Ellers Motor Sales Pty Ltd v Federal Commissioner of Taxation [1969] HCA 60; (1969) 121 CLR 665 (8 December 1969)

HIGH COURT OF AUSTRALIA

ELLERS MOTOR SALES PTY. LTD. v. FEDERAL COMMISSIONER OF TAXATION [1969] HCA 60; (1969) 121 CLR 665

Income Tax

High Court of Australia
Menzies J.(1)

CATCHWORDS

Income Tax (Cth) - Arrangement altering the incidence of or avoiding a liability to income tax - Company - Dividends - Passing of dividends to specially formed public company - Transactions carried out before date of operation of amending legislation - Specific choice left open by legislation for exercise by taxpayers - Legislative intent that exercise of choice not void - Income Tax and Social Services Contribution Assessment Act 1936-1964 (Cth), s. 260 - Income Tax and Social Services Contribution Assessment Act (No. 3) 1964 (Cth), s. 45.

HEARING

Melbourne, 1969, October 21-23; December 8. 8:12:1969
APPEALS pursuant to s. 187 of the Income Tax and Social Services Contribution Assessment Act 1936-1964.

DECISION

December 8.
MENZIES J. delivered the following written judgment: -
The Court is here concerned with six appeals against income tax assessments appellants and the subject matter of each appeal. It is to be observed that the first five appeals relate to assessments based on income derived during the year ended 30th June 1965, and the sixth to an assessment based upon income derived during the year ended 30th June 1967. (at p667)

2. The parties have agreed upon a statement of facts which traces the development of what can conveniently be called the Ellers group of companies from 1953 when, on 7th August, Ellers Motor Sales Pty. Ltd. - called "Motor Sales" - was incorporated to acquire a motor car dealing business from John Henry Ellers and his wife June Harcourt Ellers. Other companies in the group, omitting the last, were incorporated as follows:

20th June 1955 : Ellers Motor Purchases Pty. Ltd. (called
"Motor Purchases") ;
24th April 1956 : Junelle Holdings Pty. Ltd. (called
"Junelle") and Harcourt Holdings Pty.
Ltd. (called "Harcourt") ;
20th January 1958 : Ellers Pastoral Investments Pty. Ltd.
(called "Pastoral Investments") ;
21st October 1959 : John H. Ellers Pty. Ltd. (called "Ellers
Pty. Ltd.") ;
1st June 1962 : John H. Ellers (Used Cars) Pty. Ltd.
(called "Used Cars") and John H.
Ellers (South Road) Pty. Ltd. (called
"South Road").

In all of the foregoing companies the only individual shareholders were Mr. and Mrs. Ellers and, for the rest, companies within the group held shares in other companies within the group. It is only necessary, I think, to state the actual shareholding in Harcourt. Mr. and Mrs. Ellers each held one "A" share; Motor Sales held one hundred "E" shares and Junelle held one hundred "B" shares. This continued to be the position up to June 1965 when another company was incorporated and the events occurred which gave rise to the assessments against which objections were taken and, upon disallowance, appeals have been brought. (at p667)

3. During the years ended 30th April 1962, 1963 and 1964, the various companies within the Ellers group each declared such dividends as were necessary to constitute sufficient distribution within the meaning of s. 105A of the Income Tax and Social Services Contribution Assessment Act of the taxable income of the preceding tax year. Details of these dividends appear in the agreed statement of facts. (at p667)

4. As the law stood prior to the operation of the Income Tax and Social Services Contribution Assessment Act (No. 3) 1964 (No. 110), it was possible each year for the companies to make sufficient distribution to escape Div. 7 taxation by rotating dividends among themselves and obtaining rebates under s. 46 of the Act in respect of the whole of each such dividend. In substance, therefore, the dividends so declared and paid were non-taxable. In respect of the income of these three years no Div. 7 tax was incurred by any company within the Ellers group and the only income tax that became payable was in respect of any dividends declared in favour of Mr. and Mrs. Ellers. (at p668)

