|
|
[Home]
[Databases]
[WorldLII]
[Search]
[Feedback]
High Court of Australia |
FEDERAL COMMISSIONER OF TAXATION v. BRIAN HATCH TIMBER CO. (SALES) PTY. LTD.
[1972] HCA 73; (1972) 128 CLR 28
Income Tax (Cth)
High Court of Australia.
Walsh J.(1)
Barwick C.J.(2), Menzies(3), Windeyer(4) and Owen(5) JJ.
CATCHWORDS
Income Tax (Cth) - Allowable deductions - Losses incurred in previous years of income -Losses of company - Beneficial ownership of shares - Contract, agreement or arrangement affecting exercise of rights attaching to shares - Proxies - Whether Commissioner "satisfied" of material facts - Matters taken into consideration - Income Tax Assessment Act 1936-1967 (Cth), ss. 80A*, 80B.
* Sub-section (1) of s. 80A of the Income Tax Assessment Act 1936-1967 (Cth)
provided:
"Notwithstanding sections eighty and eighty AA of this Act, but subject to
the next succeeding sub-section and the next four succeeding
sections, a loss
incurred by a taxpayer, being a company, in a year before the year of income
shall not be taken into account for
the purposes of section eighty or section
eighty AA of this Act unless -
(a) the company satisfies the Commissioner;
or
(b) in the case of a company that is not a private company in relation to
assume,
that, at all times during the year of income, shares in the company carrying
between them - (c) the right to exercise not less
than two-fifths of the
voting power in the company; (d) the right to receive not less than
two-fifths of any dividends that may
be paid by the company;
and
(e) the right to receive not less than two-fifths of any distribution of
capital of the company in the event of the winding up,
or of a reduction in
the capital, of the company,
were beneficially owned by persons who, at all times during the year in which
the loss was incurred, beneficially owned shares in
the company carrying
rights of those kinds."
HEARING
Sydney, 1971, March 29, 30; May 21. 21:5:1971DECISION
1971, May 21.WALSH J. delivered the following written judgment: -for the year ending 30th June 1967 in which it showed a net profit of $67,836 but it claimed to deduct earlier losses were "not allowed in terms of s. 80A (1) of the Income $330. The respondent disallowed the claim, stating that the losses were "not allowed in terms of Section 80A (1) of the Income Tax Assessment Act". It is not disputed that the losses were incurred. But it appears that the respondent was not satisfied of the matters set out in pars. (c), (d) and (e) of s. 80A (1). In addition to assessing tax on the full amount of the net profit, the respondent made an assessment of additional tax on undistributed profits under Div. 7 of Pt III of the Act. He disallowed objections to both assessments. The principal question in these appeals is whether or not the company has shown that this Court should interfere with the decision of the respondent concerning the matters to which s. 80A (1) refers. There is a subsidiary question as to the application of s. 80B (5). (at p30)
The appellant company (herein called the company) made a return of income
2. The question is not whether I think that upon the facts placed before me
the conditions of s. 80A (1) were satisfied, but whether
the respondent's
decision should be reviewed on the ground that it can be seen that he has
failed to discharge properly his statutory
function, according to law. I
accept the statement of Dixon J. in Avon Downs Pty. Ltd. v. Federal
Commissioner of Taxation [1949]
HCA 26; (1949)
78 CLR 353, at p 360 as being an accurate
exposition of the principles to be applied in dealing with the question
which
I have to
decide. The examination of that question is complicated by the
circumstance that very little evidence has been placed
before
me to
show what
was the material before the respondent when he made his decision. The
company, through its counsel, has claimed
that it
was not practicable for it
to produce that evidence. The respondent has chosen not to provide it. His
contention is that
there
is no material before me upon which I can interfere
with the respondent's decision and that, therefore, the company must fail.
(at
p31)
3. I allowed evidence to be given, against objection, concerning the facts
which preceded, accompanied and followed the acquisition,
at a time within the
relevant year of income, by Mr. Brian Hatch and his wife of three shares in
the capital of the company, by which
they became the holders and the
beneficial owners of sixty per cent of the issued shares. (at p31)
4. According to the contentions of the company that acquisition gave Mr.
Hatch the practical control of the company but left two
shares (that is to
say, two-fifths of its issued shares) in the beneficial ownership in which
they had always been, and those shares
still carried, at all relevant times,
all the rights to which s. 80A (1) refers. For the respondent it was
contended that no evidence
should be admitted of any facts not proved to have
been known to the respondent when his decision was made. But I decided that
in
this case, in which there has been no suggestion of any deliberate
concealment or misrepresentation of any facts, I should admit
evidence of what
actually happened concerning the change in the shareholding of the company and
should determine afterwards to what
extent that evidence could properly be
considered in deciding the appeals, bearing in mind the limited scope of this
Court's inquiry
into the propriety of the respondent's decision. I think that
it is convenient to set out in these reasons the facts disclosed by
that
evidence, without confining my statement of the facts to those which are
actually proved to have been ascertained by the respondent
when he was
considering his decision. (at p31)
5. The company was incorporated in 1961. Its name was then G. A. Cleary
(N.S.W.) Pty. Ltd. At a general meeting held on 19th December
1966, it was
resolved that its name be changed to its present name. Its memorandum of
association was subscribed by Mrs. Lorna Cleary
and Mr. C. Scutt. Mrs. Cleary
is the wife of Mr. G.A. Cleary who was appointed, by the articles of
association, to be governing
director and was given control of the business
and management of the company. Mr. Scutt was an accountant who acted as such
for
this company and for other companies controlled by Mr. Cleary. Mr. Scutt
has never had any beneficial interest in his subscriber's
share. He
understood that he held it for the benefit of Mrs. Cleary but he could not say
definitely whether he held it for her or
for Mr. Cleary. It has not been
suggested that Mrs. Cleary was not the beneficial owner of the other
subscriber's share. No other
shares were issued earlier than 19th December
1966. (at p32)
6. The trading of the company was not successful. It incurred substantial
losses and it became unable to pay its debts. It was
placed under the
management of an official manager, in accordance with s. 201 of the Companies
Act, 1961 (N.S.W.). Its creditors
entered into an arrangement in accordance
with s. 181 of that Act. Its terms are not in evidence, but it appears from
documents which
are in evidence that the existence of the tax losses of the
company was seen to provide an opportunity for some money to be raised
for the
benefit of the creditors. It appears that a company called Berry Motors Pty.
Ltd., of which a Mr. McMullen was the representative
in these transactions,
was active in procuring the said arrangement made by the creditors, the effect
of which was, according to
a letter tendered in evidence, that it "has
crystallized the debts due to the creditors at a figure which will be paid and
also stayed
those debts to that figure". The provisions of the scheme
(according to the said letter) were such as to make it incumbent upon
the
"scheme creditors" to assign their debts. Assignment were to be taken from
those creditors by the Berry company which would
pay to the trustee of the
scheme the amount specified therein. (at p32)
7. Thereupon discussions took place between McMullen and Brian Hatch. Mr.
Hatch, through companies which he controlled, carried
on a business which
consisted mainly of the buying and selling of timber. That business was
profitable. These discussions were
followed by correspondence between
solicitors acting for the parties, and resulted in the execution of a deed
dated 19th December
1966. The parties to it were Berry Motors Pty. Ltd.
(Berry) and Grecher Pty. Ltd. (Grecher), which was a company controlled by Mr.
Hatch. A recital in the deed referred to the accumulated losses of the
company, which were stated to be available to be recouped
pursuant to s. 80 of
the Income Tax Assessment Act 1936 (Cth). A recital referred to the scheme of
arrangement and to the termination of the official manager's appointment.
There was another
recital that Grecher wished to take up a shareholding in the
company representing sixty per cent of its issued capital. There was
a
recital that it had been agreed that shares representing sixty per cent of the
total issued capital of the company would be issued
to Grecher, subject to its
paying to Berry the sum of $11,251. The deed contained several warranties by
Berry. In effect, although
not in form, the first warranty was that there was
no restriction upon the existing shareholders as to any rights of the kind
described
in s. 80A (1). Another warranty was that the Commissioner of
Taxation had assessed the losses of the company, available to be recouped
in
terms of s. 80 of the Act, in the four tax years up to and including the year
ending 30th June 1966, at amounts which were set
out in the deed and totalled
$67,506. There was a provision for a refund or a further payment, if the
Commissioner reduced or increased
"the losses available". Berry covenanted
that it would arrange for the issue of three shares at par to Grecher or its
nominee and
would arrange a general meeting of the shareholders of the
company, at which new directors would be appointed and the present directors
would tender their resignations. It was agreed that on or before 15th July
1968, Berry would hand to Grecher a form of assignment
executed by Berry
whereby the debt owed to Berry by the company would be assigned to Grecher.
