Case K8

Judges: HP Stevens Ch
RE O'Neill M

CF Fairleigh QC

Court:
No. 1 Board of Review

Judgment date: 21 March 1978.

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C.F. Fairleigh Q.C. (Member): The taxpayer is a superannuation fund proprietary company set up for the benefit of two persons who conduct a relatively small business. The taxpayer lodged returns of income for each year after incorporation on 22 June 1961. It did not meet the requirements of sec. 121C(1) of the Income Tax Assessment Act 1936 as amended for the years ended 30 June 1963 and 1964 but the discrepancies were of a minor nature and I propose to say very little about those years. The 1971 year requires mention later. The taxpayer's return of income for the year ended 30 June 1972 resulted in a notice of assessment bearing date 4 July 1973 as for an investment income of $3,082 at the rate of 37 ½ % being gross (and net) tax of $1,155.75. The taxpayer by letter of 9 August 1973 duly objected thereto asserting that: -

``This assessment is against the law as the Fund is an approved Fund and 30% of its assets consisted of Commonwealth Bonds. Total assets were $41,087 of which Bonds account for $12,350 as clearly shown on p. 2 of the return - Statement 4.''

The Commissioner decided to disallow the objection and sent to the taxpayer the usual formal notice bearing date 26 June 1974. Two days or so later the taxpayer requested that that decision be referred to a Board for review and the letter of request states: -

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``Our accountant lodged his objection (on) the assumption that it was made on the basis that the 30% rule was not fully observed. Please let us know whether this was the reason or what other reason caused the assessment to be made.''

A reply was not given until mid February 1975.

2. The taxpayer's return of income for the year ended 30 June 1973 resulted in a notice of assessment as for an investment income of $3,207 at the rate of 37 ½ % being gross (and net) tax of $1,202.62. The taxpayer duly objected thereto stating: -

``... the percentage of Bonds held amounted to 29.87% and further Bonds were purchased when the shortage was noticed. We therefore submit that you ought to have exercised your discretion and exempted the fund from tax. In making this objection we are again hampered by the fact that you have not stated why the fund was taxed. Would you please give us the necessary explanation as soon as possible.''

The Commissioner decided to disallow the objection and sent to the taxpayer the usual formal notice. That decision was referred to a Board for review with a request that the two references be heard together. Of course, separate formal decisions should be given as a hearing of the two references together is not a consolidation.

3. The Commissioner's reasons for disallowing the taxpayer's claims as set out in the statement required to be furnished to the Board pursuant to reg. 35(1) are as follows: -

• (i) The amounts of $3,082 and $3,207 being the investment income of the fund derived during the years ended 30 June 1972 and 1973 respectively, are not exempt from income tax by virtue of sec. 23F of the Act. In this regard the Commissioner is not satisfied in terms of sec. 121C(1) of the Act that at all times during each of the years ended 30 June 1972 and 1973 respectively, the assets of the fund included the proportion of securities prescribed by paragraphs (a) and (b) of sec. 121C(1).
• (ii) The Commissioner is not satisfied in terms of sec. 121C(4) of the Act -
  • (a) that the trustees of the fund made a genuine and bona fide attempt to ensure that the assets of the fund included, at all times during each year of income, the proportion of securities so provided; or
  • (b) that the failure of the assets of the fund to include the proportion of securities so provided was by reason of a temporary delay in investment.

  Nor is the Commissioner satisfied that, in all the circumstances, it would be reasonable to disregard the failure.

4. The constituent document for the fund has not been placed before the Board but there is the assurance of the Commissioner's representative that the fund fulfils the requirements of sec. 23F so that its income is exempt subject to the requirements of sec. 121C of the Act.

