Federal Commissioner of Taxation v Cappid Pty Ltd [1971] HCA 79; (1971) 127 CLR 140 (2 June 1971)

HIGH COURT OF AUSTRALIA

FEDERAL COMMISSIONER OF TAXATION v. CAPPID PTY. LTD. [1970] HCA 41; (1971) 127 CLR 140

Income Tax (Cth)

High Court of Australia
Menzies J.(1)
Barwick C.J.(2), McTiernan(3), Windeyer(4) and Owen(5) JJ.

CATCHWORDS

Income Tax (Cth) - Company - Whether "public company" or "private company" - All shares in company held by shareholders on trusts - Whether carried on for purposes of profit or gain to its individual members - Whether prohibited from making distributions to its members - Income Tax Assessment Act 1936-1965 (Cth), s. 103A (2) (c).

Income Tax (Cth) - Assessment - Estoppel - Whether taxpayer able to deny as to one assessment a fact assumed in another assessment.

HEARING

Melbourne, 1970, October 7-9; November 9. 9:11:1970
Melbourne, 1971, May 5-7;
Brisbane, 1971, June 2. 2:6:1971
APPEAL pursuant to s. 187 (b) of the Income Tax Assessment Act 1936-1965 (Cth).

DECISION

1970, November 9.
MENZIES J. delivered the following written judgment : -
This appeal from an assessment to tax under Div. 7 of Pt III of the Income of income of the year ended 30th June 1966, turns, subject to a preliminary matter, upon a decision whether or not the taxpayer was a private company in relation to the year of income. It was assessed to the tax in question as a private company, but has claimed throughout that it was a public company by virtue of s. 103A (2) (c) of the Act, which provides, in effect, that a company is a public company in relation to a year of income if :

"(c) the company has not, at any time since its formation,
been carried on for the purposes of profit or gain to its
individual members and was, at all times during the year
of income, prohibited by the terms of its constituent
document from making any distribution, whether in
money, property or otherwise, to its members or to
relatives of its members." (at p142)

2. In order to allow the appeal I must be satisfied about two elements stated in par. (c); the first relating to the whole period since the taxpayer's formation, the second relating to the whole of the year ended 30th June 1966. (at p142)

3. The parties have entered a special case for argument before the court pursuant to O. 35 r. 5 of the High Court Rules. The questions of law for my opinion are:

"1. Is the appellant, on this appeal against the assessment
to additional tax on undistributed income, precluded from
asserting that it is a public company or asserting that it is not
a private company for the purposes of Div. 7 of Pt III of the
Income Tax Assessment Act 1936-1966 by reason of the facts
set forth in pars 26-35 hereof?
2. If the answer to question 1 is No, was the taxpayer,
in relation to the year of income ended 30th June 1966, a
public company for the purposes of Div. 7 of Pt III of the
Income Tax Assessment Act 1936-1966 by virtue of the provisions
of par. (c) of sub-s. (2) of s. 103A of the said Act?" (at p142)

4. The first question relates to what I have referred to as a preliminary matter and I shall deal with it first. (at p142)

5. Paragraphs 26-35 inclusive of the special case show that the taxpayer furnished a return of taxable income of $573,547 for the year ended 30th June 1966 under cover of a letter claiming that it was a public company. The Commissioner chose to treat it as a private company, assessing primary tax upon taxable income increased to $593,617 at the rates specified in the Income Tax Act 1966 (Cth), 6th Sch., items 3 (a) and (b), i.e. as a private company. The taxpayer objected to the assessment and, upon consideration of that objection, the Commissioner allowed it in part and issued an amended assessment but at private company rates upon a taxable income of $587,182. The taxpayer objected and an appeal was instituted, but withdrawn. The consequence of all this is that the taxpayer has been assessed to and has paid primary tax, at rates applicable to a private company but is maintaining its objection to an assessment to additional tax upon an undistributed amount of $234,050 on the ground that it is a public company. The Commissioner has raised the question whether or not the taxpayer is precluded from doing so, arguing that, because it has been treated as a private company for the purposes of the assessment of primary tax, it cannot dispute that it is a private company and assert that it is a public company in order to escape additional tax. (at p143)

