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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Aickin J.: These four appeals from Rath J. sitting in the Administrative Law Division of the Supreme Court of New South Wales were heard together, as were the cases themselves before Rath J. The appellants are the trustees of four separate trusts under which the beneficiary is either Mr. Slutzkin's son or his daughter. The appeals relate to the year of income ended 30th June, 1969. Some of the assessments were original assessments and some were amended assessments. The assessments were based upon the addition to the taxable income as returned of an item described by the Commissioner as follows:

``Add income derived by you being your proportion of the distributions by Frances Richard Holdings Pty. Limited during year ended 30th June, 1969 $25,622.''

Objections against these assessments were disallowed by the Commissioner and the taxpayers appealed to the Supreme Court of New South Wales before Rath J.

As Rath J. observed in the opening paragraphs of his judgment, the ultimate question for decision is whether the sale by the taxpayers of shares held by them in Frances Richard Holdings Pty. Limited (``the Company'') to Cadiz Corporation Pty. Ltd. on 12th November, 1968 was void as against the Commissioner by virtue of sec. 260 of the Income Tax Assessment Act 1936 as amended.

The objective facts as found by Rath J. and derived from the extensive evidence were not the subject of significant dispute. Save in respect of two matters to which I refer below, the findings of fact and the inferences drawn by Rath J. are supported by the voluminous evidence.

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ATC 4082

I have had the advantage of reading the judgment of the Chief Justice with which I respectfully agree. I think it desirable however to indicate in my own words the reasons which have led me to the view that this appeal should be allowed. The Chief Justice sets out the essential facts of the case and I shall not repeat that summary.

His judgment also sets out two of the critical passages in the judgment of Rath J. to which I would add the following additional quotation which sets out the evidence of Mr. Rosenblum (a solicitor who is both one of the appellants and one of the professional advisers of Mr. Slutzkin and the Slutzkin group of companies, as well as being a director of Cadiz Corporation Pty. Ltd., the purchaser of the shares), concerning the initial discussion which led to the sale of the shares:

``Q. By the time when the partnership of Alan Slutzkin Enterprises commenced to carry on business, 1st July, 1967, the Frances Richard Holdings Company had really served its purpose and had no further purpose to serve, is that so?

A. I would think that was so, yes.

Q. Did you give any consideration when you were reorganising or arranging for the reorganisation of Mr. Sultzkin's affairs as to what should be done in relation to Frances Richard Holdings?

A. I don't have any recollection of having done so at that time.

Q. When was it, to the best of your recollection, that you first gave any consideration to, shall we say, the termination of Mr. Slutzkin's interest, and the other shareholder's, in Frances Richard Holdings?

A. Shortly before the acquisition or the sale by the trusts of their shares in Frances Richard Holdings I had had lunch with Mr. Slutzkin with whom I frequently - whom I frequently met socially and he said to me, `What are we going to do with Frances Richard Holdings Pty. Limited?' To use his words as best I can recollect, he said, `Joyce' - that was his present wife - has recently sold out her interests in her business and at our request Mauri Bros. & Thomson who were the purchasers, agreed to purchase Swari's Karen, I think it was Swari's Karen, but I wouldn't know how to spell it, which was the holding company for the trading company which Mauri Bros. & Thomson had purchased. Mauri Bros. had agreed to purchase this Company apparently at Mr. Slutzkin's request. I did not act on that particular transaction, and he said to me, `Maybe we could get rid of Frances Richard Holdings in the same way.' Shortly before, perhaps four months I would say before, Cadiz Corporation had entered into its first dividend stripping, in the common terminology, dividend stripping transaction. And I said to Mr. Slutzkin that we might be able to organise for Cadiz Corporation to which Cadiz Holdings No. 2 had changed its name, to acquire the shares in Frances Richard Holdings Pty. Limited.''

Mr. Slutzkin's account of that conversation was substantially to the same effect. There is nothing in the judgment to suggest that this evidence of the origin of the transaction was not accepted.

In all cases in which an assessment based on sec. 260 is challenged the first step must be to ascertain what is the ``contract agreement or arrangement'' which is said to have the ``purpose or effect'' specified in para. (a) to (d) and to ascertain which of those paragraphs is said to apply. This preliminary question was the source of a good deal of difficulty in the Court below as appears from the supplementary observations which Rath J. made at the time of delivering his judgment. In the end however the learned Judge said:

``The way in which I finally determined the case was to hold that whatever arrangement was the one to consider it must be one which terminated at the date of the sale of the shares.''

In the course of his reasons for judgment after describing in detail the events which took place on 12th November when the written agreement for the sale of the shares was executed and the financial arrangements completed in the manner which is fully and carefully set out, he stated his finding as to the arrangement in the passages quoted by the Chief Justice.