5. The parties have agreed on certain facts, for example; -

• (a) With regard to the 1971 year, the taxpayer's accountant in a letter to the Deputy Commissioner dated 15 June 1972, explained, inter alia, that during the year ended 30 June 1971 the necessary numbers of bonds were held at all times except at the end of the year when the shortage was $324 after including in the accounts income of $979.08 which did not come in until 2 July 1971 whereas if this amount had been excluded and dealt with as 1971/72 income Commonwealth bonds would have been more than 30% of total assets. The Commissioner has accepted that this was the case.
• (b) In letters dated 10 July 1964 and 1 September 1964 to the Deputy Commissioner the accountant for the taxpayer gave assurances on behalf of the trustees of the fund to the effect that greater attention would be paid to the required proportion of Commonwealth securities to be included in the fund's total assets and care would be taken in future to avoid temporary deficiencies in holdings of public securities.
• (c) The only public securities held by the fund during the two year period commencing on 1 July 1971 and ending on 30 June 1973 comprised Commonwealth bonds. The bonds on hand at 1 July 1971 and subsequent purchases were as follows: -

              
  
  
  
                                     $        $
  
        1 July 1971 bonds held              10,560
  
        20 January 1972
  
        purchases                   350
  
        5 June 1972 purchases       650
  
        16 June 1972 purchases      850      1,850
  
        30 June 1972 total
  
        bonds held                          12,410
  
        15 June 1973 purchases               1,600
  
        30 June 1973 total
  
        bonds held                         $14,010
            

• (d) The schedule which was compiled from the fund's books of account sets out the monthly changes in the fund's assets over the two year period ending 30 June 1973 and gives a fair indication of the amounts and percentages by which Commonwealth bond holdings fell short of 30% of total assets.
• (e) In Statements No. 4 in the returns of income for the years ended 30 June 1972 and 1973 the total assets and total Commonwealth securities were inadvertently understated by $60. The explanation for this is contained in a letter dated 19 February 1975 from the accountant to the Deputy Commissioner.

6. A ``shortage'' of $324 in prescribed securities as at 1 July 1971 (para. 5(a) hereof) was met by the aforesaid purchase (more correctly subscription) on 20 January 1972 (para. 5(c) hereof) of $350. Yet by reason of the general fund being increased monthly by payments of interest by a debtor there was a continually increasing deficiency; and this was aggravated by the receipt of interest from bonds (viz., $289.92) and interest from a building society (viz., $27.37). Whereby immediately prior to that outlay of $350 on 20 January 1972 the deficiency had reached the maximum for that year of $761 or 2.2%. During the remainder of that year interest from bonds was $327.42 and other interest was received and there were other debits and credits to the account. Immediately prior to the outlay of $650 for bonds on 5 June 1972 (para. 5(c) hereof) the deficiency was $681 or 1.76% and immediately prior to the outlay of $850 for bonds on 16 June 1972 (para. 5(c) hereof) the deficiency was $784 or 1.09%. From that time to the end of the year there was a ``surplus'' in prescribed securities of $66.

7. The surplus of $66 at 1 July 1972 became a surplus of $7 half way through that month. The interest from bonds during the year ended 30 June 1973 ($342.85 for the first half of the year and $383.10 for the second half) was placed to the credit of the fund. Immediately prior to the outlay of $1,600 for bonds on 15 June 1973 the deficiency was $754 or 1.72% and this was the maximum for the year. There was consequent upon other transactions recorded upon the same day a surplus of $174, and for the last week or so of that financial year there was a deficiency of $15 or 0.03%.

8. In his address the taxpayer's trustee said ``My understanding of compliance with the law... occasional purchases, periodic purchases were not necessarily wrong purchases and constituted a genuine bona fide attempt.... My attempt accordingly to the understanding of the Act was a genuine and bona fide attempt at all times.... If I give an undertaking it will not happen again it is in the light of rational examination of the documents. I realize this does not protect me. For what it is worth that is the honest and genuine situation in which I find myself.'' The taxpayer was asked by the Chairman whether a fair summation of his evidence was that an annual adjustment was all that was required to meet the particular requirements of the Act. The answer contained a qualification: ``I think that is a fair statement, yes, particularly in view of the amount of annual income and change.'' His evidence contains the passages: -