6. I do not accept the contention made on behalf of the Commissioner. The taxpayer, in making its returns, claimed that it was a public company; the Commissioner has at all times asserted that it was not a public company, but a private company, and has assessed accordingly. The taxpayer cannot be precluded from maintaining its objection to the assessment now in question because in relation to another assessment it yielded to the Commissioner's insistence upon taxing it at private company rates. It is true that if it succeeds in this appeal it will have had the advantage of a primary assessment as a private company, although it has established that it was not a private company for the purposes of additional tax, but the assessment to primary tax creates no bar in favour of the Commissioner and against the taxpayer. I have found no basis for deciding that this appeal should be dismissed merely because of the other assessment, which was, after all, no more than the act of the Commissioner. (at p143)

7. I have, therefore, to consider the second question and to do so some statement of the relevant facts is necessary. (at p143)

8. The taxpayer was incorporated on 30th June 1965. It was incorporated in a hurry in order that those concerned should have the advantage of s. 103A (2) (c), which perhaps explains infelicities hereafter to be noticed. Its members have at all times been two - Giris Pty. Ltd. holding two shares of $2 each and R. G. B. Skinner holding one share of $2. At all times material R. G. B. Skinner held his one share as nominee of Giris Pty. Ltd. At all times material Giris Pty. Ltd. held all its right, title and interest in and to its shares in its capacity as trustee of the Jansen family trusts. (at p143)

9. By an agreement in writing dated 1st July 1965 - the date upon which Act 110 of 1964 of the Commonwealth came into force - Giris Pty. Ltd. sold the business of manufacturer of electrical goods etc., which it had previously carried on as trustee of the Jansen family trusts, to the taxpayer for $897,692.45. The sale covered the assets and undertaking of the business but excluded the land and buildings upon which the business was carried on and the goodwill thereof. The price was payable on demand, and while unpaid was to bear interest. The price has not yet been demanded and no part has yet been paid. The agreement also provided that Giris Pty. Ltd. should permit the taxpayer to use the land and buildings aforesaid for the purpose of carrying on the business at the rental fixed thereby. The taxpayer has not conducted the business itself, but appointed a company, now known as Utilux Pty. Ltd., its attorney and agent to conduct the business on its behalf. Since its incorporation the taxpayer has not (save for its share capital) received any money or property whether by way of dividend or otherwise from any source, save payments made by Utilux Pty. Ltd. acting as its attorney under power. (at p144)

10. Paragraphs 21 to 23 of the special case, with some omissions, are as follows:

"21. The Appellant did not pay any amount by way of
dividend to its shareholders during the period 1st May 1966
to 30th April 1967. The Appellant has not since its

