Case L33

Judges: HP Stevens Ch
JR Harrowell M

CF Fairleigh QC

Court:
No. 1 Board of Review

Judgment date: 1 June 1979.

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C.F. Fairleigh Q.C. (Member): The taxpayer, a public company which has ``investment'' as the leading object in its Memorandum of Association, furnished returns of taxable income for the respective years ended 30 June 1969 to 1973 inclusive as follows: 1969 $71,699; 1970 $92,273; 1971 $81,496; 1972 $53,067; 1973 $413,122.

2. The Commissioner adjusted the income as returned for each of those years by the inclusion of the results of various share transactions and on 17 October 1972 he issued for those respective years ended 30 June -

• (a) 1969 - notice of amended assessment, taxable income $177,668 (originally assessed on 23 April 1970 as per return);
• (b) 1970 - notice of assessment, taxable income $130,135;
• (c) 1971 - notice of assessment, taxable income $127,092;
• (d) 1972 - adjustment sheet (increasing a loss on share trade activities from the returned sum of $24,084 to $268,452, difference $244,368);
• (e) 1973 - notice of assessment, taxable income $912,334 (after allowance for prior year's losses of $190,072 carried forward).

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  ATC 174

3. In each instance (excluding 1972 which the Commissioner designated as a loss year) the taxpayer lodged a notice of objection, the Commissioner decided to disallow the objection and that decision was referred to a Board for review.

4. I see little purpose in recounting details of evidence which have been set out by my colleagues. I adopt their findings of fact on such matters where I have not otherwise made findings thereon.

5. In a loose sense, the taxpayer may be said to have withdrawn or abandoned the objections for all years other than that ended 30 June 1973 as the evidence, almost exclusively, has been directed to supporting the objection for the 1973 year. Thus pursuant to the onus provision (sec. 190(b)) all other assessments, now under review, are to be confirmed, and attention is therefore confined to the assessment and objection for the 1973 year.

6. The taxpayer was represented by the chairman of its board of directors and he was the principal witness. The only other witness was his co-director. Neither a third board member nor its general manager gave evidence. The present board of directors took office on or about 11 April 1972 when they displaced other board members consequent upon what may be called a type of take-over, effective on or a little earlier than 11 April 1972; although the principal witness by reason of circumstances not presently relevant had been associated with the taxpayer for two or three months prior thereto.

7. I am satisfied that both witnesses have given their evidence honestly. Yet the passage of time has occasioned some demonstrable unreliability in recounting events, particularly conversations which occurred in the second and third quarters of the 1972 calendar year. One unsatisfactory feature of the evidence is incompleteness due, in part, to the taxpayer's representative failing to appreciate what was required to be proved in order to show that the 1973 year assessment was excessive.

8. I reject the Commissioner's contention that there is evidence to enable the Board to conclude that ``prima facie the taxpayer from 1967 (sic) was involved in transactions'' (scil. trading in shares) which produced assessable income and that the 1972/73 transaction here in issue was within that business. The contention is based on what is called a pattern. I think it unwise to proceed on similar fact evidence. The Commissioner's representative dubbed his own sec. 25(1) case as being a somewhat academic one. The only live issue is sec. 26(a).

9. Whilst dates of acquisition and of sale of the subject shares (all in one public company) and consideration for the same have been debated, the incontrovertible facts are that the acquisitions took place from April to June 1972, the sale was in the first quarter of the following financial year and the ultimate profit in issue is $689,284.

10. The taxpayer was incorporated in March 1959. At all relevant early years after incorporation sec. 334 to 342 of the Uniform Companies Act placed restrictions and prohibitions on the operations of the taxpayer whilst it was an investment company; and sec. 343 provided a penalty for breach of those statutory provisions.

11. Approximately one year before the aforesaid takeover those who were then in control of the taxpayer decided to drop investment as a business and take up as the leading objective general finance operations. This necessitated (i) the concurrence of the Corporate Affairs Commission, to obviate penalties under sec. 343 of the Uniform Companies Act, (ii) release from an undertaking which the taxpayer had given to the Corporate Affairs Commission, and (iii) registration as a money-lender. Apparently the view was held that no amendment to the objects clause of the Memorandum of Association was required.

12. Within a week or so of the aforesaid takeover the taxpayer completed the first step in the acquisition of shares which are referred to in para. 9 hereof. The speed of the transaction was due to the association of its chairman of directors with the vendor of the shares; though it should be mentioned that no impropriety is apparent.

13. The sale of shares which resulted in the profit of $689,284 (para. 9 hereof) was effected early in July 1973 and it was to a subsidiary of the taxpayer. All the share

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ATC 175

capital of the subsidiary was sold to an outsider a few months later for a consideration which included undertakings for immediate clearing of debts due by the taxpayer and another to the company in which the subject shares were acquired.

14. The purpose of the taxpayer at the time of acquisition of the parcels of shares here in issue is confused by a failure to draw the well-established distinction between questions addressed to a witness as to what discussions took place at board meetings which he attended as a director, and questions addressed to him as to what was in his mind or what he intended with regard to something discussed or resolved on at the meeting (cf.
Tooth & Co. Ltd. v. Lane Cove Municipal Council (1968) 2 N.S.W.R. 17 ;
Russell v. Brisbane City Council (1955) Q.S.R. 419 ;
B.P. Australia Ltd. v. Gold Coast City Council (1967) Q.D.R. 307 - reversed on a different ground (1967) Q.D.R. 321 ;
Young v. Watson (1932) 11 L.G.R. 63 ).

15. In the light of the informal nature of proceedings before a Board of Review (though noting the caution in
Re Watson ; ex parte Armstrong (1976) 50 A.L.J.R. 778 at p. 783 as to implied limitations on a statutory authorisation to proceed without undue formality, similarly
Brettingham-Moore v. St. Leonards Municipality (1969) 121 C.L.R. 509 at p. 524 ) I adopt mutatis mutandis Lord Stowell's generalisation (
The Juliana (1822) 165 E.R. 1560 at p. 1567 ) concerning the administration of equity, viz.: that (the tribunal) takes a more comprehensive view and looks at every connected circumstance which ought to influence its determination upon the real justice of the case. In this regard it is to be noted that neither of the two director/witnesses put himself or his colleague forward as representing the ``directing mind and will'' of the taxpayer (cf.
Tesco Supermarkets Ltd. v. Nattrass (1972) A.C. 153 at p. 171 ).

16. The upshot of the matter thus approached is that the taxpayer was influenced or motivated to buy the subject shares because of the advantages to be derived as controlling shareholder (whilst recognising that there must not be a fraud in respect of the interests of minority shareholders) in a company which had a building subject to an onerous lease which could be renegotiated so as to increase the market value of the building, and also had well over one million dollars in cash which could be used in the prospective money-lending and underwriting business.

17. The evidence taken en masse does not convince me on the civil standard of proof that the purpose of the taxpayer was to acquire an ``investment''; with an early frustration of its purpose upon understanding that there was a conflict between that purpose and the demands of the Corporate Affairs Commission as the condition of release from the undertaking and from the penal provisions of sec. 343 of the Uniform Companies Act - and thereupon a ``forced'' sale of the shares which are here in issue.

18. Once that position is reached it only remains to be said that the taxpayer has not shown that its purpose in acquiring those shares was not one of the purposes set out in sec. 26(a) of the Income Tax Assessment Act.

19. I would uphold the Commissioner's decisions on the objections and I would confirm the amended assessment for the first of the years here in issue and confirm the assessments for the other years.

Claims disallowed