Case L33

Judges:
HP Stevens Ch
JR Harrowell M
CF Fairleigh QC

Court:
No. 1 Board of Review

Judgment date: 1 June 1979.

H.P. Stevens (Chairman) and J.R. Harrowell (Member): The question for decision in this case is whether or not the Commissioner, in making adjustments to the taxpayer's returned taxable incomes for the years ended 30 June 1969, 1970, 1971 and 1973 by way of the inclusion of the results of certain share transactions, has acted correctly in terms of sec. 25(1), 26(a) and 82(2).

2. Details of the incomes returned and the adjustments made are as summarised hereunder:

                                  1969*    1970      1971      1972      1973

                                  ----     ----      ----      ----      ----

                                    $        $         $         $         $

      Taxable income

      returned                   71,699   92,273    81,496    53,067   413,122

      Net share profits

      included by Commissioner  104,832   37,862    45,596 L 244,368   689,284

      Sections 77A and 77C

      adjustment                  1,044

      Section 82(1) adjustment       93

      Tax free dividend

      adjustment                                               1,229

      Section 80 loss allowed                                         L 190,072

                                -------   -------   -------   -------   -------

      Adjusted taxable income   177,668   130,135   127,092 L 190,072   912,334

                                -------   -------   -------   -------   -------



                        * By notice of an amended assessment

ATC 169

3. As will become apparent the taxpayer was taken over early in April 1972 and its representative at the hearing produced no evidence in relation to the transactions concerned in the above adjustments for 1969, 1970, 1971 and 1972 years. In address he referred, inter alia, to the above failure and to the fact that when the 1972 loss adjustment was taken into account the overall effect (excluding the 1973 profit) was minimal and said that ``for the purpose of the appeal they could be ignored''.

4. Since there was no ground of objection taken in relation to the sec. 80 loss of $190,072 allowed in the 1973 year - the grounds for all years relating only to the other items referred to - the fact the overall effect might be minimal could be said to be irrelevant. However what cannot be ignored is the fact that no evidence was placed before the Board in relation to any transaction other than that for the 1973 year. In the circumstances the onus imposed by sec. 190(b) has not been discharged in relation to the 1969, 1970 and 1971 years of income and the action for those years taken by the Commissioner must be confirmed. Accordingly we put those years to one side and proceed to the situation in relation to the 1973 year.

5. The taxpayer company was incorporated in 1959 and, in 1965, undertook that it would ``comply with the provisions of sec. 335 to 342, inclusive, of the Companies Act, 1961, as amended''. Thus it became an Investment Company and subject to the obligations and restrictions imposed by the New South Wales Companies Act. Section 343(1) of that Act provides:

``If default is made by an investment company in complying with the provisions of this Division the investment company and every officer of the investment company who is in default shall be guilty of an offence against this Act.

Penalty: Two thousand dollars. Default penalty: Two hundred dollars.''

By the beginning of 1971 the status of investment company was considered unsuitable and the minutes of a directors' meeting of 10 March 1971, inter alia, record:

``The secretary tabled legal advice concerning withdrawal of the undertaking given to the Registrar of Companies in 1965 to act as a proclaimed investment company and it was RESOLVED that an Extraordinary General Meeting of Shareholders be held in accordance with the legal advice obtained and that the Secretary be instructed to convene an Extraordinary General Meeting at the earliest practical date.''

This meeting was held on 14 April 1971 and it was resolved as a Special Resolution that:

(a) ``the company enter the field of financing and/or money lending in its various phases'';
(b) ``the company apply for a money lender's licence''; and
(c) application be made for release from the undertaking given in 1965 the company being prepared to do certain things and to ``comply with any other reasonable requirement of the Registrar'' - such application was made by letter of 20 April 1971.

6. No details were furnished relating to the legal advice referred to in the minutes of 10 March 1971 nor was anything said concerning the results of the application of 20 April 1971. However the chairman's report in the taxpayer's annual report for the year ended 30 June 1971 contains the following:

``Since the Extraordinary General Meeting, held on 14 April, 1971, a number of moves have been made to put into effect the decision to enter the field of financing and/or money lending. The Company sought a release from the undertaking given to the Registrar of Companies in 1965 and was advised that it would be necessary for us to clearly demonstrate that the Company had shifted its emphasis from investment to finance before consideration could be given to a release from the undertaking. Applications were made for money lenders licences in New South Wales and Victoria resulting in a licence being granted for use in Victoria. The application for New South Wales was adjourned to give the Company an opportunity of changing its name as

ATC 170
under the New South Wales Act the word `Australia' cannot appear in the name of a money lender. Having conducted a survey of the relative markets it has been decided to establish operations initially in Victoria and then to extend to New South Wales, hence the delay in obtaining a New South Wales money lenders licence has not affected our plans.''