incorporation paid any money or property, whether by way of

dividend or otherwise, to or on behalf of its shareholders save
as follows: the following amounts were paid to or on behalf
of Giris Pty. Ltd. as trustee of the Jansen family trusts.
The said payments were made on the following dates to the
persons set out opposite the same, namely -
9. 7.65 - Cash Advance - L100 - $200 Giris Pty. Ltd. as
Trustee
16. 7.65 - " " - 300 - 600 "
30. 9.65 - " " - 500 - 1000 "
11.11.65 - " " - 150 - 300 "
8. 2.66 - " " - 500 - 1000 "
23. 5.66 - " " - 300 "
2. 6.66 - " " - 1000 "
16. 2.66 - Payment of Commissioner of
N.Z. Income Taxes (N.Z.)
Tax for
Trusts - 264.84
In year Payment of Deputy Commissioner
ended Trusts Taxation
30. 6.66 - Income Tax - 86,582
In year Cash Advance Payments at the
ended to No. 5 direction of Mrs.
30. 6.66 - Trust - 15,126.38 E. E. Jansen.
Each of the aforesaid payments was made by a cheque drawn
by Utilux Pty. Ltd. in favour of the payee shown in the table
above. Each of the said payments is shown in the Appellant's
journal and in the Appellant's Ledger where they are debited
to the 'Giris Pty. Ltd. - Current Account' and credited to the
'Utilux Pty. Ltd. - Control Account'. The said payments
are also shown in the Appellant's Balance Sheet for the year
ended 30th June 1966 as deductions from the said rent and
interest on purchase money referred to in paragraph 18 hereof.
The said rent and interest payable by the Appellant to Giris
Pty. Ltd. are shown in the Appellant's Journal and in the
Appellant's Ledger where they are debited to 'Income
Account' and credited to the said 'Giris Pty. Ltd. - Current
Account'. Giris Pty. Ltd. was assessed to income tax for the
year ended 30th June 1965 in the sum of $86,582.
22. At no time during the year of income or at any other
time has the Appellant owned, either legally or beneficially,
any shares in the capital of any company.
23. At all material times the Appellant and each of its
shareholders and two of its Directors (namely the said R. G. B.
Skinner and Joseph Jansen) had notice of the Jansen family
trusts, of terms thereof . . ." (at p145)

11. The trustees of the Jansen family trusts have been as follows :

"Giroud Trusts nos. 1-7 from the date
of creation until 1st July 1957 - R. G. B. Skinner
Giroud Trusts nos. 1-7 from 1st July
1957, and Cappis Trusts Nos. 8-10 and
Giroud Trusts Nos. 11-12 from respective
dates of creation until 10th April - R. G. B. Skinner
1962 and D. M. Wood
All trusts - from 10th April 1962 to
date - Giris Pty. Ltd."

Among the objects for which the taxpayer was established were :

"4. (a) To carry on business as manufacturers of and dealers
in all articles parts accessories applicances apparatus or things
required for or capable of being used in connection with
electricity or electrical apparatus."
"7. To undertake and execute any trusts the undertaking
whereof may seem desirable and either gratuitously or
otherwise and to act as executor or administrator manager agent
attorney or committee and generally to undertake and perform
any office of trust or confidence."

In the enumeration of the taxpayer's objects there appears this provision :

"39. The Company shall not be carried on for the purpose
of profit or gain to its individual members and is prohibited
from making any distribution whether in money property or
otherwise to its members or to relatives of its members."

Paragraph 42 of the memorandum was as follows :

"42. The objects set forth in the foregoing subclauses of
this clause shall not except when the context expressly so
requires be in any wise limited or restricted by reference to or
inference from the terms of any other clause or by the name of
the Company. None of such clauses or the objects therein
specified or the powers thereby conferred shall be deemed
subsidiary or auxiliary merely to the objects mentioned in the
first clause but the Company shall have full power to exercise
all or any of the powers conferred by any part of any clause
in any part of the world and notwithstanding that the business
undertaking property or acts proposed to be transacted
acquired dealt with or performed do not fall within the objects
of the first clause. The operation of section 19 (c) of the
Companies Act 1961 is hereby expressly excluded by the
powers set out in the Third Schedule are deemed to be main
objects."

To the relationship between 39 and 42, as aforesaid, I will have to return. (at p146)

12. The taxpayers' articles of association contain this provision :

"2. (e) The Company shall not be carried on for the purpose
of profit or gain to its individual members and is prohibited
from making any distribution whether in money property or
otherwise to its members or to relatives of its members."

