Mayfield v Federal Commissioner of Taxation (No 1) [1961] HCA 57; (1961) 108 CLR 303 (18 September 1961)

HIGH COURT OF AUSTRALIA

MAYFIELD v. COMMISSIONER OF TAXATION [1961] HCA 57; (1961) 108 CLR 303

Income Tax (Cth)

High Court of Australia
Menzies J.(1)

CATCHWORDS

Income Tax (Cth) - Assessable income - Arrangements etc. to avoid tax - Company A liable shortly to undistributed profits tax - Company A shares owned by Company D (a family-owned holding company) and members of the family - Dividends declared by Company A - Company A shares sold by Company D to new family-owned holding company - Company D shares sold to outside purchaser - Company D wound up - Whether members of the family liable to tax in respect of the dividends and of moneys paid in the course of the transfer of the shares and the winding up - Income Tax and Social Services Contribution Assessment Act 1936-1950 (Cth), ss. 47, 108, 260.

HEARING

Melbourne, 1961, June 5-9; September 18. 18:9:1961
APPEAL under the Income Tax and Social Services Contribution Assessment Act 1936-1950 (Cth).

DECISION

September 18.
MENZIES J. delivered the following written judgment:-
This group of four income tax appeals, each from an amended assessment for Mayfield and their sons Grant and Brenton born respectively on 27th April 1933 and 29th September 1939. Each appellant made a return of income for the year ended 30th June 1951 which included a dividend from F. R. Mayfield Ltd. out of a distribution of 14,765 pounds 7s. 2d. made on 23rd November 1950 and a dividend from Mayfield Investments Ltd. out of a distribution of 1,589 pounds 16s. 10d. made on the same day, but no other dividend from either company. The amended assessments added to the taxable income of each taxpayer an amount described in the notice of amended assessment as "your proportion of distributions made by Mayfield Investments Ltd." The Commissioner concedes that these amended assessments cannot be sustained except by virtue of s. 260 of the Income Tax and Social Services Contribution Assessment Act 1936-1950 (hereinafter called "the Act"), the operation of which the Commissioner claims reveals as income of the Mayfields dividends distributed by Mayfield Investments Ltd. or its liquidator after the Mayfields had sold their shares therein to others. (at p308)

2. In 1950 the Mayfield family were the only shareholders in Mayfield Investments Ltd., which was a family investment company, and Mayfield Investments Ltd. and the Mayfield family were the only shareholders in F. R. Mayfield Ltd., which carried on business in Adelaide as an electrical engineer and contractor. Mayfield Investments Ltd. held 9,980 and the members of the Mayfield family 2,020 of the 12,000 shares of 1 pound each that had been issued in F. R. Mayfield Ltd. F. R. Mayfield was governing director of each company. By virtue of his shareholding in Mayfield Investments Ltd. and as governing director, F. R. Mayfield controlled that company; and by virtue of his shareholding in Mayfield Investments Ltd. and as governing director, he also controlled F. R. Mayfield Ltd. His authority to do all that he purported to do on behalf of his wife, his sons and the two companies is not in question. (at p308)

3. Each company was a private company within the meaning of Div. 7 of Pt. III of the Act. The articles of each company provided that dividends should be payable according to the numerical value of shares held and without regard to the amount paid up. In each company Grant and Brenton held shares not fully paid - in F. R. Mayfield Ltd. 1,000 shares of 1 pound each paid to 9/-, and in Mayfield Investments Ltd. 1,000 shares of 1 pound each paid to 4/-. Here, as elsewhere in the events to be narrated, the hand of an enterprising financial adviser is apparent; the unpaid amounts upon those shares held by infants were no doubt to be paid up out of dividends and in this connexion it is not without interest to observe that in his taxation return for the year ended 30th June 1951 F. R. Mayfield claimed that his infant sons, notwithstanding the fact that they had each received 1,340 pounds dividends, were totally dependent upon him because their income was "applied in accumulating capital". (at p309)

4. The financial adviser to whom I have referred was Alfred V. Adamson, an accountant who since 1935 had advised F. R. Mayfield and his companies. At all times material Adamson was the auditor of the companies and he prepared taxation returns for them and for the members of the family. An important part of his responsibilities was to advise F. R. Mayfield upon taxation matters affecting himself, his family and their companies. In 1950 an investment company, Argo Investments Ltd. (hereinafter called "Argo"), which had been incorporated in 1946 by a firm of solicitors and a firm of accountants (of which Adamson was a member) to trade in company securities, was listed on the Adelaide Stock Exchange with an issued capital of 100,000 pounds held by the public. Adamson was a director of this company and was in a large measure responsible for its investments. Argo had a subsidiary, Dunfermline Ltd. (hereinafter called "Dunfermline"), in which Adamson himself held shares and of which he was a director. Adamson was also a trustee of the Congregational Ministers' Provident Fund of South Australia Incorporated (hereinafter called "the Provident Fund"). (at p309)

