Dalgety Downs Pastoral Co Pty Ltd v Federal Commissioner of Taxation [1952] HCA 54; (1952) 86 CLR 335 (27 October 1952)

HIGH COURT OF AUSTRALIA

DALGETY DOWNS PASTORAL CO. PTY. LTD. v. FEDERAL COMMISSIONER OF TAXATION [1952] HCA 54; (1952) 86 CLR 335

Income Tax (Cth.)

High Court of Australia
Webb(1), Fullagar(1) and Kitto(1) JJ.

CATCHWORDS

Income Tax (Cth.) - Assessable income - Deductions - Private company - Accumulated losses - Claim to deduct losses - Statutory requirement - Shares carrying twenty-five per cent of voting power to be beneficially held on last day of year of income by persons who beneficially held shares carrying not less than twenty-five per cent of voting power on last day of year in &which loss incurred - Shares transferred by way of security - "Beneficially held" - Income Tax Assessment Act 1936-1948 (No. 27 of 1936 - No. 44 of 1948), s. 80 (2) (5)*.

HEARING

Perth, 1952, September 5.
Melbourne, 1952, October 27. 27:10:1952
CASE STATED.

DECISION

October 27.
THE COURT delivered the following judgment: -
This is a case stated by the Chief Justice in an appeal against the income tax payable by the appellant under the provisions of the Income Tax Assessment Act 1936-1948 in respect of income derived during the year which ended on 30th June 1949. (at p339)

2. The appeal followed upon the disallowance of an objection by which the appellant complained that in making the assessment the deputy commissioner had not treated as an allowable deduction certain losses of previous years totalling 5,356 pounds, which the appellant contended were allowable as a deduction by virtue of s. 80 of the Act. That section first defines (in sub-s. (1)) the circumstances in which a loss is deemed to be incurred in any year for the purposes of the section; and it then provides (in sub-s. (2)) that so much of the losses incurred by a taxpayer in any of the seven years next preceding the year of income as has not been allowed as a deduction from his income of any of those years shall be allowable as a deduction in accordance with certain provisions not presently material. (at p339)

3. In the case of the appellant the circumstances had arisen in which losses were deemed by virtue of s. 80 (1) to have been incurred for the purposes of the section in certain years including the years ended 30th June 1944 and 30th June 1945 respectively, and the amounts of 3,550 pounds, being part of the loss incurred in the former of those years, and 1,582 pounds, being the whole of the loss incurred in the latter of those years, were not allowed as a deduction from the appellant's income of any year prior to the year of income now in question. In that year of income the appellant had an assessable income of 24,906 pounds. From that assessable income the appellant would have been entitled, by vitrue of sub-s. (2) of s. 80, to a deduction of the aggregate of the abovementioned amounts of 3,550 pounds and 1,582 pounds, namely 5,132 pounds, apart from the provisions of sub-s. (5) of that section. But the appellant was at all material times a private company within the meaning of Div. 7 of Pt. III. of the Act; and in the case of such a company sub-s. (5) provides that, notwithstanding any other provision of the section, no loss incurred in any year prior to the year of income shall be an allowable deduction, unless the company establishes to the satisfaction of the commissioner that, on the last day of the year of income, shares of the company carrying not less than twenty-five per centum of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than twenty-five per centum of the voting power on the last day of the year in which the loss was incurred. (at p339)

4. According to the case stated, the appellant did not succeed in establishing to the satisfaction of the commissioner that on 30th June 1949 shares of the appellant carrying not less than twenty-five per centum of the voting power were beneficially held by persons who beneficially held shares of the appellant carrying not less than twenty-five per centum of the voting power on 30th June 1944 or on 30th June 1945. It is not suggested that, at the time when the assessment was made, the information before the deputy commissioner was such that he ought to have been satisfied that the prescribed condition was fulfilled. The issued share capital of the appellant consisted of 20,305 pounds divided into 20,305 shares of 1 pound each, and each share carried one vote. The deputy commissioner had been furnished by the appellant with the names of the registered shareholders and the numbers of the shares standing in their respective names as at 30th June 1949 and (presumably) as at 30th June 1944 and 1945. But this information by itself was insufficient for the appellant's purposes under s. 80 (5), for between 30th June 1945 and 30th June 1949 such changes had occurred in the registered shareholding that no person or group of persons registered on the latter date as the holder or holders of shares carrying twenty-five per centum of the voting power had been registered on the former date as the holder or holders of shares carrying that percentage of the voting power. (at p340)

