Mayfield v Federal Commissioner of Taxation (No 2) [1961] HCA 58; (1961) 108 CLR 323 (18 September 1961)

HIGH COURT OF AUSTRALIA

MAYFIELD v. COMMISSIONER OF TAXATION (No. 2) [1961] HCA 58; (1961) 108 CLR 323

Income Tax (Cth)

High Court of Australia
Menzies J.(1)

CATCHWORDS

Income Tax (Cth) - Assessable income - Distributable income - Arrangements etc. to avoid tax - Company A liable shortly to undistributed profits tax - Company A shares owned by family-owned holding company and members of the family - Company A's business sold to Company B - Company A shares sold to outside purchaser and Company B shares purchased in lieu thereof - Dividends declared by Company A - Company A wound up - Whether former shareholders liable to tax in respect of such dividends - Income Tax and Social Services Contribution Assessment Act 1936-1953 (Cth), ss. 103, 104, 206.

HEARING

Melbourne, 1961, June 5-9; September 18. 18:9:1961
APPEAL under the Income Tax and Social Services Contribution Assessment Act 1936-1953 (Cth).

DECISION

September 18.
MENZIES J. delivered the following written judgment:-
This group of six appeals was brought by the four members of the Mayfield Beesley and Eynesbury Ltd. (hereinafter called "Eynesbury"). Together until 21st April 1954 they held all the shares in Mayfield Holdings Ltd. Except in the case of Eynesbury, the assessment appealed from is an amended assesment. I do not propose in this judgment to repeat such relevant facts as are stated in my earlier judgment, and to the extent necessary I incorporate herein what I there said. Again the assessments challenged depend upon the application of s. 260 of the Income Tax and Social Services Contribution Assessment Act 1936-1953 (hereinafter called "the Act") to what occurred, and in this group of appeals what the Commissioner seeks to do is to treat two distributions by Mayfield Holdings Ltd. (formerly F. R. Mayfield Ltd.) - one on 28th April 1954 of 48,000 pounds and the other on 8th June 1954 of 1,200 pounds - as the income of the appellants who were the shareholders of the company prior to transfers of shares on 21st April 1954 to Argo Investments Ltd. (hereinafter called "Argo") and a subsidiary, Kentish Investments Ltd. (hereinafter called "Kentish"). These transfers the Commissioner claims are void against him. (at p327)

2. On 30th June 1953 the issued capital of F. R. Mayfield Ltd. was 12,000 pounds divided into 12,000 shares of 1 pound each held as follows: Eynesbury Ltd. 9,480; F. R. Mayfield 10; Jean W. Mayfield 10; Grant Mayfield 1,000; Brenton Mayfield 1,000; K. A. Beesley 500. The directors were F. R. Mayfield and Jean W. Mayfield. The company was a private company within the meaning of Div. 7 of Pt III of the Act. Eynesbury was incorporated in the circumstances stated in the first group of appeals and all of its shares were held by F. R. Mayfield and his wife, Jean W. Mayfield. Its orginal holding of 9,980 shares in F. R. Mayfield Ltd. was reduced to 9,480 by the transfer of 500 shares to K. A. Beesley, the manager of F. R. Mayfield Ltd. Eynesbury was also a private company for the purposes of the Act. F. R. Mayfield Ltd. was controlled by F. R. Mayfield through the Eynesbury holding and by virtue of his powers as governing director. Argo was as described in the earlier appeals; so was its subsidiary Dunfermline. Another subsidiary, Kentish, took part in the transactions with which this group of appeals is concerned. A. V. Adamson was a director of this company as well as of Argo and Dunfermline. He remained the financial adviser to the Mayfield family and companies. (at p327)

