Federal Commissioner of Taxation v West Australian Tanners & Fellmongers Ltd [1945] HCA 21; (1945) 70 CLR 623 (14 September 1945)

HIGH COURT OF AUSTRALIA

The Federal Commissioner of Taxation Appellant; and West Australian Tanners and Fellmongers Limited Respondent.

H C of A

14 September 1945

Rich, Dixon and McTiernan JJ.

Louch (with him Brown), for the appellant.

Downing K.C. (with him F. E. Downing), for the respondent.

Louch, in reply.

The following written judgment was delivered:—

Rich, Dixon and McTiernan JJ.

This is an appeal by the Commissioner of Taxation from a decision of a Board of Review. The question decided by the Board of Review arises under the very difficult provisions of Div. 7 of Part III. of the Income Tax Assessment Act 1936-1941 relating to private companies. The respondent company was assessed under those provisions as a private company on the footing that it had not made a sufficient distribution of its income of the year of income ended 30th November 1941. By s. 104 (1) it is provided that, where a private company has not, before the expiration of six months after the close of the year of income ... made a sufficient distribution of its income of the year, the Commissioner may assess the aggregate additional amount of tax which would have been payable by its shareholders if the company had ... paid the undistributed amount as a dividend to the shareholders ... and the company shall be liable to pay the tax so assessed. The company had adopted the twelve months ending 30th November in lieu of that ending 30th June as its year of income.

The question is whether the company fulfils the definition of "private company." That definition in its terms depends, in the circumstances of this case, upon a fiction or presumption established by s. 103 (2) (c). "Private company" is defined to mean a company which is under the control of not more than seven persons, and which is not a company in which the public are substantially interested or a subsidiary of a public company. Paragraph c of sub-s. 2 of s. 103 provides that a company shall be deemed to be under the control of any persons where the major portion of the voting power or the majority of the shares is held by those persons or nominees of those persons or where the control is, by any other means whatever, in the hands of those persons. Section 103 (2) (a) provides what shall be deemed a company in which the public are substantially interested, and for the purpose of this case it is enough to say that, upon the facts, the respondent company cannot claim to be one which falls within the description of that paragraph.

The question in the case, therefore, is whether it is a company which is under the control of not more than seven persons, a question which depends on par. c of s. 103 (2). That question the Board of Review decided in the negative, basing its decision upon the decision of this Court in Adelaide Motors Ltd. v. Federal Commissioner of Taxation[1].

The issued share capital, namely 20,232 shares, is held by 42 shareholders. The seven largest shareholders hold a majority of these shares, and, accordingly, a major portion of the voting power. Their aggregate shareholding is 10,525 shares. But a number of other groups of seven shareholders may be made up having an aggregate holding giving a majority of shares, and therefore a major portion of voting power. There do not appear to be any shareholders who are actual nominees of other shareholders. But "nominee" in s. 103 (1) is defined in such a way that anybody who is a relative appears to be included. If this definition be used in relation to s. 103 (2) (c) in its application to the facts, a still greater number of groups may be made up having a majority of shares and a majority of voting strength. Neither the group consisting of the seven largest shareholders nor any other of these groups has in fact acted together so as to control the company.

For the purposes of his assessment, the Commissioner has chosen the group of seven consisting of the largest shareholders, and he contends that because they have a major portion of the voting power, or because a majority of shares is held by them, the company must be deemed to be under the control of those persons, with the consequence that it is a company, within the meaning of the definition of "private company," which is under the control of not more than seven persons.

A reading of the provisions of par. c of s. 103 (2), as well as a reading of the definition of "private company," suggests very strongly that these provisions were framed upon the view that there could be only one control, and that there could be only one group of seven or less possessing the major portion of the voting power or the majority of the shares.

Any analysis of the possible numerical situations of voting power or shareholdings in any given case, and of the various combinations open, will show that the assumption that there can be only one group of seven or less having the major portion of the voting power or holding the majority of the shares is quite fallacious. It is, of course, true that the conception expressed by the word "control" is not consistent with the existence at one time of more than one control. The difficulties which result from this, as well as from other peculiarities of this legislation, have brought upon it some strong, but by no means unjustified, judicial criticism, both here and in England, where these provisions originated. It is not necessary to repeat what has been said. It is enough to refer to the decision of Mr. Justice Rowlatt and of the Court of Appeal in Himley Estates Ltd. and Humble Investments Ltd. v. Inland Revenue Commissioners[2], and to Tatem Steam Navigation Co. Ltd. v. Inland Revenue Commissioners[3], and, in this Court, to Adelaide Motors Ltd. v. Federal Commissioner of Taxation[4].