Berry would engage Mr. McMullen to
assist the company, "during the period in
which the losses hereinbefore referred to are being recouped", as an
accountant, without
charge to the company or to Grecher. The general meeting
of the company which was to be arranged by Berry would be attended by a
person
nominated by Grecher and upon the issue of shares representing sixty per cent
of the issue capital, Grecher would pay to Berry
by bank cheque the sum of
$11,251. (at p33)
8. No shareholder was a party to that agreement, nor was the company. No
doubt Mr. McMullen felt it safe for his company to make
the promises which the
deed contained as to what would happen at a general meeting to be arranged,
because proxies had been obtained
from Mrs. Cleary and Mr. Scutt. Mrs. Cleary
appointed McMullen as her proxy to vote for her and on her behalf at any
ordinary or
extraordinary general meeting of the company. At the same time she
signed a request to the board of directors of the company to accept
her
resignation as director. Mr. Scutt appointed a Mr. Drever, who was a partner
or associate of the official manager, as his proxy
in similar terms. But it
was not Mr. Drever who came in place of Mr. Scutt to the general meeting which
was held on 19th December
1966. Drever signed a document appointing McMullen
"as my proxy to vote for me and on my behalf at any Ordinary or Extra-Ordinary
General Meeting of the Company". According to the minutes of the meeting of
19th December, McMullen was present as proxy for Mrs.
Cleary and as proxy for
Scutt. No one else was present, except Mr. Hatch and Mr. Levy (his
accountant), who were present by invitation.
The meeting, thus constituted
solely by McMullen in his double capacity of agent for Mrs. Cleary and (as
appears to have been supposed)
agent for Scutt by force of his appointment as
proxy made by Scutt's original agent Drever, proceeded to pass a number of
resolutions.
They included a resolution approving applications for the
allotment of two shares to Brian Hatch and one share to Noela Hatch his
wife.
Mr. and Mrs. Hatch were appointed directors and it was thereafter resolved
that "the present directors" of the company should
continue in office for the
ensuing year. Nothing was done concerning Mr. Cleary's position as governing
director (as set out in
the articles of association) and he does not appear
ever to have formally resigned from his position. But it is evident that he
did not take or seek to take any further part in the affairs of the company.
Nor did Mrs. Cleary or Mr. Scutt. It should be added
that at a general
meeting, nearly a year later, those recorded as being present were Mr. Hatch
and Mr. McMullen as proxy for Mrs.
Cleary (but not as proxy for Mr. Scutt).
(at p34)
9. Neither party has addressed any submissions to me as to the regularity or
validity of any of those proceedings or as to the consequences
for present
purposes of any irregularities that took place. The appeals have been
conducted on the basis that Mr. and Mrs. Hatch
did validly acquire three
shares in the company and became its directors. Of course, if they did not
acquire those shares, the consequence
would be that in the 1966-1967 tax year
there was no change at all in the shareholding and, therefore, no reason why
the company
should not have been allowed deductions for losses to which it was
entitled, prima facie, under s. 80. I do not think that I need
concern myself
with any oddities or deficiencies in the procedures which were adopted. (at
p34)
10. Thereafter Mr. Hatch ran the business affairs of the company, in
conjunction with the affairs of his other companies. In his
evidence, which
was given frankly and which I accept completely, he acknowledged that he
decided what parts of the available business
would be transacted by the
individual companies in his group and that he allocated to the company a
substantial part of that business.
His whole object in entering into the
transaction with McMullen's company was to get the benefit of the accumulate
losses. He could
do that only by carrying on business profitably in the name
of the company and using its profits to pay off the debts which by assignment
had become or would become due to his company Grecher. The shares acquired in
the company had no other value at the time when they
were acquired. Mr. Hatch
said that he left all formal matters in the administration of the company,
such as the sending of notices
of meetings, to the care of his accountant Mr.
Levy, who has since died. (at p35)
11. Before entering into the transaction with Berry, Hatch had received
advice. He knew that two shares only had been issued. He
was advised that an
arrangement could be made for him to acquire sixty per cent of the
shareholding and that, if any benefit was
to be obtained from the losses, the
holders of the other forty per cent of the shares must retain their complete
interest and nothing
must be done to restrict their rights in respect of those
shares. He knew that this involved the risk that if they disposed of the
shares his plan to use the company's losses must fail, but he thought this was
a small risk and was willing to take it. He had no
arrangement or
understanding with Mrs. Cleary or Scutt before the meeting of 19th December
1966. He had not met them. Afterwards
he did not make any request to them not
to deal with the shares. He did not know whether any notices of meetings or
other documents
had been sent out to them. He left such matters to Levy. He
would not agree that he considered them as having no longer any connexion
with
the company. He said that they were still shareholders and he was clearly
aware of their position. (at p35)
12. There was a subsequent transaction which I think has no direct bearing
upon this case. Mrs. Cleary signed a form of transfer
of shares. It was
expressed to be in consideration of $25 paid by Brian Hatch and to be a
transfer to him of two shares in the company.
A receipt signed by Mrs. Cleary
stated that the $25 was received from H. Levy. The transfer was expressed to
be signed on 21st
March 1968 but, most probably, it was signed somewhat later
than that. On 21st March 1968 Mr. Levy wrote to Mr. Drever stating that
Hatch
was interested in acquiring the two shares held by Mrs. Cleary and was
prepared to offer $25. He requested that if she were
agreeable she should
sign the enclosed transfer and receipt and return them. Mr. Hatch said in
evidence that the letter was written
without his knowledge. I accept that
evidence. But he did adopt the transaction. At a meeting of directors on
11th April 1968,
it was resolved that the transfer be approved of one share
from L.M. Cleary to Brian Hatch and of one share from C.B. Scutt, as trustee
for Mrs. Cleary, to Mrs. Hatch. That was an odd effect to give to a transfer
from Mrs. Cleary to Brian Hatch of two shares. But
I do not think this matters
any more than the earlier oddities associated with the company's affairs. I
do not think that this transaction
provides any basis for an inference that it
was the outcome of some earlier agreement or understanding concerning those
two shares.
The profits which the company had made under Hatch's control were
absorbed in paying its earlier debts. There is nothing to show
that the
transfer of the shares at the price stated would not have been made by Mrs.
Cleary, unless she had already divested herself
of her beneficial ownership or
had agreed to do so. (at p36)
13. I must refer now to some evidence given by Mrs. Cleary and by Mr. Scutt.
He ceased to have any interest in the company after
the official manager was
appointed. He did not recall whether he ever resigned from his position as a
director. He had no recollection
of having disposed of the share nominally
held by him. He was fairly certain that he did not. He said that he thought
that the
proxy signed by him was given to "the liquidator", at his request.
To the best of his knowledge he did not revoke the proxy. It
seems plain that
he did not make any agreement or arrangement with anyone relating to the
disposition of the share or to the exercise
of any rights associated with it.
(at p36)
14. Mrs. Cleary gave evidence that she signed the proxy at the request of
Drever and McMullen. She did not sell the shares or get
rid of them before
March 1968. She said that until then they were still hers. She did not think
that they were worth anything.
She was cross-examined about an interview which
she had in February 1968 with an officer of the Taxation Department. A report
of
that interview was subsequently tendered in evidence. Her husband was
present at the interview. The report said that "the company
was sold", with
the approval of the Court, to Berry Motors. Neither of the Clearys was able
to recall whether they received any
payments in respect of the sale. The
report said that "they were unable to recall whether they retained any
interest in the company
after the sale but said that for all purposes they
lost all interest as they did not have any further dealings with the company
or
Berry Motors". They both denied any knowledge of any such company as
"Brian Hatch Timber Co." or of Brian Hatch and Noela Hatch.
Mrs. Cleary said
that she had not had any correspondence in respect of Brian Hatch Timber Co.
and that all contact with the company
ceased on the sale to Berry Motors. The
report ended with the following sentences :
"In answer to my specific questions she denied having atBoth the Clearys signed the report as correct, with the correction that they had had no discussion with Berry Motors. (at p37)
any time entered into any arrangement, agreement or option
to sell shares in Brian Hatch Timber Co. nor had she signed a
blank share transfer in respect of that company. The reason
given for these denials was her never having heard of Brian
Hatch Timber Co. prior to the interview."
15. In evidence Mrs. Cleary said that, so far as she understood at the time
(that is, at the time of the sale described in the report
as the sale of the
company), she had ceased to have any interest in the company. Of course she
was not referring in that evidence
to a proprietary interest. Later, when the
proposal was made to sell the shares for $25 she did not think they were worth
anything.
She did not know to whom they were being sold. She knew only that
Mr. Drever suggested that she should sell them. She said that
she did not
know that Drever, on behalf of the creditors, had had a transaction with
McMullen to get money from the tax losses.
It was Drever who asked her to
sign the proxy. She did not know that this was in relation to a sale of the
tax losses. Everything
that she did was in accordance with what her husband
told her to do. She did not think she had ever received any notice of any
meetings.
(at p37)
16. Mr. Cleary was called into the witness-box and gave his name and address
and said that he was the husband of Lorna Cleary. Neither
counsel asked him
any further question. (at p37)
17. On the evidence placed before this Court the material which is known
positively to have been in the possession of the respondent
when he considered
the claim to deduct the losses was that which was contained in the income tax
return and the documents which accompanied
it and the report of his officer's
interview with the Clearys. The matters to be considered by him under s. 80A
(1) were: who had
beneficially owned shares in the company, carrying the
rights of the kind described in that provision, during the years when the
losses were incurred and whether at all times during the year of income,
shares carrying those rights were still beneficially owned
by the same
persons? The return showed that the name of the company had been changed. It
showed that its issued capital was five
ordinary shares of $2 each fully paid.