5. Act No. 110 of 1964 altered the law in such a way as to radically affect the position of the Ellers group with regard to assessments in respect of the year of income commencing on 1st July 1965, and in respect of income of all subsequent years of income (see s. 45). In short, once there was income affected by the amendments made by Act No. 110 of 1964 it would be no longer possible to follow past practice without incurring tax upon one half of every distribution of dividends among the companies within the group. Furthermore, a new s. 103A was introduced into Pt VII of the Income Tax Assessment Act to apply to income of the year commencing on 1st July 1965. The importance of these changes requires elaboration. Before embarking upon this it is, however, important to observe that the purpose of s. 45 of Act No. 110 of 1964 was clearly enough to give taxpayers the advantage of existing legislation such as s. 46 and s. 105 - dividing companies into private and non-private companies - with regard to income derived before 1st July, 1965. (at p668)

6. I turn now to consider in greater detail the changes made by Act No. 110 of 1964, ss. 10, 28 and 29. (at p668)

7. Whereas the old s. 46 had entitled a resident company, being a shareholder in any other company, to a rebate upon all dividends included in its taxable income, the amendment made by s. 10 reduced the rebate to which a private company would be entitled as of right in respect of private company dividends to a rebate upon one half of such dividends included in taxable income. The new s. 46 so introduced went on to give the Commissioner the power to allow to a private company a further rebate in respect of the other half of such dividends in the event of his being satisfied as set out in (a), (b) or (c) of s. 46 (3). The first point to be observed is that any rebate upon the second half of such dividend income depended upon a decision of the Commissioner. Secondly, the effect of s. 46 (3) (a) and (b) in relation to the Ellers group of companies would authorize the granting of a further rebate only if there were to be a distribution of income derived after 1st July 1965, to the individual shareholders within a period of twenty-two months, i.e. 30th April 1967. This is so because in order to allow a further rebate under (a) or (b) the Commissioner would have to be satisified that that income had not, and would not, pass by way of dividend to any of the other companies in the group. Nevertheless, the Commissioner could always allow a further rebate under (c) if he were to be satisfied, having regard to all the circumstances, that it would be reasonable to do so. (at p669)

8. The amendment of the old s. 103 and the addition of s. 103A - see ss. 28 and 29 of Act No. 110 of 1964 - altered the definition of a private company subject to Div. 7 tax and undistributed profits. Whereas under the old dispensation a company was not a private company if, on the last day of the year of income, all the issued shares were held by more than twenty persons, under the new dispensation - apart from special provisions not relevant here - for a company to be a public company, and therefore not a private company, for a year of income (1) its shares had to be listed for quotation upon a stock exchange upon the last day of the year of income, or (2) it had to be a subsidiary of a company the shares of which were so listed. (at p669)

9. The foregoing changes, together with a provision in the Companies Act of South Australia prohibiting a subsidiary from being a shareholder in its holding company, confronted Mr. and Mrs. Ellers and their business advisers with real problems. If past practice had been followed there was a high degree of probability that tax would be payable upon one half of every sum distributed as dividends by one of the companies in the Ellers group to any other company or companies within the group; distributions to individual shareholders sufficient to put the companies outside the operation of Div. 7 of Pt III of the principal Act in relation to undistributed profits tax would involve them in the payment of a huge amount of personal tax which would cripple the business of the companies of which they were the owners; the failure to declare sufficient dividends out of dividends received would attract undistributed profits tax at the rate of fifty per cent without any retention allowance. To indicate the magnitude of the tax that would be incurred in one way or another unless there could be distributions carrying full rebate it is only necessary to say that by 28th May 1965, Harcourt had, during the year, received dividends of 358,923 pounds which, after 30th April 1967, if not distributed would attract Div. 7 tax, if distributed to private companies would not be fully rebatable, and if distributed to individuals would attract ordinary income tax. (at p670)

10. At this point it is, I think, convenient to set out a bare statement of what happened subsequently to 28th May 1965, taken from the agreed statement of facts with the minutes of the meetings referred to interpolated:

"24th June 1965. John H. E. Holdings Pty. Ltd. (called
'John Holdings') was incorporated. The subscribers to the
memorandum of association were Ellers and Mrs. Ellers, each
taking 1 'A' Class Ordinary share of 1 pound. The authorized
capital of John Holdings was:
1000 'A' ordinary shares
3500 fixed preference shares
500 redeemable preference shares
The 2 'A' class ordinary shares referred to above comprised
the whole of the issued capital of that company until 28th
June 1965.
25th June 1965. At 10 a.m. Ellers and Mrs. Ellers as the
managing directors of John Holdings held a meeting of directors
of that company, relative to the purchase of the shares in
Harcourt." - What was done is recorded in the minutes as
follows:
"'The directors reported that they had negotiated with
the shareholders of Harcourt Holdings Pty. Ltd. and had
made an offer to them of 1,766pounds. 16s. 8d. per share. The
negotiations had been successfully concluded and to
complete the takeover it was necessary to raise a loan in
excess of 356,900 pounds to enable the takeover to be completed
on a cash basis.
Mr. Ellers gave notice of his interest to make a temporary
advance to the company of 357,000 pounds repayable at call.
It was resolved to accept Mr. Eller's offer.
As the company was now in a financial position to
conclude
the purchase of the whole of the issued capital of
Harcourt Holdings Pty. Ltd., it was resolved to purchase
the following shares:
John H. Ellers 1 "A" ord. share for
the sum of - 1,766pounds. 16s. 8d.
June H. Ellers 1 "A" ord. share for
the sum of - 1,766pounds. 16s. 8d.
Ellers Motor 100 "E" ord. shares
Sales Pty. Ltd. for the sum of - 176,683pounds. 6s. 8d.
Junelle Hold- 100 "B" ord. shares
ings Pty. Ltd. for the sum of - 176,683pounds. 6s. 8d.
It was resolved that the transfers for the above shares and
for the consideration as shown be executed.'"
"At 10.10 a.m. Ellers and Mrs. Ellers as the only directors
of Motor Sales held a meeting of directors of that company
relative to the sale and transfer of shares in Harcourt." -
What was done is recorded in the minutes as follows:
"'The directors reported that John H. E. Holdings Pty.
Ltd. were prepared to purchase the company's holdings
in Harcourt Holdings Pty. Ltd. for the sum of
1,766pounds. 16s. 8d. per share and that such would be a cash
offer.
It was resolved to accept the cash offer and to execute
the transfer of the 100 "E" shares held by the company
in Harcourt Holdings Pty. Ltd. to John H. E. Holdings
Pty. Ltd.'"
"At 10.15 a.m. Ellers and Mrs. Ellers as the only directors of
Junelle held a meeting of directors of that company relative to
the sale and transfer of shares in Harcourt." - What was
done is recorded in the minutes as follows:
"'The directors reported that John H. E. Holdings Pty.
Ltd. were prepared to purchase the company's holdings
in Harcourt Holdings Pty. Ltd. for the sum of
1,766pounds. 16s. 8d. per share and that such would be a cash
offer.
It was resolved to accept the cash offer and to execute
the transfer of the 100 "B" ordinary shares held by the
company in Harcourt Holdings Pty. Ltd. to John H. E.
Holdings Pty. Ltd.'"
"At 10.20 a.m. Ellers and Mrs. Ellers as the managing
directors of Harcourt held a meeting of directors of that
company relative to the sale and transfer of shares and the
issue of new certificates." - What was done is recorded in the
minutes as follows:
"'The following share transfers were tabled:
Transfer No. 1 from John Henry Ellers to John H.
Ellers as nominee of John H. E. Holdings Pty.
Ltd. 1 "A" ordinary share numbered 1.
Transfer No. 2 from June Harcourt Ellers to John
H. E. Holdings Pty. Ltd. being 1 "A" ordinary
share numbered 2.
Transfer No. 3 from Ellers Motor Sales Pty. Ltd. to
John H. E. Holdings Pty. Ltd. being 100 "E"
ordinary shares numbered 401-500.
Transfer No. 4 from Junelle Holdings Pty. Ltd. to
John H. E. Holdings Pty. Ltd. being 100 "B"
ordinary shares numbered 101-200.
It was resolved that such transfers be accepted and to