``What happened in this case was that in the years 1961 to 1971 the amount of the annual contribution exceeded the income. As the income was comparatively small it had in the early years a very small immediate effect on the ratio of securities held and an occasional adjustment to the ratio of those securities was all that was called for. The major adjustment to the investment ratio and therefore the major purchase of Commonwealth Bonds - which is what the public securities consist of - in this case was made at the time these major contributions were made, and that is at the end of June and sometimes the beginning of July, round about the end of the financial year. The aim was always to adjust the ratio at the end of the financial year and this practice had been accepted by the Commissioner in previous years. In the year 1971/2 for the first time, for a variety of reasons, the income from the interest of the fund rose to such a degree as that it was

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greater than the contributions but the effect it had on the ratio of securities was minute and it went unnoticed - simply that. The interest cheque for the capital interest was deposited monthly in a building society account and it rested there. The reconciliation took place as usual as at 30 June... The whole matter went unnoticed for a period and when the assessment... for the year concluded 30 June 1972 was issued in July 1973 the damage for 1972 and 1973 had already been done... As soon as I became fully conscious of the real situation... of the gravity of the situation and of the importance of the increase in the income that had occurred, viz., very gradually and the effect it was having on the ratio I changed my bookkeeping procedure from that date.... As the monthly interest payments arrived and were deposited in the building society account which was the holding account, and no Commonwealth Bonds were purchased monthly, the 30% ratio was being eroded.... I have got the percentage well ahead of the requirements in order to provide some cushioning for the quarterly income cheques that come in, that sort of thing $1,100 or $1,200. That makes a significant difference. Before that the income was less than $1,000 a year.... But the intention was to meet the targets at all times and if they did not quite meet it... I complied with the spirit and intent of the law.... There was never any intention to... divert investments or income from the aims purposes or objects which allows the fund to operate as a bona fide superannuation fund.... It was never a haphazard purchase.... Every time a bond purchase was made it was made with the particular purpose of updating that percentage, that requirement... a genuine and bona fide attempt... (is) to maintain substantially the balance of percentage that is laid down at reasonable intervals, periodic intervals commensurate with the nature and type of investment and amount of assets held and amount of income drawn... the attempt made... (was) a genuine and bona fide attempt to maintain that ratio at all times.... My present understanding is that the ratios be kept updated constantly, continuously and regularly.... At the time I thought I was doing the right thing.''

9. The taxpayer's agent gave evidence that in 1971 following the ``Henderson'' case [
Henderson v. F.C. of T. 70 ATC 4016 ] income was included which was ``June'' income though received in July.

10. The Commissioner's representative has drawn particular attention to certain phrases in sec. 121C(1) and in sec. 121C(4) and these are here set out with the mark of emphasis: -

• (1)... unless the Commissioner is satisfied that, at all times during that year of income -
  • (a) the assets of the fund included public securities the cost of which was not less than thirty per centum of the cost of all the assets...
• (4) For the purposes of this section the Commissioner shall disregard any failure of the assets of a superannuation fund to include, at all times during a particular year of income , assets as provided by any provision of this section if he is satisfied -
  • (a) that the trustee of the fund made a genuine and bona fide attempt to ensure that the assets of that fund included at all times during that year , assets as so provided; or
  • (b) that the failure was by reason of a temporary delay in investment,

  and that, in all the circumstances, it would be reasonable to disregard the failure.

11. The Commissioner's case for each of the years in issue is as follows: -

• (i) the taxpayer concedes the breach, viz., that at some times during the year of income the public securities included in the assets of the fund had a cost which was less than thirty per centum of the cost of all the assets;
• (ii) the taxpayer concedes that it cannot rely on sec. 121C(4)(b), viz., failure by reason of a temporary delay in investment;
• (iii) the taxpayer (more precisely the trustee as the person taking responsibility for the taxpayer's actions) has misunderstood the meaning of the phrase ``at all times'', i.e., there has been a misconception as to the extent of the statutory obligation;
• (iv) the ground of relief is sec. 121C(4)(a), and thus the foundation for the exercise of the discretion is dependent upon the taxpayer - or the trustee, etc., of the fund - being appreciative of the ``true''

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  construction of the phrase ``at all times during the year''; that is to say a trustee who fails to bear in mind that the phrase ``at all times'' is to be construed strictly in a literal manner (as the Commissioner would have it) is incapable of making a genuine and bona fide attempt to ensure that the assets of the fund meet the statutory requirement and thus there is no power to exercise the discretion at all.