The articles, although containing no provisions relating to the payment of dividends, do contain provisions authorizing the reduction of capital and regulating the distribution of assets in a winding up as follows :

"44. The Company may by special resolution and subject
to confirmation by the Court reduce its share capital and any
capital redemption reserve fund in any manner and inter alia
may
(a) extinguish or reduce the liability on any of its shares in
respect of share capital not paid up,
(b) in addition or alternatively cancel any share capital
which is lost or unrepresented by available assets."
"107. The distribution of the assets of the Company upon
a winding-up shall be determined by special resolution." (at p146)

13. I am now in a position to consider whether the taxpayer has established the two conditions referred to in s. 103A (2) (c) to make it a public company in relation to the year ended 30th June 1966. (at p146)

14. First, has it been established that the taxpayer has not, at any time since its formation, been carried on for the purpose of profit or gain to its individual members? (at p146)

15. I do not regard the phrase "its individual members" in s. 103A (2) (c) as excluding corporate members. I therefore consider the problem treating Giris Pty. Ltd. as an individual member of the taxpayer. (at p146)

16. The taxpayer's contention, in its simplest form, is that, because the only two members of the taxpayer were trustees and that this was known to all concerned with the transactions that have taken place - including the taxpayer's directors - it cannot be said that the business of the taxpayer was carried on for the purpose of profit or gain to those members. (at p147)

17. To one accustomed to the ordinary rule that a company is entitled to treat the registered holder of any share as the absolute owner thereof, and is not bound to recognize equities, this contention did not command instant acceptance. Naturally enough, upon the first reading of s. 103A (2) (c), one's mind goes to the kind of company formed for charitable purposes, bound to apply its profits to such purposes, and prohibited from the payment of dividends to its members, such as are referred to in s. 24 of the Companies Act 1961 (Vict.). Upon reflection, however, I cannot confine s. 103A (2) (c) to companies of this kind. Had this been intended, it could so easily have been said. It seems to me that the first part of s. 103A (2) (c) requires an examination of what has actually occurred since the formation of the company, and a decision that the company has not been carried on for the purposes stated could be reached notwithstanding that, until the last year, the company could, by virtue of its constituent document, have made distributions to members and their relatives. Furthermore, the limitations to be found in s. 103A (2) (c) go beyond the paying of dividends. Moreover, the word "individual", once it has been decided that its purpose is not to exclude corporate members, seems to me to carry with it the notion of profit or gain to the members themselves. (at p147)

18. Upon the whole, therefore, I have come to the conclusion that, in the case where a company has been carried on for the purpose of profit or gain for persons other than the members, and for such persons exclusively, it is proper to conclude that it has not been carried on for the purpose of profit or gain to its individual members. (at p147)

19. The difficulty about the second condition is that the company's constituent document - which I take to be its memorandum of association, although it may be that it comprehends both the memorandum and articles of association - is not free from inconsistency. Thus, although par. 39 is couched in language which is clear and unambiguous, that paragraph does not stand alone, for par. 42, while excluding the operation of s. 19 (c) of the Companies Act 1961 (Vict.), goes on to provide that the powers set out in the 3rd Sch. to the Act are deemed to be main objects. Among the powers enumerated in the 3rd Sch. is 23 in these terms :

"To distribute any of the property of the company among
the members in kind or otherwise but so that no distribution
amounting to a reduction of capital shall be made without
the sanction required by law." (at p148)

20. Then too, although art. 2 (e) is clear and unambiguous, the articles relating to the reduction of capital and to the distribution of assets in a winding up cast some doubt upon the absolute character of the earlier prohibition. (at p148)

21. However, notwithstanding any contradictions which there may be, I am satisfied that it would be a breach of a prohibition in the taxpayer's constituent document if it were to make a distribution in money, property or otherwise to its members or relatives of its members. (at p148)

22. In the course of argument I was referred to a number of technical rules of construction which would support this conclusion ; viz. that par. 39 of the memorandum of association precedes par. 42 thereof ; that the former is special, whereas the latter is general ; that the former is in writing, whereas the latter is printed. I have reached my conclusion, however, without aid from these technical rules, for, upon the reading of the document as a whole, I am satisfied that par. 39 is of overriding force and that its effect cannot be destroyed by the words at the end of par. 42 which seem to me to lack any precise meaning. Moreover, looking at the articles of association, either as an aid to the construction of the memorandum or as themselves forming part of the constituent document of the taxpayer, I find in art. 2 (e) a similar overriding provision. (at p148)

