[Home] [Databases] [WorldLII] [Search] [Feedback]

High Court of Australia

You are here: AustLII >> Databases >> High Court of Australia >> 1924 >> [1924] HCA 60

[Database Search] [Name Search] [Recent Decisions] [Noteup] [Help]

Jaques v Federal Commissioner of Taxation [1924] HCA 60; (1924) 34 CLR 328 (10 June 1924)

HIGH COURT OF AUSTRALIA

H C of A

15 December 1923

Rich J.

Brissenden K.C., J. A. Browne and Harper, for the appellant.

Innes K.C. and E. M. Mitchell, for the respondent.

Dec. 15, 1923

Rich J

. delivered the following written judgment:—

This is an appeal under sec. 38 of the Income Tax Assessment Act 1915-1918. The appellant was dissatisfied with the assessment made by the Commissioner of the income tax payable by him for the financial year 1920-1921, and lodged an objection thereto under sec. 37 of the Act. stating the following reasons for his objection: (1) that the amount of tax as assessed and levied is contrary to law; (2) that the sum of £5,625 representing calls paid to Kandos Cement Co. Ltd. and Kandos Collieries Ltd. is a proper deduction from the income shown in the return and should have been allowed as such. The Commissioner disallowed the objection, which now comes before me as an appeal under sec. 37.

The real question in contest is stated in the second reason above quoted. The appellant's case is primarily rested on sec. 18, sub-sec. 1 (i), of the Income Tax Assessment Act, which is in the following terms:—"five per centum of the total amount paid in the year in which the income is derived in respect of calls on the shares of a company carrying on operations in Australia: Provided that the total amount of calls paid in the year in which the income is derived shall be deducted in the case of calls on shares in a mining company or syndicate carrying on mining operations in Australia." The appellant relies on the proviso.

The facts before me establish beyond controversy that the sum of £5,625 was paid in the year in which the income was derived as calls on shares in the Kandos Companies, which I shall assume for the purpose of this case are carrying on mining operations in Australia. On that basis the appellant is prima facie entitled to deduct the full amount of £5,625 from his total assessable income for the year in order to arrive at his taxable income.

But the Commissioner relies on sec. 53 of the Act, which is in these terms: "Every contract, agreement, or arrangement made or entered into, in writing or verbal, whether before or after the commencement of this Act, shall, so far as it has or purports to have the purpose or effect of in any way, directly or indirectly — (a) altering the incidence of any income tax; or (b) relieving any person from liability to pay any income tax or make any return; or (c) defeating, evading or avoiding any duty or liability imposed on any person by this Act; or (d) preventing the operation of this Act in any respect; be absolutely void, but without prejudice to its validity in any other respect or for any other purpose."

A considerable amount of evidence, some oral and some documentary, has been given. The general features of the transaction upon which I have to determine this case are not seriously disputed. It is rather the legal effect of them as bearing upon sec. 53 that is in contest. They comprise a number of contracts, agreements and arrangements, beginning with two contracts between a reconstructing company and two other companies—the results of reconstruction; then two other contracts and some less formal arrangements replacing the two original contracts, and, lastly, the taking up of shares in the two new companies followed by calls made upon these shares and the payment of those calls.

The arguments of the parties were respectively directed to the question whether the transactions to which I have referred regarded in their entirety could be said to fall or not to fall within the provisions of sec. 53. As I regard the matter the real issue takes a simpler form. The question relates to the tax liability of the appellant. I do not wish to deny that the Commissioner might succeed if he had to establish that the transactions in their entirety constituted a scheme amounting in law to a "contract, agreement, or arrangement" falling within the provisions of sec. 53; as to that I decide nothing. I reduce the question to a simpler proposition. Inasmuch as the calls were paid by virtue of the appellant's own personal "contract, agreement, or arrangement" with the companies by which he became a shareholder liable to pay calls if they were made, I content myself with inquiring whether that "contract, agreement, or arrangement" falls within the section. In order to determine that question, however, it is clearly necessary to ascertain whether it had or purported to have "the purpose or effect of in any way, directly or indirectly," doing any of the things mentioned in pars. (a), (b), (c) or (d) of sec. 53. If it had, it is declared by the section to be void; and in that case the moneys so paid would not fall within the ambit of par. (i) of sec. 18, sub-sec. 1. In order to satisfy my mind regarding the purpose or effect of the appellant's application for shares it is necessary to see how that application came about. This involves an inquiry into the history of the series of transactions leading up to the application; and these I now proceed to narrate.