12. The Commissioner contends that the grounds of objection for the first of the years in issue do not encompass a ground which goes to the exercise of the discretion. In my appreciation of the Commissioner's case he considered that the circumstances did not lay a foundation for the exercise of his discretion and therefore he did not reach the point of exercising a discretion adverse to the taxpayer or at all. Accordingly, I would hold that the taxpayer was not required to refer specifically in his objection to the discretionary power in order to be able to invoke that power before the Board. The terms in which the reg. 35(1) statement is phrased do no more than suggest that as at the date of compilation of that statement the Commissioner would, if the question then arose, adopt a certain attitude with regard to the exercise of the discretionary power.

13. There are phrases such as ``forthwith'' ``forthwith on demand'', etc., which have to be construed according to the act to be done ( vide Stroud). The phrase ``at all times'' is one of that class. In
Davies v. Winstanley (1930) 144 L.T. 433 Avory J. at pp. 436-437 said in respect of a requirement that a register should be at all times available for inspection: -

``It is, I think, necessary to give a reasonable construction to those words and in my opinion a reasonable construction is that which... may mean `at all reasonable times'. But at any rate they do mean that the register must be available for inspection at all times when the shop is open for business.''

14. In the present context I would hold that the phrase ``at all times during (the) year of income'' is to be construed strictly, i.e. literally. The practical considerations which may lead to a different construction are not here present. For example it would not be an impossible burden for the fund trustee to anticipate accretions and additions to the general part of the fund and acquire prescribed securities in advance to forestall any shortfall. Doubtless it might be said that this is not the actual burden which the section imposes. However it is the practical result of what is required by the section; unless the fund trustee prefers to be meticulously accurate in acquiring bonds on the very day that a shortfall occurs; or prefers to fall back on the Commissioner's discretionary power as in para. 10 hereof.

15. The Commissioner's representative placed before the Board a circular (or Public Information Bulletin) issued in August 1961 advising the public, and trustees of superannuation funds in particular, of the effect of the amendments to the Act as made in May 1961. This document cannot be used in the interpretation of the Act or of any provisions thereof (cf.
Commissioner for Prices and Consumer Affairs (S.A.) v. Charles Moore (Aust.) Ltd. and Others (1977) 47 A.L.J.R. 715 ). My point in mentioning that document is to draw attention to the Commissioner's proposal therein as regards his discretion: -

``The Commissioner's discretion under this provision has to be exercised in the light of the facts of each particular case, but it is intended that the following general principles will be followed where no special circumstances exist.

Occasional or accidental fluctuations below the necessary ratios will be disregarded, and full exemption of income will still be allowed in any case where -

• (i) the trustees of a fund have adopted systematic procedures that would ordinarily be expected to ensure that the appropriate ratios are maintained throughout the year; and
• (ii) at not less than monthly intervals a check is made of the proportions of public and Commonwealth securities held, and any deficiencies are then remedied.''

16. I think it necessary to stress the Commissioner's phrases ``in the light of the facts of each particular case'' and ``where no special circumstances exist'', for I do not look on the discretion as limited by the matters to which the Commissioner has referred in (i) and (ii) as there should not be an inflexible rule for the exercise of the discretion because circumstances vary infinitely; though guide lines are necessary administratively.

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17. The phrase ``genuine and bona fide'' is tautological (cf. Viscount Simon in
Palser v. Grinling , Property Holding Co. Ltd. v. Mischoff (1948) A.C. 291 at p. 310 ). There is good faith where there is the absence of bad faith: thus there is no attempt to evade payment in the absence of evidence of some device or contrivance for that purpose (cf.
Simms and Others v. The Registrar of Probates (S.A.) (1900) A.C. 323 ). In
Attorney-General v. Duke of Richmond and Gordon (1909) A.C. 466 at p. 472 Lord Macnaghten said: ``The debts... were incurred bona fide, and the encumbrances intended to secure those debts were created bona fide in the only sense in which the term bona fides can be used in such a connection, that is to say, the debts and incumbrances were not fictitious or colourable, but real and genuine to all intents and purposes.''