7. Steps were taken to liquidate the taxpayer's holdings of shares - minute of 10 March 1971 authorising the elimination of the Share Trading Portfolio, that of 25 June 1971 referring to the Managing Director liquidating ``the Portfolio of Investments at his discretion'' and that of 14 October 1971 reviewing both long and short term investments with a view to ``realisation in accordance with the decision to liquidate the portfolios and enter money lender field''. No doubt this was to demonstrate the shift in emphasis (see above report) and to provide funds for its proposed financing activities. As at 30 June 1971 the taxpayer's investment in shares in listed companies - at market value - was $1,015,454 but, by 31 March 1972, it had been reduced to $543,547.97 (realisable value $404,007).

8. The taxpayer was ``taken over'' early in April 1972 and the minutes of directors' meeting of 11 April 1972 record a complete change in directors. The minutes of 17 April 1972 record resolutions: (a) to purchase 7,567,102 fully paid shares in company B for $754,855 cash (giving the taxpayer a majority shareholding in B, (b) for company C to act as nominee to hold these shares, and (c) to borrow $500,000 from company D against a first mortgage on the shares in B. The minutes also record the following in respect of Future Corporate Policy:

``The Chairman reported on discussions he held with the Companies legal advisers and fellow Directors on changing the direction of the company from that of an investment company to that of a finance company specialising in corporate and real estate financing.

RESOLVED that the Chairman seek necessary legal advice to give effect to:

(1) Allotting the direction of the Company from an investment company to a finance company.

(2) Seek a Money Lenders Licence for New South Wales.

(3) Obtain a release from the Corporate Affairs Commission in respect of the undertaking to comply with section 335-342 of the Companies Act 1961.

(4) Commence negotiations for a possible $500,000 to be issued by debenture.''

Since the chairman (who gave evidence) admitted he knew upon takeover of the previous moves of the taxpayer in the same direction the necessity for such a resolution is not readily apparent.

9. Despite the above resolution to purchase the shares in B the evidence given was not particularly precise in relation to the actual acquisition thereof. In an attachment to the taxpayer's 1973 return the following details were shown:

          20/4/72       3,027,597       $302,071

          27/4/72       4,539,505       $452,784

           2/6/72          84,000         $8,400

These cover 7,651,102 shares costing $763,255 but a balance sheet as at 30 April 1972 showed only the first parcel as having been acquired whilst a note thereto said a further 4,539,505 for $455,000 had been acquired subsequent to 30 April 1972 - this gives 7,567,102 (as per resolution) but for $757,071 (not $754,855). The Cash Payments journal records the three amounts set out above on the dates shown - the first cheque was to a finance company (notation Part Purchase 3,207,597), the second to C (notation advance to acquire 4,538,748) and the third to another company (notation purchase 84,000). Whilst the discrepancy in numbers and amounts is small it is indicative of the lack of precision in the evidence given. Even less precision exists in relation to the parties from which the shares in B were acquired and how they came to be acquired - despite this situation being raised at the hearing and the taxpayer's chairman being asked to look into matters overnight and, when not done, to do so for the next hearing day.

ATC 171

10. The minutes of the directors' meeting of 13 June 1972 record, inter alia, that a release had not been received from the 1965 undertaking and it was resolved that a new approach be made to the Commissioner of Corporate Affairs for ``a release from the proclaimed investment company undertaking''. By letter dated 4 July 1972 the taxpayer's solicitors wrote to the Commissioner of Corporate Affairs, enclosed a balance sheet as at 30 April 1972 and a prospectus for the issue of debenture stock, and referred to -

(i) the grant of the Victorian Money Lender's licence and endeavours to obtain a New South Wales licence;
(ii) the active realisation of its investment portfolio - the balance sheet showing the 30 June 1971 figure of $1,026,193 reduced to $211,343 and it being stated that as at 15 June 1972 the figure would be approximately $20,000. Note 5 to the balance sheet indicated that, as a result of acquisitions subsequent to 30 April 1972, B became a subsidiary company and the realisations were obviously not to cover those shares; and
(iii) the taxpayer taking all necessary steps to convert to a finance company,

and applied for a release from the undertaking given in 1965.