5. Having identified the dramatis personae it is necessary, before narrating the course of action that was taken in the period from November 1950 to March 1951, to set out the financial position of the Mayfields and their two companies at the beginning of November 1950 and to indicate its taxation implications. In the year ended 30th June 1950 F. R. Mayfield Ltd. made a profit of 15,932 pounds 18s. 6d. before tax, which was estimated at 4,570 pounds 2s. 0d., leaving a net profit of 11,362 pounds 16s. 6d. This was more than twice the profit of any earlier year. At the end of the year its bank account with the Bank of Adelaide was in credit 12,342 pounds 12s. 7d. It had a Tax Profit Reserve of 2,095 pounds 6s. 2d. and its Profit and Loss Appropriation Account showed a credit of 14,694 pounds 15s. 6d. Amounts owed by sundry debtors exceeded what was owed to sundry creditors by about 3,000 pounds and the company's only other liability was a debt to Mayfield Investments Ltd. of 2,086 pounds. F. R. Mayfield Ltd., it seems, was used as a banker for F. R. Mayfield and his family, by whom on 30th June 1950 it was owed 1,578 pounds. It had net assets of nearly 30,000 pounds and its paid up capital was 10,900 pounds held as follows: Frederick R. Mayfield 10 fully paid shares of 1 pound each; Jean W. Mayfield 10 fully paid shares of 1 pound each; Grant Mayfield 1,000 shares of 1 pound each paid to 9/-; Brenton Mayfield 1,000 shares of 1 pound each paid to 9/-; Mayfield Investments Ltd. 9,980 fully paid shares of 1 pound each. The prosperous state of the company's business as disclosed by its accounts for the year ended 30th June 1950 continued and results between 1st July and 23rd November were at the latter date seen to warrant not only a substantial distribution of the profits disclosed at 30th June but also additional sums of about 100 pounds out of Tax Profit Reserves and 3,500 pounds out of taxable income of the current year. As at 23rd November 1950 the company had in hand profits for the year ended 30th June 1950 of 11,362 pounds which, unless there were a sufficient distribution before 31st December 1951 or unless some other step were taken, would then be subject to undistributed profits tax; it also had some 3,500 pounds of current profits which might be expected to become subject to undistributed profits tax by 31st December 1952, unless something were done in the meantime. Any distribution of these profits to individual shareholders - except such part as had borne undistributed profits tax in the company's hands - would also attract income tax as dividends in the hands of the shareholders; but because 9,980 of the 12,000 issued shares were held by Mayfield Investments Ltd., the tax that would be incurred by shareholders upon a distribution would be but trifling, as any dividend received by Mayfield Investments Ltd. would be rebatable under s. 46 of the Act. So much for the financial position of F. R. Mayfield Ltd. At 30th June and up to 23rd November 1950 Mayfield Investments Ltd. held profits of 1,984 pounds which, unless something were to be done by 31st December of that year, would attract undistributed profits tax. Its balance sheet was simple. Its assets were as follows:-

Balance at Bank of Adelaide . . . . 80 pounds 15 4
Shares in other companies at cost -
9,980 - F. R. Mayfield Ltd. . . . . 12,495 pounds 0 0
Debentures -
Phoenix Gold Mines N. L. . . . . 500 pounds 0 0
Loan to F. R. Mayfield Ltd. . . . . 2,086 pounds 0 0
-------------------
15,161 pounds 15 4

It owed 10 pounds 10s. 0d. to sundry creditors, and apart from this on the liability side there was nothing but 12,900 pounds paid up capital, Profit and Loss Appropriation Account 1,984 pounds 15s. 4d. and Tax Profit Reserve 266 pounds 10s. 0d. If the 1,984 pounds in the Profit and Loss Appropriation Account were distributed before 31st December, then, of course, the Mayfield family would incur tax liability in accordance with their shareholding, that is: - F. R. Mayfield 7,500 shares including 5,500 "A" shares; Jean W. Mayfield 5,000 shares including 3,000 "A" shares; Grant Mayfield 1,000 shares; Brenton Mayfield 1,000 shares. The "A" shares carried ten votes each. From the foregoing figures it is apparent that if the accounts of Mayfield Investments Ltd., as they stood at the end of June 1950 and at the beginning of November 1950, were to be looked at in isolation from those of F. R. Mayfield Ltd., no considerable taxation problem appeared. The declaration of further dividends by F. R. Mayfield Ltd. out of the profits it had made and was making would, however, in turn raise the problem whether Mayfield Investments Ltd. should distribute its profits with the consequence that the shareholders would incur considerable tax or whether it should adopt some other course. (at p311)

