Finance Facilities Pty. Limited v. Federal Commissioner of Taxation.

Judges: Barwick CJ
McTiernan J

Windeyer J
Owen J

Court:
High Court (Full Court)

Judgment date: Judgment handed down 12 November 1971.

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Windeyer J.: This is an appeal from a decision of Gibbs J. The appellant is a ``private company'', as defined by the Income Tax Assessment Act 1936-1968. His Honour dismissed its appeal against the Commissioner's assessment of tax for the year of income ended 30 June 1967. The case turns upon the meaning of sec. 46(3) of the Act. Section 46 in the form that it now has, and had at the relevant time, was enacted by sec. 10 of Act No. 110 of 1964. That Act was passed in consequence of recommendations of the Report of the Commonwealth Committee on Taxation 1961 (the Ligertwood Report). Section 46 is designed to prevent Div. 7 tax on the undistributed income of a private company being avoided by the device, available as the law was before 1964, of passing on of the company's profits through a chain of private companies.

The present question concerns rebates that, in respect of dividends received by a private company by reason of its being a shareholder in another private company, are to be taken into account in the assessment of its income. By sec. 46(2) a private company ``is entitled to a rebate... of the amount obtained by applying the average rate of tax payable'' by it ``in relation to the year of income to the sum of one-half of the part of any private company dividends [as defined by sec. 46(1)] that is included in its taxable income...''.

So far, the section is aimed at preventing tax avoidance by private companies which do not distribute their income. But the next subsection enables ``a further rebate'' in circumstances specified. It, sec. 46(3), is obviously intended to meet the case of a private company which does not in the year of income in fact avoid undistributed profits tax by means of a dividend paid to another private company. The words of sec. 46(3) that are relevant in this case are as follows: ``Subject to the succeeding provisions of this section, the Commissioner my allow... a private company... a further rebate in its assessment'' - amounting to another half, calculated as in sec. 46(2), of private company dividends received -

``if the Commissioner is satisfied that -

(a) the shareholder has not paid, and will not pay, a dividend during the period commencing at the beginning of the year of income of the shareholder and ending at the expiration of ten months after that year of income to another private company;

(b)..... [not relevant in present matter]; or

(c) having regard to all the circumstances, it would be reasonable to allow the further rebate.''

The several matters thus specified of which the Commissioner must be satisfied if he is to allow a further rebate are separate and alternatives. The word ``or'' establishes that. I emphasize this because I have seen the several conditions set out in a textbook as if they must all be fulfilled. And it seems that the Commissioner may have taken the third, (c), as an overriding requirement: as if in order to allow the further rebate he had to be satisfied of (a) or (b) and (c). That is not so.

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ATC 4229

In the present case condition (a) was fulfilled. Of that the Commissioner was in fact satisfied. He could not have been otherwise than satisfied. Condition (c) is thus irrelevant, except for such light as it throws upon the critical question in the case, which is, the Commissioner being satisfied of the matters set out as (a), must he allow the further rebate provided for in the subsection, or has he a discretion to refuse to do so? The case for the Commissioner is that, as the Act says that he ``may allow a further rebate'' he is not bound to do so notwithstanding that a condition precedent be met. The case for the taxpayer, the appellant, is that, if the condition be fulfilled to the satisfaction of the Commissioner, be must allow the rebate. ``May'', it was said, should be read as if it were ``shall''. The Commissioner's answer was that the word ``may'' prima facie imports a discretion to do or not to do. This, it was said, was reinforced by the contrast between the provision in sub-sec. (2), by which the taxpayer ``is entitled'' to a rebate of a half, and that in sub-sec-(3), by which the Commissioner ``may allow'' a rebate of a further half. I see the difference in words: but I do not think that much can be built upon it. The right of a taxpayer to a discount or rebate arising from facts objectively determinable is quite properly called an entitlement. A claim to a discount or rebate dependent upon the Commissioner being satisfied of certain facts is equally properly called an allowance, something to be allowed. In some contexts the word ``allow'' in the phrase ``may allow'' might enhance a discretion said to be embodied by the word ``may''. But not, I think, in this context. The act is filled with provisions about allowable deductions which are mandatory. The contrast in language in sec. 79B(1A) between what is allowable and what a taxpayer is ``entitled to'' is significant. The question, which comes back to the words ``may allow'', is not to be solved by concentrating on the word ``may'' apart from its context. Still less is the question answered by saying that ``may'' here means ``shall''. While Parliament uses the English language the word ``may'' in a statute means may. Used of a person having an official position, it is a word of permission, an authority to do something which otherwise he could not lawfully do. If the scope of the permission be not cimcumscribed by context or circumstances it enables the doing, or abstaining from doing, at discretion, of the thing so authorised. But the discretion must be exercised bona fide, having regard to the policy and purpose of the statute conferring the authority and the duties of the officer to whom it was given: it may not be exercised for the promotion of some end foreign to that policy and purpose or those duties. However, that general proposition is irrelevant in this case. Here the scope of the permission or power given is circumscribed. Conditions precedent for its exercise are specified as alternatives. The question then is, must the permitted power be exercised if one of those conditions be fulfilled?