It gave a list of the shareholders as at 30th June 1967. It showed Mrs.
Cleary as holding
one share and Scutt as holding one share. It showed that
two shares were held by Mr. Hatch and one by Mrs. Hatch. It cannot be
supposed that the respondent acted so irresponsibly that when he disallowed
the claim to deduct the tax losses and afterwards disallowed
the objection, he
did not know and had taken no steps to find out how many shares there were in
the loss years and who held them.
It may, therefore, be assumed that he knew
that at that time the only shares were the two held by Mrs. Cleary and Scutt.
The question
that remained was whether the beneficial ownership of those
shares had continued as it was earlier or had changed. Section 80A (1)
operated to prevent the losses being taken into account, unless the company
satisfied the respondent that the beneficial ownership
had remained unchanged.
But the respondent could not reasonably fail to be so satisfied, in relation
to shares which had continued
to be held by the same persons, unless there was
something before him to indicate that a change in the beneficial ownership had
occurred.
If it be supposed that he regarded the statements, which the
Clearys were reported to have made to his officer, as being such an
indication, the question arises whether the respondent could have held that
view except as the result of some misconception of a
kind which would require
that his decision be reviewed. In my opinion the statements then made by the
Clearys in the interview could
not support a conclusion either that there had
been, or that there might have been, a disposition by Mrs. Cleary (or by Mr.
Cleary
if he had been thought to have any beneficial interest in either of the
shares) of the beneficial ownership or of any rights attached
to them. If the
statements that they had "lost all interest" in the company and that they
could not recall whether they had retained
any interest (in a different sense
of that word) in it after the sale to Berry had stood alone, it might perhaps
have been reasonable
to infer that she (or they) had parted with the
beneficial ownership of the shares or at least to suppose that this may have
happened
and therefore to refuse to be satisfied that it had not. But the
Clearys denied any dealings by them with Berry. They denied any
knowledge of
Brian Hatch. Mrs. Cleary denied having entered into any arrangement,
agreement or option to sell shares in Brian Hatch
Timber Co. and having signed
a blank share transfer in respect of that company. (at p38)
18. The respondent did not put forward the report of the interview as being
either the whole or part of the material upon which
he acted and upon which he
was justified in acting. As I have said, evidence has not been given
identifying the material upon which
his decision was based. I recognize the
need to be on guard against treating the appeals as a rehearing of the facts.
Nevertheless,
I think that the limits which are placed by the nature of the
appeal upon the review of the respondent's decision, important as these
are,
must not be allowed to be pressed so far as to make it impossible, in a
practical sense, for an appellant to challenge it at
all. If what the
respondent learned from the interview with the Clearys was not part of the
material which he used in making his
decision, either because he did not
consider it to be relevant or because he thought it to be of no assistance,
the result is that
there is no known explanation for his failing to be
satisfied that the beneficial ownership of the two shares had remained
unchanged.
(at p39)
19. It may be suggested that the respondent did not accept the statements
made by the Clearys or did not accept all of them. But
upon an examination of
what they were reported to have said I do not think that his decision can be
explained on the basis that a
part of their statements was accepted by him and
was regarded as making it doubtful that Mrs. Cleary had retained her
beneficial
ownership. Again, it may be suggested that the respondent may have
had before him material of which I do not know and that it is,
therefore,
impossible for me to conclude that some misconception or some extraneous
considerations entered into the decision. This
is a matter which requires
close consideration. In many cases in which the material before the
respondent had not been proved, I
think that an appellant would be precluded
from succeeding upon a question in which the satisfaction of the respondent
was the determining
factor. I was disposed to the view that this is so in
this case. But I consider that I am in a position to come to the conclusion
that it is extremely unlikely that from any of the parties to the transactions
by which Mr. and Mrs. Hatch acquired respondent obtained
information (not
disclosed to me) which could have helped him to conclude or to suspect that
Mrs. Cleary had parted with her beneficial
interest in the other shares or had
agreed or arranged not to exercise any rights in relation to them. I say that
because the evidence
given by Hatch and by Mrs. Cleary did not reveal, in my
opinion, any facts tending to such a conclusion or suspicion, and because
I
think there is no reason to believe that any relevant facts have been at any
time concealed or misrepresented. I think that the
theoretical possibility
that this may have happened ought not to be held in the circumstances of this
case, in which the respondent
has called no evidence, to require a conclusion
that his decision cannot be reviewed. In the circumstances, I am of opinion
that
I can have regard to the evidence of the actual facts of the transactions
which have been outlined above. This evidence is relevant,
although it is not
my task to decide the facts of the case for myself, because it makes known to
me the nature of the additional
material which could have been available to
the respondent, concerning the beneficial ownership of the two shares, as a
result of
inquiries from the people most directly concerned. If he had before
him an account of the matter given by Hatch, I have no reason
to doubt that it
would have agreed with the account that he has given in evidence. It would
have been to the effect that he had made
no agreement or arrangement relating
to the two existing shares and that he would have been anxious to avoid the
making of any such
agreement or arrangement. There is no ground for supposing
in this case that the respondent has been supplied with information which,
although it could be shown later to be not in accordance with the facts, could
reasonably have been accepted and acted upon by him,
as occurred in Avon Downs
Pty. Ltd. v. Federal Commissioner of Taxation [1949] HCA 26; (1949) 78 CLR 353 . Whilst it
is theoretically
possible
that he had some erroneous information upon which he
acted, I think that
in the circumstances of this case it would not
be right
to
treat that possibility as being of practical significance. I think that
his
decision may be examined, in the absence
of any evidence
to the contrary, on
the supposition that he acted upon the actual facts
or upon so much of them as
had come to his
knowledge. (at
p40)
20. The question, then, is whether there was anything to suggest that the
beneficial ownership of the two shares had changed. In
my opinion there was
not. I think that a conclusion that it had changed or a belief that it might
have changed could not reasonably
have been formed, unless it had been based
upon the circumstances that during the relevant period Mrs. Cleary (or her
husband) had
not exercised or sought to exercise any rights as shareholder and
had not taken any actual interest in the affairs of the company
and had no
intention of doing so and that (probably) no notices of meetings or other
correspondence had been sent to her by the company.
But in my opinion those
circumstances could not be found to have divested from her a proprietary right
and could not have operated
by way of estoppel or otherwise to preclude her
from asserting that right if she had wished to do so at any time. If it be
supposed
that her right was divested, in my opinion the consequence must have
been that it passed to somebody else. In Wood Preservation
Ltd. v. Prior
(1969) 1 WLR 1077, at p 1096; (1969) 1 All ER 364, at p 367 , Lord Donovan
said that it "is possible for property to
lack any beneficial owner for a
time". But although there may be special circumstances in which that is so, I
have the same difficulty
in thinking that it could be so in this case as
Widgery L.J. had in the case cited (1969) 1 WLR, at p 1097; (1969) 1 All ER,
at p
368 . To whom could the property have passed? Surely not to Berry,
although the Clearys are said to have stated that "the company
was sold" to
it. It seems plain that Berry did not acquire any beneficial interest in the
shares and it should be recalled that
the Clearys said they had had no
discussion with Berry. It seems equally clear that Mr. Hatch did not acquire,
at the relevant time,
any beneficial interest in the two shares in question.
The Clearys knew nothing of him and had no dealing with him or his other
companies,
either directly or through agents. The signing of the proxies
could not amount to a transfer or a surrender of any rights to the
shares. So
long as they remained unrevoked, they authorized the appointees to vote at any
general meeting. It may be assumed that
the authority given by the proxies
enabled the appointees to vote in a way which would have an effect upon the
existing shares, inasmuch
as an issue of further shares would reduce them to a
minority holding. But the proxies could not have conferred authority to deal
with the rights which remained attached to the two shares themselves and the
proxies were not used in a way which suggested that
anybody thought they had
conferred that authority. (at p41)
21. If Mrs. Cleary had heard of the meeting of the company arranged for 19th
December 1966 or of any other general meeting of the
company, prior to March
1968, and had attended it, I do no know upon what principle she could have
been restrained by Mr. Hatch or
by anyone else from exercising voting rights
in respect of the share held by her. There is no need to consider whether or
not she
would have been precluded by any arrangement inferred to have been
made earlier by her, from voting so as to prevent the issue of
the three
shares to Mr. and Mrs. Hatch. But there seems to be no legal or equitable
ground upon which she should have been precluded
from exercising the rights
attached to the share held by her or from controlling, for her own benefit,
the exercise of the rights
attached to the share held by Scutt. (at p41)
22. In Federal Commissioner of Taxation v. Casuarina Pty. Ltd. [1971] HCA 78; (1971) 127 CLR
62 , the main question arose under
s. 103A of the
Act. Therefore the case is
not directly in point here. But s.
103A (4), which contains the expressions
"beneficially
owns", "beneficial
ownership" and "beneficially entitled", was
considered.
It was there said that the questions to be considered
in relation
to par.