6. The foregoing examination reveals that although according to ordinary standards the Mayfields and their companies were not oppressed by taxation, there was room for manipulation to free them from taxation upon the growing profits of F. R. Mayfield Ltd. It was to this situation that F. R. Mayfield and his financial adviser Adamson, with Argo to hand, addressed themselves in November 1950. (at p311)

7. Early in the month Adamson, acting for Argo, proposed to F. R. Mayfield the purchase of all the shares in Mayfield Investments Ltd. at net asset value less 2,500 pounds. It was a condition of this offer that Mayfield Investments Ltd. should have disposed of its shares in F. R. Mayfield Ltd. and of its only other non-liquid asset, that is, the 500 pounds debenture in Phoenix Gold Mines N.L. It was also a term of the offer that F. R. Mayfield Ltd. should have declared and paid such dividends as it could. It was argued for the appellants that these were merely conditions imposed by the proposed purchaser for its own purposes, but I have no doubt that they originated with Adamson in his capacity as financial adviser to the Mayfields for securing substantial taxation advantages for them. Adamson made F. R. Mayfield fully aware that to accept an offer in the form outlined would serve the interests of the Mayfield family, notwithstanding that the immediate result was an outgoing, because of the escape from taxation that it would bring about. As a means of retaining the shares in F. R. Mayfield Ltd. for the family, he proposed that there should be another company incorporated to take over from Mayfield Investments Ltd. its shares in F. R. Mayfield Ltd. so that at the end as at the beginning F. R. Mayfield Ltd. would be controlled through a Mayfield family company holding the majority of the shares. The stipulation that F. R. Mayfield Ltd. should distribute as much as it could by way of dividends was one entirely for the benefit of the Mayfields. Its performance would, it was expected, give them a substantial taxation advantage by enabling a distribution by F. R. Mayfield Ltd. that would free that company from any undistributed profits tax as at 31st December 1951 and would also go substantially towards a distribution sufficient to do so at 31st December 1952 as well and yet, because in Mayfield Investments Ltd. it was to bring about an increase in the capital value of its shares to be sold forthwith, it would never give rise to any taxation liability for the Mayfields either directly or indirectly. It is apparent that this particular stipulation held no advantage of any sort for Argo because all Argo wanted was a profit of 2,500 pounds regardless of the value of the assets of Mayfield Investments Ltd., and when it came to calculating how much the Mayfields should receive in cash, all that was necessary was to deduct 2,246 pounds (as the 2,500 pounds deduction eventually became) from the amount that stood to the credit of the bank account of Mayfield Investments Ltd. at the time of sale and before the receipt either of the dividend in question or the purchase price of the shares in F. R. Mayfield Ltd. In short, the only money that it was contemplated would change hands was what Mayfield Investments Ltd. had in the bank, which was to be divided between the Mayfields and the purchasers, who in the result got 2,246 pounds. However, this is to anticipate what occurred later and it is necessary to return to the offer made by Adamson on behalf of Argo to the Mayfield family. After consultation with his wife, F. R. Mayfield proposed that the discount of 2,500 pounds upon net asset value should be reduced to 2,000 pounds, and in the event 2,250 pounds was the figure agreed to by both sides. In the discussion that he had with F. R. Mayfield, Adamson had worked out for him what tax would be saved by the Mayfield interests if they accepted Argo's offer, and although the memorandum of this calculation has since been lost, the evidence is that the saving shown was from 5,000 pounds to 6,000 pounds. This also appears in a letter that F. R. Mayfield Ltd. wrote to the Deputy Commissioner of Taxation on 11th December 1957 which is Exhibit 1. In evidence F. R. Mayfield frankly admitted what appears clearly from the facts themselves, that is, that so far as he was concerned all that was done by the Mayfield family, by F. R. Mayfield Ltd. and by Mayfield Investments Ltd. - so long as it was under Mayfield control - was done to effect a tax saving for the family. What was done after the transaction was arranged can, so far as it is material for present purposes, be traced briefly. Eynesbury Ltd. (hereinafter called "Eynesbury"), the alter ego of Mayfield Investments Ltd., was incorporated on 17th November as a Mayfield family company; F. R. Mayfield Ltd. on 23rd November declared dividends totalling 14,765 pounds 7s. Od. of which 12,279 pounds 17s. Od. was payable to Mayfield Investments Ltd.; Mayfield Investments Ltd. on 23rd November (1) declared dividends of 1,589 pounds 16s. 10d. out of its tax-free reserves, (2) resolved to sell the company's 9,980 shares of 1 pound each in F. R. Mayfield Ltd. to Eynesbury at 3 pound each (29,940 pounds becoming payable - 440 pounds in cash and the balance of 29,500 pounds on demand), and (3) resolved to lend 7,914 pounds to F. R. Mayfield Ltd. When these resolutions had been carried into effect and Mayfield Investments Ltd. had sold its 500 pounds debenture in Phoenix Gold Mines N.L. to F. R. Mayfield for 500 pounds, the funds of Mayfield Investments Ltd., according to its books of account, were as follows:

1949-50 profits . . . . . . 1,982 pounds
1950-51 profits . . . . . . 9,918 pounds
Tax Profit Reserve . . . . . 976 pounds
Capital Profit Reserve, being surplus
on the sale of F. R. Mayfield Ltd.
shares . . . . . . . . . 17,445 pounds
Share Capital - 14,500
Less calls unpaid 1,600 12,900 pounds
43,221 pounds

These items were represented by the following assets:

Loans to F. R. Mayfield Ltd. . . . . . . . . 10,000 pounds
Purchase money owing by Eynesbury. . . . . . 29,500 pounds
Money in Bank less amounts due to creditors . 3,721 pounds
43,221 pounds

On 28th November there were banked cheques representing F. R. Mayfield Ltd.'s dividend of 23rd November totalling 14,765 pounds 7s 9d; cheques representing Mayfield Investments Ltd.'s dividend of 23rd November totalling 1,589 pounds 16s. 10d.; a cheque for 7,914 pounds- the loan from Mayfield Investments Ltd. to F. R. Mayfield Ltd. authorized on 23rd November; a cheque from F. R. Mayfield to Mayfield Investments Ltd. for 500 pounds for the Phoenix Gold Mines N.L. debenture; and a cheque for 440 pounds - F. R. Mayfield to Mayfield Investments Ltd. for the deposit upon the sale of shares to Eynesbury. (at p314)

8. About this stage the members of the Mayfield family sold all their shares in Mayfield Investments Ltd. for 40,975 pounds. There is but little information about the details of this sale. How the actual price of the shares was determined does not appear, but it can be calculated that it was 2 pounds 19s. Od. for each fully paid share and 2 pounds 1s. Od. for each share paid to 4/-. The total price was, however, 2,246 pounds less than the value of the assets (i.e., 43,221 pounds), which gave Argo its stipulated profit of 2,250 pounds less 4 pounds. At this point, and without any explanation, Dunfermline and the Provident Fund appeared with Argo as purchasers of the shares and in the event Argo purchased and had transferred to it 5,000 fully paid shares; so did Dunfermline; while the Provident Fund had transferred to it 2,500 fully paid shares and 2,000 shares paid to 4/-. Deposits totalling 1,475 pounds were paid by cheques dated 27th November. How each deposit was determined does not appear, but although there was no uniform method of calculation and each was a round figure it turned out that they totalled 2,246 pounds less than the money in Mayfield Investment Ltd.'s bank account and it is quite clear that it was always expected that the Mayfields would receive what was in the Mayfield Investments Ltd.'s bank account less the purchasers' rake-off. The deposit cheques, dated 27th November, were not banked until 30th November, although it appears probable that the vendors received them on 28th November. On that day, in addition to the banking transactions already enumerated, F. R. Mayfield handed Adamson signed transfers of all the issued shares in Mayfield Investments Ltd. and a document dated 24th November signed by himself whereby he appointed Thomas Mollison, Alfred Victor Adamson and William Edward Sara directors of Mayfield Investments Ltd. and removed Jean W. Mayfield from office as director. This document concluded with the following signed statement of F. R. Mayfield: "Having made the appointments set out above and having sold my shares in the company, I hereby resign my office of governing director." (Mollison was a director of Dunfermline and Sara was the secretary of the Provident Fund). On the same day a transfer of 9,980 shares in F. R. Mayfield Ltd. from Mayfield Investments Ltd. to Eynesbury was executed. (at p314)

9. On 30th November there was a meeting described as a meeting of directors of Mayfield Investments Ltd. which was attended by F. R. Mayfield, Jean W. Mayfield (by proxy F. R. Mayfield), A. V. Adamson, T. Mollison and W. E. Sara. The meeting began by F. R. Mayfield's producing the document he had signed on 24th November and handed to Adamson on 28th November, and this was recorded in the minutes. F. R. Mayfield submitted his resignation as governing director and this was accepted. The transfers of shares to Argo, Dunfermline and the Provident Fund were then approved and authority was given for the issue of new share certificates. Thereafter the transferees were treated as members. Dividends were then declared totalling 11,600 pounds, and 16/- per share was called up upon the 2,000 shares paid to 4/- which had been transferred to the Provident Fund. The dividends declared as aforesaid were paid by cheques dated 30th November and paid into the bank accounts of the payees on 1st December. They were as follows:-

