Slutzkin v Federal Commissioner of Taxation [1977] HCA 9; (1977) 140 CLR 314 (25 February 1977)

HIGH COURT OF AUSTRALIA

SLUTZKIN v. FEDERAL COMMISSIONER OF TAXATION [1977] HCA 9; (1977) 140 CLR 314

Income Tax (Cth)

High Court of Australia
Barwick C.J.(1), Stephen(2) and Aickin(3) JJ.

CATCHWORDS

Income Tax (Cth) - Arrangement to avoid liability for tax - Company - Undistributed profits - Sale of all shares - Stipulation by buyer that assets be converted to cash by date of settlement - Dividend declared after transfer of shares - Whether sale void against Commissioner - Whether sale price assesable as income in hands of former shareholders - Income Tax Assessment Act 1936 (Cth),s. 260.

HEARING

Sydney, 1976, November 10.
Melbourne, 1977, February 25. 25:2:1977
APPEAL from the Supreme Court of New South Wales.

DECISION

1977, Feb. 25.
The following written judgments were delivered: -
BARWICK C.J. The shareholders of Francis Richard Holdings Pty. Ltd. ("the D'Arcy Hapgood, held their shares in trust for the children of Alan Slutzkin. The company had functioned in part as a means of retaining profits made by a holding company, Alan Slutzkin & Co. Pty. Ltd., such retained profits being intended for use as working capital in a group of companies controlled by Mr. Alan Slutzkin. For the rest the company was a means whereby Mr. Slutzkin made provision for his children. (at p316)

2. On 12th November 1968, all the shareholders transferred their shares to a purchaser for a cash payment. It appears that in the year in which the share sales were made, the company had ceased to serve these purposes so that Mr. Slutzkin determined and all the shareholders agreed that its assets should be realized and reinvested. The method chosen to effect this purpose was a sale by the shareholders in collaboration of all their shares for cash, and the redeployment by them of the proceeds of the sale of the shares. (at p317)

3. Immediately prior to the transfer of the shares the company had a total liability to shareholders of $1,380, a capital profit reserve of $26,098, and a profit and loss appropriation account of $77,645.98. The company had no liabilities though provision was made in its accounts for taxation in the sum of $790.50. (at p317)

4. The liquid situation of the company had been brought about by the calling in, in one instance at the cost of the loss of some interest, of deposits made by the company with Custom Credit Corporation Ltd. and Alliance Holdings Ltd. Former indebtedness, including some liabilities for dividends, had been paid. This state of the company's finances had been effected with a view to presenting the company as having liquid assets and no liabilities. I assume for the purpose of these reasons that this had been done at least with the concurrence, if not on the initiative, of all the shareholders acting in concert. (at p317)

5. A company known as Cadiz Corporation Pty. Ltd. was known to be willing to buy the whole of the shares in the company for cash, provided that the Company's assets were liquid and its liabilities nil. Cadiz Corporation Pty. Ltd., either by itself or through allied companies, had engaged in operations which have come to be known as dividend stripping: and in fact its interest in offering to purchase all the shares in the company was to conduct such an operation in the affairs of the company when it had possession of that shareholding. (at p317)

6. On 12th November 1968, all the shareholders signed an agreement with Cadiz Corporation Pty. Ltd. and a Mr. Wallace by which they agreed to sell all their shares in the company, the greater part to Cadiz Corporation Pty. Ltd. and one share to Mr. Wallace for the total sum of $104,393.30. This sum may be taken to be substantially the amount of the company's assets. (at p317)

7. On 12th November the share transactions were completed. Appropriate share transfers were signed, approved by the directors of the company, the resignation of the existing directors accepted and new directors appointed. Bank cheques were handed over, one for $103,133.30 in favour of Mr. Slutzkin, Mr. Rosenblum and Mr. Hapgood, one for $1,258.00 in favour of Mr. Slutzkin and one for $2.00 in favour of Miss Slutzkin who had held one share. (at p318)

8. I have confined this narrative to the essential facts of the case. All the circumstantial details can be found extensively expressed in the reasons for judgment of the Supreme Court. (at p318)