3. What has here to be considered is the position of F. R. Mayfield Ltd. and its shareholders in April 1954. For the year ended 30th June 1953 the company had made a record profit of 28,427 pounds 5s. 3d, on which tax was estimated at 7,960 pounds 15s. 0d, leaving a net profit of 20,466 pounds 10s. 3d. If this profit were not distributed by 30th April 1954 about 14,260 pounds - ascertained by the reduction of the retention allowance - would attract undistributed profits tax under Div. 7 of Pt III of the Act unless something were to happen in the meantime to make that division inapplicable. The Profit and Loss Account for the period 1st July 1953 to 31st December 1953 shows six months' net profit of 10,150 pounds and again unless something were to happen to make Div. 7 inapplicable this would attract undistributed profits tax, but only in the event of there being no sufficient distribution by 30th April 1955. As at the end of December 1953 there was in the company's Profit and Loss Appropriation Account 41,695 pounds 7s. 6d. available for distribution. By the end of March 1954 it was estimated that a further net profit of 3,000 pounds had been made. The tax that would be incurred upon any distribution would not be large as Eynesbury would have been entitled to a rebate, but there would be a taxation problem in the future because in the event of no distribution by Eynesbury undistributed profits tax would be incurred, and in the event of a distribution by that company F. R. Mayfield and Jean W. Mayfield would incur a considerable amount of tax. 1,000 shares of 1 pound each fully paid in Eynesbury had been issued - 600 "A" shares to F. R. Mayfield and 400 "B" shares to Jean W. Mayfield. (at p328)

4. It was in these circumstances that Adamson proposed that instead of repeating a sale and purchase of shares in the holding company, Argo would purchase all the shares in the operating company (that is, F. R. Mayfield Ltd.) for 5,000 pounds less than the net asset backing of the shares after the sale of the company's business to a new F. R. Mayfield Ltd. that would be formed. F. R. Mayfield agreed to this on behalf of all the shareholders in the old F. R. Mayfield Ltd. and a course of action began on 23rd March 1954 which terminated with the liquidation of the old F. R. Mayfield Ltd. in October 1954. (at p328)

5. On 23rd March 1954 F. R. Mayfield Ltd. changed its name to Mayfield Holdings Ltd., and at a meeting of directors it was resolved to sell the company's business as at 31st December 1953 for 52,413 pounds, payable 913 pounds by way of deposit and 51,500 pounds on demand. This price included 4,000 pounds for profit "from 1st January 1954 to date of incorporation" and it was decided that the old company should pay to the company to be formed all receipts since 31st December 1953 and should receive from the new company a refund of expenses paid since that date. On 25th March the new F. R. Mayfield Ltd. was incorporated. On 29th March 1954 a meeting of the subscribers to the memorandum of the new F. R. Mayfield Ltd. was held at which: (a) shares were allotted as follows - 3,000 fully paid "A" class shares of 5/- each to F. R. Mayfield, 2,000 fully paid "B" class shares of 5/- each to Jean W. Mayfield; (b) it was noted that F. R. Mayfield was governing director of the company by reason of his holding the majority of the "A" class shares; (c) an offer from Mayfield Holdings Ltd. to sell its business to the company for 52,413 pounds was reported and it was resolved to accept it; and (d) F. R. Mayfield intimated that he had appointed Jean W. Mayfield as a director. The shares so allotted were paid for in cash by a cheque from F. R. Mayfield on 29th March. The new company took over the business as a going concern on 1st April 1954; the deposit of 913 pounds and 56,424 pounds on account of payments by the business since 1st January 1954 were paid and Mayfield Holdings Ltd. paid to F. R. Mayfield Ltd. 49,775 pounds 6s. 7d. on account of receipts from 1st January 1954 and lent it 20,682 pounds 3s. 10d. to carry on. When all this had been done, the value of the net assets of Mayfield Holdings Ltd., less provision for taxation, amounted to 61,882 pounds 16s. 11d. so that the purchase price of the shares was that sum less 5,000 pounds (i.e., 56,882 pounds 16s. 11d.) which was taken to be 56,900 pounds in round figures. By arrangement between F. R. Mayfield and Beesley, he was to get 2 pounds 5s. 0d. for each of his 500 shares while the other shareholders received 4 pounds 17s. 0d. per share. The financial position of Mayfield Holdings Ltd. was as follows:

Assets -
Amount owing by the new F. R. Mayfield
Ltd. as purchase price for the business
and by way of loan . . . . . . 72,182 pounds 12 0
Bank of Adelaide . . . . . . . . . 2,700 pounds 4 11
74,882 pounds 16 11
Less provision for income tax . . 13,000 pounds 0 0
61,882 pounds 16 11

The company had no outside liabilities and the shareholders' funds were as follows:

Capital - pounds
12,000 shares of 1 pounds each . . . . 12,000 0 0
Capital Profit Reserve . . . . . . . . 4,894 0 0
General Reserve . . . . . . . . . . . . . 284 12 5
Tax Profit Reserve . . . . . . . . . . . . 8 17 0
Profit and Loss Appropriation Account -
pounds
Balance at 30. 6. 53 31,544 10 7
Profit to 31. 12. 53 10,150 16 11
Estimated Profit prior to
incorporation of F. R.
Mayfield Ltd. (Less
tax 1,000 pounds) 3,000 0 0 44,695 7 6
61,882 16 11 (at p329)

6. On 20th April the directors of Eynesbury resolved to sell its 9,480 shares in Mayfield Holdings Ltd. for 4 pounds 17s. 0d. per share (45,978 pounds in all) and to apply for 180,000 shares of 5/- each in the new F. R. Mayfield Ltd. About the same time the other shareholders in Mayfield Holdings Ltd. must also have agreed to sell their shares and have signed transfers, although detailed information about this is lacking. On the same day Argo and Kentish drew cheques as follows upon their accounts with the Bank of Adelaide:

45,978 pounds 0 0 Kentish to Eynesbury
in respect of 9,480 shares;
48 pounds 10 0 Kentish to F. R. Mayfield
in respect of 10 shares;
48 pounds 10 0 Kentish to Jean W. Mayfield
in respect of 10 shares;
1,125 pounds 0 0 Kentish to Keith A. Beesley
in respect of 500 shares;
9,700 pounds 0 0 Argo to the new F. R. Mayfield
Ltd., being -
4,850 pounds for Grant R. Mayfield
in respect of 1,000 shares;
and
4,850 pounds for Brenton J. Mayfield
in respect of 1,000 shares.
56,900 pounds 0 0 12,000 shares.

To enable these cheques to be met, Adamson arranged with the Bank of Adelaide an overdraft for Argo and Argo lent Kentish what was required to meet its cheques. The transfers and cheques were exchanged and on 21st April the directors of Mayfield Holdings Ltd. approved the transfers (other than those by F. R. Mayfield and Jean W. Mayfield) and the transferees were thereafter treated as members of the company. F. R. Mayfield and Jean W. Mayfield then resigned as directors and Adamson and Mollison were appointed in their place. The transfers by F. R. Mayfield and Jean W. Mayfield were then approved. The cheques for the purchase of the shares, other than those payable to F. R. Mayfield and Jean W. Mayfield, were banked on 21st April; the cheques payable to F. R. Mayfield and Jean W. Mayfield were deposited in the account of the new F. R. Mayfield Ltd. on 29th April 1954. (at p330)

7. There were other transactions on 21st April. Eynesbury paid 45,000 pounds to the new F. R. Mayfield Ltd. for its 180,000 shares of 5/- each in the new F. R. Mayfield Ltd. and that company paid 60,182 pounds 12s. 0d. to Mayfield Holdings Ltd. on account of the balance owing for the business and the amount lent to carry on the business, leaving 12,000 pounds outstanding. There was also a meeting of directors of the new F. R. Mayfield Ltd. at which 180,000 fully paid 5/- "B" shares were allotted to Eynesbury and 2,000 fully paid 5/- "B" shares were allotted to K. A. Beesley. On 23rd April 1954 a cheque for 1,000 pounds was given by Beesley to the new F. R. Mayfield Ltd., being 500 pounds for his shares in that company and 500 pounds in payment of an amount payable by Beesley to Eynesbury for shares purchased by him in the old F. R. Mayfield Ltd., which had been transferred to him on 7th December 1951. (at p331)