Argo . . . . . . 4,000 pounds
Dunfermline . . . . 4,000 pounds
Provident Fund . . . . 3,600
Less call on shares . . 1,600 2,000 pounds

so that although the dividend declared was 11,600 pounds, 1,600 pounds thereof was used to pay up the Provident Fund shares. Argo and Dunfermline included these dividends (which were rebatable) in their returns of income for the year ended 30th June 1951, and the income of the Provident Fund was not taxable. This dividend of 11,600 pounds is one that the Commissioner claims to be a distribution upon which the Mayfield family are accountable for tax. (at p315)

10. On 30th November 1950 instalments totalling 7,500 pounds of the amounts owing for shares in Mayfield Investments Ltd. were received by the vendors, being 3,250 pounds each from Argo and Dunfermline and 1,000 pounds from the Provident Fund. All cheques were drawn in favour of F. R. Mayfield and on 1st December 1950 were deposited to the credit of the bank account of F. R. Mayfield Ltd., which paid 7,500 pounds on account of its indebtedness of 10,000 pounds to Mayfield Investments Ltd. (at p315)

11. On 11th December 1950 the Provident Fund sold its 4,500 shares of 1 pounds each (now fully paid) in Mayfield Investments Ltd. to Dunfermline for 10,256 pounds 5s. 0d., of which 256 pounds 5s. 0d. was paid on transfer. Dunfermline accepted responsibility for 10,000 pounds owing by the Provident Fund to F. R. Mayfield, Grant Mayfield and Brenton Mayfield for the shares transferred by them on 28th November 1950 and they assented to the transfer of this indebtedness. Here it may be remarked that the Fund's brief participation in what occurred (that is, its entry upon the scene on 27th November and its departure on 11th December) left it better off by 781 pounds 5s. 0d. which ultimately came from money in the bank account of Mayfield Investments Ltd. (at p316)

12. The next material date is 15th December 1950. On that date, at a meeting of directors of Mayfield Investments Ltd., a dividend of 976 pounds 10s. 2d. was declared out of the Tax Profit Reserve and loans of 11,000 pounds to Argo and 21,000 pounds to Dunfermline were authorized. Cheques for these amounts were signed by F. R. Mayfield and A. V. Adamson. In the statement of agreed facts it is said that F. R. Mayfield "purported to act as director" but for present purposes it hardly seems to matter whether F. R. Mayfield was or was not at that time a director of Mayfield Investments Ltd. His resignation was only as governing director and it may be that he was still regarded as a director in law or it may be that he was merely a de facto director. The dividend cheques were banked on 15th December and the loan cheques on 18th December. On 15th December Argo and Dunfermline drew cheques respectively for 11,000 pounds and 21,000 pounds payable to F. R. Mayfield Ltd., which banked them on 18th December 1950. These amounts totalling 32,000 pounds were paid in settlement of the balance then owing to F. R. Mayfield and his family for shares in Mayfield Investments Ltd. F. R. Mayfield Ltd. then paid the 2,500 pounds still owing by it to Mayfield Investments Ltd. and made a loan of 29,500 pounds to Eynesbury which paid the balance of 29,500 pounds still owing by it to Mayfield Investments Ltd. for shares in F. R. Mayfield Ltd. This cheque was drawn and paid on 18th December. (at p316)

13. The Commissioner claims that what took place on 15th December amounted to a distribution to members of the Mayfield family of dividends amounting to 17,696 pounds from Mayfield Investments Ltd. How this amount was calculated will soon appear, although the fact is that on 15th December the full amount of 17,696 pounds was not available for distribution among shareholders. On 15th January 1951 the directors of Mayfield Investments Ltd. (F. R. Mayfield being present) resolved upon the winding up of the company and that the directors should sign a certificate of solvency. On the following day Mollison, Adamson and Mayfield signed such a declaration and on 24th January 1951 at an extraordinary general meeting of Mayfield Investments Ltd. a special resolution that the company be wound up voluntarily was passed and Alfred V. Adamson was appointed liquidator. On 28th February 1951 Argo and Dunfermline repaid to the liquidator of Mayfield Investments Ltd. the amounts totalling 32,000 pounds lent to them on 15th December 1950. On 1st March 1951 Adamson, as liquidator, made a first and final distribution to Argo and Dunfermline as follows:

Return of capital . . . . . . . . . . . . . 14,500 pounds 0 0
From Capital Profit Reserve (Surplus on
sale of shares in F. R. Mayfield Ltd.) . . 17,397 pounds 13 9
From ordinary profits. . . . . . . . . . . . . 298 pounds 7 1
32,196 pounds 0 10

The sum of 17,397 pounds 13s. 9d. seems to be capital profit of 17,445 pounds less expenses of administration and liquidation. (at p317)

14. Alternatively with the contention that dividends of 17,696 pounds were received by the members of the Mayfield family on 15th December, the Commissioner contends that the sums of 17,397 pounds 13s. 9d. and 298 7s. 1d. totalling 17,696 pounds, paid on 1st March 1951 are income of the Mayfields. (at p317)

15. As a result of all that occurred, Argo and its associates paid the members of the Mayfield family 40,975 pounds and received from Mayfield Investments Ltd. and its liquidator 43,172 pounds, being a gain of 2,197 pounds after providing for the expenses of the administration of the company and its liquidation. This 2,197 pounds was received as follows:

Out of the dividend of 11,600 pounds declared on
30th November 1950 - . . . . . . . . . 1,025 pounds;
the dividend declared on 15th December
out of tax-free profits - . . . . . . . 976 pounds;
and the difference between the amount
received from the liquidator (namely
32,196 pounds) and the amount paid to the
liquidator (namely 32,000 pounds) on 1st March
1951 - . . . . . . . . . . . . . . . . . 196 pounds.

In arriving at the figure of 43,172 pounds I have, for the purpose of showing what the purchasers received, excluded the 1,600 pounds of the 11,600 pounds dividend that was used to pay up the unpaid shares, but the Commissioner takes the whole of the dividend into account and claims that of the distributions by Mayfield Investments Ltd. and its liquidator totalling 44,772 pounds, everything is taxable as the income of the Mayfields except 976 pounds dividends out of tax-paid profits and 14,500 pounds paid by way of return of capital. The remaining sum of 29,296 pounds is, of course, made up of the two amounts already referred to - 11,600 pounds and 17,696 pounds. (at p317)

16. It is now necessary to consider s. 260 and its application to the facts of the case. (at p317)

17. The first question is whether the facts disclose any contract, agreement or arrangement to avoid any liability imposed by the Act upon the Mayfields or preventing the operation of the Act in any other relevant respect. That there was a contract, agreement or arrangement to which the Mayfields were parties is beyond question, but for them it was contended that their arrangement was merely to sell their shares in Mayfield Investments Ltd. to Argo and its associates upon the terms of an offer made to them by Argo. I am satisfied, however, that there was a very much more comprehensive arrangement to which the members of the Mayfield family were parties, of which the sale of the shares in Mayfield Investments Ltd. to Argo Dunfermline and the Provident Fund was but one element. That arrangement was devised by Adamson and it covered (1) the declaration of dividends by F. R. Mayfield Ltd. of all its 1950 and 1951 profits available for distribution; (2) the incorporation of Eynesbury; (3) the sale by Mayfield Investments Ltd. to Eynesbury of the F. R. Mayfield Ltd. shares upon terms that left 29,500 pounds outstanding; (4) the sale by Mayfield Investments Ltd. of the Phoenix Gold Mines N.L. debenture; (5) the loan by Mayfield Investments Ltd. to F. R. Mayfield Ltd. of 7,914 pounds to bring its indebtedness up to 10,000 pounds; (6) the sale by the members of the Mayfield family of their Mayfield Investments Ltd. shares to Argo and its associates for 40,975 pounds with a deposit of 1,475 pounds, leaving outstanding 39,500 pounds, the same amount as Mayfield Investments Ltd. was owed by F. R. Mayfield Ltd. and Eynesbury; (7) the payment of deposits leaving 2,250 pounds approximately in Mayfield Investment Ltd.'s bank account for the benefit of the purchasers; (8) the satisfaction of the outstanding 39,500 pounds on each side by means of a complicated series of transactions involving the declaration of dividends, the making of loans and repayments and the exchange of cheques for banking on 1st December 1950, 18th December 1950 and 1st March 1951; and (9) the liquidation of Mayfield Investments Ltd. and, at the end of the course, its dissolution. I regard Argo, Dunfermline and the Provident Fund as parties to the arrangement through the agency of Adamson. (at p318)