The more the language of par. c is studied the more difficult it is to be sure of its meaning and application. It is not easy to believe that, where there are many groups of shareholders of each of which it may be truly said that the group holds a major portion of the voting power or a majority of the shares, it is intended to attribute the control of the company to every one of such groups, either alternatively or cumulatively. To meet this difficulty, it is contended on behalf of the taxpayer in the present case that the provision is applicable only to cases where there is one group and no other group of whom possession of the voting power or the majority of the shares may be predicated.

The objection to this explanation of the provision is that it cannot often be true that one group only of seven or less shareholders can make up a majority of voting strength or of shareholding. It would, of course, cover cases in which one shareholder has a majority of shares, or in which two or three shareholders together make up a majority of shares and the numbers are such that no majority composed otherwise can be made up.

Another explanation suggested is that an actual exercise of control, as well as the capacity to control, must reside in the seven shareholders. There are difficulties upon the exact words of the provision in this interpretation, which, however, gains some support from the general sense or purpose of the provisions.

Another possible way of applying the enactment where there are numerous groups satisfying its exact terms is to treat it as applying to that group which has the largest voting strength or shareholding.

Still another interpretation of the provisions is to take them as meaning that, wherever there is any group or groups, however numerous, of seven persons or less holding the voting power or a majority of shares, the first part of the definition of "private company" is satisfied and that it then remains a question whether the public is substantially interested or whether the company is a subsidiary of a public company.

The view adopted by the Commissioner appears to be that, where there are numerous groups, it is for him to select one of them, and when he does so it is that group which has to be considered. At all events, that contention was advanced on his behalf. It is open to the objection that the provision does not depend upon the exercise of the discretion either of the Commissioner or the Board of Review, but places the liability of the company upon the actual existence of the state of facts it attempts to describe. The Commissioner's function is merely to ascertain the existence of that state of facts, subject to review by a Board of Review, or to appeal to the Court.

But the definition of "private company" and the application of par. c of s. 103 (2) received the consideration of this Court in Adelaide Motors Ltd. v. Federal Commissioner of Taxation[5], and the decision in that case is one which we should follow. The Commissioner contends that the Board of Review was wrong in interpreting the decision as governing the present case. It is true that, in the case of Adelaide Motors Ltd., there was a question whether that company was one in which the public were substantially interested. It is true, moreover, that his Honour the Chief Justice decided the case upon that question. His Honour decided that it was a company in which the public were substantially interested. Rich J. and Starke J., however (who, with the Chief Justice, composed the Court), did not confine their decision to that ground. On the contrary, Starke J. does not appear to have dealt with it. It was contended before us that the objection of the taxpayer and the arguments of counsel went no further than that particular ground, and that, in so far as Rich J. and Starke J. dealt with the question before us, their opinions should not be taken to form part of the ratio decidendi of the court.

The objections of the taxpayer appear in the report[6] and, though it is true that the second and third of them relate only to the public character of the company or the interests of members of the public, the first is a general objection that the company is not a private company within the meaning of the statute, and it is this question that was asked in the case stated. The arguments of counsel as reported appear to be directed to that question, but, even in the brief account of those arguments, there are indications of a general discussion of the provisions. But, in any case, the failure of counsel to argue the question could scarcely detract from the authority of the decision.

A study of the judgment of Rich J. makes it clear that he expressly dealt with the ground that the major portion of the voting power or the majority of the shares was held by many groups of not more than seven persons, as well as with the ground that it was a company in which the public were substantially interested. He refers to the fact that courts are called upon to solve the puzzle set by the "bewildering" definition clause found in the English Finance Act and the Federal Income Tax Assessment Act. He speaks of the judgment of the Chief Justice, which he had had the opportunity of reading, and that of Romer L.J. in the Himley Estates Ltd. Case[7], and of the comment made by those two learned judges on the ridiculous result of an arbitrary grouping of persons in control. The judgment of Rich J. then proceeds as follows:—"But the facts in this case show that the de facto control of the company is in the hands of more than seven persons. Thus one element or condition is wanting to comply with the definition"[8].