On 22nd May 1913 the New South Wales Cement Lime and Coal Co. Ltd. was incorporated as a limited company under the provisions of the New South Wales Companies Act 1899. The appellant was a director of the company, and held 3,750 fully paid-up shares in it. The company continued to carry on business as a cement and coal company until its reconstruction in 1920. In April and May of that year the directors of the company decided to submit to the shareholders resolutions for the reconstruction of the companies.

The basis of reconstruction was that two new companies should be formed, one to be called "Kandos Cement Co. Limited" with a capital of £500,000 divided into 500,000 shares of £1 each, and the other "Kandos Collieries Limited" having a capital of £225,000 shares of £1 each. The assets of the old company were to be distributed in such a way that those represented by the cement works, limestone deposits, &c., were to be transferred to Kandos Cement Co. Ltd. The consideration for such transfer was to be the sum of £400,000 to be satisfied by the allotment to the shareholders of the old company of one fully paid share in the new company of £1 for every share held in the old company. The assets represented by the old company's coal lands, collieries, &c., were to be transferred to Kandos Collieries Ltd. for the consideration of £200,000 to be satisfied by the allotment to the shareholders of the old company of 200,000 fully paid shares of £1 each. The reconstruction was to be carried out under sec. 261 of the New South Wales Companies Act 1899, which necessitated the voluntary liquidation of the old company.

In the meantime draft agreements for carrying out the reconstruction and memoranda of association of the new companies were prepared. On 17th May 1920 an extraordinary general meeting of the old company was held, when the following resolutions were carried unanimously:—"(1) Proposed by the chairman (Mr. L. J. Davies) and seconded by Mr. Justice Heydon, that it is desirable to reconstruct the company, and accordingly that the company be wound up voluntarily and that Charles Colin Campbell be and he is hereby appointed liquidator for the purpose of such winding up. (2) Proposed by the chairman (Mr. L. J. Davies) and seconded by Mr. Justice Heydon, that the said liquidator be and he is hereby authorized to consent to the registration of two new companies to be named respectively "Kandos Cement Company Limited" and "Kandos Collieries Limited" with memoranda and articles of association which have already been prepared with the privity and approval of the directors of the present company. (3) Proposed by the chairman (Mr. L. J. Davies) and seconded by Mr. Justice Heydon, that the draft agreements submitted to this meeting and made respectively between this company and its liquidator of the one part and Kandos Cement Company Limited of the other part and this company and its liquidator of the one part and Kandos Collieries Limited of the other part be and the same are hereby approved and that the liquidator be and he is hereby authorized under sec. 261 of the Companies Act of 1899 to enter into agreements with such new companies when incorporated in the terms of the said draft and to carry the same into effect subject to any modifications which he may think expedient." On 1st June 1920 these resolutions were confirmed. On 22nd June 1920 the two new companies were duly incorporated.

Some time after the execution of the agreements referred to in the third resolution above mentioned, Mr. Campbell, who combined the duties of liquidator of the old company with those of secretary of the new companies, received certain advice from Mr. Johnson, one of the auditors of the three companies: "Mr. Johnson told me this matter could be arranged in another way and that way would save the Cement Company stamp duty—a large amount of stamp duty—and later on the shareholders would receive a benefit of deducting calls paid with the new company from the Federal income tax." Legal advice was then taken, with the result that two new agreements were prepared. No meeting of the old company was called, but the new agreements were placed before directors' meetings of the new companies on 25th August 1920, when the following resolution was passed:—Meeting of Directors of Kandos Cement Co. Ltd.—"The proposals relating to the altered form of the reconstruction were explained, and it was resolved that the resolutions passed at the meeting of directors held on 23rd June 1920 relative to the execution and filing of the agreement then produced be rescinded, and that the agreement now submitted be approved and the same be duly executed and the seal of the company affixed thereto, having been previously sealed by the New South Wales Cement Lime and Coal Co. Ltd. by its liquidator and signed and sealed by him as liquidator." Meeting of Directors of Kandos Collieries Ltd.—"The proposals relating to the altered forms of the reconstruction were explained, and it was resolved that the resolutions passed at the meeting of the directors held on 23rd June relative to the execution and filing of the agreement then produced be rescinded, and that the agreement now submitted be approved and the same be duly executed and the seal of the company affixed thereto, which was accordingly done, having been previously sealed by the New South Wales Cement Lime and Coal Co. Ltd. by its liquidator and signed and sealed by him as liquidator."

At this meeting "the explanation" of Mr. Oakden, the general manager, was that by making an agreement for the sale of the company's assets a large amount of stamp duty would be saved, and by making the sale by verbal arrangement for the balance it would enable the shareholders of the new company to take advantage of the clause in the income tax form to deduct any "calls paid." "They could deduct what calls were paid by them, and would be able to claim as a deduction the whole of their capital in the old company."

