time, distributing its profits to its shareholders and could also avoid paying additional tax, under sec. 104. of the Act. Counsel for the appellant has submitted that the relevant events began earlier. In 1966 Hesso was incorporated and it acquired Sternberg's shares in Sternberg Motors, which declared a dividend most of which went to Hesso. If the same procedure had been adopted in the following year, there would have been a serious tax problem affecting Hesso and it was that problem which Sternberg sought in 1967 to solve. But these facts do not, in my opinion, affect the determination of the questions raised by these appeals. I do not think it matters whether the tax problem was a problem as to tax falling upon Hesso or upon Sternberg Motors or upon Mr. Sternberg himself. A solution which was suggested was that affairs should be arranged so that a public company would derive profits coming from the motor sales business. The details of a plan by which this might be done were explained to Sternberg. These details were given in evidence which is quoted in the judgment of Windeyer J. and need not now be repeated. It seems clear that at this time the parties to the discussion of this plan were Sternberg and the accountants and that it was discussed before Casuarina was incorporated. His Honour referred to evidence which described Casuarina as being ``upon the shelf'' in the office of the accountants who formed it. However, its stay on the shelf was very short. It was incorporated on 12 April 1967. As early as 24 April 1967, it was taking part in the events by which the tax plan was carried into execution. Its only shareholders at that time were the two original subscribers, who belonged to the accountants' firm. They were also its directors. On 24 April they resolved that forty-seven ordinary shares be issued to Sternberg and his wife and that transfers of the two subscribers' shares to them be approved. By this means Sternberg and his wife became the holders at that time of all the shares in Casuarina. One of the subscribers who was also a director of Forum, signed on its behalf an application for the allotment by Casuarina to it of fifty-one redeemable preference shares. A cheque for the price of these shares was given and deposited in Casuarina's bank account.

At or about this same time some other events occurred which are not all set out in his Honour's reasons. On 24 April 1967 there were allotted to Casuarina ten redeemable preference shares of $2 each in Sternberg Motors and twenty preference shares of $1 each in Hesso. A few days later, on 28 April, dividends were declared on those shares by Sternberg Motors and by Hesso, by which Casuarina became entitled to a total amount of over $12,000. Counsel for the appellant has pointed out that this entitlement accrued to Casuarina before it resolved, on 15 May 1967, to allot the fifty-one shares to Forum and thus to

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ATC 4074

make it a majority shareholder in Casuarina. It did this through its directors, who were still the two men from the accountants' firm. Although they had earlier transferred their subscriber shares, it was not until July 1967 that they resigned as directors and then the Sternbergs took their place. The Articles of Association provided that a director should not require any share qualification. The fifty-one preference shares thus acquired by Forum gave it, according to the Articles of Association of Casuarina, the right to receive a fixed preferential dividend and, in addition, to share rateably with the ordinary shareholders in any other dividend declared by the company. They gave it also the right on a winding-up or on a reduction of capital to have capital distributed to them rateably with the holders of ordinary shares and the same rights as the holders of ordinary shares to receive notice of general meetings and to attend general meetings and there to vote in person or by proxy. It was provided also that the company should be entitled, subject to sec. 61 of the Companies Act 1961 (Vic.). upon giving to holders of redeemable preference shares not less than seven days' previous notice in writing of its intention to do so, to redeem the shares at any time out of profits or moneys lawfully applicable for that purpose. It was provided that no such redemption should be made between 24 June and 7 July (both days inclusive) in any year.

Subsequently Forum did not take any part in Casuarina's affairs. It received in July 1967 and in August 1968 small dividends of about $200. In his reasons Windeyer J said

``These, with dividends received from other companies which had come for similar reasons under Forum's aegis, produced for it a revenue enabling it to pay an amount by way of dividend satisfactory to the three public companies whose shareholdings had enabled it to qualify as a subsidiary of a public company.''

On 29 March 1968 Sternberg Motors declared a dividend of $6,560 in favour of Casuarina. That was its only income for the year. Its taxable income for that year was shown in its return as $6,557. Most of that dividend was allowed to remain with Sternberg Motors as a loan without interest. Casuarina took actual payment only of so much as was necessary to provide for its own very small outgoings and for the dividend which it paid to Forum. As stated earlier, assessments of tax were made on the footing that Casuarina was a private company. One was for tax at the rate of thirty per cent of the taxable income but with the allowance of a rebate under sec. 46(2) of the Act. The other assessment was for additional tax under sec. 104. Casuarina claims that it was not a private company. It relies upon para. (d)(v) of sec. 103A(2) of the Act and it contends that within the meaning of sub-sec. (4) of sec. 103A it was a subsidiary of a public company. The appellant contends that Casuarina was not within the meaning of those provisions a private company. In the alternative he relies upon sec. 260 of the Act.

