Slutzkin and Others v. Federal Commissioner of Taxation.

Judges:
Barwick CJ
Stephen J
Aickin J

Court:
Full High Court

Judgment date: Judgment handed down 25 February 1977.

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Barwick C.J.: The shareholders of Frances Richard Holdings Pty. Ltd. (the Company) in the year 1968, Alan Slutzkin, Rodney Isaac Rosenblum and Gordon D'Arcy Hapgood, held their shares in trust for the children of Alan Slutzkin. The Company had functioned in part as a means of retaining profits made by a holding company, Alan Slutzkin & Co. Pty. Ltd., such retained profits being intended for use as working capital in a group of companies controlled by Mr. Alan Slutzkin. For the rest the Company was a means whereby Mr. Slutzkin made provision for his children.

On 12th November, 1968, all the shareholders transferred their shares to a purchaser for a cash payment. It appears that in the year in which the share sales were made, the Company had ceased to serve these purposes so that Mr. Slutzkin determined and all the shareholders agreed that its assets should be realised and reinvested. The method chosen to effect this purpose was a sale by the shareholders in collaboration of all their shares for cash, and the redeployment by them of the proceeds of the sale of the shares.

Immediately prior to the transfer of the shares the Company had a total liability to shareholder of $1,380, a capital profit reserve of $26,098, and a profit and loss appropriation account of $77,645.98. The Company had no liabilities though provision was made in its accounts for taxation in the sum of $790.50.

The liquid situation of the company had been brought about by calling in, in one instance at the cost of the loss of some interest, of deposits made by the Company with Custom Credit Corporation Ltd. and Alliance Holdings Ltd. Former indebtedness, including some liabilities for dividends, had been paid. This state of the Company's finances had been effected with a view to presenting the Company as having liquid assets and no liabilities. I assume for the purpose of these reasons that this had been done at least with the concurrence, if not on the initiative of all the shareholders acting in concert.

A company known as Cadiz Corporation Pty. Ltd. was known to be willing to buy the whole of the shares in the Company for cash, provided that the Company's assets were liquid and its liabilities nil. Cadiz Corporation Pty. Ltd., either by itself or through allied companies, had engaged in operations which have come to be known as dividend stripping: and in fact its interest in offering to purchase all the shares in the Company was to conduct such an operation in the affairs of the Company when it had possession of that shareholding.

On 12th November, 1968, all the shareholders signed an agreement with Cadiz Corporation Pty. Ltd. and a Mr. Wallace by which they agreed to sell all their shares in the Company, the greater part to Cadiz Corporation Pty. Ltd. and one share to Mr. Wallace for the total sum of $104,393.30. This sum may be taken to be substantially the amount of the Company's assets.

On 12th November the share transactions were completed. Appropriate share transfers were signed, approved by the directors of the Company, the resignation of the existing directors accepted and new directors appointed. Bank cheques were handed over, one for $103,133.30 in favour of Mr. Slutzkin, Mr. Rosenblum and Mr. Hapgood, one for $1,258.00 in favour of Mr. Slutzkin and one for $2.00 in favour of Miss Slutzkin who had held one share.

I have confined this narrative to the essential facts of the case. All the circumstantial details can be found extensively expressed in the reasons for judgment of the Supreme Court.

The Commissioner of Taxation assessed income tax payable by the appellants upon the amount of money received by them as a result of this transaction. He did so on the basis that that transaction was void by reason of sec. 260 of the Income Tax Assessment Act, 1936 as amended (the Act), and that the money received by the appellants was in truth a dividend paid by the Company to the appellants. Upon appeals to the Supreme Court of New South Wales against these four assessments which were dismissed, the Supreme Court ( Rath J.) said:

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ATC 4079

``According to the evidence Mr. Slutzkin and Mr. Hapgood then left " (i.e., on 12th November, 1968) " the part of the banking chamber where the meeting of directors was being held for the purpose of banking the payment cheques. Mr. Rosenblum and Mr. Wallace proceeded with the further business of the director's meeting. By this stage the transactions culminating in the sale of the shares had come to an end, and the subsequent activities of the Company and Cadiz Corporation were no part of any arrangement to which the appellants as trustees were parties, or of the implementation of any such arrangement. What did in fact occur is what was described in evidence as a dividend stripping operation. Mr. Rosenblum was concerned in that operation as a director of Cadiz Corporation and as one of the new directors of the Company, but not as one of the trustees. He had in fact taken Counsel's opinion on the propriety of his acting in his many capacities. I am satisfied that his various capacities were separately pursued, and that there is no significance, in relation to the application of sec. 260, in his being concerned both before and after the sale of shares as a director of Cadiz Corporation in preparation for and in the performance of the dividend stripping operation.''

The learned judge further said:

``In the present case, not only is Cadiz Corporation a completely independent company, acting solely in its own business interests, and in the course of one of its normal commercial activities, but also its activities after the sale of shares are unrelated to any activities of the appellants. Upon the sale taking place none of the vendors has any further interest either in the Company or in Cadiz Corporation, and is interested only in the disposal of the purchase money received.''