9. The Commissioner of Taxation assessed income tax payable by the appellants upon the amount of money received by them as a result of this transaction. He did so on the basis that that transaction was void by reason of s. 260 of the Income Tax Assessment Act, 1936 ("the Act"), and that the money received by the appellants was in truth a dividend paid by the company to the appellants. Upon appeals to the Supreme Court of New South Wales against these four assessments which were dismissed, the Supreme Court (Rath J.) said (1976) 6 ATR, at pp 88-89; 76 ATC, at p 4026 :
"According to the evidence Mr. Slutzkin and Mr. Hapgood then left" (i.e., on 12th November 1968) "the part of the banking chamber where the meeting of directors was being held for the purpose of banking the payment cheques. Mr. Rosenblum and Mr. Wallace proceeded with the further business of the directors' meeting. By this stage the transactions culminating in the sale of the shares had come to an end, and the subsequent activities of the company and Cadiz Corporation were no part of any arrangement to which the appellants as trustees were parties, or of the implementation of any such arrangement. What did in fact occur is what was described in evidence as a dividend stripping operation. Mr. Rosenblum was concerned in that operation as a director of Cadiz Corporation and as one of the new directors of the company, but not as one of the trustees. He had in fact taken counsel's opinion on the propriety of his acting in his many capacities. I am satisfied that his various capacities were separately pursued, and that there is no significance, in relation to the application of s. 260, in his being concerned both before and after the sale of shares as a director of Cadiz Corporation in preparation for and in the performance of the dividend stripping operation." (at p318)

10. The learned judge further said (1976) 6 ATR, at p 89; 76 ATC, at p 4027 :
"In the present case, not only is Cadiz Corporation a completely independant company, acting solely in its own business interests, and in the course of one of its normal commercial activities, but also its activities after the sale of shares are unrelated to any activities of the appellants. Upon the sale taking place none of the vendors has any further interest either in the company or in Cadiz Corporation, and is interested only in the disposal of the purchase money received." (at p318)

11. On these facts I should have thought it was clear beyond argument that the receipt by the appellants of the proceeds of the sale of the shares formerly held by them in the company was not taxable. By no manner of torture of the language of the decided cases would the sale of the shares by the appellants, albeit in unison with the other shareholders in the company, fall within the operation of s. 260 of the Act. It was no more than a realization by them of the benefit of their shareholding in a way which would not attract tax. It may be granted that a purchaser of the shares could not have been found willing to pay the price in cash, which in fact was agreed to be paid, unless the company had made its assets liquid and itself free of debt; and that all shareholders were willing to sell their shares. It may also be granted that to obtain the benefit of the shareholding by way of dividend or by liquidation would have rendered the shareholders liable to tax in respect of the money thus received. But the choice of the form of transaction by which a taxpayer obtains the benefit of his assets is a matter for him: he is quite entitled to choose that form of transaction which will not subject him to tax, or subject him only to less tax than some other form of transaction might do. Inland Revenue Commissioners v. Duke of Westminster (1936) AC 1 , too easily forgotten, is still basic in this area of the law. There is no room in that area for any doctrine of economic equivalence. To the legal form and consequence of the taxpayer's transaction, which in fact has taken place, effect must be given: see Inland Revenue Commissioner (N.Z.) v. Europa Oil (N.Z.) Ltd. (1971) AC 760 . A passage from this decision warrants emphasis (1971) AC, at p 771 :
"The question for decision is not to be answered by describing the benefit derived by Europa through Pan Eastern as in substance a discount or, more ambiguously, as a price concession. No doubt it was a concession obtained from Gulf, in the course of a discussion about prices, but in a matter of taxation it is necessary to consider and respect the legal form in which the concession was embodied. Their Lordships have no need to restate the principle laid down in such cases as Inland Revenue Commissioners v. Duke of Westminster (1936) AC 1 , a decision cited in the judgments appealed from and fully accepted as applicable. It is not legitimate in this branch of the case, as distinct from that involving section 108, to disregard the separate corporate entities or the nature of the contracts made and to tax Europa on the substantial or economic or business character of what was done. The use of the word 'concession' does not resolve the dispute, whether what was done was in law or merely the economic equivalent of a reduction in price. The one may have quite different taxation results from the other." (at p320)