The first question to be considered is whether or not the facts relating to Casuarina and to Forum were such that the requirements of sub-sec.(4) of sec. 103A were satisfied, so that Casuarina was - ``at the end of the year of income'' - a subsidiary of a public company, within the meaning of that provision. The subsection provides -

``(4) For the purposes of this section, a company is a subsidiary of a public company in relation to the year of income if, at the end of the year of income, one or more companies that are public companies for the purposes of sub-sec. (1) of this section in relation to the year of income but none of which is a company referred to in para. (c) of sub-sec. (2) of this section -

• (a) beneficially owns or own shares representing more than one-half of the paid-up capital of the first-mentioned company;
• (b) is or are, by reason of its or their beneficial ownership of shares in the first-mentioned company, capable of controlling or of obtaining control of more than one-half of the voting power in that company;
• (c) would be beneficially entitled to receive more than one-half of any dividends paid by the first-mentioned company; and
• (d) would be beneficially entitled to receive more than one-half of any distribution of capital of the first-mentioned company in the event of the winding-up, or of a reduction in the capital, of that company.''

As to para. (a) it is not, in my opinion, seriously open to question that Forum beneficially owned shares representing more than one-half of the paid-up capital of Casuarina. I think that Windeyer J. was correct in holding that the term ``shares'' includes redeemable preference shares: see the definition of ``shares'' in sec. 6(1) of the Act and compare the special provision made in sec. 80B(8) to give effect to an intention to exclude certain redeemable shares from consideration for the purposes with which that provision deals. His Honour was also correct, in my opinion, in finding that the shares were owned beneficially by Forum.

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ATC 4075

There was no evidence of any agreement that they or any of the rights attached to them were to be held on behalf of some other person.

In relation to para. (b) the appellant's contention was that Forum was not capable of controlling or of obtaining control of more than one-half of the voting power in Casuarina, since the real capacity to control the voting power was in the hands of the Sternbergs. It was put that this was so for two reasons. The first was that there was an understanding that Forum would not interfere in the affairs of Casuarina. The second was that the right to redeem Forum's shares could always be used to prevent Forum from controlling the affairs of Casuarina at any general meeting of that company. Except with the consent of the Sternbergs, no general meeting could take place at such a time that it would not be within the power of the Sternbergs, as directors of Casuarina, to prevent any use by Forum at a general meeting of its voting power, by redeeming the shares held by it. I cannot accept either of these reasons as demonstrating that the fulfilment of the terms of para. (b) should be denied. I shall make some observations later in these reasons as to the meaning and effect of the statement made by Windeyer J. that it was - ``an element in the scheme, well understood by all concerned, that Forum would not in fact interfere in Casuarina's affairs provided it received by way of dividends the stipulated payments for taking Casuarina in as one of its subsidiaries'' - But at this point I state the opinion that that ``understanding'' did not detract from Forum's capability of controlling the voting power attached to its shares. In applying para. (b) of the provision (as well as its other paragraphs) attention must be directed to the facts existing at a particular time, that is, at the end of the year of income. The only question is whether or not at that point of time Forum was capable of controlling more than one-half of the voting power in Casuarina. The question is not whether it was likely to control it or was likely to exercise its voting power in a particular way. The question is whether it was capable of controlling the voting power. In my opinion the answer to that question must be ``Yes''. The shares were still held by Forum. They had not been redeemed and no notice had been given to redeem them. Without doubt it is true that in a practical sense there was no likelihood that Forum would exercise its voting power adversely to the interests or the wishes of the Sternbergs. It is true also that the right to redeem the shares was a powerful instrument in the hands of the Sternbergs for the thwarting of any threat by Forum to do so. But so long as the shares were not redeemed and Forum held fiftyone per cent of the shares, it was capable of controlling more than one-half of the voting power. As Windeyer J. said: ``If its (Forum's) shares were redeemed it would lose the control they gave. But a liability to lose control in the future does not contradict the present existence of a capacity to control.''