On these facts I should have thought it was clear beyond argument that the receipt by the appellants of the proceeds of the sale of the shares formerly held by them in the Company was not taxable. By no manner of torture of the language of the decided cases would the sale of the shares by the appellants, albeit in unison with the other shareholders in the Company, fall within the operation of sec. 260 of the Act. It was no more than a realisation by them of the benefit of their shareholding in a way which would not attract tax. It may be granted that a purchaser of the shares could not have been found willing to pay the price in cash, which in fact was agreed to be paid, unless the Company had made its assets liquid and itself free of debt: and that all shareholders were willing to sell their shares. It may also be granted that to obtain the benefit of the shareholding by way of dividend or by liquidation would have rendered the shareholders liable to tax in respect of the money thus received. But the choice of the form of transaction by which a taxpayer obtains the benefit of his assets is a matter for him: he is quite entitled to choose that form of transaction which will not subject him to tax, or subject him only to less tax than some other form of transaction might do.
I.R. Commrs. v. Duke of Westminster (1936) A.C. I , too easily forgotten, is still basic in this area of the law. There is no room in that area for any doctrine of economic equivalence. To the legal form and consequence of the taxpayer's transaction, which in fact has taken place, effect must be given: see
Commr. of I.R. v. Europa Oil (N.Z.) Ltd. 70 ATC 6012 ; (1971) A.C. 760 . A passage from this decision at ATC p.6018; A.C. p.771 of the report warrants emphasis:

``The question for decision is not to be answered by describing the benefit derived by Europa through Pan Eastern as in substance a discount or, more ambiguously, as a price concession. No doubt it was a concession obtained from Gulf, in the course of a discussion about prices, but in a matter of taxation it is necessary to consider and respect the legal form in which the concession was embodied. Their Lordships have no need to restate the principle laid down in such cases as I.R. Commrs. v. Duke of Westminster (1936) A.C.1, a decision cited in the judgments appealed from and fully accepted as applicable. It is not legitimate in this branch of the case, as distinct from that involving section 108, to disregard the separate corporate entities or the nature of the contracts made and to tax Europa on the substantial or economic or business character of what was done. The use of the word `concession' does not resolve the dispute, whether what was done was in law or merely the economic equivalent of a reduction in price. The one may have quite different taxation results from the other.''

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ATC 4080

Reference may also profitably be made to the Court's decision in
Cecil Bros. Pty. Ltd. v. F.C. of T. , (1964) 111 C.L.R. 430 . Thus it is nothing to the point in this case that the appellants and their fellow shareholders by the sale of their shares received money which, if it had been received by way of dividend declared by the Company whether or not in liquidation, would have rendered them liable to tax in respect of its receipt. It is a complete misconception of the operation of sec. 260 to conclude that, because a transaction was entered into in the form which it took in order not to subject its proceeds to tax in the hands of the recipient, sec. 260 is satisfied. Further, it is fundamental that the section is, as it has been said, no more than an annihilating section. It does not itself impose tax, nor does it construct or reconstruct any transaction. It does no more than avoid a transaction. The avoidance is of no consequence unless, if the transaction were swept aside, a factual situation involving the payment of tax is exposed. A passage in
Europa Oil (N.Z.) Ltd. (No. 2) v. Commr. of I.R. (N.Z.) , 76 ATC 6001 at p.6009 , relevant to sec. 260 should be prominently in mind in the resolution of cases said to involve the operation of that section:

``There are several things to be noted in connection with the application of this section.

First, it is not a charging section; all it does is to entitle the Commissioner when assessing the liability of the taxpayer to income tax to treat any contract, agreement or arrangement which falls within the description in the section as if it had never been made. Any liability of the taxpayer to pay income tax must be found elsewhere in the Act.

There must be some identifiable income of the taxpayer which would have been liable to be taxed if none of the contracts, agreements or arrangements avoided by the section had been made.

Secondly, the description of the contracts, agreements and arrangements which are liable to avoidance presupposes the continued receipt by the taxpayer of income from an existing source in respect of which his liability to pay tax would be altered or relieved if legal effect were given to the contract, agreement or arrangement sought to be avoided as against the Commissioner. The section does not strike at new sources of income or restrict the right of the taxpayer to arrange his affairs in relation to income from a new source in such a way as to attract the least possible liability to tax. Nor does it prevent the taxpayer from parting with a source of income.''

Here the avoidance of the sale of the shares would not expose a situation in which the appellants and their fellow shareholders were in receipt of taxable income. By no process could the purchase money for the shares become a dividend paid by the Company to the shareholder. That fact is itself strongly indicative of the absence of elements essential to the operation of sec. 260.

However, the learned primary judge held that upon the avoidance of the sale of the shares, the shareholders are to be treated as having received the dividend which the Company subsequently declared and paid to others in the course of the operation by the Cadiz Corporation Pty. Ltd. of its dividend stripping, an activity in which the appellants had no part whatever. They were then no longer shareholders in the company: nor in any wise in control of its affairs. To fasten the appellants with liability for the dividend subsequently paid is a result quite unreal and not required by the Act.

This case is, in my opinion, so clearly not a case where sec. 260 could have any operation that I find it quite unnecessary to discuss the various decisions which upon other and different facts have brought that section into play. This is not to pretend that the reasoning in all these cases is either consistent or clear. But the circumstances of this case do not call for any attempt to reconcile them all with each other or with the terms of the section itself. It suffices to refer to the two decisions of the Privy Council in Commr. of I.R. v. Europa Oil (N.Z.) Ltd. (supra) and Europa Oil (N.Z.) Ltd. (No. 2) v. Commr. of I.R. (N.Z.) (supra) and the other decisions I have mentioned which state fundamental considerations by the application of which this appeal is resolved.

I would allow the appeals.