(b) of that provision was whether a shareholder, which
was a public
company, was capable of controlling more
than one-half of the
voting power in
the taxpayer company and was not whether
it was likely to control it or was
likely to exercise
its voting power in
a particular way. Similarly, in
relation to pars (c) and
(d), the question was said to be a question as to the
entitlement of the
shareholder at a given point of time to a dividend, or to
a
distribution of capital assumed then to be paid or
to take place. The
question was not to be determined by considering the probabilities
as to what
the shareholder would receive in
fact. Likewise in
the present case, I am of
opinion that it would be a misconception
of the relevant statutory provision
to treat
the question to be
decided as depending upon whether or not, during
the relevant period,
the rights described in s. 80A (1) were
exercised or
enjoyed
in fact by the holders of the two shares or were expected to be
exercised
or enjoyed. (at p42)
23. I have said that reference was made at the hearing to s. 80B (5). But I
am of opinion that there is not, on any view of the
facts proved before me (or
of any part of those facts considered in isolation from the rest of the
facts), any basis for a finding
in relation to the two shares that Mrs. Cleary
entered into a contract, agreement or arrangement or granted a right, power or
option
of the kind described in that provision. (at p42)
24. It was the Commissioner whom the company had to satisfy as to the
existence of the facts set out in s. 80A (1). The task of
an appellant, who
must show that his decision should be reviewed, is not an easy one. It has
been suggested by counsel for the company
that an attempt to produce evidence
of the actual material upon which the respondent acted would probably have
been frustrated by
a successful claim of privilege against its production. I
am not convinced that that is so, although it is true that the decision
in
O'Flaherty v. McBride [1920] HCA 60; (1920) 28 CLR 283 presents an obstacle to an appellant
who wishes to take that course.
So far as I am
aware, that case has not
been
reconsidered by this Court in the light of the modern decisions in England on
this
type of privilege.
Counsel for the respondent
contended that the matter
was one which could have been examined more satisfactorily
by a Board of
Review.
But the company was entitled
to come to this Court, if it chose to do
that. The respondent called no evidence.
That was within
his rights. But it
cannot prevent
the Court from examining his decision and it leaves the Court
without the benefit
of evidence
which might have provided an acceptable
explanation of that decision. Upon the view I take of the case, I am not able
to perceive
a satisfactory explanation of it, other
than that some mistake of
law was made, or some extraneous factor was taken into
account.
I am disposed
to think it likely that
the respondent regarded the cessation of any actual
connexion with or interest in
the company's
affairs on the part of the Clearys
and their vagueness as to what had occurred as being sufficient grounds for
failing
to be satisfied
that the beneficial ownership
of the two shares had
not been changed. If that was the basis of the decision I think
that it was
based upon a mistake of law.
It may have had a different basis. But, if so,
the fact that I do not know exactly what
that basis
was does not preclude me
from
holding that the decision ought not to stand. Dixon J. said in Avon
Downs Pty. Ltd. v.
Federal Commissioner
of Taxation [1949] HCA 26; (1949) 78 CLR 353, at p
360 :
"It is not necessary that you should be sure of the preciseI am of opinion that in the matter No. 3 of 1970 the appeal should be allowed with costs. The assessment of additional tax issued on 4th March 1969 should be set aside. In the matter No. 4 of 1970 the appeal should be allowed with costs. The assessment of primary tax issued on 4th March 1969 should be set aside and the matter should be remitted to the respondent for the assessment of income tax in accordance with this judgment. (at p43)
particular in which he has gone wrong. It is enough that
you can see that in some way he must have failed in the discharge
of his exact function according to law."
ORDER
Appeals allowed with costs.
The Commissioner appealed from this decision to the Full Court.
W.P. Deane Q.C. (with him J.R. Gibson and M. Baker), for the appellant. Unless a strong prima facie case can be made out that the Commissioner has acted wrongly in failing to be satisfied of the matters referred to in s. 80A the Court should not intercede. If, for example, all obvious sources of evidence are before the Court and these sources provide no basis on which the Commissioner might fail to be satisfied, then the Court may intercede. Further, it is necessary that the taxpayer should itself satisfy the Commissioner of the material facts. The taxpayer may require the Commissioner to give evidence or to produce his material files. The record of interview shows in the present case that there was uncertainty as to whether the original shareholders retained their interests, and hence the analysis of Dixon J. in Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation [1949] HCA 26; (1949) 78 CLR 353 is appropriate here. Further, s. 80B (5) is applicable in the circumstances of this case. It should be given a broad operation: Franklin's Selfserve Pty. Ltd. v. Federal Commissioner of Taxation (1970) 125 CLR 52 . The onus of proof is on the taxpayer to show that s. 80B is not applicable; and it appears clearly that a proxy was given by the shareholders. Reference should be made to McAndrew v. Federal Commissioner of Taxation [1956] HCA 62; (1956) 98 CLR 263, at p 273 , as to the establishing by taxpayers of rights in respect of amendments of assessments, and to Driclad Pty. Ltd. v. Federal Commissioner of Taxation [1968] HCA 91; (1968) 121 CLR 45 as to the order which it is appropriate to make here.
H. Jenkins Q.C. (with him R.B. Murphy and R.M. Court), for the respondent. The grant of the proxy could not authorize any dealing with the shares themselves, and s. 80B (5) was hence inapplicable. As to s. 80A, all the material facts were before Walsh J., and from those facts it did not appear that the Commissioner could properly have failed to have been satisfied of the matters referred to in the section. Mr. Hatch knew of the provisions of ss. 80A and 80B, and he was careful to ensure that they were complied with and that there was no arrangement which might destroy the efficacy of the transaction. The analysis of Walsh J. as to the effect of these sections is very full and governs the circumstances of the present case. The statements in the return of the taxpayer were entirely clear, and they could not reasonably be disregarded merely by reason of equivocal matters in the report of the interview. If the Commissioner could not properly fail to be satisfied, then he must be considered to have been satisfied: see generally Perpetual Executors Trustees and Agency Co. (W.A.) Ltd. v. Federal Commissioner of Taxation (1935) 3 ATD 132 , Metropolitan Gas Co. v. Federal Commissioner of Taxation (1932) 47 CLR 621 . There was no suggestion before Walsh J. that any of the witnesses should be disbelieved. No more appears than suspicions or misgivings on the part of the Commissioner, and they are not enough.
W.P. Deane Q.C., in reply.
Cur. adv. vult.
Solicitor for the appellant, R.B. Hutchison, Crown Solicitor for the Commonwealth.
Solicitors for the respondent, N.J. Hazell & Lucas, North Parramatta, by
R.S.B. Sillar & Maddison.
I.C.F.S.
1972, January 7.
The following written judgments were delivered:-as the text of the statutory provisions relevant to its determination are to be found in the judgments of other members of the Court. The deduction for prior losses which the respondent taxpayer claimed to deduct from the assessable income of the tax year in question could only be allowed if the respondent taxpayer satisfied the appellant Commissioner of the continued beneficial ownership by Mrs. Cleary of the two shares beneficially owned by her in G.A. Cleary (N.S.W.) Pty. Ltd. in the year in which the losses in question were suffered. (at p45)
BARWICK C.J. The facts and circumstances giving rise to this appeal as well
2. The primary judge rightly regarded the Commissioner's lack of satisfaction
as examinable by the Court but only for the limited
purposes which are
summarized by Dixon J. in Avon Downs Pty. Ltd. v. Federal Commissioner of
Taxation [1949] HCA 26; (1949) 78 CLR
353, at p 360
. As others have observed the respondent
taxpayer did not take the course of seeking from the appellant
Commissioner
an
account
of the material upon which he acted in rejecting the claim to the
deduction. All that seems to have been
known of the
material that
was before
the Commissioner would suggest that he had the respondent's return and a
record of interview,
the text of
which appears
in the reasons for judgment
prepared by my brother Menzies. However evidence was led by the respondent
before the
primary judge
as to the circumstances in which further shares were
issued in J. Cleary (N.S.W.) Pty. Ltd. and its name
changed to
the present
name
of the respondent. This evidence was subject to an objection by counsel
for the appellant Commissioner
on the ground
that the evidence
was irrelevant
unless it was shown to have come to the knowledge of the Commissioner before
his disallowance
of
the claim to the
deduction. The objection was not upheld.
Although this objection was made, it seems to me somewhat unsatisfactory
that
the Commissioner
did not call any evidence of any matter which he had before
him at the time he disallowed the claim. In the
light of that circumstance
I
would myself be very loathe to think that the Commissioner had any substantial
material at that time
other than the return and
the record of interview. As I
read his Honour's judgment, he did not decide that the Commissioner ought
not
to have been dissatisfied
as to the continued identity of the beneficial
ownership of the shares in question because of the evidence
produced before
him and
not shown to have been before the Commissioner when he rejected the
claim to the deduction. His Honour held
that, having no more
than the return
which showed the continued identity of the ownership of the two shares and the
record of interview,
a reasonable
mind ought not to have been dissatisfied as
to the continued identity of the beneficial ownership, therefore the
Commissioner's
dissatisfaction
must have sprung from some undisclosed error.