The appellant sought to rely in relation to this question on part of the reasons in the joint judgment of Dixon C.J., Kitto J. and Taylor J. in
W.P. Keighery Pty. Ltd. v. F.C. of T. (1957) 100 C.L.R. 66 (which I shall call Keighery ). In my opinion that case does not assist the appellant on this point and, indeed, I think its reasoning is incompatible with the argument of the appellant. At first instance Williams J. (at pp. 78 and 79 of the report) held in effect that because on the relevant day Mr. and Mrs. Keighery had vested in them a right, by virtue of which they could thereafter act so as to eliminate the preference shareholders by redeeming their shares before a general meeting could take place, the company was on that day ``capable of being controlled'' by Mr. and Mrs. Keighery. But this view was rejected by the majority in the Full Court. It was urged in the present case that in rejecting it their Honours indicated (at pp. 88-89) that, but for the existence of certain contingencies which were regarded as affecting and limiting the power of Mr. and Mrs. Keighery to eliminate the other shareholders, their Honours would have accepted the view which had been taken by Williams J. But although their Honours referred to certain contingencies, by reason of which it could not have been affirmed on the relevant day that Mr. and Mrs. Keighery would certainly be the repositories of the power when it should become exercisable, or that the power would certainly become exercisable before the next general meeting, it is important to observe that at p. 88 their Honours contrasted a power exercisable at will to disqualify the votes of other shareholders with a power which on the relevant day ``was incapable of immediate exercise''; and they concluded their reasons on this part of the case by saying at p.89: ``The company was capable of being made controllable by them in certain eventualities; but that is not to say that the company was then capable of being controlled by them.''

The question arising directly in the present case in relation to para. (b) is not the question whether the Sternbergs were at 30 June 1968 capable of controlling or obtaining control of more than half the voting power. It is whether Forum was capable of doing so. But to the extent that the argument for the appellant involves an attempt to deny the existence, on the relevant day, of the capacity which prima facie Forum clearly had as holder and beneficial owner of fifty-one per cent of the

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ATC 4076

shares, by asserting that the right to redeem the shares which was vested in Casuarina and controlled by the Sternbergs nullified the capacity of Forum, I am of the opinion that the argument fails to give due weight to the fact that the statutory criterion is related to a particular point of time, so that the requirement is fulfilled or not fulfilled according to the position then existing and is not dependent upon the probabilities, however strong these may appear to be, concerning the manner in which the voting power will continue to be controlled or will be actually exercised, at some subsequent point of time.

Next, it was contended for the appellant that neither the requirement set out in para. (c) nor that set out in para. (d) was satisfied. Windeyer J. did not deal in express terms with those paragraphs or make express findings concerning them. But on the view that I take of the case this is not of importance. Having reached the conclusion that at the relevant time the matters set out in paras. (a) and (b) could be predicated of Forum in its relation to Casuarina, I am of opinion that it follows that the matters set out in paras. (c) and (d) could also be predicated of it. This does not mean, of course, that there could never be a case in which paras. (a) and (b) were satisfied but para. (c) or para. (d) was not. It does not mean that paras. (c) and (d) have no significance. The beneficial entitlement to the receipt of dividends or of capital might be divested by some binding transaction from the beneficial owner or owners of shares and transferred to some other person or company, not being itself a public company. In such a case paras. (a) and (b) might be satisfied and para. (c) or para. (d) might not be satisfied. But there is no evidence in the present case upon which it could be found that Forum had so acted as to divest from itself its entitlement to receive dividends or to participate in a distribution of capital.

At one stage in the submissions for the appellant, it was said that if Forum had sought to exercise its rights so as to procure for itself a substantial dividend, it could have been restrained by injunction from so doing, upon the footing that this would be a breach of the understanding upon which Forum had acquired the shares. As I understood the argument, at a later stage the contention was not pressed that Casuarina had any legal or equitable right to prevent Forum from exercising its rights as shareholder, but it was then said that the Sternbergs could have obtained relief, as minority shareholders in Casuarina, against any attempt by Forum to exercise its rights to the detriment of the Sternbergs and, in particular, against any attempt by Forum to take for itself a large portion of the money which had come to Casuarina as a shareholder in the Sternberg companies. But I find no reason to disagree with the statement made by Windeyer J. that Forum could in law exercise its voting rights as it thought fit or with his statement that ``there was nothing which in law restricted Forum exercising whatever rights it had as beneficial owner of its shares in Casuarina''.