12. Reference may also profitably be made to the Court's decision in Cecil Bros. Pty. Ltd. v. Federal Commissioner of Taxation [1964] HCA 82; (1964) 111 CLR 430 . Thus it is nothing to the point in this case that the appellants and their fellow shareholders by the sale of their shares received money which, if it had been received by way of dividend declared by the company whether or not in liquidation, would have rendered them liable to tax in respect of its receipt. It is a complete misconception of the operation of s. 260 to conclude that, because a transaction was entered into in the form which it took in order not to subject its proceeds to tax in the hands of the recipient, s. 260 is satisfied. Further, it is fundamental that the section is, as it has been said, no more than an annihilating section. It does not itself impose tax, nor does it construct or reconstruct any transaction. It does no more than avoid a transaction. The avoidance is of no consequence unless, if the transaction were swept aside, a factual situation involving the payment of tax is exposed. A passage in Europa Oil (N.Z.) Ltd. v. Commissioner of Inland Revenue (N.Z.) (No. 2) (1976) 1 WLR 464, at p 475; (1976) 1 All ER 503, at pp 511-512 , relevant to s. 260, should be prominently in mind in the resolution of cases said to involve the operation of that section:
"There are several things to be noted in connexion with the application of this section.
First, it is not a charging section; all it does is to entitle the Commissioner when assessing the liability of the taxpayer to income tax to treat any contract, agreement or arrangement which falls within the description in the section as if it had never been made. Any liability of the taxpayer to pay income tax must be found elsewhere in the Act. There must be some identifiable income of the taxpayer which would have been liable to be taxed if none of the contracts, agreements or arrangements avoided by the section had been made.
Secondly, the description of the contracts, agreements and arrangements which are liable to avoidance presupposes the continued receipt by the taxpayer of income from an existing source in respect of which his liability to pay tax would be altered or relieved if legal effect were given to the contract, agreement or arrangement sought to be avoided as against the Commissioner. The section does not strike at new sources of income or restrict the right of the taxpayer to arrange his affairs in relation to income from a new source in such a way as to attract the least possible liability to tax. Nor does it prevent the taxpayer from parting with a source of income." (at p320)

13. Here the avoidance of the sale of the shares would not expose a situation in which the appellants and their fellow shareholders were in receipt of taxable income. By no process could the purchase money for the shares become a dividend paid by the company to the shareholder. That fact is itself strongly indicative of the absence of elements essential to the operation of s. 260. (at p321)

14. However, the learned primary judge held that upon the avoidance of the sale of the shares, the shareholders are to be treated as having received the dividend which the company subsequently declared and paid to others in the course of the operation by the Cadiz Corporation Pty. Ltd. of its dividend stripping, an activity in which the appellants had no part whatever. They were then no longer shareholders in the company: nor in any wise in control of its affairs. To fasten the appellants with liability for the dividend subsequently paid is a result quite unreal and not required by the Act. (at p321)

15. This case is, in my opinion, so clearly not a case where s. 260 could have any operation that I find it quite unnecessary to discuss the various decisions which upon other and different facts have brought that section into play. This is not to pretend that the reasoning in all these cases is either consistent or clear. But the circumstances of this case do not call for any attempt to reconcile them all with each other or with the terms of the section itself. It suffices to refer to the two decisions of the Privy Council in Inland Revenue Commissioner (N.Z.) v. Europa Oil (N.Z.) Ltd. (1971) AC 760 and Europa Oil (N.Z.) Ltd. v. Commissioner of Inland Revenue (N.Z.) (No.2) (1976) 1 WLR 464; (1976) 1 All ER 503 and the other decisions I have mentioned which state fundamental considerations by the application of which this appeal is resolved. (at p321)

16. I would allow the appeals. (at p321)

STEPHEN J. A sufficient statement of the facts appears in the reasons for judgment of the Chief Justice. I agree that these appeals should be allowed. (at p321)