8. When all this had been done, the directors of Mayfield Holdings Ltd. on 27th April 1954 declared a dividend of 4 pounds per share totalling 48,000 pounds which was paid on 28th April. This is the first dividend which the Commissioner contends was a distribution to those who were shareholders of Mayfield Holdings Ltd. before the transfers of 21st April 1954. On 28th April 1954 Argo and Kentish received from Mayfield Holdings Ltd. their dividends declared on 27th April 1954, and Mayfield Holdings Ltd. lent Argo 9,000 pounds. (at p331)

9. On 8th June 1954 Mayfield Holdings Ltd. declared and on 10th June paid to Argo and Kentish a dividend of 2/- per share, totalling 1,200 pounds. This is the second dividend that the Commissioner contends was a distribution to those who were shareholders in Mayfield Holdings Ltd. before the transfers of 21st April 1954. (at p331)

10. On 10th June 1954 the following transfers of shares in Mayfield Holdings Ltd. were executed, the consideration for the transfers being the amounts shown : Argo to Dunfermline - 2,000 shares for 2,050 pounds; Kentish to Dunfermline - 5,000 shares for 5,125 pounds; and cheques for these amounts were paid on 11th June 1954. (at p331)

11. Cheques for the balance of 12,000 pounds still owing by the new F. R. Mayfield Ltd. to Mayfield Holdings Ltd. were handed over as follows : on 25th June 1954 - 8,000 pounds; on 30th June 1954 - 4,000 pounds. (at p331)

12. On 5th October 1954 Mayfield Holdings Ltd. went into voluntary liquidation and Adamson was appointed liquidator. Before this date Mayfield Holdings Ltd. had, it seems, purchased shares in outside companies which in its balance sheet as at 30th June 1954 stood at a value of 4,537 pounds. (at p331)

13. It is now necessary to state in a summary form the result of all these moves. Mayfield Holdings Ltd. had disappeared and in its place there was the new F. R. Mayfield Ltd. carrying on the same business but without any earned profits in its accounts ; Eynesbury had received 45,978 pounds for 9,480 shares in the old F. R. Mayfield Ltd., which had stood in its books at 29,460 pounds, and so had made a capital profit of 16,518 pounds and had 180,000 fully paid 5/- shares in the new F.R. Mayfield Ltd., for which it had paid 45,000 pounds; Beesley had sold 500 shares in Mayfield Holdings Ltd. for 1,125 pounds and had paid 500 pounds for 2,000 shares of 5/- each in the new F. R. Mayfield Ltd. ; F. R. Mayfield had sold 10 shares in Mayfield Holdings Ltd. for 48 pounds 10s. 0d., as had his wife ; Grant and Brenton Mayfield had each sold 1,000 shares in Mayfield Holdings Ltd. for 4,850 pounds; and Argo and Kentish had paid 56,900 pounds for shares in Mayfield Holdings Ltd. and had received dividends of 49,200 pounds, and they, or Dunfermline (to which certain shares had been transferred) no doubt received a further 600 pounds less expenses out of profits in addition to a return of capital of 12,000 pounds in the liquidation of Mayfield Holdings Ltd., thus showing a profit of 4,900 pounds approximately upon the whole of the transactions. (at p332)