Now the facts of the case showed that there were many groups of seven shareholders holding a major portion of the voting power or a majority of the shares, and that the Commissioner had chosen one of them. The passage quoted from the judgment of Rich J. plainly means that this is not enough without de facto control. In other words, where there are many such groups, only that group which not only has the capacity to control, but also exercises it, can be regarded as in control. In Adelaide Motors Ltd., there was no group which exercised control, although there were many groups of persons who, by combining together, might have done so. Rich J. expressed this view as the first ground of his decision. He then proceeded to decide that it was a company in which the public were substantially interested, but as a second ground for his decision.

Starke J. expressed the ground of his decision as follows:—

Similar provisions have been described by English judges as "bewildering" and "ridiculous," and so they are if applied in the manner suggested by the Commissioner. In terms the section only refers to a company which is under the control of not more than seven persons; it contemplates and provides for a single group of not more than seven persons of whom it can be established that they, and no other, control the company. Those persons may control the company because they have the major portion of the voting power, the majority of the shares may be held by them or their nominees, or the control is by any other means whatever in their hands. The section becomes unintelligible if, according to the Act, the control of the company may be deemed to be in any of a number of groups of shareholders not exceeding seven persons, and as in this case, in several thousands of such groups.

In my opinion, the section has no application in such circumstances[9].

We take this to mean that, unless there is a group of not more than seven people who actually control the company or a group of not more than seven people which is the only group of that description holding the major portion of the voting power or the majority of the shares, the conditions prescribed by the provisions in question are not fulfilled.

His Honour the Chief Justice explained in full the difficulties of the interpretation of these sections, but, as we understand his judgment, did not pronounce an actual decision upon the question with which we are concerned. We regard his judgment as neither dissenting from nor assenting to the views expressed by Rich J. and Starke J.

We interpret the decision of the Court in the Adelaide Motors Case[10] as giving to par. c of s. 103 (2) in its application to the definition of in s. 103 (1) an operation which may perhaps be compendiously stated as follows. The paragraph applies where a group or groups exist holding the major portion of the voting power of a company or the majority of the shares, if, in addition, there is an actual control of the company by one of the groups, and there is such an actual control whenever there is only one such group who hold the major portion of the voting power or the majority of the shares. If the group so ascertained consists of not more than seven persons, then the first condition prescribed by the definition of "private company" is fulfilled. We should perhaps interpolate the observation that neither the decision in the case of Adelaide Motors Ltd.[11] nor in this case deals in any way with that part of par. c which refers to a case where the control is by any other means in the hands of a group of persons: Compare British American Tobacco Co. v. Inland Revenue Commissioners[12].

Interpreting the decision in this way, we think that our decision is governed by it and must be for the taxpayer. We were asked by the Commissioner to take steps to submit the decision in the case of Adelaide Motors Ltd. v. Federal Commissioner of Taxation[13] to a Bench consisting of all the judges with a view to its reconsideration. We do not think this is a course which we should pursue.

The enactment presents very great difficulties—difficulties, indeed, to which it may perhaps be said no satisfactory solution can be offered. The decision in the case of Adelaide Motors Ltd.[14] disposes of some of them and provides a practical answer which does not appear to us to be unworkable. If the law as there laid down does not carry out the intention of the legislature, the desirability of amending the provisions will no doubt receive the consideration of the appropriate authorities. They are provisions the form of which in any event appears to merit a full reconsideration.

The appeal from the Board of Review must be dismissed with costs.

Appeal dismissed with costs.

Solicitor for the appellant, H. F. E. Whitlam, Crown Solicitor for the Commonwealth.

Solicitors for the respondent, Downing & Downing.

[1] [1942] HCA 25; (1942) 66 C.L.R. 436.

[2] (1933) 1 K.B. 472.

[3] (1941) 2 K.B. 194.

[4] [1942] HCA 25; (1942) 66 C.L.R. 436.

[5] [1942] HCA 25; (1942) 66 C.L.R. 436.

[6] (1942) 66 C.L.R., at p. 441.

[7] (1933) 1 K.B. 472.

[8] (1942) 66 C.L.R., at p. 450.

[9] (1942) 66 C.L.R., at p. 450.

[10] [1942] HCA 25; (1942) 66 C.L.R. 436.

[11] [1942] HCA 25; (1942) 66 C.L.R. 436.

[12] (1943) A.C. 335.

[13] [1942] HCA 25; (1942) 66 C.L.R. 436.

[14] [1942] HCA 25; (1942) 66 C.L.R. 436.