issue new script as follows:
Certificate No. 5 in the name of John Henry Ellers to
John H. Ellers as nominee of John H. E. Holdings
Pty. Ltd. being 1 "A" ordinary share numbered 1.
Certificate No. 6 in the name of John H. E. Holdings
Pty. Ltd. being for 1 "A" ordinary share numbered
2.
2.
Certificate No. 7 in the name of John H. E. Holdings
Pty. Ltd. being for 100 "E" ordinary shares
numbered 401-500.
Certificate No. 8 in the name of John H. E. Holdings
Pty. Ltd. being for 100 "B" ordinary shares
numbered 101-200.'"
25th June 1965. Mr. Douglas Ian Barton, the secretary
of the Ellers companies, saw Mr. John Venning, the then
manager of the Grote St., Adelaide, branch of the A.N.Z.
Bank with a view to making temporary financial
arrangements
to enable John Holdings to pay the purchase price of
the shares in Harcourt.
25th June 1965. John Holdings opened a bank current
account at the Grote St., Adelaide, branch of the A.N.Z. Bank,
and Ellers' personal cheque for 357,000 pounds was credited to that
bank account. Four separate cheques were drawn by John
Holdings in favour of Ellers, Mrs. Ellers, Junelle and Motor
Sales respectively for their shares in Harcourt, as follows:
Ellers one 'A' share . . . . . . 1,766 pounds 16 8
Mrs. Ellers one 'A' share . . . . 1,766 pounds 16 8
Junelle 100 'B' shares . . . . 176,683 pounds 6 8
Motor Sales 100 'E' shares. . . . 176,683 pounds 6 8
356,900 pounds 6 8
The cheques for Junelle and Motor Sales, each for
176,683pounds. 6s. 8d. were debited to John Holdings' bank account
on the same 25th June, but the cheques for Ellers and Mrs.
Ellers (each for 1,766pounds. 16s. 8d.) were not debited to that
account until three days later. The share transfers by Ellers
and Mrs. Ellers, Junelle and Motor Sales were all dated 25th
June 1965, and on the same day those transfers were entered
in the share register of Harcourt as having been transferred on
that date. The share transfers were stamped with South
Australian stamp duty on 5th July 1965, by impressed stamps
at the office of the Commissioner of Stamps, the amount of
duty, totalling 1,338pounds. 18s. being then paid." - The relevant
minute is as follows:
"'It was resolved that the seal of the company be affixed
to the following scrip certificates :
Scrip No. Share No. Class Holder
1 1 1 "A" ordinary John Henry
(subscriber) Ellers
2 2 1 "A" ordinary June Harcourt
(subscriber) Ellers.
It was resolved that a current account with the A.N.Z.
Bank Ltd., Grote St. branch be opened in the name of the
company and that Mr. John H. Ellers solely or any two
of the following be authorized to sign cheques drawn on
the account:
Mr. Douglas I. Barton; Mr. Morris G. Kearney;
Mr. Bruce J. Gepp.'"
"28th June 1965. The cheques for the purchase of the
Harcourt shares of Ellers and Mrs. Ellers were deposited and
debited in the bank account of John Holdings.
On 28th June 1965, John Holdings allotted one redeemable
preference share to each of twenty-one individuals. The
twenty-one redeemable preference shares were taken up for
cash by the individuals concerned.
28th June 1965. On this same day, Harcourt declared and
paid to John Holdings a dividend of 358,923 pounds. The dividend
cheque was credited to John Holdings' Bank account on the
same day." - The relevant minute is as follows :
"'Resolved to distribute in the form of an interim dividend
the sum of 358,923 pounds out of the company's profits for the
year ended 30th June 1965. It was resolved that such a
dividend should be declared on the "B" ordinary shares
of the company and that the dividend should be paid in
cash.'"
"2nd July 1965. A cheque dated 1st July 1965, for
357,000 pounds drawn by John Holdings in favour of Ellers was
debited to the company's bank account on 2nd July 1965,
and credited to Ellers' personal account at the same bank ;
thus the loan from Ellers was discharged, and Ellers repaid to
the bank the sum which he had borrowed on 25th June 1965." (at p673)