The case thus fell within the terms of Avon Downs Pty. Ltd. v. Federal
Commissioner
of Taxation [1949] HCA 26; (1949) 78 CLR 353 . (at p45)
3. I have found the appeal difficult of resolution but in the long run I have
come to think that with due respect to the primary
judge the statements
contained in the record of interview were sufficient to raise such a doubt in
the mind of a reasonable man as
to whether or not Mrs. Cleary had throughout
retained the beneficial ownership in the two shares in question as to justify
a lack
of satisfaction on the part of the appellant Commissioner. Of course if
it were concluded that in all the circumstances it was reasonable
to think
that the Commissioner had other material before him when he disallowed the
claim to the deduction quite clearly the respondent
taxpayer would have failed
to have shown that the lack of satisfaction on the part of the appellant
Commissioner was due to error
of one kind or another. But, assuming no more
material than the return and the record of interview, I am unable to say that
it was
unreasonable for the Commissioner not to be satisfied. (at p46)
4. In expressing this conclusion I would like to say that of course it is not
for the Commissioner to entertain dissatisfaction
in cases of this kind merely
because the taxpayer has sought to produce a state of facts which when they
exist entitle him under
the statute to benefits in the assessment of income
tax. The taxpayer is quite entitled to create such a state of affairs if he
can.
It is not for the Commissioner because he might regard the use of the
statutory provisions in that fashion as detrimental to the
interests of the
revenue to show his disapproval in any manner whatsoever. But having reached
the conclusion in this case that a
reasonable man might well entertain a doubt
as to whether the shares continued to be beneficially owned as required by the
statute,
I do not suggest that this is a case in which the Commissioner may
have overstepped his function. (at p46)
5. Consequently in my opinion the appeal should be allowed. I would desire
to add that I have had the advantage of reading the
reasons for judgment
prepared by my brother Menzies and that I agree with his views and conclusions
in relation to the provisions
of s. 80B (5). In my opinion the grant of the
proxy was the grant of a power which depended for its operation on the
beneficial
interest of Mrs. Cleary in the shares in question or upon rights
carried by those shares. (at p46)
MENZIES J. The appellant taxpayer is a company which has, at all times
material, been a private company. Until 19th December 1966
its name was G.A.
Cleary (N.S.W.) Pty. Ltd. The Commissioner disallowed a deduction of $67,506
claimed by the taxpayer in its return
of income for the year ended 30th June
1967. The claim was made under s. 80 of the Income Tax Assessment Act
1936-1967 (Cth) for
losses in previous years. The Commissioner disallowed the
deduction because the taxpayer had not satisfied him, as is required by
s. 80A
(1), that two of the five issued shares in the company throughout the year of
income, i.e. 1966, were then beneficially owned
by persons who, at all times
during each year of loss, i.e. 1962, 1963, 1964 and 1965, were the beneficial
owners of those shares.
(at p47)
2. In all the years of loss the company had but two issued shares. One was
registered in the name of L.M. Cleary, the other in the
name of C.B.J. Scutt.
Mrs. Cleary was the beneficial owner of the first share; Mr. Scutt was not the
beneficial owner of the second
share. He held it either for Mrs. Cleary or
for her husband, G.A. Cleary. Throughout the year of income the shareholding
was as
follows:
Mrs. Cleary: One share(at p47)
Mr. Scutt: One share
Brian Hatch: Two shares
Noela Irene Hatch: One share.
3. The Commissioner was not satisfied that the beneficial ownership of the
shares, registered in the names of Mrs. Cleary and Mr.
Scutt, had remained
with the Clearys throughout the year 1966. (at p47)
4. The taxpayer appealed and Walsh J. decided that the Commissioner's failure
to be satisfied arose either because of some error
of law or from taking some
unidentified extraneous factor into account. His Honour's decision was, in
substance, that, from the
evidence before the Court, it could be seen that the
Commissioner had failed to discharge properly his statutory function according
to law. Accordingly, his Honour set aside two assessments, one of primary tax
and one of additional tax. The allowance of the deduction
in question meant
that there could be no additional tax but that the taxpayer was still liable
for some primary tax. Accordingly,
the assessment of primary tax was remitted
for re-assessment in accordance with the judgment of the Court. There is no
doubt that
compliance with this direction would require the allowance of the
deduction in the reassessment of primary tax. (at p47)
5. One difficulty which the learned trial judge faced was in ascertaining
what information the Commissioner had before him in disallowing
the deduction
claimed. He had, of course, the return which showed the shareholders in the
company as at 30th June 1967. Presumably,
he also had before him the record
of an interview in February 1968 between an officer of the Taxation Department
and Mr. and Mrs.
Cleary. What else he had is a matter for conjecture. (at
p48)
6. Upon the hearing of the appeal the taxpayer provided a good deal of
evidence relative to the circumstances in which a moribund
company called G.A.
Cleary (N.S.W.) Pty. Ltd. became a flourishing company called Brian Hatch
Timber Co. (Sales) Pty. Ltd. The Commissioner,
however, called no evidence;
nor had the taxpayer sought from the Commissioner any statement about the
matter. It is desirable,
before setting out shortly the effect of the
evidence, to refer to the record of interview with Mr. and Mrs. Cleary which
has already
been mentioned. (at p48)
7. It was not very informative. After a reference to the original issue of
shares, it proceeded as follows:
"In 1962 the company got into financial difficulties and asThe Clearys, moreover, said that they had no discussion with Berry Motors and they denied any knowledge of Brian Hatch Timber Co., or of Brian Hatch or Noela I. Hatch. The record ended as follows:
far as either was able to remember the company went into
voluntary liquidation in that year. The liquidator who was
appointed was Mr. White, Public Accountant at Auburn.
Sometime in 1963 the company was sold with the approval of
Court, to Berry Motors of Rockdale and so far as Mr. Cleary
remembers the purpose of the sale was to take advantage of
tax losses. Neither Mr. nor Mrs. Cleary were able to recall
whether they received any payments in respect of the sale, or
if payment was received what happened to the payment.
Also they were unable to recall whether they retained any
interest in the company after the sale but said that for all
purposes they lost all interest as they did not have any further
dealings with the company or Berry Motors."
"Mrs. Cleary stated that she had not had any correspondence
or other communication in respect of Brian Hatch
Timber Co. and reiterated that all contact with this company
ceased on sale to Berry Motors. In answer to my specific
questions she denied having at any time entered into any
arrangement, agreement or option to sell shares in Brian
Hatch Timber Co. nor had she signed a blank share transfer
in respect of that company. The reason given for these
denials was her never having heard of Brian Hatch Timber
Co. prior to the interview." (at p48)
8. Upon the appeal it appeared that the reference in the Cleary interview to
the sale of the company sometime in 1963 was to a transaction
arranged by one
McMullen on behalf of Berry Motors Pty. Ltd. of which no further information
was given. McMullen was not a witness
and Mrs. Cleary's evidence did not go
much beyond what had been said at the interview. She said:
"Q. Would you agree that in February 1968 when you hadShe also said that, before 1968, the shares were still hers. (at p49)
the interview with the officer from the Commissioner of
Taxation you yourself were not sure exactly what had
happened about the shares in the taxpayer company?
A. It had been such a long time ago and I was surprised
to find I was called in about it.
Q. Would you agree that at that time your understanding
was that the taxpayer company had been sold to some
people who were prepared to buy it in terms of making
use of the tax losses? A. Yes.
Q. And so far as you understood at that time, you had
ceased to have any interest in the company?
A. That is right."
9. So far as appears, nothing of importance happened until 5th December 1966
when McMullen was given proxies from Mrs. Cleary directly
and Mr. Scutt
indirectly to vote at meetings of the company. On the same day Mrs. Cleary
tendered her resignation as a director
of the company. (at p49)
10. The 19th December 1966 was an eventful day. An agreement was made
between Berry Motors Pty. Ltd. and Grecher Pty. Ltd., which
was a Brian Hatch
company. Under that agreement Grecher Pty. Ltd. paid Berry Motors Pty. Ltd.
the sum of $11,251, which was 3s. 4d.
in the pound of the amount of the
company's losses calculated to be deductible for income tax purposes. This
sum was adjustable
according to the amount actually allowed by the
Commissioner as deductible. Clause 4 was as follows:
"4. PRIOR to payment of the sum of $11,251 Berry will:Just how "Berry" would perform these undertakings was not revealed. The performance of (a) and (c), however, depended upon the Clearys. To this the Clearys did not refer. (at p49)
(a) Arrange for the issue of Three (3) shares at par to
Grecher or its nominee
(b) Ensure that all necessary steps have been taken to
terminate the Official Management of the Company
(c) Arrange a General Meeting of the shareholders of the
Company at which Meeting:
(i) New Directors being nominees of Grecher will be
appointed;
(ii) The present Directors will tender their resignations
as Directors;
(iii) The present Secretary of the company will
retire."
11. It was also agreed that Berry Motors Pty. Ltd. would assign to Grecher
Pty. Ltd. the debts originally owing by the company to
creditors who, as
parties to a deed of arrangement, had assigned their debts to either Berry
Motors Pty. Ltd. or McMullen. (at p50)
12. On 19th December there was also a meeting of the shareholders of the
company at which the foregoing undertakings were substantially
performed with
the help of the Clearys. McMullen, as proxy for Mrs. Cleary and for Mr.