As I have said, I think that, since it is established that Forum beneficially owned shares representing more than one-half of the paid-up capital of Casuarina and was by reason of that beneficial ownership of shares capable of controlling more than one-half of the voting power of Casuarina, the consequence is that there is no reason for denying that Forum would be beneficially entitled to receive more than one-half of any dividends paid by Casuarina and to receive more than one-half of any distribution of capital, in the event of the winding-up or of a reduction in capital of that company. In my opinion, in applying the terms of paras. (c) and (d) to the facts existing at the relevant time, that is, the end of the year of income, the supposition must be made that at that time a dividend is being paid or capital is being distributed. That supposition being made, the question to be answered, having regard to the facts existing at that time, is whether Forum would be entitled beneficially to receive more than one-half of the supposed dividend or of the supposed distributed capital. In my opinion, the question thus posed must be answered ``Yes''. Having regard to the Articles of Association of Casuarina, and in the absence of any act by which Forum had divested itself of its entitlement, no one else could be entitled to receive the dividend or the capital payable to Forum which was the beneficial owner of fifty-one per cent of the shares.

It was contended for the appellant that paras. (c) and (d), although they are concerned with rights existing at the end of the year of income and not at some other time, must nevertheless be interpreted and applied in a sense which looks forward to prospective payments of dividends and to prospective distributions of capital. It was argued that in order that the paragraphs may be satisfied one must be able to affirm, as at the relevant date, that the rights of the public company (or companies) owning shares are such that it (or they) cannot lose in the future the entitlement to dividends subsequently declared or to capital subsequently distributed, otherwise than as the result of some voluntary act, such as the sale of the shares. In my opinion, that construction of the provisions should not be accepted. In applying paras. (c) and (d), no less than in applying paras. (a) and (b), it is necessary in my opinion to look to what would be the entitlement, at the particular time which the provisions themselves designate as

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ATC 4077

the relevant time, upon the hypothesis that a dividend or capital were then being paid out by the company in which the shares are held. The use of the words ``would be'', instead of the present tense used in paras. (a) and (b), was relied upon as supporting the argument for the appellant. But I do not think that it does so. The use of the words ``would be'' is apt, because the criteria stated in paras. (c) and (d) depend upon setting up a hypothetical situation and asking what would be the company's entitlement in that situation.

I have stated the view that neither the right of Casuarina to redeem the preference shares nor the understanding that Forum would not interfere in the affairs of Casuarina had the consequence that para. (b) was not satisfied. Likewise, I am of opinion that that right and that understanding did not have the consequence that para. (c) or para. (d) was not satisfied.

It was said that the provisions of Div. 7 in force at the relevant time differed materially from the provisions for which they were substituted. In the earlier provisions, it was said, the criteria by which the character of a company as a private company was determined, were concerned mainly with the state of its share register, whereas in the later provisions there may be seen a legislative intention to attach more importance to external criteria and to the question whether or not it appears that a company has really and genuinely a public character. But in my opinion there is no basis in the later legislation for deciding whether a company is or is not a private company for the purposes of Div. 7 by reference to any broad concept as to what is ``genuinely'' a public company. The matter can be decided only by applying the precise terms of the statutory descriptions to the facts of the case.

It is necessary now to consider the appellant's submissions based on sec. 260 of the Act. Before Windeyer J., the appellant put forward two alternative versions of the arrangement which was said to have attracted the operation of that section. I need not refer to the details of those formulations. The case for the appellant in relation to the application of sec. 260, according to the submissions made to us, may be stated shortly as follows. There was an ``arrangement'' within the meaning of the section, having the purposes or at least one of the purposes described in it, that a plan would be carried out in order to avoid the substantial tax liabilities which would be incurred if the profits made by Sternberg's private companies were distributed to the Sternbergs or alternatively if those profits were not distributed. It was a necessary step in that plan that the allotment of fifty-one preference shares should be made by Casuarina to Forum. It was that step which, on the assumption made for the purpose of this argument, brought about the result that Casuarina became for the purposes of the Act a public company and it was that step which altered the taxation liabilities which would have existed if it had not been taken. This was the critical step for the purpose of tax avoidance. Section 260 as applied to these circumstances renders void as against the appellant that allotment of shares. The section has no effect on other steps which formed part of the arrangement or plan, such as the incorporation of Casuarina and the declaration in its favour of dividends by the Sternberg companies. According to the argument, the taking of those steps did not have any relevant taxation consequences.