2. It is a simple enough case, an instance of shareholders in a company wishing to be rid of their investment and, to that end, electing to sell their shares rather that to place the company in liquidation. Had they opted for liquidation or had they otherwise, as by way of dividend declaration, sought to receive the fruits of the great surplus of assets over liabilities which reposed in the company a heavy tax liability would have been incurred. Instead they decided to sell their shares, which comprised the whole of the company's issued capital, and proceeded to give effect to that decision. This is, in substance, all they did or, for that matter, needed to do. (at p322)

3. They had, it is true, readied the company for a sale at maximum advantage. The company's assets had largely consisted of deposits with public companies and before sale these were called in and liabilities were paid off, the only remaining debit item on the balance sheet, apart from issued capital, being a modest provision for income tax. The taking of these steps made the company's issued capital a more attractive asset in the market place since it then represented virtually liquid assets; to one class of buyer, known as dividend strippers, it would be particularly attractive. It was to just such a buyer that the sale was made for cash and the banking of the cheques representing the sale price received by each of the vendor shareholders constituted, according to the unchallenged finding of the learned trial judge, the end of the transaction in which the taxpayers were involved. They were in no way interested in what occurred to the company after they sold their shares. (at p322)

4. No doubt the taxpayers were astute to adopt the particular means they did in bringing to an end their connexion with the company; no doubt they appreciated the tax advantages which such a course offered. But this in itself reveals no purpose or effect such as that of which s. 260 speaks: a purpose or effect of altering the incidence of tax, of relieving from liability to pay tax, of defeating, evading or avoiding liability imposed by the taxing legislation or of in any respect preventing the operating of that legislation. The company's shares were assets of a capital nature and to realize their value, converting it to cash, would in itself attract no tax; their sale effected no alteration in the incidence of, nor any relief from liability to pay tax, nor was liability to tax evaded or avoided; the operation of the legislation was not prevented. At most what was done was consciously to refrain from taking a course which, had it been taken, would then, for the first time, have brought into existence a situation whose features would have subjected the appellants to liability to pay tax. But it is not to this that s. 260 is directed. The reasons for judgment of the other members of the Court and the citations of authority which they contain amply demonstrate this to be the case. (at p322)

5. It is for these reasons that I would allow these appeals. (at p322)

AICKIN J. These four appeals from Rath J. sitting in the Administrative Law Division of the Supreme Court of New South Wales were heard together, as were the cases themselves before Rath J. The appellants are the trustees of four separate trusts under which the beneficiary is either Mr. Slutzkin's son or his daughter. The appeals relate to the year of income ended 30th June 1969. Some of the assessments were original assessments and some were amended assessments. The assessments were based upon the addition to the taxable income as returned of an item described by the Commissioner as follows: "Add income derived by you being your proportion of the distributions by Francis Richard Holdings Pty. Limited during year ended 30th June 1969 $25,622." (at p323)

2. Objections against these assessments were disallowed by the Commissioner and the taxpayers appealed to the Supreme Court of New South Wales before Rath J. (at p323)

3. As Rath J. observed in the opening paragraphs of his judgment, the ultimate question for decision is whether the sale by the taxpayers of shares held by them in Francis Richard Holdings Pty. Ltd. ("the company") to Cadiz Corporation Pty. Ltd. on 12th November 1968 was void as against the Commissioner by virtue of s. 260 of the Income Tax Assessment Act 1936. (at p323)

4. The objective facts as found by Rath J. and derived from the extensive evidence were not the subject of significant dispute. Save in respect of two matters to which I refer below, the findings of fact and the inferences drawn by Rath J. are supported by the voluminous evidence. (at p323)

5. I have had the advantage of reading the judgment of the Chief Justice with which I respectfully agree. I think it desirable however to indicate in my own words the reasons which have led me to the view that this appeal should be allowed. The Chief Justice sets out the essential facts of the case and I shall not repeat that summary. (at p323)

6. His judgment also sets out two of the critical passages in the judgment of Rath J. to which I would add the following additional quotation which sets out the evidence of Mr. Rosenblum (a solicitor who is both one of the appellants and one of the professional advisers of Mr. Slutzkin and the Slutzkin group of companies, as well as being a director of Cadiz Corporation Pty. Ltd., the purchaser of the shares), concerning the initial discussion which led to the sale of the shares (1976) 6 ATR, at p 84; 76 ATC, at p 4022 :
"Q. By the time when the partnership of Alan Slutzkin Enterprises commenced to carry on business, 1st July 1967, the Frances Richard Holdings Company had really served its purpose and had no further purpose to serve, is that so?