Scutt, was there; Brian Hatch was there by
invitation, as was his accountant,
Harold Levy. Applications, as follows, for the allotment of shares were
approved:
Brian Hatch : TwoIt was resolved that Brian Hatch and Noela Hatch be appointed directors of the company. Following the meeting notice was given to the Registrar of Companies that the company's name had, by special resolution, been changed to Brian Hatch Timber Co. (Sales) Pty. Ltd. (at p50)
Noela Hatch : One.
13. After the events of 19th December 1966 the Clearys apparently dropped out
of the picture altogether until 21st March 1968 when
the two original shares
were irregularly transferred to Brian Hatch, and Mrs. Cleary, to her surprise,
received $25 for the shares.
I say the transfer was irregular because it
appears that the transfer of the shares was signed by Mrs. Cleary alone. Mr.
Scutt
was not a transferor. In the meantime the Clearys received no notice of
meetings, no accounts, no information whatever. They were
not treated as
shareholders; they were entirely disregarded. During the period between 19th
December 1966 and 30th June 1967 the
company carried on successfully as Brian
Hatch Timber Co. (Sales) Pty. Ltd. and was run by, and on behalf of, the Brian
Hatch interests.
Its sales by 30th June 1967 had totalled $527,616.34. Of
this successful trading it seems that neither Mr. nor Mrs. Cleary was
told
anything or knew anything. (at p50)
14. In the course of his evidence upon the appeal Brian Hatch said:
"Q. Your company paid $11,251 for the structure of theWhen questioned about the risk he was taking in putting business into a company in which he would control but sixty per cent of the shareholding, he said that he recognised that there was some risk but until the company's debts, which had, in effect, become owing to him, were paid, the company would not be of value to others and that it was in the interests of Mrs. Cleary, as a debtor of the company, not to interfere with what he was doing. He also said that, although the two outstanding shares were purchased on his behalf in 1968 for $25, that was the work of his accountant of which he knew nothing. It occurred after he had fulfilled his purpose by obtaining payment of the debts out of successful trading and exhausting the loss deductions. (at p51)
taxpayer and the assignment of debts owing by the
taxpayer?
A. That is correct.
Q. And at the time you paid that money those debts,
apart from what could be done to use the tax loss,
were worthless? A. Apart from what could be
done to use the tax loss, yes.
Q. This is a company in which you were buying shares at
the time you entered into this transaction which was
simply a bare structure; it had no assets and it had
liabilities which had been affected to some extent by a
scheme of arrangement? A. I had been advised,
of course, that there was some advantage to me in
acquiring this company structure because of the
accumulated tax losses."
15. A comparison of the evidence upon the appeal with what it seems was known
to the Commissioner reveals additional matter bearing
both for and against a
finding that the Cleary's beneficial interest in the two shares continued.
The position of the company as
a debtor of the Hatch interests unquestionably
secured the position of those interests as against the minority shareholders
and gave
force to Mr. Hatch's contention that, in order to secure the
advantage that he was seeking, he had to run but a small risk in not
controlling those shares. The same was no doubt true of the fact that G.A.
Cleary was, by the articles of association - which were
not altered -
governing director for life. On the other hand, Mr. Hatch acknowledged that
he was paying $11,251 for the "structure
of the company and the assignment of
debts". It is not apparent what could have been meant by acquiring the
structure of the company
if the words did not cover the acquisition of the
issued shares. (at p51)
16. It is not, however, necessary to arrive at any conclusion about effect
and weight of the evidence in relation to what was actually
involved in the
acquisition of the structure of the company. The evidence as a whole is
important only insofar as it bears upon the
question whether the Commissioner,
in disallowing the deduction claimed, had failed to discharge his statutory
function according
to law. With regard to that problem the evidence seems to
me to have but little significance. (at p51)
17. I do regard it as unfortunate that the basis for the Commissioner's not
being satisfied of what was requisite for allowing the
deduction claimed was
not revealed. It seems to me that a taxpayer, in the position of the
appellant, might properly have inquired
from the Commissioner why he was not
so satisfied. Such an inquiry would no doubt have been answered. Here,
however, there was nothing
of that sort, so that the taxpayer's case must
depend upon showing that, in not being satisfied, there was undisclosed error
on the
part of the Commissioner. This is the central problem which his Honour
faced and which he answered in favour of the taxpayer, principally
because of
his conclusion that the statement of the Clearys "could not support a
conclusion either that there had been, or that there
might have been, a
disposition by Mrs. Cleary (or by Mr. Cleary if he had been thought to have
any beneficial interest in either
of the shares) of the beneficial ownership
or of any rights attached to them". (at p52)
18. It is at this point that I have, with respect, reached a different
conclusion. If the statement "that the company was sold"
means that the
shares were sold, that would end the matter, and for my part I have difficulty
in attaching any other meaning to that
statement, particularly in the light of
the statement that they could not recall whether they had retained any
interest in the company
after the sale. Furthermore, the Clearys putting the
"sale" in 1963, and their failure to remember whether they received any
payment
in respect of the sale, could inspire but little confidence in their
reliability. Their insistence that they knew not Hatch seems
to me
unimportant. They were dealing with McMullen and, without knowing what was
arranged with him, it would be difficult to form
any positive conclusion about
the vital transaction which they referred to as the sale of the company. The
Commissioner, however,
did not have to reach any positive conclusion, and, in
particular, it was not necessary for him to come to any conclusion about what
had happened to the beneficial ownership of the shares. It was for the
taxpayer to satisfy the Commissioner and if, without error,
he was left in
doubt whether or not they had disposed of their beneficial interest the
taxpayer failed. Doubt about the Clearys'
transaction with McMullen would
warrant misgiving about their continued beneficial ownership of the shares.
In Avon Downs Pty. Ltd.
v. Federal Commissioner of Taxation [1949] HCA 26; (1949) 78 CLR 353,
at p 362 , Dixon J., after referring to circumstances which,
it was claimed,
would remove doubt, observed:
"When the shoe was found to pinch, the commissioner wasIn this case I am satisfied that the Commissioner could, on the Clearys' own statement, have, not improperly, failed to be satisfied that they had retained the beneficial interest in the two shares after the events of December 1966. In all the circumstances an attitude of wise scepticism was quite consistent with the performance of his statutory duty. (at p53)
invited to adopt the contrary view and to do so on the faith
of explanations which, however circumstantial, were necessarily
ex parte. I do not know why he must be taken to have been
filled with confidence in the later version, why he must be
assumed to have entertained no doubt that the earlier version
had no justification in the actual facts or why he must be taken
to be reasonably satisfied that he had been told everything and
there was no further fact which would show that before 30th
June 1944 the position had become such that all parties would
have been precluded from denying that the purchasers were
'members'. In the circumstances a commissioner can hardly
be considered unreasonable if he fails to rid himself altogether
of misgivings and refuses to be satisfied that the issue is
established."
19. Accordingly, the Commissioner's disallowance of the deduction claimed
ought not, I think, to have been set aside. (at p53)
20. Although this conclusion disposes of the appeal there was a further
matter of law in issue at the hearing of the appeal to which
I think I should
refer. It concerns the meaning and application of s. 80B (5) of the Act. (at
p53)
21. It seems that, upon the appeal, the Commissioner relied upon this
sub-section to support the assessment under challenge. As
to this Walsh J.
said [1972] HCA 73; (1971) 128 CLR 28, at p42 :
"I have said that reference was made at the hearing top53)
s. 80B (5). But I am of opinion that there is not, on any view
of the facts proved before me (or of any part of those facts
considered in isolation from the rest of the facts), any basis
for a finding in relation to the two shares that Mrs. Cleary
entered into a contract, agreement or arrangement or granted
a right, power or option of the kind described in that provision." (at
22. It seems to me that it is a condition of the Commissioner's power under
s. 80B (5) that there is identity between beneficial
ownership in the year of
loss and beneficial ownership in the year of income as required by par. (a)
thereof. That condition was
not fulfilled here. The company failed to satisfy
the Commissioner of that identity and he assessed on that basis. Accordingly,
the power conferred by s. 80B (5) could not save the assessment for no more
appeared than that, when assessing the Commissioner was
not satisfied that
such identity existed. If this had been due to error there would have had to
be a reassessment. (at p54)
23. It does seem to me, however, that a further point arises for, if the
Commissioner were to be told by the Court that such identity
did exist, it
would, I think, be necessary to frame the order so as to give the Commissioner
the opportunity, in reassessing, to
treat the shares as not having been so
beneficially owned if the other conditions warranting the exercise of that
power exist. Here
I set out sub-s. (5) of s. 80B :
"(5) Where -The conditions so expressed require consideration. (at p54)
(a) a person who beneficially owned any shares in the
company at all times during the year in which the
loss was incurred also beneficially owned shares in
the company at any time (in this sub-section
referred to as 'the relevant time') during the year
of income ;
(b) before or during the year of income, that person
entered into a contract, agreement or arrangement,
or granted or was granted a right, power or option
(including a contingent right, power or option),
that, in any way, directly or indirectly, related to,
affected, or depended for its operation on -
(i) the beneficial interest of that person in the last-mentioned
shares, or the value of that interest ;
(ii) the right of that person to sell, or otherwise
dispose of, that interest, or any such sale or
other disposition ;
(iii) any rights carried by those shares, or the
exercise of any such rights ; or
(iv) any dividends that might be paid, or any
distribution of capital that might be made, in
respect of those shares, or the payment of any
such dividends or the making of any such
distribution of capital; and
(c) the contract, agreement or arrangement was entered
into, or the right, power or option was granted, for
the purpose, or for purposes that included the
purpose, or for purposes that included the purpose,
of enabling the company to take into account for the
purposes of section eighty or section eighty AA of
this Act a loss that the company had incurred in a
year before the year in which the contract, agreement
or arrangement was entered into or the right,
power or option was granted or a loss that the company
might incur in that last-mentioned year,
the Commissioner may, subject to the succeeding provisions
of this section, treat those shares as not having been beneficially
owned by that person at the relevant time."