5. After having issued to the appellant a notice of assessment on 20th April 1950 on the basis that no losses of previous years were allowable deductions, the deputy commissioner received further information in a letter written to him by one M. J. Gerloff on 26th April 1950, accompanied by a statutory declaration made by Gerloff on the same date and a mortgage deed made on 15th June 1948 between Gerloff and a Mrs. Fitzpatrick. These documents established that Gerloff, who was the registered proprietor of 9,151 of the appellant's shares, both on 30th June 1944 and on 30th June 1945, had transferred 9,000 of those shares to Mrs. Fitzpatrick in 1948 by way of security for a sum of 2,750 pounds to be paid on 15th June 1951 and interest thereon to be paid monthly in the meantime, and that on 30th June 1949, the mortgage being still in force, the 9,000 shares stood in the name of Mrs. Fitzpatrick and the remaining 151 stood in the name of Gerloff. On 11th May 1950 the appellant lodged its notice of objection. The notice referred to the documents submitted by Gerloff and asserted that the 9,000 shares standing in the name of Mrs. Fitzpatrick were held by her as security only and were beneficially owned by Gerloff. (at p340)

6. The deputy commissioner, though admittedly satisfied of the truth of the facts thus placed before him, nevertheless disallowed the objection. The ground upon which the disallowance was supported in argument before this Court was that, on the true construction of s. 80 (5), shares cannot be said to be "beneficially held" by a person unless two conditions are fulfilled, first, that he is the holder of the shares, in the sense that his name is entered in the register of members in respect of them; and, secondly, that he holds the shares for his own exclusive benefit. The appellant answers that if the expression "beneficially held" were to be construed in this sense there would arise in the application of the section serious inequities which the legislature cannot be supposed to have intended. It is said that those inequities would be avoided by construing "beneficially held" as referring only to the ownership of the beneficial interest, and that this construction is to be preferred because it accepts what is the natural meaning of the expression considered as a whole, and avoids the error of interpreting each of its component words as if divorced from the other. The remaining steps in the appellant's argument are these: Because the transfer from Gerloff to Mrs. Fitzpatrick was by way of security only, Gerloff remained at all material times the beneficial owner of the shares transferred: English Sewing Cotton Co. Ltd. v. Inland Revenue Commissioners (1947) 1 All ER 679 . In other words, the whole of the 9,151 shares which on any view were beneficially held by Gerloff on 30th June 1944 and 30th June 1945 were, on the construction contended for, beneficially held by him on 30th June 1949 also. Therefore, it is said, the appellant should be held to have established to the satisfaction of the deputy commissioner the facts necessary to entitle it to the deduction it claimed, since he must necessarily have been so satisfied if he had correctly understood the section. (at p341)

7. What have been described as the remaining steps in the appellant's argument need not be further considered, because we are of opinion that the construction of s. 80 (5) upon which the deputy commissioner acted is correct. Dixon J. so held in Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation [1949] HCA 26; (1949) 78 CLR 353 , basing his conclusion upon the view that in the terminology of company law shares are said to be "held" by the person who is registered as a shareholder in respect thereof, and that s. 80 (5), being concerned with voting power, should be treated as using that terminology. We share this view. Indeed it is not too much to say that the verb "hold" and its variants, when used in relation to shares in companies, normally refers to the legal ownership of the shares according to the register of members. The Companies Acts of the United Kingdom and of the several States of the Commonwealth have uniformly used the word in this sense, and common usage has followed their example. Before a different meaning is accepted, some justification must be found in the context, or the subject-matter. No such justification is provided by the fact that "held" is modified by the adverb "beneficially". This word serves more naturally the purpose of excluding the case of a holding for the benefit of others than the purpose of so broadening the meaning of the word "held" beyond the particular significance which it normally has in relation to shares as to make it equivalent to "owned" in the most general sense of that word. (at p342)