18. I do not find that each and every step of the arrangement which I have outlined was something that was legally enforceable in advance of its taking place, but I have no doubt that all that was done was done in accordance with Adamson's plan which was accepted to the extent to which they were respectively concerned by the members of the Mayfield family, F. R. Mayfield Ltd., Mayfield Investments Ltd., Argo, Dunfermline and the Provident Fund. I am also satisfied that one purpose of the arrangement was that while preserving for the Mayfields the control of F. R. Mayfield Ltd. through a holding company, they should have the benefit of distributions to be made by F. R. Mayfield Ltd. and Mayfield Investments Ltd. (except as to the 2,250 pounds approximately for Argo and its associates) and that this should be accomplished without them or their companies incurring any tax liability. Indeed, so far as the Mayfields were concerned, all that happened was done to effect this purpose, so that any particular step which they or their companies took can be regarded as subsidiary and ancilliary to this purpose. The liability that the arrangement had the purpose and effect of avoiding was undistributed profits tax upon F. R. Mayfield Ltd. or Mayfield Investments Ltd. or ordinary tax upon a distribution by Mayfield Investments Ltd. to the Mayfields consequent upon distributions to be made by F. R. Mayfield Ltd. I find, therefore, that there was an arrangement to which the Mayfields were parties that had the purpose and effect of avoiding liability to pay tax upon distributions by Mayfield Investments Ltd. that would involve them in tax were they to remain shareholders of the company. To declare a dividend that is a sufficient distribution for the purposes of Div. 7 of Pt III of the Act is not avoided by s. 260 and so the extent to which the arrangement is void against the Commissioner does not go beyond the purpose and effect of avoiding liability for tax consequent upon a distribution, and the one step vital for this was the transfer by the Mayfields of their shares in Mayfield Investments Ltd. to Argo, Dunfermline and the Provident Fund. So far as the Commissioner is concerned, these transfers are therefore void and the Mayfields stand to be taxed as though they had remained shareholders of Mayfield Investments Ltd. up to the time of its dissolution. Had they done so, nothing else would have stood in the way of a lawful assessment, and it is the steps that would do so that s. 260 avoids. (at p319)

19. It follows as an immediate consequence that whatever the members of the Mayfield family received out of any distribution of profits by Mayfield Investments Ltd. is taxable: Bell v. Federal Commissioner of Taxation (1953) 87 CLR 548 ; Federal Commissioner of Taxation v. Newton (1957) 96 CLR 577 ; Newton v. Federal Commissioner of Taxation (1958) AC 450; (1958) 98 CLR1 and Hancock v. Federal Commissioner of Taxation [1961] HCA 90; (1961) 108 CLR 258 . (at p319)

20. There was a distribution of 11,600 pounds by Mayfield Investments Ltd. on 30th November 1950 and, although this went directly to Argo, Dunfermline and the Provident Fund, I consider that the sum of 1,475 pounds paid by those recipients to the members of the Mayfield family by way of deposit upon the sale of shares and the 7,500 pounds paid to the same persons on 15th December by way of instalments upon the purchase of shares came from the distribution made by the company. I find, therefore, that of this distribution 8,975 pounds was received by the members of the Mayfield family and they should be regarded as having received this sum in proportions according to their shareholding. (at p320)

21. The only other distribution made by Mayfield Investments Ltd. before liquidation was the dividend of 976 pounds 10s. 2d. declared on 15th December 1950 and paid to Argo and Dunfermline out of tax-paid profits. This is, therefore, of no moment. (at p320)

22. The Commissioner sought, however, to treat 17,696 pounds of the 32,000 pounds loans made by Mayfield Investments Ltd. to Argo and Dunfermline on 15th December 1950 as a distribution of profits to the members of the Mayfield family because the moneys borrowed by Argo and Dunfermline from Mayfield Investments Ltd. were paid to the members of the Mayfield family who ex hypothesi were members of that company. But although the Mayfields received these moneys, the loans did not have the character of dividends nor do I think they could be deemed to be dividends by reason of s. 108 of the Act. The loans were made to Argo and Dunfermline, which upon the basis upon which I am proceeding were not shareholders in Mayfield Investments Ltd., and the section can apply only when there is a loan or advance to, or a payment on behalf of, or for the individual benefit of shareholders. Although the Mayfields were for present purposes shareholders, I do not consider that the loan by a company to non-shareholders which is used to pay their debts to shareholders is a payment for the benefit of the shareholders individually. Furthermore, I do not think that the Commissioner did or could form the opinion that 17,696 pounds of the loans represented distributions of income of Mayfield Investments Ltd. It is clear that it was not part of the purpose and effect of the arrangement to avoid tax on the capital profit that occurred in the course of carrying out the arrangement. (at p320)