23. In the face of par. 39 of the memorandum and art. 2 (e) I am not in doubt that distributions to members and relatives of members are prohibited, notwithstanding the ingenious use that counsel for the Commissioner has made of other parts of the documents. The memorandum and the articles are untidy, but I do not think there is any doubt about the effective existence of a prohibition in accordance with s. 103A (2) (c). (at p148)

24. For the foregoing reasons I find that the taxpayer was a public company within the description of s. 103A for the purposes of the tax year ended 30th June 1966, and, accordingly, I allow the appeal and set aside the assessment to additional tax. (at p148)

25. Appeal allowed with costs. Assessment set aside. Usual order with respect to exhibits. (at p148)

26. The Commissioner of Taxation appealed from this decision to the Full Court. (at p149)

27. R.J. Davern Wright Q.C. and J. D. Davies, for the appellant Commissioner. (at p149)

28. R. K. Fullagar Q.C. and J. F. Lyons, for the respondent taxpayer. (at p149)

29. (The following cases were cited in the course of argument: A. & S. Ruffy Pty. Ltd. v. Federal Commissioner of Taxation [1958] HCA 18; (1958) 98 CLR 637; National Mutual Life Association of Australasia Ltd. v. Federal Commissioner of Taxation [1970] HCA 51; (1970) 122 CLR 13; Federal Commissioner of Taxation v. Casuarina Pty. Ltd.(1971) [1970] HCA 30; ; 127 CLR 62; Finance Facilities Pty. Ltd. v. Federal Commissioner of Taxation [1971] HCA 12; (1971) 127 CLR 106; Abbey Malvern Wells Ltd. v. Ministry of Local Government and Planning (1951) Ch 728; Bohemians Club v. Acting Federal Commissioner of Taxation [1918] HCA 16; (1918) 24 CLR 334; Carlisle and Silloth Golf Club v. Smith(1912) 2 KB 177 ; (1913) 3 KB 75; Forbes v. Git(1922) 1 AC 256; Commissioners of Inland Revenue v. Yorkshire Agricultural Society (1928) 1 KB 611; Permanent Trustee Co. of N.S.W. Ltd. v. Commissioner of Stamp Duties (N.S.W.) [1954] HCA 34; [1954] HCA 34; (1954) 91 CLR 1; Commissioner of Stamp Duties (N.S.W.) v. Permanent Trustee Co. of N.S.W.(1956) AC 512; In re Australian Home Finance Pty. Ltd. [1956] VicLawRp 1; (1956) VLR 1;King v. Tait(1936) [1936] HCA 62; 57 CLR 715; Churchwardens of Birmingham v. Shaw [1849] EngR 263; (1849) 10 QB 868 (116 ER 329); Reg. v. Manchester Overseers [1851] EngR 89; (1851) 16 QB 449 (117 ER 951).) Cur. adv. vult. (at p149)

1971, June 2.

The following written judgments were delivered : -
BARWICK C.J. This is an appeal from the order of a justice of this Court

allowing the appeal of the now respondent (the taxpayer) against an assessment by the appellant (the Commissioner) for additional tax under Div. 7 of the Income Tax Assessment Act 1936- 1966 (Cth) ("the Act") in respect of profits insufficiently distributed in the year ending 30th June 1966. The material before the justice was wholly expressed in a special case and its annexures upon which the parties had agreed. His Honour answered the questions asked by the case favourably to the taxpayer. (at p149)

2. The taxpayer's appeal against the assessment turned upon the meaning and application to the taxpayer's circumstances of the provisions of s. 103A (2) (c). Section 103A (1) and (2) is in the following terms :