These submissions give rise to certain questions which I think are not free from difficulty but upon which for the purpose of the present appeals I assume that answers favourable to the appellant are given. I take that course because I am of opinion that upon those assumptions it should still be held that sec. 260 has no operation. One such question is whether or not it is open to the appellant to say that one part of the scheme, namely the allotment of shares, was void, whilst at the same time treating other parts of it as valid and exacting tax on the basis that they were valid. Windeyer J. thought that it was not open to the appellant to do this. But if it were necessary to decide this point, close consideration would need to be given to the observations made in
Newton v. F.C. of T. (1958) 98 C.L.R. 1 at pp. 10-11 , and to the manner in which, in the circumstances of this case, one ought to apply the principle that sec. 260 operates to avoid a transaction only so far as the transaction has the purpose or effect of avoiding tax and does not affect a transaction which in itself, although it has a place in a scheme of tax avoidance, does nothing to avoid tax. I shall assume that this principle enables the appellant, for the purposes of the assessments now in question, to treat the transactions prior to the allotment of shares as valid but to treat that allotment as void. This means that for present purposes (whatever might be the position if the liability to tax of the Sternberg companies or of the Sternbergs themselves was in question) the incorporation of Casuarina, the transfer to it of the shares of the Sternbergs in Sternberg Motors and in Hesso and the declaration by those companies of dividends in its favour are all to be taken as valid. The only thing which according to the appellant is affected by sec. 260 is the allotment of shares which constituted the method by which Casuarina was transformed from being a private company to being a public company.

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ATC 4078

Another question upon which there was some debate at the hearing of these appeals was whether it was shown by the evidence that Casuarina itself was a party to or a participant in the scheme or plan upon which the appellant relied. Windeyer J. said that it was an element in the scheme which was ``well understood by all concerned'' that Forum would not interfere in Casuarina's affairs. His Honour said that he would consider the case on the basis that this was understood. But a plan or scheme was already in existence before Casuarina was incorporated and it did not afterwards record in any formal way any decision by which it agreed to participate in the scheme or plan. It was described by his Honour as being a pawn or a puppet in the whole scheme. But I am disposed to doubt that, in considering whether sec. 260 operated in relation to the assessment of tax payable by Casuarina, the whole matter may be resolved simply by saying that, whatever arrangement may have been made by the Sternbergs with Forum and with the accountants, Casuarina was not a party to it and for that reason sec. 260 could have no operation. It may be thought that it would be proper to infer, from what Casuarina did and from the circumstances in which it acted, that it adopted the scheme or plan and made itself a participant in it. Whether that be so or not, it may be that an act done by it, even if only as ``a puppet'' in a tax avoidance scheme formulated by others, could be held to be avoided by sec. 260, if that act had the effect of avoiding a tax liability imposed on Casuarina by the Act. But in my opinion I need not resolve these questions. I assume in favour of the appellant that Casuarina did participate in a plan which had been formulated in order to bring about the result that at the relevant time Casuarina would be a public company within the meaning of the Act and to produce by that method a more advantageous tax situation than that which would have existed if this had not been done.

Before proceeding to consider the matter on the assumptions which I have stated, some further observations need to be made concerning the ``understanding'' between the Sternbergs and Forum that Forum would be content with a small return by way of dividend and would not, so long as it obtained this, interfere in the affairs of Casuarina. Windeyer J. thought that no arrangement of this kind had been made which was legally binding. With this view I agree. But there is authority for the view that sec. 260 may operate in regard to an ``arrangement'' which falls short of being legally binding or which includes elements which are not legally binding: see Newton's Case (1958) 98 C.L.R. 1 at p. 7. But the understanding concerning Forum's non-interference in the affairs of Casuarina was not in my opinion an element in the scheme which had very much real significance in relation to the question of the applicability of sec. 260 in the circumstances of this case. The Sternbergs did not have to rely on any such understanding to protect themselves against the taking of actual control by Forum or by the companies which were shareholders in Forum. This protection was provided by the right of redemption of Forum's shares, given by the Articles of Association to Casuarina and did not rest simply upon an unenforceable understanding.