18. Rich J., Starke J. and Dixon J. (as he then was) said in their joint judgment in
F.C. of T. v. Taylor (1929) 42 C.L.R. 80 at pp. 90-91 : -

``(Counsel for the appellant) conceded that `bona fide' meant no more than real or genuine, being perhaps deterred from contending that it referred to an intention to avoid the operation of the statute by such cases as
Simms v. Registrar of Probates (1900) A.C. 323 and such observations as those of Lord Macnaghten in
A.-G. v. Duke of Richmond (1929) A.C. 466 at p. 472. ..... Rich J. desires to add for himself that whilst concurring in this judgment, he does not wish to conceal his misgivings upon the correctness of the interpretation of the words `bona fide' in the definition of `gift inter vivos ' in sec. 3 which both parties adopted.''

19. In respect of Landlord and Tenant legislation Wallace J. said that the words ``bona fide'' stress the substantial and genuine nature of the occupation required (
Morgan v. Davis (1962) N.S.W.R. 1013 at pp. 1016-1017 ). The Duke of Richmond's case supra as applied in Canada has led to the view that the expression ``bona fide secured'' in a certain context meant ``in good faith, not as a sham or a mere paper transaction, not collusively or as a part of a scheme to defraud anybody, but being in fact what is in form a genuine transaction'' (
Carson v. Dunsmuir Construction Ltd. (1961) 35 W.W.R. 521 B.C.C.A. per Tysoe J. at p. 524).

20. Bramwell L.J. (
R. v. Hall 7 Q.B.D. 575 ) has said that the equivalent of the phrase ``bona fide'' is honestly. ``The correct province of this phrase is therefore to qualify things or actions that have relation to the mind or motive of the individual; and it has no meaning when joined to things or actions common to all mankind, though sometimes it is used in a figurative or inaccurate sense'' (per Stroud).

21. Some analogy with the present issue can be found in
Penn v. Alexander (1893) 1 Q.B. 522 where the majority of a court of five judges held that if a person journeys the prescribed distance but only for the purpose of getting a drink during prohibited hours, he is not a ``bona fide'' traveller. Penn was followed in
Parker v. The Queen (1896) 2 I.R. 404 . There can be mala fide exercise of statutory powers, e.g., of taking land when used for a purpose not authorized by parliament. There cannot be a mala fide exercise of a person's legal rights in his own land (
Bradford v. Pickles (1895) A.C. 587 ); or a mala fide company duly registered under the Companies Acts (
Re Salomon (1897) A.C. 22 ;
Re Hirth (1899) 1 Q.B. 612 ). The crux of the matter is stated by Stroud: -

``there may be a bona fide act, belief, intention, claim, objection or mistake; or a person's conduct may be bona fide. Each of these is so to speak, a mental fact having its origin in the individual.... There is no difference between `bona fide disputed' and `disputed on some substantial ground'.''

22. The present question is different from cases such as the bona fide belief that a first wife or husband has been divorced forms no excuse for bigamy (
R. v. Wheat and Stocks (1921) 2 K.B. 119 ); as to a belief that the first wife or husband is dead see
R. v. Tolson 23 Q.B.D. 168 . There is some basis for comparison of the present case and statutes which provide for the bona fide belief by a policeman that an offence has been committed (
Ballinger v. Ferris 5 L.J.M.C. 133 ); and as to bona fide belief in statements in a company prospectus see
Derry v. Peak 14 App. Cas. 337 .

23. Some assistance is also given by the innumerable cases on what constitutes a bona fide claim of right so as to oust the jurisdiction of inferior tribunals (e.g.,
Scott v. Baring 64 L.J.M.C. 200 ;
Arnold v. Morgan (1911) 2 K.B. 314 ).