The agreements of 25th August 1920 were then executed. The main difference between these agreements and the original agreements is that, instead of a sale of the assets of the old company to the new companies for fully paid shares in these companies, representing the whole of the consideration for the sales, there is substituted an arrangement by which the "immovable" property of the old company representing the cement proposition is sold to Kandos Cement Co. Ltd. for £135,723, and similar property representing the coal proposition is sold to Kandos Collieries Ltd. for £90,375. In entering into these new contracts the liquidator of the old company interpreted very liberally, to say the least of it, the power of modification given him by the third resolution of 17th May. There were, however, in fact, no dissentients from the substituted arrangement, and its validity under sec. 261 of the Companies Act is not relevant to the present inquiry.

After the execution of the new agreements formal transfers were made of the property referred to in the agreements. The next step taken in the reconstruction scheme was a letter dated 8th September signed by Mr. Campbell, purporting to act as liquidator of the old company, addressed to the shareholders in the old company. As this document and the authority signed by the appellant are, in the view I take of the case, the crux of the matter I set them out in full:—"Perpetual Trustee Chambers, 33-39 Hunter Street, Sydney.—8th Sept. 1920.—Dear Sir or Madam,—New South Wales Cement Lime & Coal Co. Ltd.—Reconstruction.—Herewith form of authority, which kindly sign and return to me at your earliest convenience. This request is rendered necessary owing to some slight modification in the method of carrying through the reconstruction agreement having been decided upon. On receipt by me of authorities from all the shareholders of the above-named company, I will be in a position to obtain for you your proper quota of shares in both Kandos Cement Co. Ltd. and Kandos Collieries Ltd. as under:—______Shares in Kandos Collieries Ltd. of £1 each paid up in full.________Shares in Kandos Cement Co. Ltd. of £1 each paid up in full.________Shares in Kandos Cement Co. Ltd. of £1 each paid up to 2s. Your liability of 18s. per share of these last-mentioned shares I will satisfy when I receive from you the sum of £__________representing the call on your________contributing shares in the New South Wales Cement Lime and Coal Co. Ltd., which falls due on the 24th day of April 1921. Should you desire, you may pay this call at any time prior to the due date, in which event these________shares in Kandos Cement Co. Ltd. will thereupon be paid in full and rank for dividend accordingly. In order that there may be no undue delay in distributing the shares in the two new companies I am asking all shareholders to return forms of authority immediately. Should you desire the whole or part of your quota of paid-up shares in the new companies to be issued in names other than your own, kindly supply me with the particulars.—Yours faithfully, C. C. Campbell, Liquidator." "To the Liquidator, New South Wales Cement Lime and Coal Co. Ltd., Sydney.—Dear Sir,—I hereby direct you to lodge application for me in Kandos Cement Co. Ltd. for 3,750 shares and in Kandos Collieries Ltd. for 1,875 shares, and I direct you to retain and utilize the moneys to which I am entitled as a shareholder in New South Wales Cement Lime and Coal Co. Ltd. upon the distribution of the assets thereof in satisfying any calls made upon the shares so applied for.—Yours faithfully, C. A. Jaques." In passing, it will be noticed that this document does not indicate in any way that the shareholders were entitled to receive in cash their respective proportions of the consideration money paid to the old company. Mr. Campbell as liquidator had no duty imposed or power conferred on him to apply for shares in this way, and in so doing he was acting altogether outside his office as liquidator.

On 19th October 1920, Mr. Campbell applied to the directors of the new companies for allotment of a certain number of shares to the persons named in the lists accompanying the applications. In this document it is not expressed that Mr. Campbell is acting as liquidator. The appellant's name was included in the lists for 3,750 shares in Kandos Cement Co. Ltd. and 1,875 shares in Kandos Collieries Ltd.

Then, on 20th October 1920, the directors of Kandos Cement Co. resolved to issue at par 399,993 £1 shares of the authorized and unissued capital of the company. The "liquidator," who was also acting at the meeting in his capacity of secretary, thereupon handed in an application for 293,909 shares, which was considered, and these shares were allotted to (among others) the appellant. The secretary was directed to give notice of the allotment and also to inform allottees of certain numbered shares, including the appellant, that a call of £1 per share would forthwith be made on such shares. The directors also resolved to acquire certain assets of the old company, as specified in the schedule handed in by the liquidator, at the price fixed by him. These assets comprised those not included in the agreement of 25th August 1920 with Kandos Cement Co. Ltd., and consisted of the assets which would pass by delivery. The price had been arrived at by the liquidator of the old company and the general manager of the new company by deducting £135,723, the amount fixed for the property in that agreement, from the paid-up capital of the company. The sum of the two amounts, £360,913 6s., was the amount payable by Kandos Cement Co. to the liquidator for all assets transferred to that company. The directors further resolved that, as Kandos Cement Co. Ltd. was already in possession of all the assets, the company should pay forthwith to the liquidator a cheque for the amount of the total consideration agreed upon. On 3rd November 1920 similar resolutions were passed by the directors of Kandos Colliery Co. Ltd., and the liquidator and the general manager went through a similar process of fixing the price for the assets not included in the agreement of 25th August with Kandos Collieries Ltd., the total consideration amounting to £200,000.