The argument which must now be considered, upon the stated assumptions made in favour of the appellant, is that sec. 260 operated to produce the result, for tax purposes, that Casuarina remained a private company. In my opinion the argument should be rejected. We were referred to all the principal cases in which sec. 260 has been considered. Only a few of them need be mentioned. In Keighery (1956-57) 100 C.L.R. 66, which has already been mentioned, it was decided that reliance could not be placed upon sec. 260, in order to avoid the allotments of preference shares as a result of which the appellant in that case ceased to be a private company for the purposes of Div. 7 of the Act. From the reasons given in the joint judgment of three members of the Court I quote some passages. At p. 93 their Honours said -

``Whenever, as the end of a year of income approaches, it is found that facts exist in relation to a company which will make it a `private company' if they persist on the last day of the year, the persons interested in the company are presented by the Act itself with an opportunity to decide whether the consequences of its being a `private company' will be incurred or a sufficient change will be made to prevent its being incurred.

If they so alter the relevant facts that, when the last day of the year of income arrives, the company will not be a `private company', their action cannot be regarded as tending to defeat a liability imposed by the Act; it is one which the Act contemplates and allows.''

At pp. 93 and 94 they said -

``The very purpose or policy of Div. 7 is to present the choice to a company between incurring the liability it provides and taking measures to enlarge the number capable of controlling its affairs. To choose the latter course cannot be to defeat evade or avoid a liability imposed on any person by the Act or to prevent the operation of the Act.''

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ATC 4079

In another judgment published on the same day as was the judgment in Keighery, the same Justices, in their joint judgment in
F.C. of T. v. Sidney Williams (Holdings) Limited (1956-57) 100 C.L.R. 95 at pp. 113-114 said this -

``Williams J. held that the case was untouched by anything in sec. 260. His Honour considered that it was the scheme of the Act to give companies a choice of being taxed as non-private companies or as private companies, and to impose no liability to Div. 7 tax on company not in fact falling within the descriptions of a private company in sec. 105 ((1957) 100 C.L.R., at p. 104). Accordingly he held that a company was not relieved from any liability under the Act if it preferred to become a non-private company and to be taxed as such than to remain a private company. `Whichever it may be,' his Honour said, `it pays the full tax for companies in that category' ((1957) 100 C.L.R., at p. 104).

Reasons have been given in the case of W.P. Keighery Pty. Ltd. v. F.C. of T. ((1957) 100 C.L.R. 66) for adopting a similar view. To hold that sec. 260 applies in this case would be to give it an operation, not to effectuate an intention appearing from the Act to impose a liability, but to defeat an intention appearing from the Act to impose alternative liabilities according as the persons interested in a company elect to have or not to have a certain state of facts existing on the last day of a year of income. The appellant's contention based on sec. 260 must therefore be overruled.''

As has already been stated, the only effect of sec. 260 for which the appellant contended in the present case was that it rendered void the allotment of the shares to Forum, with the result that Casuarina must be deemed to have remained a private company and to have incurred the tax liability appropriate to companies in that category. This is precisely the effect which, according to the cases I have cited, is not to be given to sec. 260, notwithstanding that the reason for the steps which have taken the company out of the one category and placed it in the other has been to produce a tax advantage. In Keighery (at p. 92) their Honours said that ``all concerned must have realised that they were participating in a course of action which had no substantial practical significance apart from its effect on income tax (and possibly, as Mr. Keighery suggested in cross-examination, on probate duties)''. It was not there stated that there was any explicit ``understanding'' of the kind to which Windeyer J. referred in the present case but the review of the facts which their Honours made at pp. 90-92 shows that it must have been taken for granted that Mr. Keighery's friends and acquaintances, who took up the redeemable shares, would not interfere in the company's affairs; but the real protection against interference was given in that case as in this by the right to redeem the shares. In my opinion the principle stated in the cases cited should be accepted and applied in this case. But it is proper to refer to some particular reasons advanced against that view.

It was said that since the decision in Keighery, a new approach to the interpretation and application of sec. 260 has been made and that upon that new approach sec. 260 should be held in this case to have operated. It was argued that in Newton v. F.C. of T. (1958) 98 C.L.R. 1, a test was enunciated which when applied to this case requires a result favourable to the appellant. The test was stated at p. 8 in this way -

``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.''

The difficulty about this argument from the appellant's point of view is that immediately after the passage just quoted and by way of illustration and explanation of it, their Lordships said at p. 9 -

``Nor can anyone, by seeing a private company turned into a non-private company, predicate that it was done to avoid Div. 7 tax, see W.P. Keighery Pty. Ltd. v. F.C. of T. ((1958) 32 A.L.J.R. 118).''