A. I would think that was so, yes.
Q. Did you give any consideration when you were reorganizing or

arranging for the reorganization of Mr. Slutzkin's affairs as to what should be done or what might be done in relation to Frances Richard Holdings?

A. I don't have any recollection of having done so at that time.
Q. When was it, to the best of your recollection, that you first gave

any consideration to, shall we say, the termination of Mr. Slutzkin's interest, and the other shareholder's, in Frances Richard Holdings?
A. Shortly before the acquisition or the sale by the trusts of their shares in Frances Richard Holdings I had had lunch with Mr. Slutzkin with whom I frequently - whom I frequently met socially and he said to me, 'What are we going to do with Frances Richard Holdings Pty. Ltd.?' To use his words as best as I can recollect, he said, 'Joyce' - that was his present wife - 'has recently sold out her interests in her business and at our request Mauri Bros. & Thomson who were the purchasers, agreed to purchase Swari's Karen', I think it was Swari's Karen, but I wouldn't know how to spell it, which was the holding company for the trading company which Mauri Bros. & Thomson had purchased. Mauri Bros. had agreed to purchase this company apparently at Mr. Slutzkin's request. I did not act on that particular transaction, and he said to me, 'Maybe we could get rid of Frances Richard Holdings in the same way.' Shortly before, perhaps four months I would say before, Cadiz Corporation had entered into its first dividend stripping, in the common terminology, dividend stripping transaction. And I said to Mr. Slutzkin that we might be able to organize for Cadiz Corporation to which Cadiz Holdings No. 2 had changed its name, to acquire the shares in Frances Richard Holdings Pty. Ltd."
Mr. Slutzkin's account of that conversation was substantially to the same effect. There is nothing in the judgment to suggest that this evidence of the origin of the transaction was not accepted. (at p324)

7. In all cases in which an assessment based on s. 260 is challenged the first step must be to ascertain what is the "contract agreement or arrangement" which is said to have the "purpose or effect" specified in pars (a) to (d) and to ascertain which of those paragraphs is said to apply. This preliminary question was the source of a good deal of difficulty in the Court below as appears from the supplementary observations which Rath J. made at the time of delivering his judgment. In the end however the learned judge said (1976) 6 ATR, at p 94 :
"The way in which I finally determined the case was to hold that whatever arrangement was the one to consider it must be one which terminated at the date of the sale of the shares."
In the course of his reasons for judgment after describing in detail the events which took place on 12th November when the written agreement for the sale of the shares was executed and the financial arrangements completed in the manner which is fully and carefully set out, he stated his finding as to the arrangement in the passages quoted by the Chief Justice. (at p325)

8. The contract agreement or arrangement thus found is one which is simply for the sale by all the shareholders of their shares in the company to a single purchaser for cash paid by bank cheques. What the purchaser wanted to do with the company or with the funds which comprised its assets was not known to the vendors (except to Mr. Rosenblum in his capacity as a director of the purchaser). The arrangement was neither more nor less than a sale of shares for cash, such shares not having been acquired for the purpose of re-sale at a profit. The arrangement so found is, in my opinion, one of which it could not be said that it had the purpose or effect of avoiding tax. There was no prior contract, agreement or arrangement which might have had some tax operation which was avoided by changing an existing transaction into the present transaction. The only arrangement or transaction was that which was actually carried out, namely, the sale of a capital asset. That characterization is not affected by the fact that the purchaser required the assets of the company (which consisted of money out on loan) to be reduced to liquid cash and required appropriate safeguards in the contract. (at p325)