11. At a meeting of 6 July 1972 discussion took place as to the asset position of B and as to the desirability of selling the shares in B to a wholly owned subsidiary E which could then become the corporate vehicle for holding all of the taxpayer's investments. It was resolved to sell 7,567,102 shares in B to E for $1,450,000. At the hearing it was pointed out that if the number of shares as stated in the minute was correct the taxpayer still held 84,000 in B as its total holding was 7,651,102. However the taxpayer's chairman was adamant that the transfer related to the total holding in B and so it would appear that the minute of 6 July 1972 should have referred to 7,651,102 shares.

12. In evidence the chairman of the taxpayer company stated that the sale of the shares in B to the subsidiary company E was one of the steps necessary to obtain from the Corporate Affairs Commission its release in terms of the provisions of the New South Wales Companies Act relating to investment companies. This statement was supported by another witness, also a director, who had conferred at that time with an officer of the Corporate Affairs Commission. He maintained that the officer had expressed concern that the taxpayer's large investment in B did not appear consistent with the request to move out of investments. It was therefore believed by the directors that the transfer of the shares in B to a subsidiary would meet the requirements of the Commission and the long sought after release would be granted.

13. The officer appeared before the Board as a witness. He denied that he had advised the directors of the taxpayer company that the taxpayer would have to dispose of its large holding in B before the Commission would grant a release. He said that as B was a subsidiary of the taxpayer it was not part of its investment portfolio. On his evidence the disposal of the shareholding in B was not a prerequisite to the granting of the release.

14. On 31 July 1972 the directors resolved to revalue the shares in B as at 30 June 1972 notwithstanding their decision of 6 July 1972 selling those shares to E. The revaluation was applied to the original cost of $763,255 raising that figure to $1,256,892, an increase of $493,637. This revaluation was reflected in the published accounts for the year ended 30 June 1972 as laid before shareholders but the revalued figure was $1,255,671 (an increase of $492,416) - no explanation for the difference with the resolution figure was given.

15. At that same meeting the directors resolved to ratify the advance by the taxpayer of $1,450,000 to its subsidiary E to enable it to pay for the shares it had purchased in B.E was non-trading subsidiary possessing no other asset than $4 representing its paid up capital of two shares of $2 each.

16. On 28 August 1972 there was another meeting of directors. At that meeting it was noted that the taxpayer had been issued with a New South Wales Money Lender's licence and that the Corporate Affairs Commission had at last granted the company release from its 1965 undertaking made when it was an investment company. The release was granted by letter dated 18 September 1972 signed on behalf of the Commissioner for

ATC 172

Corporate Affairs addressed to the secretary of the taxpayer company. The officer signing appeared before the Board as a witness. It read:

``I wish to advise that as the company has demonstrated that its activities have altered so as to bring it outside the definition of an investment company envisaged by sec. 334(2), a release is hereby granted from the undertaking entered into on 3 May, 1965 to comply with sec. 335 to 342 inclusive.''

The board noted that this ``release was forthcoming on the assurance given to the C.A.C. that the investment in (B) be disposed of''. The board then:

``Resolved to authorise the sale of 7,567,102 ordinary shares (20 cents) in (B) for the sum of $1,450,000.''

The narration supporting this resolution stated that the Corporate Affairs Commission had indicated that the holding of the shares in B was inconsistent with the company's request for release.

17. The officer from the Corporate Affairs Commission who had been directly associated with these matters firmly maintained that he gave no such indication to representatives of the taxpayer for the reasons as stated in para. 13. Further the terms of the letter of 18 September 1972 granting the release were not contingent on the understanding that the shares in B had to be sold. His evidence was based on memory but he had with him at the hearing notes on those distant conferences. Unfortunately neither party to the references sought leave to refer to them.

18. The resolution, supra, to sell the shares in B warrants comment. Firstly, the number of shares sold, 7,567,102, had been altered in ink from 7,651,102, again that difference of 84,000 (see para. 11). Again the Board was assured that all shares held were sold. The chairman had no explanation to offer in regard to the discrepancy. Secondly, the actual shares were not, in fact, sold although the final outcome was that the group of companies no longer held those shares. What happened was this - E, the dormant subsidiary, the now holder of the shares in B, was as a result of that resolution sold for $4 - the value of the paid up capital. With that sale went undertakings, the taxpayer to repay deposit moneys ($1,275,000) owing by it to B and E to repay the $1,450,000 debt it owed the taxpayer. In addition the taxpayer had to repay the loan of $500,000 from D secured on the B shares (para. 8). The receipt and the two outgoings appeared in the taxpayer's cash book under the date of 18 September 1972.

19. The profit of $689,284 which emerged as a result of the sale by the taxpayer of its shares in B is the subject of this reference. It is arrived at by applying the original cost of these shares ($763,255) to a consideration of $1,452,539. According to the details contained in the taxpayer's 1973 return of income these shares were sold on 18 September 1972.