Later on the same page their Lordships, after referring to the purposes of the arrangement found to have been made in that case, said this (at p. 9) -

``(It is to be noticed that, in so far as it was the purpose of the transaction to let the motor companies escape from the additional tax under Div. 7 - this could have been effected by turning the motor companies into non-private companies.)''

Counsel for the appellant seeks to explain those passages as meaning that if no more be known than the bare fact that a private company has been turned into a non-private company, it cannot be predicated that this was done as a means of avoiding tax, but if, upon looking in a particular case at the overt acts by which the transformation was made, you are not able to regard the transaction as capable of explanation ``by reference to ordinary business or family dealing'' then you treat it as caught by sec. 260. But their

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Lordships invited attention specifically to Keighery, which was not a case in which no more was known than the bare fact that a private company had become a non-private company. The facts and the circumstances in which this had occurred were set out in the report of the case. It is to be observed also that in relation to the transaction which is relevant in the present case, the allotment of shares to Forum, there was in my opinion no ``overt act'' done in the course of implementing the allotment, to which one may look in order to decide whether it was ``implemented in that particular way'' so as to avoid tax. The test stated in Newton's Case (at p. 8), which I have quoted above, appears to me to have been regarded by their Lordships as incapable of being applied so as to avoid a transaction, consisting simply of an allotment of shares having the effect of depriving the allotting company of its ``private'' character.

It was said for the appellant that the ``new approach'' taken in Newton's Case has since been followed in this Court in cases such as
Hancock v. F.C. of T. (1959-61) 108 C.L.R. 258 and
Peate v. F.C. of T. (1962-64) 111 C.L.R. 443 . In those cases Newton's Case was considered, and in Hancock's Case at p. 283, Kitto J. formulated some general propositions based upon his view of what was said and implied in the reasons of the Privy Council in Newton's Case. But neither Hancock's Case nor Peate's Case was concerned with the particular question which arose in relation to sec. 260 in Keighery. No reference to that case is made in the later cases. It is impossible to treat those later cases as authorities for the view that the principles stated in the joint judgment in Keighery have been rejected.

It was submitted that as a result of changes made in the Act after Keighery was decided, a different view is now required as to the operation of sec. 260 in relation to the transformation of a company from the private to the public category. It was submitted that the only basis, consistent with the later cases, upon which what was said in Keighery can be supported is that the provisions of Div. 7, as they stood at that time, required that an implication should be made that sec. 260 should not operate so as to preclude the making of the choice which Div. 7 was regarded as giving to a taxpayer company. But according to the argument, there is no basis for any such implication in the relevant provisions of Div. 7 in the form in which since 1964 they have appeared in the Act. In my opinion there is no substance in this argument. The changes made were considerable and they may have rendered it more difficult in a practical sense to achieve a satisfactory solution of a tax problem by the method of transforming a private company into a public company. But they did nothing to alter the situation that if certain facts should exist at a particular time, a company would be liable to be taxed on the basis that it was a private company and if it could arrange matters so that those facts were changed in such a way that it was taken out of that category, it would be liable on a different basis. Both before and after the changes, there were ``alternative liabilities'' under which a company would come according to the category to which it belonged. In the sense in which reference is made in Keighery to a ``choice'', it still remained open to a company or to those who controlled it, after the change in the legislation, to make a choice between incurring the liability for which Div. 7 provides, and altering the relevant facts so that Div. 7 would not apply.

It was said that in so far as Keighery, when properly understood, should be taken to negate the operation of sec. 260 in the present case, we should refuse to follow it. But it is my respectful opinion that there is no ground for dissenting from the reasoning in Keighery and, as I have already indicated, I am of opinion that its authority has not been weakened by the decision or the reasons in Newton v. F.C. of T. (1958) 98 C.L.R. 1, or by the later cases in this Court.

I am of opinion that the submissions on behalf of the appellant should not be accepted. It is therefore unnecessary for me to consider a question which was raised concerning the construction and effect of sec. 46 of the Act. Counsel for Casuarina argued that the company was entitled, under the provisions of sec. 46(3), to a further rebate in addition to that which the appellant allowed. But this question would be material only if the company was, as the appellant claimed, a private company for tax purposes. Since in my opinion it was not, the question under sec. 46 does not arise.

In my opinion the appeals should be dismissed with costs.