The appellant thus became the allottee of 3,750 contributing shares, numbered 57686 to 61435, in Kandos Cement Co. Ltd. and of 1,875 contributing shares numbered 36001 to 37875 in Kandos Collieries Ltd. On the same date both companies made calls on the appellant, amongst others. On 3rd November 1920 Mr. Campbell notified the shareholders of Kandos Cement Co. Ltd. of the allotment of the shares and of the call, and stated "which call I will now pay in accordance with your instructions." On 12th November 1920 he gives a similar notice and makes a similar statement to the shareholders of Kandos Colliery Co. Ltd. On 6th December 1920 Kandos Cement Co. Ltd. and Kandos Collieries Ltd. drew cheques for the sums of £360,913 6s. and £200,000 respectively, and handed them to Mr. Campbell as liquidator in payment for the assets transferred. On 16th December 1920 he as liquidator drew cheques for the same amounts (less a small sum for exchange) in payment of calls made or anticipated. On that date Campbell deposited both sets of cheques at the bank—the first set to the credit of the old company and the second set to the credit of the new companies. The payment for the assets and of the calls was effected by an exchange of cheques, which resulted only in cross-entries in the bank accounts of the three companies.

I have now reached the point when it is possible to assess the situation of the appellant relatively to the call made upon him by the new companies. The complicated series of events which I have narrated was deliberately entered upon for the purpose of culminating, and did in fact culminate, in an obligation to pay the calls by reason of which the deduction is claimed. In my opinion, the Legislature has permitted the deduction where it is the legitimate result of a call arising from the ordinary situation of a shareholder in a mining company. But sec. 53, in my opinion, also excludes a deduction which is not the result but the animating purpose of a call deliberately incurred, as this was, for the purpose of the deduction. I may state at once that, although very able arguments on both sides were addressed to me touching the reality or unreality of the transactions I have to investigate, and as to whether they did or did not amount to an evasion of the income tax legislation, I do not propose as to those arguments to say more than this:—Numerous judicial decisions have dealt with the subject of sham transactions and transactions said to be "evasions" of the law. There is always great difficulty in determining in any particular case whether a transaction is a lawful or unlawful "evasion" of a statute. I apprehend that the Commonwealth Parliament, in passing sec. 53, recognized the difficulties I have referred to and determined to get away from them. It laid down its own test of avoidance for its own purposes. Therefore, what I have to do is not to consider the question of "evasion" by the light of the standard authorities on that subject. Nor do I see on the facts before me how I can treat what has been done as an unreality. Sec. 53 regards the "contract, agreement, or arrangement" as possibly a very real one, but attaches consequences to the purpose or effect. It is on this basis that I am proceeding.

If I assume, as I do for the purposes of this judgment, that the series of transactions, down to and including the later contractual and other relations between the old company and the new companies, stands in full validity and unimpeachable either under sec. 53 or otherwise, what was then the personal situation of the appellant? As a shareholder in the old company he would have been entitled to his proportionate share of the money payable by the new companies to the old company as consideration for the assets transferred. That proportionate share would have amounted to £5,625. Had he so received it, he would have been liable in the ordinary way to pay income tax, not on that sum, but on his general income. Then, as a purely personal arrangement unconnected in law but very closely connected in fact with what had gone before—to all of which he had been an active party—the appellant authorized Campbell as his agent to apply for shares in the new companies, and to pay over, also as his agent, to the new companies for calls which it was arranged should be made, the share of the old company's assets which Campbell as liquidator held for the appellant. This application for shares and appropriation of assets are legally separate from and independent of the preceding arrangements, which stand, so to speak, as preparation for it. They were admittedly made for the very purpose of creating the deduction now sought.

I am of opinion that the appellant's contract or agreement with the new companies to take the shares plus the arrangement to make the call amounted, in the circumstances, to a "contract, agreement, or arrangement" for one or more of the purposes or effects mentioned in sec. 53.

I therefore disallow the deduction, and dismiss the appeal with costs.

Appeal dismissed with costs.

Solicitors for the appellant, Stephen, Jaques & Stephen.

Solicitor for the respondent, Gordon H. Castle, Crown Solicitor for the Commonwealth.