"103A. - (1) For the purposes of this Division, a company
is a private company in relation to the year of income if the
company is not a public company in relation to the year of
income.
(2) For the purposes of the last preceding sub-section, a
company is, subject to the next succeeding sub-section and to
sub-section (6.) of this section, a public company in relation
to the year of income if -
(a) . . .
(b) . . .
(c) the company has not, at any time since its formation,
been carried on for the purposes of profit or gain to its
individual members and was, at all times during the
year of income, prohibited by the terms of its constituent
document from making any distribution, whether
in money, property or otherwise, to its members or to
relatives of its members ; or." (at p150)

3. The basis of the Commissioner's assessment was that the taxpayer was not in the taxation year in question a public company but a private company within the meaning of Div. 7. The justice was of opinion that the taxpayer had established that it was a company which fell within the above-mentioned provisions and thus for relevant purposes a public company. His Honour construed par. (c) as meaning that a company would be a public company if in the specified period it had not been carried on for the personal profit or gain of its members and otherwise complied with the conditions of the paragraph. This construction was derived from the presence of the word "individual" in the paragraph, a word which his Honour held, and in my respectful opinion rightly, not to exclude corporate members of a company. Consequently, his Honour thought that the benefit of the profit or gain resulting from the company's activities to which the paragraph referred must be a benefit which the members could receive and retain for themselves beneficially. (at p150)

4. His Honour also concluded that the terms of the taxpayer's memorandum and articles of association satisfied the second condition of the paragraph. (at p150)

5. As I have the misfortune to differ from my brother Justice on the construction of the first condition of the paragraph, it is necessary that I set out the salient facts so far as they are disclosed by the special case. (at p150)

6. A company, Giris Pty. Ltd. (Giris), was at all material times sole trustee of property, including land, held under trusts which are referred to as "the Jansen family trusts", the details of which are not presently relevant beyond the statement that neither Giris nor a solicitor, R. G. B. Skinner, was beneficially entitled under them. Giris, incorporated in the State of Victoria, had but five shareholders and a paid-up capital of Pound14 ($28). It had no other activity than the performance of the Jansen family trusts and no property except such as was held on those trusts. On 30th June 1965 Giris caused the taxpayer to be incorporated and became one of its only two shareholders. The other shareholder was the said R. G. B. Skinner who held his share on behalf of Giris. It is clear that Giris held both the share in the taxpayer standing in its own name and that to which it was beneficially entitled standing in the solicitor's name on the Jansen family trusts. Giris sold to the taxpayer a considerable business concern along with the assets of that business the whole being property held on the said trusts and it placed the taxpayer in possession of certain land whereon that business was conducted. The taxpayer agreed to pay to Giris a price for the business and rent in respect of its occupation of the land. Whilst the price remained unpaid interest was agreed to be paid thereon by the taxpayer. (at p151)

7. The purpose of Giris in incorporating the taxpayer and in transferring the business to it was to augment the capital and income of the said trusts and to take advantage of the provisions of the Act. It could be said that the subscription of Giris and of the solicitor to the memorandum and articles of association of the taxpayer, and the acquisition of the shareholding in the taxpayer were mechanical but necessary steps in the achievement of these purposes of the trust under Giris' control. It could also be said that it was never a purpose of Giris or of the solicitor that any part of the profits or gains or assets of the taxpayer should be received and retained by them beneficially but that their purpose was that those profits and gains were to be held on the said trusts and, if practicable, should be paid at their direction direct to, or for the benefit of, the beneficiaries under those trusts. (at p151)