11. With this record of what was done in mind, it is now necessary to refer both to how it all came about - although this will involve some repetition - and to what were the consequences of what was done with respect to the taxation of the companies within the Ellers group and that of Mr. and Mrs. Ellers. (at p673)

12. In April 1965, Mr. Lang, who was the financial adviser to Mr. Ellers, drew Mr. Ellers' attention to the problems which the future held. A number of possibilities were then considered. The first was whether the Commissioner might be approached to ask him if he would extend the period of twenty-two months pursuant to a discretion and allow the Ellers group of companies to distribute to individual shareholders over an extended period. The Commissioner was first approached generally by Mr. Lang with problems on behalf of many of his clients. On 5th May he wrote again specifying the Ellers group of companies and asking whether the Commissioner would exercise his discretion in favour of the companies. Mr. Lang was notified by the Commissioner on 2nd June that the discretion would not be exercised. The second course was for the Ellers group of companies to float themselves into a public company. Mr. Ellers made an approach to General Motors on this score and was advised that it was against company policy and that there was a grave possibility that he would not have his franchise transferred to the public company. The third possibility was that they should accept takeovers which were being made about that time but this was contrary to Mr. Ellers' wish to continue the business operation and introduce his sons into the business. The fourth possibility was to incorporate a company to be a non-private company along the lines of that which the High Court had considered in W. P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation [1957] HCA 2; (1957) 100 CLR 66 , and to put profits which might in one way or another attract tax into that company. (at p674)

13. Mr. Ellers then wrote to General Motors Acceptance Corporation, the finance house with whom he ordinarily dealt, to seek their assistance. On their advice he consulted a Mr. Hughes of Buckley & Hughes, Chartered Accountants of Melbourne. There were two consultations with Mr. Hughes. The first, which was short, was held in Mr. Hughes' office in Melbourne. This was largely to outline the nature and structure of the Ellers group. The second conference took place on 28th May in Adelaide and there was no contact in between these two dates. This was a more detailed conversation and from it Mr. Hughes concluded that the course that was almost certainly to be adopted was what has already been referred to as the fourth possibility. Indeed, steps to incorporate such a company were already in train. (at p674)

14. What then happened is as follows. A firm decision was taken to add a non-private company at the apex of the Ellers group of companies' structure, that company to be formed in accordance with the opening left by s. 45 of Act No. 110 of 1964. It was decided that issued shares in Harcourt Holdings Pty. Ltd. should be sold to the company to be formed. At this stage there were four shareholders in Harcourt ; one share was held by Mr. Ellers ; one was held by Mrs. Ellers ; one hundred shares were held by Sales ; and one hundred shares were held by Junelle. The Keighery company, which was called John Holdings Pty. Ltd., was formed with an issued capital of 2 pounds subscribed by Mr. and Mrs. Ellers, being one share each. Mr. Ellers approached a number of his friends, ascertained from them first of all that they were not employees of his, or not in any other way interested in his companies, or that they were not related, and obtained from them individually a cheque for 1 pound and they each applied for one redeemable preference share. This was paid for in cash. The issued capital of Harcourt was then sold to John Holdings. Mrs. Ellers sold one share ; Mr. Ellers sold one share ; Junelle sold its one hundred and Sales sold its one hundred. The sale in each case took place upon the basis of a valuation of shares effected by Mr. Lang. Mr. Lang indicated that he based his valuation on the net asset backing of the shares. Each share was valued at 1,766 pounds. Mr. and Mrs. Ellers each received 1,766pounds. 16s. 8d. and each of the companies received 176,683pounds. 6s. 8d. In order to enable John Holdings to purchase these shares, Mr. Ellers, through his bank, the A.N.Z. Bank, obtained a personal loan of 357,000 pounds. He lent that money to John Holdings and John Holdings drew on those funds to effect the purchase of the shares. Harcourt was thus in line to become a subsidiary of a non-private company on 30th June. Similarly, Junelle, as a subsidiary of Harcourt, would also become the subsidiary of a non-private company. Dividends were then declared by Harcourt on 28th June 1965, to Holdings of 358,923 pounds. The dividend cheque was credited to Holdings' bank account on the same day. On 2nd July 1965, a cheque dated 1st July 1965, for 357,000 pounds, drawn by Holdings in favour of Ellers, was debited to the company's bank account and credited to Ellers' personal account at the same bank ; thus the loan from Ellers was discharged and Ellers repaid to the bank the sum which he had borrowed on 25th June 1965. The company paid the 1 pound back to each of the redeemable preference shareholders, redeemed their shares and paid a two shilling dividend. (at p675)