14. In addition to the transactions themselves, it is necessary to bear in mind the evidence of F. R. Mayfield and Adamson that in addition to a taxation advantage of something over 5,000 pounds, which was the main advantage and had been worked out upon a piece of paper since lost, the Mayfields had either directly or indirectly gained other advantages. The new F. R. Mayfield Ltd. had a more satisfactory memorandum of association than the old F. R. Mayfield Ltd. Furthermore, whereas the capital of the old F. R. Mayfield Ltd. was only 12,000 pounds, the capital of the new F. R. Mayfield Ltd. was 46,750 pounds, and this was regarded as advantageous in two ways. The larger capital divided into 5/- shares made it possible to issue shares to employees, and the capital was more in keeping with the asset position which would be of assistance if the company should at any time seek listing on the Stock Exchange - a move that it seems was discussed in April 1954 but, if it were ever entertained as a genuine proposition, it was soon abandoned upon the advice of a stockbroker. (at p332)

15. The taxation returns made by the members of the Mayfield family and Beesley for the year ended 30th June 1954 not unnaturally contain no reference to the transactions that had taken place ; the return of Eynesbury, however, in addition to showing a loss of 17 pounds on the footing that the company had received no dividends or other income in the year but had expenses of 17 pounds, contained the following note : "Capital Profits Reserve - Profit on sale of 9,480 shares in F. R. Mayfield Ltd. (old company) to Argo Investments Ltd. and Kentish Investments Ltd. : 16,518 pounds". The Deputy Commissioner of Taxation enquired about this by a letter of 10th August and in a letter in reply Adamson, for Eynesbury, after referring to the purchase of 9,480 shares in November 1950 at a cost of 29,460 pounds, wrote : "The subsequent sale of the shares was decided upon to give effect to a reconstruction of the operating company, F. R. Mayfield Ltd. Considerable thought was given to the advisability of conversion to a public company and conferences were held between Mr. Mayfield, the writer and Mr. George Thompson, sharebroker. It was decided not to provide a public flotation at the present juncture but in order to bring the capital structure of the operating company more into line with real values in 1954, it was decided to form a new company. Instead of winding up the old company, the directors were able to negotiate a sale for the consideration stated above. This procedure did not differ from the case of any other taxpayer who, as referred to in Bell v. Federal Commissioner of Taxation (1953) 87 CLR 548 'in preference to retaining his shares and claiming the dividends which they seem certain to yield, chooses to sell the shares for a capital sum'". Eynesbury's return also showed that the only dividend declared in the period 1st July 1953 to 30th June 1954 was dividend of 6,147 pounds in March 1954. (at p333)

16. Each of the individual taxpayers received notices of assessment based upon the returns made but no notice of assessment was issued to Eynesbury until 21st May 1958. In May 1958 each individual taxpayer received a notice of amended assessment including, as taxable income, a proportion of the distributions of 48,000 pounds and 1,200 pounds made by Mayfield Holdings Ltd. on 28th April 1954 and on 8th June 1954 respectively. Eynesbury, as has been said, received a notice of assessment. Its assessment was for undistributed profits tax calculated upon an undistributed amount of 38,851 pounds which was made up by adding together the 37,920 pounds described as its proportion of the 48,000 pounds distributed by Mayfield Holdings Ltd. on 28th April and 940 pounds described as its proportion of the 1,200 pounds distributed on 8th June, and by deducting from the total (38,868 pounds) the loss of 17 pounds for the year shown in the company's share. (at p333)

17. It may be added that Eynesbury's return for the year ended 30th June 1955 showed that there had been no dividends paid or credited by the company during the period from 1st July 1954 to 30th June 1955, so that if its income did include 38,868 pounds from Mayfield Holdings Ltd., as the Commissioner claims, there was no sufficient distribution for the purposes of Div. 7 of what had been received. (at p333)