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24. A bona fide mistake may include a mistake of law as well as of fact (
Duckett v. Gover 6 Ch. D. 82 ;
Mason v. Harris 11 Ch. D. 106 ;
Tryon v. National Provident Institution 16 Q.B.D. 678 ) provided that there is a genuine mistake and not an erroneous view of the law which has been deliberately adopted (
Clawes v. Hilliard 4 Ch. D. 413 ). The most recently reported decision on ``bona fides'' is In the
Marriage of Read (1977) FLC ¶ 99-201 ; (1977) 27 F.L.R. 392 at p. 396 . One might simply adopt the statement in Wharton's Lexicon that bona fides implies the absence of all fraud or unfair dealing or acting whether it consists in simulation or dissimulation.

25. The phrase ``genuine and bona fide'' in sec. 121C is to be contrasted with a statute which contains the words ``reasonable cause to believe''. It was held in
Australian Telecommunications Commission v. Kreig Enterprises Pty. Ltd. (1976) 27 F.L.R. 400 that those words are to be read objectively whereby the actual state of the mind of the person in question is immaterial, and the inquiry is whether there was in fact reasonable cause to believe. As Stroud says there may be a bona fide act, belief, intention or mistake and a person's conduct may be bona fide - because, ``each of these is so to speak, a mental fact having its origin in the individual''.

26. The main point at which I part company with the Commissioner is that in my view of the section ``genuine and bona fide attempt to ensure'' performance can be satisfied where the trustee (or other person responsible for the fund) believes e.g. that the obligation is to keep up the percentage so far as is practicable (similar to the construction given to ``at all times'' in Davies v. Winstanley supra ). Thus I think it misconceived (assuming I may use that expression of the Commissioner's representative, though not of counsel - 51 A.L.J. 743) to say that before the discretion can be exercised the trustee must manifest an understanding that the literal meaning of the phrase has the practical result that (where there are periodic or sporadic additions or accretions to the general part of the fund) compliance means taking up prescribed securities in anticipation of the need so that the requisite percentage does not have a shortfall at any time.

27. In my opinion if the trustee has the broad understanding that he must endeavour to keep up the percentage (and not as a matter of course simply leave a review to the end of the year) then, in some instances (more particularly the present), the case is within the ambit of the discretionary power, i.e., whether or not in all the circumstances it would be reasonable to disregard the failure.

28. Whilst I consider the ``reasonable person'' test to be inapplicable, I mention that it is not a purely objective test. In criminal law jurisdiction Lord Simonds L.C. has said that it is a refinement too subtle for his mind to grasp that temper may be ignored but a personal defect of the defendant taken into account (
Bedder v. D.P.P. (1954) 1 W.L.R. 1119 at p. 1123 ). This led to wide spread criticism and culminated in New Zealand in 1961 altering its law so as to define ``reasonable man'' with that distinction. Yet even in the United Kingdom where Bedder's case continues to be the law, a youth is not required to show that he reacted as a man of mature years would react (
R. v. Camplin (1977) 3 W.L.R. 929 ); and presumably a fortiori for a girl or a woman.

29. It would be a curious construction (and the parts selected as above from the circular show that it is not the Commissioner's view) that a monthly check with an ensuing correction of deficiencies is a performance of the obligation to ensure by a genuine and bona fide attempt that the required percentage of specified securities is held at all times during the year of income. In some instances a less frequent review might serve as practical a fulfilment of the statutory requirement as a monthly review, and in some circumstances it may be that a review more frequently than monthly intervals is indicated.

30. The summary of the whole matter is: -

• (a) The trustee of a superannuation fund (or other person responsible therefor) is not required to have the same comprehension of the extent of the obligation under sec. 121C(1) and (4) as a Court would have, in order for the trustee to be within the ambit of the discretionary power to grant relief where there is non-compliance. (A cynic might suggest that this conclusion is inevitable when regard is had to the countless occasions on which lower courts, and tribunals, have been told by superior courts that they have misconstrued a statute.)
• (b) The oral and documentary evidence (para. 5, 6, 7 and 8 hereof) indicates in respect of each year that it would be reasonable pursuant to sec. 121C(4) to

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  disregard the failure to ensure that the assets of the fund included, at all times during that year of income, prescribed assets to the appropriate percentage.

31. I would uphold the objection for the year of income ended 30 June 1972 and reduce the assessment to nil.

32. I would uphold the objection for the year of income ended 30 June 1973 and reduce the assessment to nil.

Claim allowed