24. As I have said, (a) would be fulfilled if, in accordance with the
direction of the Court, the Commissioner were to be satisfied
of the identity
of the beneficial ownership there referred to. (at p55)
25. In deciding whether the condition in (b) could be fulfilled, it is
necessary to examine the significance of the grant of proxies
on 5th December
1966. The problem is whether the giving of a proxy by a holder of shares is
the grant of a right or power that directly
or indirectly related to "any
rights carried by those shares or the exercise of any such rights". The
proxies given here simply
appoint McMullen "as my proxy to vote for me and on
my behalf at the Ordinary or Extraordinary General Meetings of the Company".
To vote is, of course, to exercise a right carried by shares. The question is
whether appointing a proxy to vote is a granting of
a power relating to the
exercise of such a right. Voting by proxy is the privilege of a member, but,
once a proxy is given and so
long as it remains unrevoked, the person holding
the proxy may speak at a meeting, demand a poll and vote upon a poll. By
virtue
of a proxy given to him a person has, therefore, powers in relation to
the exercise of rights carried by the shares in respect of
which the proxy has
given been. This seems to me to be sufficient to bring the giving of a proxy
to vote within s. 80B (5) (b) (iii).
(at p55)
26. It has next to be considered how the condition expressed in s. 80B (5)
(c) may be fulfilled. This is a difficult provision.
It seems to me that the
usual way in which a company does take into account a loss that the company
had incurred in a previous year
is by making profits from which such a loss
can be deducted. It is true that there is no right to a deduction unless
there is substantial
continuity of ownership of the shares in the company as
required by s. 80A. However, an arrangement to secure conformity with the
requirements of s. 80A (1) does not itself enable a company to take a previous
loss into account. The simplest instance of such
conformity would be that the
beneficial ownership of all the shares remained unchanged. Here I do not
doubt that the proxies were
obtained to enable the company to become one of
the Brian Hatch group of companies and to carry on business profitably. If it
were
to be assumed, as I think it must for the purposes of s. 80B (5), that
the Clearys retained the beneficial ownership of the two original
shares, then
it could only be by the use of the proxies that the Brian Hatch interests
could take control of the company. I would
therefore be prepared to find that
the proxies were taken for the purpose of enabling the company to use the tax
losses. However,
this is not the exact problem which s. 80B (5) (c) poses.
The problem is whether the proxies were granted for that purpose. It does
appear from their statements that the Clearys were aware that "the purpose of
the sale was to take advantage of tax losses". The
purpose of Mrs. Cleary and
Mr. Scutt in giving the proxies may have been for the same purpose. If that
were so the condition expressed
in s. 80B (5) (c) would, I think, be
fulfilled. (at p56)
27. The result of this consideration of the meaning of s. 80B (5), and its
possible application to the facts of this case, satisfies
me that, in this
case, it was necessary to allow the Commissioner, in reassessing, to consider
the possible application of s. 80B
(5). If it applied and the Commissioner
exercised the discretion conferred upon him the loss would not be an allowable
deduction
notwithstanding the sufficient identity of the beneficial interests
at the two times specified. Accordingly, had I been of the opinion
that the
Commissioner was in error in not being satisfied as provided by s. 80A (1),
the order made for reassessment should have
left open the possible application
of s. 80B (5) and it would therefore have been going too far to direct the
Commissioner, in reassessing,
to allow the deduction claimed. Although the
meaning and application of s. 80B (5) was argued, my earlier conclusion makes
it unnecessary
to come to a final conclusion upon the matters which I have
just discussed. What I have said, therefore, about s. 80B (5), is tentative
rather than final. (at p56)
28. Because of my conclusion that the Commissioner was not shown to have been
in error in not being satisfied as provided by s.
80A (1), I would allow the
appeal and confirm the assessments. (at p56)
WINDEYER J. I have read the judgment of my brother Owen. I agree in his
Honour's conclusion and in his reasons. I add only a few
quotations from
judgments, which seem to me to emphasize that the question in cases such as
this is not whether a discretion was
properly exercised. The question is
whether a fact existed. Did the company satisfy the Commissioner of beneficial
ownership of
shares as prescribed by s. 80A ? Was the Commissioner duly
satisfied in fact ? That is the essential question: not was his
dissatisfaction
justified. (at p56)
2. In Lloyd v. Wallach [1915] HCA 60; (1915) 20 CLR 299 - a case which turned on whether a
Minister had "reason to believe" something
as to a
person - Isaacs J. said
that the power of determining that question was conferred on the Minister; and
that "laying aside
possibilities
so extreme as to
be outside real
consideration, the only means of disproving the essential fact in this case is
the
testimony of
the Minister himself;
and that is subject to the recognized
rules of evidence" (1915) 20 CLR, at p 309 . Higgins J.
in the same
case said
(1915) 20 CLR,
at p 313 : "The material issue is not actual guilt or
innocence, but the Minister's belief,
and (perhaps)
whether he has any reason
which induces that belief." (at p57)
3. In Ex parte Walsh and Johnson; In re Yates [1925] HCA 53; (1925) 37 CLR 36, at p 67 Knox
C.J. said:
"When the operation of a law is made conditional uponThis passage was quoted by Fullagar J. in Australian Communist Party v. The Commonwealth [1951] HCA 5; (1951) 83 CLR 1, at p 257 . It is presently pertinent, although as a general statement it is now too far-reaching. It must be qualified in relation to a determination of the Commissioner of Taxation by what Dixon J. said in Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation [1949] HCA 26; [1949] HCA 26; (1949) 78 CLR 353, at p 360 . His Honour, after pointing out that in a case such as the present one it was for the Commissioner, not for this Court on an appeal from him, to be satisfied of the relevant facts, went on:
the opinion, as to certain matters, of some person named or
described, or on proof of certain matters to his satisfaction,
the question whether his opinion is justified, or whether he
should have been satisfied on the materials before him, is not
examinable by the courts. The only question which can be
examined is whether, acting bona fide, he formed the opinion
or was satisfied with the proof."
"His decision, it is true, is not unexaminable. If he doesI add to these references the remarks of Starke J. in Boucaut Bay Co. Ltd. (in liquidation) v. The Commonwealth (1927) 40 CLR 98, at p 101 - observing, however, that that was a case where a "belief" founded a discretion, whereas here a "satisfaction" is a condition of a right. I would emphasize that the passage from the judgment of Dixon J. that I have quoted seems to me to show that it is the material that was before the Commissioner that this Court has to consider, to see whether it can be said that in failing to be satisfied by that material he must have been moved by some misconception of it or by some extraneous consideration. It is not easy to see how that could be established without evidence from the Commissioner himself of what material was before him or perhaps from some one of his officers who had advised him in the particular matter. (at p58)
not address himself to the question which the sub-section
formulates, if his conclusion is affected by some mistake of
law, if he takes some extraneous reason into consideration
or excludes from consideration some factor which should affect
his determination, on any of these grounds his conclusion is
liable to review. Moreover, the fact that he has not made
known the reasons why he was not satisfied will not prevent
the review of his decision. The conclusion he has reached
may, on a full consideration of the material that was before
him, be found to be capable of explanation only on the ground
of some such misconception."
4. I would allow the appeal. (at p58)
OWEN J. In these two appeals the Commissioner of Taxation seeks to have set
aside orders made by Walsh J. in appeals brought by
the taxpayer, a private
company, against assessments made by the Commissioner for the year ended 30th
June 1967. In its return for
the year in question the taxpayer claimed a
deduction of $67,506 representing losses incurred in prior years during which
it had
carried on business under the name of G. A. Cleary (N.S.W.) Pty. Ltd.