18. I turn now to the application of s. 260 to the state of affairs that has been disclosed. (at p333)

19. The course of events narrated does, I consider, require the finding that there was an arrangement, planned by Adamson and to which the members of the Mayfield family, Beesley and Eynesbury were parties, to avoid any liability on their part for tax upon distributions to be made by the old F. R. Mayfield Ltd. To this arrangement Adamson, acting for Argo and Kentish, was party and each one concerned, when the occasion arose, acted in accordance with the arrangement. This, according to authority, is an arrangement to which the section applies, and for the purpose of the assessment of tax the transfers of their shares are void and these shareholders must be regarded as having remained as shareholders and as having received the dividends that were in the event received by those to whom, as part of the arrangement, they sold their shares not merely to the extent to which the payments which the taxpayers actually received from the purchasers had their source in the dividends, but also to the full extent to which but for the arrangement the taxpayers would have received the dividends that were, in accordance with the arrangement, diverted to other parties thereto : 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] UKPCHCA 1; (1958) AC 450 ; (1958) 98 CLR 1 and Hancock v. Federal Commissioner of Taxation [1961] HCA 90; (1961) 108 CLR 258 . (at p334)

20. I decide, therefore, that the dividends of 48,000 pounds and 1,200 pounds distributed by Mayfield Holdings Ltd. on 28th April and 8th June 1954 respectively are, so far as the Commissioner is concerned, the income of the taxpayers proportionally to their shareholding immediately before the transfers of 21st April 1954. (at p334)

21. Furthermore, I consider that notwithstanding the overdraft arranged by Argo as an interim financial measure for the provision of funds to pay for the shares, the payments made by Argo and Kentish on 21st April 1954 for the purchase of the taxpayers' shares in Mayfield Holdings Ltd., which totalled 56,900 pounds, came to the extent of 49,200 pounds from the profits of the company which were distributed shortly afterwards. This conclusion, I consider, follows from what was said by all the members of the Court in Hancock v. Federal Commissioner of Taxation [1961] HCA 90; (1961) 108 CLR 258 negativing the need for the tracing of what the taxpayers received back to the bank account of the distributing company. A substantial identity between what the company distributed and what the assumed members received is sufficient. As an affirmative statement of the position, I cite the following words from the judgment of the Chief Justice in Hancock's Case [1961] HCA 90; (1961) 108 CLR 258 "It does not seem to me to matter at all what interim financial expedients were resorted to or which moneys or whose credit was used in the course of carrying out the transaction. It is the result that exposes the taxpayer to liability : a result necessarily involving the employment by the taxpayer of a distribution of the profit fund (1961) 108 CLR, at p 282 ". (at p334)

22. What I have already said disposes of the appeals of the individual taxpayers but not that of Eynesbury, for its liability depends upon the non-distribution of income received. (at p335)

23. Eynesbury's share of the dividends that I have decided were the income of the taxpayers has, it seems to me, to be taken into account by the Commissioner in determining its taxable income, from which its distributable income has to be calculated in accordance with s. 103. Section 104 imposes liability to pay additional tax upon undistributed income, which is calculated by deducting from distributable income the retention allowance and dividends paid. It seems to me, therefore, that once it appears that there was no distribution before 30th April 1955 of what, so far as the Commissioner is concerned, is income that Eynesbury received in the year ended 30th June 1954, there is under the Act liability for undistributed profits tax. It follows that Eynesbury is liable to pay the additional tax imposed by s. 104. (at p335)

24. For all the taxpayers it was argued that the assessments appealed from were out of time. It seems to me, however, that the assessment of Eynesbury was an original assessment of undistributed profits tax and the limitations imposed by s. 170 (2) and (3) have no application. So far as the other taxpayers are concerned, although I agree that the amended assessments were not made to correct an error in calculation or a mistake of fact, I cannot accede to the argument that a full and true disclosure of all the material facts necessary for the assessment of the taxpayers was made to the Commissioner by the taxpayers or by anyone else. Again, as in the earlier proceedings, it was necessary for the Commissioner to know all the facts material to the question whether s. 260 applied and, if it did, what was disclosed as income of the taxpayers. This was not in any way disclosed. (at p335)

25. Accordingly the appeal of each appellant is dismissed with costs. (at p335)

ORDER

Order in each case :

Appeal dismissed with costs.