8. A consideration of certain other provisions of the Act strengthens the conclusion that under sub-s. (5) the only persons with whom the company and the commissioner are required to concern themselves are those who were the shareholders as appearing from the register of members on each of the relevant dates. It is natural to turn first to Div. 7, for sub-s. (5) applies only to a company which is a private company within the meaning of that Division. The definition of "private company" in s. 103 (1), taking that section as it stood when s. 80 (5) was enacted, excludes a company in which the public are substantially interested and a subsidiary of a public company. In par. (a) of s. 103 (2), which describes a company in which the public are substantially interested, there occurs the expression "beneficially held" in relation to shares; and in par. (b), which describes a subsidiary of a public company, there occurs the expression "the beneficial ownership of the shares". It is clear from the context that the phrases were not regarded by the legislature as interchangeable. Indeed, when the section was redrafted and a new form of it was substituted by the Act No. 44 of 1948, s. 9, the new par. (a) used the words "beneficially held by, or held directly or indirectly on behalf of or for the benefit of, twenty or less persons". It is clear that "held" is treated as signifying held on the register, that the addition of "beneficially" is not regarded as altering the meaning of "held", and that, when the legislature wishes to refer to the ownership of the beneficial interest separately from the legal interest in shares, it chooses unequivocal language for the purpose. Confirmation is provided by the definition of "nominee" in s. 103 (1), where "holds" is used in relation to a registered shareholder who is not the beneficial owner of his shares; and also by the reference in s. 88 (3) to an individual who directly or indirectly controls the voting power, which contrasts significantly with the reference in s. 80 (5) to persons who hold shares carrying voting power. (at p342)

9. One other matter may be mentioned in relation to Div. 7. In ss. 108 and 109 there are provisions which require that in some circumstances loans made by a private company to any of its "shareholders", and remuneration paid by a private company for services rendered by a "shareholder", shall be deemed dividends paid by the company to the recipient. "Shareholder" is defined in s. 6 as including a member or stockholder, and in ss. 108 and 109 the word cannot include anyone who is not a registered holder of shares. The policy manifested by these sections might quite well have led to their being expressed so as to be applicable to loans made or remuneration paid to persons entitled to shares in equity only, as well as to registered members, but evidently the uncertainty resulting from a desertion of the register of members as the sole source of information as to the persons in respect of whom the sections apply was considered a decisive practical reason for not carrying the policy to that length. The same uncertainty provides no less cogent a consideration in relation to s. 80 (5), and goes far to answer the arguments addressed to us which were based upon examples of the injustices apt to arise from the commissioner's construction of the section. To take only one of the examples suggested, it may seem unjust that a company should be denied the right it would otherwise have to deduct losses of previous years simply because of the fortuitous circumstance that an appointment of new trustees of a settlement has led to a change in the registered membership of the company, the beneficial interests remaining unaltered. But, as against that, it must be recognized that taxing Acts often choose the method of the broad axe, the practical view being adopted that the advantages of a complete avoidance of all anomalies and inequalities of treatment may be obtained at too high a price if difficult, complicated or burdensome problems are left to be solved on the facts of individual cases. It is a comparatively simple problem which is raised by making a company's right to a deduction depend upon its satisfying the commissioner that at two dates certain of its registered shareholders held their shares for the benefit of no one but themselves. Much greater difficulty and uncertainty would be introduced into the application of the section if it were framed so as to entitle a company to require the commissioner to decide whether shares, which had changed hands between the two relevant dates according to the register of members, had nevertheless suffered no change as regards beneficial ownership. Bearing this in mind, it cannot be said to be at all improbable that the words "beneficially held" are used with their prima-facie meaning. (at p343)

10. Reference may also be made to ss. 117, 136 (b) and (c), and s. 137 (b) and (c), where "hold" and "held" are employed to refer to a registered shareholding, in contexts distinguishing between the registered and the beneficial title to shares. (at p344)

11. In the case stated the first of the two questions asked is: - (1) On 30th June 1949 were the 9,000 shares of the company in respect of which Kathleen Fitzpatrick was registered as a member in the company's register beneficially held by Murray Julius Gerloff? (at p344)

12. For the reasons we have stated we are of opinion that this question should be answered: No. That answer being given, the second question does not arise. The case stated will be remitted to the Chief Justice with these answers. The costs will be costs in the appeal. (at p344)

ORDER

Questions asked in the stated case answered as follows: -
(1) No.
(2) Does not arise.

Case remitted to the Chief Justice with these answers.

Costs, costs in the appeal.