8. The memorandum of the taxpayer contained the following relevant provisions :

"4. (a). To carry on business as manufacturers of and
dealers in all articles parts accessories appliances apparatus or
things required for or capable of being used in connection with
electricity or electrical apparatus.
7. To undertake and execute any trusts the undertaking
whereof may seem desirable and either gratuitously or otherwise
and to act as executor or administrator manager agent
attorney or committee and generally to undertake and perform
any office of trust or confidence.
39. The Company shall not be carried on for the purpose
of profit or gain to its individual members and is prohibited
from making any distribution whether in money property or
otherwise to its members or to relatives of its members.
42. The objects set forth in the foregoing sub-clauses of this
clause shall not except when the context expressly so requires
be in any wise limited or restricted by reference to or inference
from the terms of any other clause or by the name of the
Company. None of such clauses or the objects therein specified
or the powers thereby conferred shall be deemed subsidiary or
auxiliary merely to the objects mentioned in the first clause
but the Company shall have full power to exercise all or any
of the powers conferred by any part of any clause in any part
of the world and notwithstanding that the business undertaking
property or acts proposed to be transacted acquired
dealt with or performed do not fall within the objects of the
first clause. The operation of Section 19 (c) of the Companies
Act 1961 is hereby expressly excluded but the powers set out
in the Third Schedule are deemed to be main objects." (at p152)

9. Clause 23 of the 3rd Sch. to the Companies Act (Vict.) as imported into the memorandum by cl. 42 is in the following terms :

"23. To distribute any of the property of the company
among the members in kind or otherwise but so that no
distribution amounting to a reduction of capital shall be made
without the sanction required by law." (at p152)

10. The articles of association of the taxpayer contain the following relevant provisions :

"2. (3) The Company shall not be carried on for the purpose
of profit or gain to its individual members and is prohibited
from making any distribution whether in money property or
otherwise to its members or to relatives of its members.
44. The Company may by special resolution and subject to
confirmation by the Court reduce its share capital and any
capital redemption reserve fund in any manner and inter alia
may
(a) extinguish or reduce the liability on any of its shares in
respect of share capital not paid up,
(b) in addition or alternatively cancel any share capital which
is lost or unrepresented by available assets.
107. The distribution of the assets of the Company upon a
winding-up shall be determined by special resolution." (at p152)

11. During the financial year which elapsed from the date of its incorporation to 30th June 1966 the taxpayer carried on the business which had been transferred to it and thereby made very large profits and gains. During that period by its agent it paid to or for the account of Giris a total sum of $91,746.84 and at the direction of one of the beneficiaries of the Jansen family trust, though presumably with the concurrence of Giris, a further sum of $15,125.38. All of these sums were treated by the taxpayer in its books of account as a contra to its liabilities to Giris for rent and for interest on the purchase money of the business. In fact the total of this sum exceeded the total of those liabilities. From the perusal of books of account forming part of the special case, it might seem that that excess was applied by the taxpayer to the reduction of the purchase price. However it is expressly stated in the special case that no part of the purchase price has been paid. (at p153)

12. The first and principal question to be decided is whether it has been established that the taxpayer has not at any time since its incorporation been carried on for the purposes of profit or gain to its individual members. As I have indicated, my brother answered this question in the affirmative because of his view of the meaning of s. 103A (2) (c). In my opinion, however, the function of the word "individual" in par.(c) is not to import the idea of "personal" or "beneficial" profit or gain. Its function, in my opinion, is to exclude from the operation of the paragraph those incorporated companies and unincorporated associations (see definition of "company" in s. 6 (1)) which are carried on for the profit or gain of the membership as a whole and those which are carried on for the profit or gain of some specified person or body not being a member. Section 23 (g) exempts from tax the income of certain bodies which are not carried on for the purposes of profit or gain to their individual members. The concept in this provision is of bodies, either corporate or unincorporate which are carried on for the benefit of their members but not for the profit or gain of their members severally or individually. It is the same concept as underlies the expression "individual members" in par. (c). The exemption which s. 23 (g) offers is not co-extensive with all bodies which are not carried on for the benefit of their members severally or individually. Instances of corporate bodies which direct their profits or gains to the benefit of their members as a whole but not to their members individually readily come to mind. These not being covered by s. 23 (g), in my opinion, may fall within par. (c). The presence of the word "individual" in par. (c) does not, in my opinion, operate to exclude from the ambit of Div. 7 companies which include members who are in fact trustees or nominees, nor companies in which all the members are trustees or nominees. I should add that it would not matter, in my opinion, that the company had notice of the fact that its member or members was or were trustees or nominees, as could be said to be the case in this matter. (at p154)