20. On the facts as set out here the taxpayer purchased 7,651,102 shares in B for $763,255 in April and June 1972. According to the facts these shares were sold by the taxpayer to E, a dormant subsidiary of the taxpayer, on 6 July 1972 for $1,450,000. B financed the purchase by borrowing $1,450,000 from the taxpayer. The shares in B passed from the control of the taxpayer when E was sold to an outside buyer for $4 plus undertakings. Therefore on the evidence before the Board the shares in B were not sold on 18 September 1972 nor was the consideration $1,452,539. Both parties accepted this figure and as the difference of $2,539 was not material the hearing proceeded on the footing that the profit of $689,284 was the subject of these references.

21. The argument put forward by the taxpayer in respect of the year ended 30 June 1973 may be summarised as follows:

(a) The purchase of the 60% interest in B was part of the taxpayer's plan to become a finance company. B's assets consisted mainly of cash and investment in properties. In the words of a director who also gave evidence - ``This cash could be available to be placed on deposit with the (taxpayer)... It was envisaged that (B) would be a cash box company which could act as a sub-underwriter for the (taxpayer's) proposed debenture issues.''
(b) The decision to cease being an investment company required a release from the company's 1965 undertaking.

ATC 173
For a release to be granted the company had first to dispose of its investment portfolio. In the minds of the directors this included selling the taxpayer's interest in B. The taxpayer did this by selling B to a dormant subsidiary E. However in the view of the directors this was not sufficient and to honour a believed undertaking E was sold and with it the taxpayer's interest in B.

For these reasons the taxpayer's representative argued that the profit on the sale did not fall within sec. 25(1) or sec. 26(a), and so was not assessable.

22. Counsel for the Commissioner referred the Board to the taxpayer's 1973 return of income when in a supporting schedule it stated that the shares in B ``were acquired with a view to being held as a long term investment...'' He maintained that when the decision to purchase these shares was taken in April 1972 the board had already decided to cease being an investment company and to seek release from its 1965 undertaking. The board knew of the need to dispose of its investment portfolio and in his opinion this fact precluded the company from arguing that the decision to sell the shares in B in July 1972 was to meet a sudden demand from the Corporate Affairs Commission. Even if one accepted the proposition of the taxpayer the evidence did not support the contention that the Corporate Affairs Commission had ever insisted on the shares in B being sold as a prerequisite to the granting of the release. Counsel then proceeded to argue that a pattern of share trading existed if one considered the preceding years between 1967 to 1972 inclusive.

23. Having considered the facts we agree with our colleague, Mr. C.F. Fairleigh Q.C., that this matter falls within sec. 26(a) not sec. 25(1).

24. We also have not been convinced on the civil standard of proof that the purpose of the company was to acquire an investment. The shares in question were purchased between April and June of 1972 and sold on 6 July 1972, although the shares did not leave the group until 18 September 1972. The reasons given by the representative of the taxpayer for such an early frustration of the intention to hold the shares long term were, in our opinion, not supported by the evidence. Even disregarding the evidence of the officer from the Corporate Affairs Commission to the effect that the company was under no pressure from the Commission to sell the shares in B it would be difficult, in our opinion, to accept the proposition that these shares were purchased as an investment in a company which was ceasing that type of business. If we follow the director's reasons in evidence that they were acquiring a ``cash box'' company we still find that the facts do not support the sudden reversing of that intention.

25. In our opinion the taxpayer has not shown that its purpose in acquiring the shares was not one of the purposes set out in sec. 26(a).

26. We would uphold the Commissioner's decisions and we would confirm the amended assessment for 1969 and the assessments for 1970, 1971 and 1973.

Disclaimer and notice of copyright applicable to materials provided by CCH Australia Limited

CCH Australia Limited ("CCH") believes that all information which it has provided in this site is accurate and reliable, but gives no warranty of accuracy or reliability of such information to the reader or any third party. The information provided by CCH is not legal or professional advice. To the extent permitted by law, no responsibility for damages or loss arising in any way out of or in connection with or incidental to any errors or omissions in any information provided is accepted by CCH or by persons involved in the preparation and provision of the information, whether arising from negligence or otherwise, from the use of or results obtained from information supplied by CCH.

The information provided by CCH includes history notes and other value-added features which are subject to CCH copyright. No CCH material may be copied, reproduced, republished, uploaded, posted, transmitted, or distributed in any way, except that you may download one copy for your personal use only, provided you keep intact all copyright and other proprietary notices. In particular, the reproduction of any part of the information for sale or incorporation in any product intended for sale is prohibited without CCH's prior consent.