23. In the course of the liquidation, however, there was a distribution to Argo and Dunfermline of 17,696 pounds 0s. 10d., of which 298 pounds 7s. 1d. came from ordinary profits and 17,397 pounds 13s. 9d. from the Capital Profit Reserve arising from the sale of shares in F. R. Mayfield Ltd. Had the members of the Mayfield family, as shareholders, received the payments from the Capital Profit Reserve, they would have not been taxable under s. 47 of the Act and I do not think that s. 260 turns them into taxable dividends. I do not regard the liquidation of Mayfield Investments Ltd. as void against the Commissioner and were I to do so I would but find its funds being dealt with by somebody without authority to do so. The sum of 298 pounds 7s. 1d. stands on a different footing for had the Mayfields received this sum in a liquidation, they would have received dividends as provided by s. 47. (at p321)

24. There are, therefore, two amounts about which I have to make up my mind - the first, that part of the dividend of 11,600 pounds which I find did not reach the Mayfields (i.e., 2,625 pounds); the second, the 298 pounds distributed by the liquidator out of profits, which again, in my opinion, did not reach the Mayfields. (The sum of 2,625 pounds to which I have just referred is made up of the 1,600 pounds devoted to the paying up of unpaid shares and 1,025 pounds retained by Argo, Dunfermline and the Provident Fund out of dividends paid to them). The question whether these sums are taxable is one that has occasioned me some difficulty but I have reached the conclusion that the decision of the Court in Hancock v. Federal Commissioner of Taxation [1961] HCA 90; (1961) 108 CLR 258 requires the conclusion that these are to be regarded as income of the Mayfields notwithstanding that they did not receive them. The reasoning of the Chief Justice, with whom Windeyer J. concurred, is not identical with that of Kitto J. and both differ from that of Fullagar J., whose judgment was affirmed, but in this case, as in that, whichever line of reasoning is followed it leads to the conclusion that the taxpayers, being entitled to dividends, disposed of them by an arrangement to avoid taxation that the Commissioner is bound to disregard, and because the dividends here were paid as they were by reason of what the taxpayers, as the persons entitled to them, did they were income derived by them. As shareholders the Mayfields were entitled to all dividends, and the dividends were paid as they were by virtue of what the Mayfields themselves did to avoid taxation. (at p321)

25. My conclusion is therefore that the whole of the distribution of 11,600 pounds made on 30th November 1950 by Mayfield Investments Ltd. and 298 pounds of the distribution made by the liquidator of Mayfield Investments Ltd. on 1st March 1951 must be regarded as the taxable income of the Mayfields. (at p321)

26. There remains for consideration a submission that the amended assessments under consideration were not authorized by s. 170 of the Act because the taxpayers had made to the Commissioner a true and full disclosure of the facts necessary for their assessment and the amended assessments were not made to correct any error in calculation or mistake of fact. In the circumstances of these cases, the contention really is that the Commissioner had been made aware of all the facts necessary to decide whether s. 260 applied to what had been done. This was clearly not the case and even if the taxpayers could rely upon what the Commissioner could gather from other returns, including those of Mayfield Investments Ltd., if they were all considered in conjunction I am satisfied that there was no full and true disclosure. A comparison between the statement of agreed facts together with the evidence upon these appeals and what was disclosed to the Commissioner in the taxation returns of those concerned demonstrates this. It only remains to say that I do not consider that the substitution on 18th June 1958 of what was described as a "corrected notice of adjustment" to replace that forwarded with the notice of amended assessment issued on 21st May 1958 meant that the amended assessments were not made on 21st May 1958, which in every case is a date within six years of the date in 1952 when tax originally assessed became due and payable. (at p322)

27. I therefore allow each appeal, set aside the amended assessment and remit each assessment to the Commissioner for amendment on the footing that the sum of 11,600 pounds was distributed among the appellants by Mayfield Investments Ltd. in accordance with their shareholding in that company on 27th November 1950 and that the sum of 298 pounds distributed by the liquidator on 1st March 1951 was distributed among the appellants in the same proportions. (at p322)

28. As the appellants and the respondent have each succeeded and failed in part I shall make no order for costs. (at p322)

29. (An order in a similar form was made in each case. The order made in the case of F. R. Mayfield v. Commissioner of Taxation of the Commonwealth of Australia was as follows:) (at p322)

ORDER

Appeal allowed, amended assessment appealed from set aside and remitted to the Commissioner for further amendment on the footing that the sum of 11,600 pounds was distributed on 30th day of November, 1950, among the appellant Frederick Robert Mayfield, Jean Winifred Mayfield, Brenton John Mayfield and Grant Robert Mayfield by Mayfield Investments Limited in accordance with their shareholding in that company on 27th November, 1950, and that of the sum of 17,696 pounds distributed by the liquidator of Mayfield Investments Limited on 1st March, 1951, the sum of 298 pounds and no more was distributed among the persons aforesaid in the same proportions.