13. His Honour held that the provisions of the memorandum and articles of association of the taxpayer satisfied the second condition of the paragraph : and with this conclusion I agree. It seems to me that it is sufficient that the constituent document should by its terms express the requisite prohibition. It is not necessary, in my opinion, that those terms should be effective in fact and in law to prevent a distribution in breach of them. The situation in point of fact is dealt with by the first condition of the paragraph and in relation to a possibly larger period of time than that with which the second condition is concerned. The second condition is satisfied, in my opinion, by the formality of the constitutent document. Therefore it is nothing to the point in this case that the terms of the constituent document which I have quoted would appear to be unenforceable by any person. (at p154)

14. There remains however a question whether upon the construction of the paragraph which I favour, the taxpayer has established that since its incorporation it has not been carried on for the purpose of profit or gain to its individual members, that is to say, its shareholders Giris and the solicitor R. G. B. Skinner. (at p154)

15. In approaching this question I put on one side all payments which were made by the taxpayer to or for the benefit of Giris or with its approval. The situation then is that the taxpayer at all times since its incorporation has had in its memorandum of association the clauses prohibiting the distribution of money to its members which I have already set out. These although effective to satisfy the second condition of the paragraph are presently unenforceable and alterable in the future by the members. (See ss. 21, 28 and 31 of the Companies Act (Vict.)). During that time the company has been earning very considerable profits and has been accumulating a very large profit and loss appropriation account now standing at more than $500,000. We are not here concerned with "purposes" in the sense of the subjective intention of the shareholders or of those who caused the taxpayer to come into existence. We are concerned with the objective conclusion to be drawn from the circumstances of the operation of the company. Upon the facts I have mentioned there is no room to doubt that the company was carried on for the purposes of profit or gain. Then for whose profit and gain has the taxpayer been so carried on? No body or person has been nominated by the memorandum and articles of association of the taxpayer as the person or body for whose benefit or to whose account such profit or gain must be paid or be made available. Normally an incorporated company which is trading for profit is carried on for the purposes of profit or gain to its individual members, whether or not what those members receive must, by reason of arrangements by which they are bound, be held for the benefit of others. Bearing in mind the construction which I would put upon the paragraph, and those circumstances to which I have just referred, can it be said that the taxpayer has established that it has not been carried on since its corporation for the purpose of profit or gain to its individual members? I think not. Indeed, whenever any distribution of the profits or gains of the taxpayer takes place it must be either to or upon the order of the shareholders. If as I think, any fiduciary obligations of the shareholders should be ignored in this connexion, the right conclusion is that those profits and gains are profits and gains for the shareholders. Consequently, in my opinion, the taxpayer has not established that it is a public company within the meaning of s. 103A (2) (c). It follows that it is a private company and that the Commissioner's assessment has not been shown to be excessive. (at p155)

16. I should add that had I not formed the opinion which I have just expressed as to the first limb of par. (c) there would have been outstanding, in my opinion, a question of fact as to whether in substance the payment of the said sum of money to or for the benefit of Giris out of the funds of the taxpayer since its incorporation permitted the conclusion that the taxpayer had not at any time since its incorporation been carried on for profit or gain to its individual members. But having expressed my opinion on the former point there is no need for me to pursue the question how that matter of fact should be resolved. (at p155)

17. In my opinion therefore the appeal should be allowed and the assessment restored. (at p155)

McTIERNAN J. I agree with the judgment of the Chief Justice. (at p155)

WINDEYER J. I agree with the judgment of the Chief Justice. (at p155)

OWEN J. I have had the opportunity of reading the judgment prepared by the Chief Justice and agree with his Honour's reasons for allowing the appeal. (at p155)

ORDER

Appeal allowed with costs. Order of Menzies J. allowing the taxpayer's appeal set aside and in lieu thereof order that the taxpayer's appeal be dismissed with costs.