15. The taxation consequences of what was done can be stated shortly. Harcourt, the company in the Ellers group in which most of the profits that could in one way or another have been subjected to tax if retained or distributed had been concentrated, was left as an empty shell. Its assets were a mere 777 pounds; its liabilities were 573 pounds and its reserves 2 pounds. Holdings, however, overnight gained assets of 717,365 pounds; liabilities of 358,419 pounds and reserves of 358,923 pounds. The dividend of 358,923 pounds, declared and paid by Harcourt to John Holdings could be held by that company indefinitely without liability for tax. It was, according to the pre-amendment definition of a private company, a non-private company when it received the dividend and it was unimportant that a year later it would not be a public company according to the then effective definition to be found in s. 103A. The dividends could remain undistributed indefinitely. It was only in the event of John Holdings declaring dividends or going into liquidation that what it had received as dividends from Harcourt could become subject to tax. (at p675)

16. The assessments now in question were all made on the footing that s. 260 of the principal Act avoided, as against the Commissioner, the transfer of the shares in Harcourt to John Holdings, so that tax liability was to be assessed as if these transfers had not been made and the distribution by Harcourt had been to the original shareholders. If s. 260 did not so operate the assessments made cannot stand. Without s. 260 the declaration of dividends by Harcourt and its payments to John Holdings attracted no tax because the dividend was wholly rebatable under the unamended s. 46 of the principal Act. Furthermore, John Holdings, being a non-private company for the year in which the dividend was received, could not incur any liability in the future under Div. 7 of Pt III of the principal Act for retaining and not distributing what it had received as dividends from Harcourt because, by virtue of the unamended s. 105 of the principal Act, John Holdings was not a private company for the purposes of income of the year ended 30th June 1965. (at p676)

17. It is established by W. P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation [1957] HCA 2; (1957) 100 CLR 66 that the conversion of a private company into a non-private company by the creation of redeemable preference shares and the allotment of one such share to each of twenty applicants just prior to 30th June, so that on 30th June there were twenty-two shareholders and it was a company to which Div. 7 of Pt III did not apply, was not something which attracted s. 260 and the Commissioner could not access the company on the footing that it was a private company, notwithstanding that what had been done was done pursuant to an arrangement to take advantage of the circumstance that a company could, by doing what was done, become a non-private company with the tax advantages that followed from it being a company of that description. It follows from this decision that s. 260 did not avoid the incorporation of John Holdings nor warrant that company being regarded as otherwise than a non-private company for the year ended 30th June 1965. Indeed, although counsel for the Commissioner reserved the right to contend hereafter that W. P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation (1) was wrongly decided, the matters to which I have just referred were properly treated as unarguable before me. (at p676)

18. The Commissioner did, however, claim that the transfers of the shares in Harcourt, being part of an arrangement having the purpose and effect (1) of altering the incidence of income tax, or (2) relieving Harcourt or its original shareholders from the liability to pay income tax, or (3) avoiding a liability imposed upon Harcourt and its shareholders under the Act, or (4) preventing the operation of the Act, are void as against him. The Commissioner claims, moreover, that the result of this avoidance of the transfers produces liability for tax in accordance with the assessments under review which have been made on the footing that the dividends actually paid by Harcourt to John Holdings were paid to the shareholders in Harcourt who transferred their shares to John Holdings. The taxpayers dispute both these contentions. (at p677)