The contract agreement or arrangement thus found is one which is simply for the sale by all the shareholders of their shares in the Company to a single purchaser for cash paid

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ATC 4083

by bank cheques. What the purchaser wanted to do with the Company or with the funds which comprised its assets was not known to the vendors (except to Mr. Rosenblum in his capacity as a director of the purchaser). The arrangement was neither more nor less than a sale of shares for cash, such shares not having been acquired for the purpose of re-sale at a profit. The arrangement so found is, in my opinion, one of which it could not be said that it had the purpose or effect of avoiding tax. There was no prior contract, agreement or arrangement which might have had some tax operation which was avoided by changing an existing transaction into the present transaction. The only arrangement or transaction was that which was actually carried out, namely, the sale of a capital asset. That characterisation is not affected by the fact that the purchaser required the assets of the Company (which consisted of money out on loan) to be reduced to liquid cash and required appropriate safeguards in the contract.

The fact that the vendors, with knowledge of the tax consequences of liquidating the Company or declaring dividends, decided to sell rather than to continue to hold the shares, neither of which would attract any tax consequence under the Income Tax Assessment Act, does not mean that the ``ordinary provisions'' of the Act are defeated or frustrated. It is a transaction which according to the terms of the Income Tax Assessment Act attracts no tax consequence. It is therefore not necessary to consider whether it is an ordinary business transaction, even if it is proper to regard the words first used by Lord Denning in
Newton v. F.C. of T. (1958) 98 C.L.R. 1 as though they were part of the statute, because they have application only in a situation in which it can be said that the purpose or effect of the transaction appears to be one which does avoid tax. In such a case it nonetheless falls outside sec. 260 if it has the character of an ordinary business or family transaction. But that point is never reached in the present case.

In my opinion the words used in the judgments of Barwick C.J. and Stephen J. in
Mullens v. F.C. of T. 76 ATC 4288 are equally applicable to this situation. Indeed that case and this are examples of a wider principle which is embodied also in such cases as
W.P. Keighery Pty. Ltd. v. F.C. of T. (1957) 100 C.L.R. 66 ,
F.C. of T. v. Casuarina Pty. Ltd. 71 ATC 4068; (1971) 127 C.L.R. 62 and
Patcorp. Pty. Ltd. v. F.C. of T. 76 ATC 4225 . All those cases illustrate a fundamental principle with respect to sec. 260 which is stated by Barwick C.J. in two passages in Mullens' case (supra) at p. 4294):

``It is in my opinion nothing to the point that the effect of the transaction actually entered into by the parties might be the same as that which a loan by the taxpayer to Close with security over the shares would have produced. There is no room in this connection for any doctrine of economic equivalence. In
Europa Oil (N.Z.) Ltd. v. Commr. of I.R. (N.Z.) 76 ATC 6001 at p.6007; [1976] 1 W.L.R. 464 at p.472 , the views expressed in
Commr. of I.R. v. Europa Oil (N.Z.) Ltd. 70 ATC 6012 at p.6019; [1971] A.C. 76- , at p.761 were affirmed: `Taxation by end result, or economic equivalence, is not what the section (a taxing provision) achieves'.''

Dealing with the position in Mullens' case (supra, at p.4294) itself his Honour said:

``I turn now to consider whether the transaction was avoided by sec. 260. This question must be approached on the footing that if not struck down the transaction between the parties would be effective to entitle the taxpayer to the deduction claimed. Though the section speaks of the purpose in entering into the transaction, it can have no relevance if, being effective, the transaction does not alter the incidence of tax as that expression has come to be understood. As I have already pointed out, there will be no relevant alteration of the incidence of tax if the transaction, being the actual transaction between the parties, conforms to and satisfies a provision of the Act even if it has taken the form in which it was entered into by the parties in order to obtain the benefit of that provision of the Act. It would be otherwise if there had been some antecedent transaction between the parties, for which the transaction under attack was substituted in order to obtain the benefit of the particular provision of the Act. Section 260 is not directed to tax on income to which the taxpayer is entitled only by reason of the actual transaction into which the parties have entered.''

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ATC 4084

In my opinion this is equally the position where the actual transaction is one which stands wholly outside the operation of the Income Tax Assessment Act . To adapt the language of the Chief Justice to the present case, the position may be expressed thus: there will be no relevant alteration of the incidence of tax if the transaction, being the actual transaction between the parties, does not attract the operation of any provision of the Income Tax Assessment Act in that the receipt in question is not income according to the ordinary conceptions of that term, nor is deemed to be income by any provision of the Act.