This does not depend on the abstract meaning of the word ``may'' but of whether the particular context of words and circumstances make it not only an empowering word but indicate circumstances in which the power is to be exercised - so that in those events the ``may'' becomes a ``must''. Illustrative cases go back to 1693: R. v. Barlow, Carth. 293. Today it is enough to cite
Julius v. The Lord Bishop of Oxford (1879), 5 App. Cas. 214 ; and add in this Court
Ward v. Williams (1955) , 92 C.L.R. 496 at pp. 505-506 . But I select one other reference out of a multitude:
Macdougall v. Paterson (1851), 11 C.B. 755 . There Jervis C.J. said in the course of the argument (at p. 766): ``The word `may' is merely used to confer the authority: and the authority must be exercised, if the circumstances are such as to call for its exercise''. And, giving judgment, he said (at p. 773): ``We are of opinion that the word `may' is not used to give a discretion, but to confer a power upon the court and judges; and that the exercise of such power depends, not upon the discretion of the court or judge, but upon the proof of the particular case out of which such power arises''. I consider that to be directly applicable to the present case. If the Commissioner, having considered the matter, is satisfied of facts out of which the power to allow a rebate arises, he cannot nevertheless refuse to allow it. That is obvious in the case of condition (c): and it seems to me to be so also in the case of the alternatives (a) and (b).

It was suggested in the argument for the Commissioner that sec. 103A(6) provided a useful comparison with sec. 46(3) in the use of the word ``may'' - it being contended that sec. 103A(6) gave the Commissioner an unfettered discretion. But, apart from the risks inherent in construing one provision of the Act by reference to the use of the same words in a different context, it seems to me that both provisions raise the same question. It is not apparent to me that the Commissioner can refuse to treat a company as ``not a public company'' for the purposes of sec. 103A(1) if he has formed the opinion as to it stipulated in sec. 103A(6). However, that question is not presently before us.

The Commissioner's contention, that he can in his discretion refuse a further rebate notwithstanding that he is satisfied that the conditions for allowing it exist, leads on to a consideration of the grounds on which he claims he might legitimately do so. In the present case he gave as his reasons that the appellant was a participant in a tax avoidance scheme. But that a taxpayer company is able to avoid a liability which

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ATC 4230

if the law or the facts were different it would incur, cannot be a ground for denying it a rebate that the Commissioner, being satisfied of the relevant facts for allowing it, is empowered to allow. I can well understand that Gibbs J. described the arrangement in which the appellant played a part as an artifice. It was an ingenious and elaborate expedient to avoid taxation. But it was not dishonest. Its legal character was not disguised or recondite. Having regard to recent decisions of this Court, it cannot be said that a taxpayer company by availing itself of a choice that the law allows puts itself within the reach of sec. 260. I say nothing as to whether the very incorporation of a company which is called into existence simply to do the bidding of a taxpayer and thereby to enable him to avoid taxation, and which has no other reason for existence and carries on no business, is a matter that can fall within sec. 260. That is not this case. The Commissioner does not seek to treat the appellant or any of the other companies whose affairs were linked with it, as if they were not really in existence as entities in law. Such companies may be seen by some people as merely noms de guerre of a taxpayer in his warfare with the Commissioner of Taxation. But the decision in
Salomon's Case , [1897] A.C. 22 , and the logic built upon it, require us as lawyers to treat them as separate warriors duly enlisted. The Commissioner does not claim that sec. 260 would permit him to ignore their existence. What he here seeks to do is, while recognising the existence of the appellant, to deny it the rebate that the Act, as I read it, requires him in the circumstances to allow it.

If, contrary to my view, the Commissioner may in his discretion refuse this taxpayer the benefit of sec. 46(3), I do not think he could be justified in doing so merely because allowing it would diminish the revenue. That in substance is what is claimed. The proposition that the Commissioner has a discretion in which he can be guided by that consideration reinforces for me the conclusion that he has no discretion to refuse the rebate when he is satisfied that the condition on which he may allow it exists.

For these reasons I am unable to take the view of the matter that Gibbs J. took. I would therefore allow the appeal.