Adelaide Stevedoring Co Ltd v Federal Commissioner of Taxation [1963] HCA 20; (1963) 109 CLR 309 (25 July 1963)

HIGH COURT OF AUSTRALIA

ADELAIDE STEVEDORING CO. LTD. v. FEDERAL COMMISSIONER OF TAXATION [1963] HCA 20; (1963) 109 CLR 309

Income Tax (Cth)

High Court of Australia
Dixon C.J.(1), McTiernan(2), Menzies(3), Windeyer(4) and Owen(5) JJ.

CATCHWORDS

Income Tax (Cth) - Assessment - Private company - Whether subsidiary of public company - "Control of the company" - Capacity to control in hands of public companies - Control not in fact exercised - Income Tax and Social Services Contribution Assessment Act 1936-1958 (Cth), s. 105 (4) (b).

HEARING

Adelaide, 1962, September 26, 27;
Sydney, 1963, July 25. 25:7:1963
APPEAL under the Income Tax and Social Services Contribution Assessment Act 1936-1958 (Cth).

DECISION

1963, July 25.
The following written judgments were delivered:-
DIXON C.J. I have found the question involved in this appeal a difficult one all the arguments I have come to the conclusion that the interpretation adopted by Taylor J. is correct and that his reasons are adequate to sustain it. I think therefore that the appeal should be dismissed and I will not add to the learned judge's reasons for that conclusion. (at p310)

McTIERNAN J. In my opinion this appeal should be dismissed. I agree with the reasons of Taylor J. and in my view it is not necessary to add anything. (at p310)

MENZIES J. This appeal from a judgment of Taylor J., who decided that the appellant (whom I shall call "the company") was not a private company for the purposes of the assessment of income tax for its tax year ended 31st July 1958, turns upon the interpretation to be put upon s. 105(4)(b) of the Income Tax and Social Services Contribution Assessment Act 1936-1958 (Cth). It was not disputed that the judgment appealed from was correct if the company was "a subsidiary of a public company" on 31st July 1958 (that is, the last day of the company's year of income) and it was common ground that whether it was or not depended upon whether it fell within s. 105(4)(b) of the Act which provides that "a company is a subsidiary of a public company if, by reason of the beneficial ownership of the shares, the control of the company is in the hands of one or more companies none of which is a private company". This provision, it should be noted, relates to control exercised through beneficial ownership of shares and, whether this is altogether in accord with the realities of company administration or not, it is a well-recognized legal conception. Thus in W.P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation (1957) 100 CLR 66 , Dixon C.J., Kitto and Taylor JJ. said: "The controlling authority of a company is its general meeting, and accordingly it has always been recognized in the cases in this Court to which reference will be made and in the line of English decisions which the Court of Appeal has recently reviewed in S. Berendsen Ltd. v. Inland Revenue Commissioners (1958) Ch 1 that the only way in which a company can be controlled, in the relevant sense of the word, is by the carrying of a resolution at a general meeting" (1957) 100 CLR, at p 84 . Both parties accepted the position that control of a company is in the hands of the shareholders with major voting strength at general meetings. For the Commissioner it was contended that susceptibility to control by non-private companies in this way was enough: the company's contention was that something more than this was required to bring a company within s. 105(4)(b) and put forward as alternatives either capacity to control to the exclusion of any other grouping of shareholders or actual control effectively exercised in general meetings. (at p311)

2. On the material date the beneficial ownership of the issued shares in the company was as follows:-

Elder Smith & Co. Ltd. - a company but not a
private company . . . . . . . . . . . . . . 30,637
John Darling & Son Pty. Ltd. - a company but
not a private company . . . . . . . . . . . 12,697
Gibbs Bright & Co. - a partnership . . . . . 10,833
______
65,000
______