19. Of course, there was here an arrangement between the Ellers and Harcourt, John Holdings, Junelle and Sales, if not with the other companies as well, to do, upon the advice of their tax advisers, what was done between 24th June 1965, and 2nd July 1965, and this is so notwithstanding that before it was decided to do what was in fact done other possibilities were reviewed and rejected. Nor do I think it matters that, until those concerned did commit themselves to the course of conduct which was carried out between the dates mentioned, it would have been possible for Harcourt to have retained the dividends it had received in the year ended 30th June 1965, until 30th April 1966, without incurring any liability for undistributed profits tax or to have become a public company or a subsidiary of a public company so as to fall altogether outside the provisions of Div. 7 of Pt III of the principal Act. Moreover, the frenzied activity in the last week of June and the willingness of those concerned to register transfers of shares in Harcourt, in breach of the Stamp Duties Act of South Australia, before the payment of stamp duty in order that the transfers could be registered by 30th June, does no more than highlight the determination of all concerned that Harcourt should declare a dividend to John Holdings before 30th June 1965. I am not in doubt that this was done in order to obtain the advantage of the circumstances that Act No. 110 of 1964 provided, that the amendments made by s. 10 thereof to s. 46 of the principal Act and by ss. 28 and 29 thereof to Div. 7 of Pt III of the principal Act should first apply in respect of income of the year of income commencing on 1st July 1965. (at p677)

20. Notwithstanding all this, it seems to me that when Parliament expressly amended the principal Act with a time lag to provide taxpayers with the opportunity of ordering their affairs in accordance with the law as it had stood but was, at a future date, to be changed, it cannot be said that taxpayers who acted simply in order to take advantage of Parliament's indulgence can properly be treated as making or carrying out arrangements with any of the purposes enumerated in s. 260 in the principal Act. It is not to be thought that what Parliament gave by the enactment of s. 45 of the Act No. 110 of 1964 was given merely to be taken away by the operation of s. 260 of the principal Act. I regard s. 45 as the key provision for the purposes of this case and I cannot regard s. 260 as denying its full operation. Section 45, in effect, says (1) that a dividend received by one private company from another private company and forming part of the income of the former during the year of income ending 30th June 1965, shall carry full rebate in accordance with the unamended s. 46 of the principal Act, and (2) that, for the purposes of income received during the year ending 30th June 1965, a company, having more than twenty shareholders on 30th June 1965, and not within pars. (b) to (f) of s. 105 of the principal Act unamended, is a non-private company. What those concerned with the group of companies did was to take advantage of these two provisions. (at p678)

21. In these circumstances it seems to me that the following statement by Dixon C.J. and Kitto and Taylor JJ., in W.P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation (1957) 100 CLR, at pp 92, 93 applies. Their Honours said :

"Whatever difficulties there may be in interpreting s. 260,
one thing at least is clear : the section intends only to protect
the general provisions of the Act from frustration, and not to
deny to taxpayers any right of choice between alternatives
which the Act itself lays open to them. It is therefore
important to consider whether the result of treating the
section as applying in a case such as the present would be to
render ineffectual an attempt to defeat etc. a liability imposed
by the Act or to render ineffectual an attempt to give a
company
an advantage which the act intended that it might be
given." (at p678)

22. For the reasons which I have already given, I think that to treat s. 260 as applying here would be to render ineffectual attempts to give to the taxpayers concerned an advantage which s. 45 of No. 110 of 1964 was designed to give them. (at p678)

23. My decision that s. 260 does not apply disposes of these appeals, but, had I come to the conclusion that the section did apply, I would have had difficulty in treating as taxable, in the hands of the original shareholders of Harcourt, dividends which they did not receive. The dividends went to John Holdings where they are held as profits, so that any distribution by way of dividends or deemed dividends - see s. 47 of the principal Act - to its shareholders would be deemed to be taxable. At present those shareholders are, of course, the persons and companies to whom the Commissioner attributes the receipt of the dividends which Harcourt declared. This aspect of the matter does not, however, arise in the view I have taken that s. 260 does not apply and I do not pursue it further. (at p678)

24. For the foregoing reasons the Commissioner's reliance upon s. 260 cannot succeed. The appeals must be allowed with costs and the assessments set aside. I will give the parties leave to make submissions in writing about the desirability of the Court making any further order in relation to the assessments of the appeals in lieu of the assessments which I have set aside. (at p679)

ORDER

Appeals allowed with costs. Assessments set aside.