In Mullens' case (supra, at p.4303) Stephen J. said:

``The principle in W.P. Keighery Pty. Ltd. v. F.C. of T. (1957) 100 C.L.R. 66 is not to be confined to cases where the Act offers to the taxpayer a choice of alternative tax consequences either of which he is free to choose; it was there held that merely because the taxpayer chose quite deliberately the alternative most advantageous to it from the tax standpoint did not thereby attract sec. 260. So too if no question arises of a choice between two courses of conduct but instead the Act offers certain tax benefits to taxpayers who adopt a particular course of conduct, the adoption of that course does not establish any purpose or effect such as is described in sec. 260. Indeed an assessment which reflects the tax consequences of the course of conduct which the taxpayer has in fact adopted will then represent a due and proper incidence of tax, there will be no relief from or defeating of liability to tax and the Act will have the very operation which the legislature intended.''

That principle equally applies in a case of receipts with which the Act simply does not deal, i.e. capital receipts, save such as are for the purpose of the Act deemed to be income. To adopt a course which produces a result outside the scope of the Act is not to alter the incidence of tax, or to defeat any liability to tax or prevent the operation of the Act, notwithstanding that such course is adopted with full knowledge of the provisions of the Act and with a conscious intention that the proceeds should not fall within the operation of the Act.

If the arrangement however is something more than the mere sale of a capital asset not acquired for the purposes of re-sale at a profit, different questions may arise such as the possibility discussed, but rejected, in Mullens' case (supra) that there was some other earlier transaction which was abandoned and some other course substituted in order to achieve a tax advantage. It is necessary to consider whether Rath J. took that view as the basis for deciding that sec. 260 applied. His Honour said:

``There is here the contract of sale of 12th November, 1968 and that is a subject matter to which the Section could apply. But there is a wider transaction involved, commencing from the approach on behalf of the appellants to Cadiz Corporation, and culminating with the sale itself. It is consistent with the authorities to have regard to the consequent purpose or effect of this wider transaction.... In the present case the final transaction in the arrangement was the approval by the Company of the transfers. The earlier transactions commenced with the shares taken to convert the assets of the Company to cash as required by Cadiz Corporation.''

He then stated an alternative approach to the facts as follows:

``On this approach the arrangement is among shareholders and the Company, and again commences with the moves to convert the Company's assets into cash and ends with the approval by the Company of the share transfers to Cadiz Corporation and its nominee Mr. Wallace. Whichever view of the arrangements is taken its purpose or effect will, in my opinion, be the same.''

He then says:

``I have already said that in the present case the appellants were desirous of obtaining for themselves the reserves and profits of the Company and were aware of the taxation consequences of achieving their object by a declaration of dividends or liquidation. Mr. Slutzkin and Mr. Rosenblum took Counsel's advice as to the taxation consequences of the sale of shares to Cadiz Corporation, and it is obvious that the sale was made with the object of obtaining an amount equivalent to those reserves and profits but without the tax

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ATC 4085

consequences of the alternative methods. It follows from this reasoning that the arrangement is necessarily labelled (to use Lord Denning's words) as a means to avoid tax unless the transactions are capable of explanation by reference to ordinary business or family dealing.''

His Honour then considers the question of whether the arrangement can be described as an ordinary business or family dealing.

It is plain from what his Honour has said that he did not find that there was some antecedent arrangement which was changed in order to avoid the tax consequences which would have followed from the earlier arrangement. He did find that what was done was to obtain ``an amount equivalent to those reserves and profits'', but as I have said above the cases demonstrate that that is not enough to attract sec. 260.

Even if it were correct to say, as he does in the passage just quoted, that ``the appellants were desirous of obtaining for themselves the reserves and profits of the Company'' that would not constitute either an arrangement or a transaction within the meaning of sec. 260. It has long been settled that sec. 260 is not concerned with the subjective purposes, motives or intentions of taxpayers but with the character of the acts done and transactions entered into - see Newton's case (supra, at p.8) where the Privy Council approved a passage in the judgment of Williams J. in this Court (1957) 96 C.L.R. 577, at p.630 that what must be looked at is the ``overt acts by which it (i.e. the arrangement) was implemented in order to ascertain its purpose''. Moreover, I do not think that there is any evidence to warrant a finding that the ``appellants were desirous of obtaining for themselves the reserves and profits of the Company''. The evidence makes it plain that the only step contemplated was the sale of the shares and the initial conversation was directed to the finding of a purchaser who would be prepared to pay a price approximately equivalent to the value of the net assets of the Company.

In view of the conclusions which I have reached above it is not necessary for me to consider whether the arrangements actually made and the acts done should be regarded as an ``ordinary business or family dealing'' but I should say that I am not satisfied as to the correctness of Rath J.'s conclusion on this point and would myself have been satisfied, if it were material, that this was an ordinary business dealing in the light of the evidence given.

I agree that these appeals should be allowed.

ORDER:

Appeals allowed with costs.

Orders of the Supreme Court of New South Wales set aside and in lieu thereof order that the appeals to that Court be allowed with costs and that each assessment be set aside.