Upon a poll every member was entitled to one vote for every share held (art. 85). There was unchallenged evidence to the effect that in the administration of the company decisions had been unanimous and that the non-private companies had not used their voting strength to outvote other shareholders. In practical terms the question is, then, whether by reason of their holding of 43,334 shares out of an issued capital of 65,000 the control of the company was on 31st July 1958 in the hands of Elder Smith & Co. Ltd. and John Darling & Son Pty. Ltd. For the company it was argued that control was not in the hands of the two non-private companies notwithstanding that if they were to vote together they would have a majority, because there were other combinations of shareholders which could form a majority and that either non-private company could be outvoted by a combination of other shareholders. I agree with Taylor J., however, that these possibilities do not matter. Section 105(4)(b) selects the shareholder or shareholders to whom attention is to be directed primarily (that is, one or more non-private companies) and, having related control to beneficial ownership of shares, seems to me to require nothing more than a comparison between the voting strength attached to shares beneficially held by non-private company shareholders and that attached to shares held by other shareholders. It is no different in character from a provision which, for instance, grouped together Australian resident shareholders and required a comparison between their voting strength as a group and that of non-resident shareholders as a group to determine whether control of a company is in the hands of residents of Australia. Furthermore, whether or not control is actually exercised by the selected group is a matter with which the provision is not concerned. Indeed, it having been provided that the decision should depend upon the circumstances of a particular day and control having been related to voting power arising from beneficial holding of shares, it would seem practically impossible to determine the question by reference to an actual exercise of control unless there had happened to be a general meeting on the day in question at which one or more issues arose upon which the voting revealed that the non-private company shareholders had exercised control. That the exercise of control by a particular group is not important can perhaps best be illustrated by supposing that one non-private company, which by reason of its beneficial ownership of shares controls 60 per cent of the voting power of another company, was by virtue of a mistake not represented at a meeting held on the last day of the year of income of that company when a resolution was carried which it had decided to oppose. If merely because of a mistake a particular resolution was passed which could soon be rescinded, it surely could not be said on that day the company was in control of the other shareholders by reason of their beneficial holding of shares. Mr. Astley - quite properly to my mind - conceded that a company beneficially holding shares carrying more than half the voting power of the shareholders in another company would at all times have the control of that company in its hands and, although his concession ended there, I think the reason for the correctness of this concession is that control is to be found in the hands of the shareholder which by virtue of a majority shareholding has power to control, whether or not that power is exercised at any particular time. It is the two elements already referred to - namely, that control is related to the voting power of a named group and that s. 105(1) requires s. 105(4)(b) to be applied upon a particular day - that make it impossible to treat the test of control actually and effectively exercised as that to be applied here. It is true that in Adelaide Motors Ltd. v. Federal Commissioner of Taxation [1942] HCA 25; (1942) 66 CLR 436 and in Federal Commissioner of Taxation v. West Australian Tanners and Fellmongers Ltd. [1945] HCA 21; (1945) 70 CLR 623 the test of actual control was treated as relevant in the application of a provision which, subject to a particular exception, defined a private company as "a company which is under the control of no more than seven persons", but this was an entirely different provision from that now under consideration and it left at large who the seven persons might be, it did not specify beneficial shareholding as the one criterion of control and it did not require the criterion which it adopted to be applied to the circumstances of a particular day. (at p313)

3. There is, I think, no alternative to regarding the voting strength of non-private companies by reason of beneficial ownership of shares as decisive but in reply Mr. Astley, in the course of his penetrating argument, suggested that even so to find that nonprivate companies beneficially owned a sufficient number of shares to give them major voting power would not of itself be enough to show that the control of the company was in their hands and that this would appear only if in no circumstances could the voting strength of some other shareholder be of any significance upon an ordinary resolution and he instanced the case of three non-private companies each holding 30 per cent of the shares and one other shareholder holding the remaining 10 per cent so that, on the assumption that each share carried one vote, the non-private company shareholder could never by his voting determine whether an ordinary resolution should be carried or defeated. There is, however, no reason to confine s. 105(4)(b) in this way. In common parlance, one company is a subsidiary of another when that other, by reason of its shareholding, has major voting strength and the object of the section seems to be to accept this common notion and to accommodate it to a case where two or more non-private companies have, by reason of shareholding, major voting strength for the purpose of giving the company in question a particular character, viz. the subsidiary of non-private companies. (at p314)

4. In my opinion the judgment appealed from was correct and the appeal should be dismissed. (at p314)

WINDEYER J. For the purposes of s. 105 of the Income Tax and Social Services Contribution Assessment Act a company is a subsidiary of a public company "if by reason of the beneficial ownership of the shares, the control of the company is in the hands of one or more companies none of which is a private company". The test is where, at the given day, namely 31st July, does the preponderance of voting strength lie, having regard to the beneficial ownership of the company's shares not to the names of the persons on the share register. If there be any one public company with a preponderance of voting strength the statutory description is satisfied. It is equally satisfied if any two or more public companies together have a preponderance of voting strength. In my view the question is not how voting strength is in fact exercised, but where voting strength lies. I appreciate that, as Mr. Astley pointed out, two public companies having together a preponderance of voting strength might have divergent views; and at a general meeting neither might be able to ensure acceptance of its views without the aid of the votes of private shareholders, who would then have the balance of power. But the company would nevertheless, I think, be within the statutory description of a public company. The provisions of Div. 7 of the Act are clearly intended to be confined to companies in which the public are not substantially interested either directly or indirectly. And the definition of "subsidiary" reflects this policy. I do not think that its application involves a distinction between capacity to control or a particular exercise of control. I need say no more for I fully agree that for the reasons given by my brother Menzies, whose judgment I have had the advantage of reading, the appeal should be dismissed. (at p314)

OWEN J. I have read the judgment of Menzies J. and I agree with it. (at p314)

ORDER

Appeal dismissed with costs.