This claim was disallowed by the Commissioner and the adjustment
sheet stated
that the deduction claimed "was not allowed in terms of s. 80A (1) of the
Income Tax Assessment Act". In the result
the taxpayer was assessed on a
taxable income of $67,836. The second assessment was for an amount of $12,209
representing
tax assessed
on undistributed profits under Div. 7 of the Act,
the amount of those undistributed profits being determined after the
disallowance
of the deduction claimed for past losses. (at p58)
2. On the appeal against the assessment to primary tax, Walsh J. upheld the
appeal, set aside the assessment and remitted the matter
to the Commissioner
so that tax might be re-assessed on the basis that the taxpayer was entitled
to be allowed the deduction of $67,506
claimed by it. His Honour also upheld
the appeal against the assessment of undistributed profits tax since the
result of allowing
the deduction on the first appeal was that no undistributed
profits tax would be payable. (at p58)
3. I go now to matters arising before us on the appeal to us against his
Honour's decision on the taxpayer's claim that it should
have been allowed the
deduction of $67,506. (at p58)
4. Section 80A (1), so far as material, provides that losses of previous
years are not, in the case of a company, to be taken into
account for the
purposes of s. 80 unless
"(a) the company satisfies the Commissioner;Having regard to the fact that the adjustment sheet showed that the Commissioner had disallowed the taxpayer's claim to deduct previous years' losses which had "not been allowed in terms of s. 80A", it appears that it had failed to satisfy the Commissioner that at all times during the year of income ended 30th June 1967 shares in the company carrying between them the rights set out in pars. (c), (d) and (e) of sub-s. (1) of the section "were beneficially owned by persons who, at all times during the year in which the loss was incurred, beneficially owned shares in the company carrying rights of those kinds". It was not disputed that at all times during the four years up to and including the year ended 30th June 1966 during which the losses were incurred by the taxpayer (then carrying on business as G. A. Cleary (N.S.W.) Pty. Ltd.), two shares only had been issued. One of them stood in the name of a Mrs. Cleary and one in the name of a Mr. Scutt. From the taxpayer's tax return for the year ended 30th June 1967 it appeared that during that year three additional shares had been issued, two of them standing in the name of a Mr. Hatch and one in the name of Noela Hatch. (at p59)
(b) ...
that, at all times during the year of income, shares in the
company carrying between them -
(c) the right to exercise not less than two-fifths of the
voting power in the company;
(d) the right to receive not less than two-fifths of any
dividends that may be paid by the company; and
(e) the right to receive not less than two-fifths of any
distribution of capital of the company in the event of
the winding up, or of a reduction in the capital, of
the company,
were beneficially owned by persons who, at all times during
the year in which the loss was incurred, beneficially owned
shares in the company carrying rights of those kinds."
5. On the appeal to Walsh J., it was for the taxpayer to show that the
assessment was wrong and the onus lay upon it to establish
that, on the
material before the Commissioner, he had failed to address himself to the
question which the subsection formulates or
had made some mistake of law, or
taken some extraneous reason into consideration or had excluded from
consideration some factor which
should have affected his determination (Avon
Downs Pty. Ltd. v. Federal Commissioner of Taxation [1949] HCA 26; (1949) 78 CLR 353,
at p
360 per
Dixon J. (as he then was). The taxpayer could, of course, have
appealed to the Board of Review.
Had he done so it
would have been
for the
Board to decide whether on the material placed before it, it was satisfied
that the taxpayer
was entitled
to the deduction
claimed. The taxpayer,
however, did not take that course nor does it appear to have taken any steps
to ascertain
what material was
before the Commissioner in making his
assessment or to inquire from him what matters he had considered
in
disallowing
the deduction
claimed or why he had failed to be satisfied about
the state of the shareholding at the relevant times.
Had this been
done I
have
no reason to think that the Commissioner would not have paid due regard
to a passage in the judgment of
Barwick C.J.
in Giris Pty.
Ltd. v. Federal
Commissioner of Taxation in which his Honour said [1969] HCA 5; (1969) 119 CLR 365, at p 373
:
"...the Commissioner is under a duty in each case to formThat statement was made in the course of dealing with s. 99A of the Act but it is, I think, equally applicable in cases arising under s. 80A. Again, the taxpayer might have called the Commissioner or his appropriate officer as a witness in an endeavour to ascertain what matters he took into consideration in performing the task which s. 80A places upon him or to produce to the Court the material which was before him when he made his assessment. None of these courses was adopted. Instead the taxpayer placed before Walsh J. oral and documentary evidence to show that at all material times not less than two-fifths of the issued shares in the taxpayer were in the same beneficial ownership. The only portion of this material, however, which was shown to have been before the Commissioner was the taxpayer's income tax return for the year in question and, I would assume, its earlier returns, and a report of an interview between Mr. and Mrs. Cleary and an officer of the Taxation Department, which had taken place in February 1968. That report was in the following terms:
an opinion and the taxpayer is entitled to be informed of it,
and upon the taxpayer's request, the Commissioner should
inform the taxpayer of the facts he has taken into account in
reaching his conclusion."
"Mr. and Mrs. Cleary attended the office on 1st FebruaryIt should be added that no evidence was called on behalf of the Commissioner. (at p61)
for an interview on the matters raised by Sydney Office.
With regard to G. A. Cleary (N.S.W.) Pty. Ltd. they
advised that there were only two shares issued. These were one pound
fully paid shares and were issued one to Mrs. Lorna Myra Cleary
and one to C.B.J. Scutt in trust for Lorna Myra Cleary.
There was only the one class of share issued and each share
had equal rights with respect to voting, dividend entitlement
and return of capital.
In 1962 the company got into financial difficulties and as
far as either was able to remember the company went into
voluntary liquidation in that year. The liquidator who was
appointed was Mr. White, Public Accountant at Auburn.
Sometime in 1963 the company was sold with the approval of
Court, to Berry Motors of Rockdale and so far as Mr. Cleary
remembers the purpose of the sale was to take advantage of
tax losses. Neither Mr. nor Mrs. Cleary were able to recall
whether they received any payments in respect of the sale, or
if payment was received what happened to the payment.
Also they were unable to recall whether they retained any
interest in the company after the sale but said that for all
purposes they lost all interest as they did not have any
further dealings with the company or Berry Motors.
They advised that the books of the company were held by
Mr. C.B.J. Scutt of Elizabeth Street, Sydney and that so far
as they were aware he still had the records.
The interview was then directed to Brian Hatch Timber Co.
and at this point both Mr. and Mrs. Cleary denied any knowledge
of any such company. They also denied any knowledge
of Brian Hatch and Noela I. Hatch.
Mrs. Cleary stated that she had not had any correspondence
or other communication in respect of Brian Hatch Timber Co.
and reiterated that all contact with this company ceased on
sale to Berry Motors. In answer to my specific questions she
denied having at any time entered into any arrangement,
agreement or option to sell shares in Brian Hatch Timber Co.
nor had she signed a blank share transfer in respect of that
company. The reason given for these denials was her never
having heard of Brian Hatch Timber Co. prior to the interview.
The report is correct with the following correction
(1) We had no discussion with Berry Motors.
G.A. Cleary
L.M. Cleary J. Morgan 1.03 21.2.1968."
6. Walsh J. recognized, of course, that the question for him was not whether,
upon the evidence before him, he was satisfied that
the necessary continuity
of ownership of the required proportion of shares had existed throughout the
relevant periods but to decide
whether it had been shown that, on the material
that was before the Commissioner, the latter "had failed to discharge properly
his
statutory function according to law". His Honour was of opinion that
there was nothing in the report of the interview with Mr. and
Mrs. Cleary
which I have earlier set out which could properly have caused the
Commissioner's lack of satisfaction, and considered
also that if the evidence
given before him on the appeal had been before the Commissioner when he made
his assessment, he could not
properly have disallowed the deduction claimed.
In these circumstances, his Honour took the view that in the absence of any
evidence
to the contrary, he should examine the Commissioner's decision "on
the supposition that he had acted on the actual facts" - that
is the facts
proved before his Honour - "or upon so much of them as had come to his
knowledge". In the result his Honour concluded
that the Commissioner's lack
of satisfaction could be satisfactorily explained only upon the assumption
that some mistake of law
had been made or some extraneous matter had been
taken into account. (at p62)
7. With all respects to his Honour, I am unable to agree with this
conclusion. No doubt the Commissioner had before him material
- perhaps much
material - in addition to the taxpayer's income tax returns and the record of
interview to which I have already referred.
But it is impossible to say what
that additional material may have disclosed or whether or not it covered the
same ground as did
the evidence before his Honour and in these circumstances I
think, with respect, that his Honour erred in concluding that the Commissioner
must have made some mistake of law or taken some extraneous matter into
account. (at p62)
8. Further, I am of opinion that some of the statements made by the Clearys
in their interview with the taxation officer in February
1968 might reasonably
have raised doubts in the Commissioner's mind whether at all relevant times
after what they described as the
"sale" of the company they, to use their
phrase, "retained any interest in the company". (at p62)
9. For these reasons I would allow the appeal against the assessment of
primary tax (No. 45 of 1971), set aside his Honour's order
and in lieu thereof
order that the appeal to him be dismissed with costs. I think it follows that
the same order should be made
in the second appeal from his Honour (No. 46 of
1971). In the result the taxpayer's claim to be allowed a deduction of $67,506
fails,
as does its objection to the assessment of Div. 7 tax. (at p62)
ORDER
Appeals allowed with costs. Orders of Walsh J. set aside and in lieu thereof order that the appeals against the assessments be dismissed with costs.
AustLII:
Copyright Policy
|
Disclaimers
|
Privacy Policy
|
Feedback
URL: http://www.austlii.edu.au/au/cases/cth/HCA/1972/73.html