9. The fact that the vendors, with knowledge of the tax consequences of liquidating the company or declaring dividends, decided to sell rather than to continue to hold the shares, neither of which would attract any tax consequence under the Income Tax Assessment Act, does not mean that the "ordinary provisions" of the Act are defeated or frustrated. It is a transaction which according to the terms of the Income Tax Assessment Act attracts no tax consequence. It is therefore not necessary to consider whether it is an ordinary business transaction, even if it is proper to regard the words first used by Lord Denning in Newton v. Federal Commissioner of Taxation [1958] UKPCHCA 1; (1958) 98 CLR 1; (1958) AC 450 as though they were part of the statute, because they have application only in a situation in which it can be said that the purpose or effect of the transaction appears to be one which does avoid tax. In such a case it nonetheless falls outside s. 260 if it has the character of an ordinary business or family transaction. But that point is never reached in the present case. (at p326)

10. In my opinion the words used in the judgments of Barwick C.J. and Stephen J. in Mullens v. Federal Commissioner of Taxation [1976] HCA 47; (1976) 135 CLR 290 are equally applicable to this situation. Indeed that case and this are examples of a wider principle which is embodied also in such cases as W. P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation [1957] HCA 2; (1957) 100 CLR 66 , Federal Commissioner of Taxation v. Casuarina Pty. Ltd. [1971] HCA 78; (1971) 127 CLR 62 and Patcorp. Pty. Ltd. v. Federal Commissioner of Taxation (1976) 140 CLR 247 . All those cases illustrate a fundamental principle with respect to s. 260 which is stated by Barwick C. J. in two passages in Mullens' Case (1976) 135 CLR, at p 301 :
"It is in my opinion nothing to the point that the effect of the transaction actually entered into by the parties might be the same as that which a loan by the taxpayer to Close with security over the shares would have produced. There is no room in this connexion for any doctrine of economic equivalence. In Europa Oil (N.Z.) Ltd. v. Inland Revenue Commissioner (N.Z.) (1976) 1 WLR, at p 472; (1976) 1 All ER, at p 509 , the views expressed in Inland Revenue Commissioners (1971) AC 760, at p 722 were affirmed: 'Taxation by end result, or economic equivalence, is not what the section (a taxing provision) achieves'."
Dealing with the position in Mullens' Case itself his Honour said (1976) 135 CLR, at p 302 :
"I turn now to consider whether the transaction was avoided by s. 260. This question must be approached on the footing that if not struck down the transaction between the parties would be effective to entitle the taxpayer to the deduction claimed. Though the section speaks of the purpose in entering into the transaction, it can have no relevance if, being effective, the transaction does not alter the incidence of tax as that expression has come to be understood. As I have already pointed out, there will be no relevant alteration of the incidence of tax if the transaction, being the actual transaction between the parties, conforms to and satisfies a provision of the Act even if it has taken the form in which it was entered into by the parties in order to obtain the benefit of that provision of the Act. It would be otherwise if there had been some antecedent transaction between the parties, for which the transaction under attack was substituted in order to obtain the benefit of the particular provision of the Act. Section 260 is not directed to tax on income to which the taxpayer is entitled only by reason of the actual transaction into which the parties have entered." (at p326)

11. In my opinion this is equally the position where the actual transaction is one which stands wholly outside the operation of the Income Tax Assessment Act. To adopt the language of the Chief Justice to the present case, the position may be expressed thus: - there will be no relevant alteration of the incidence of tax if the transaction, being the actual transaction between the parties, does not attract the operation of any provision of the Income Tax Assessment Act in that the receipt in question is not income according to the ordinary conceptions of that term, nor is deemed to be income by any provision of the Act. (at p327)

12. In Mullens' Case Stephen J. said (1976) 135 CLR, at p 318 :
"The principle in W. P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation [1957] HCA 2; (1957) 100 CLR 66 is not to be confined to cases where the Act offers to the taxpayer a choice of alternative tax consequences either of which he is free to choose; it was there held that merely because the taxpayer chose, quite deliberately, the alternative most advantageous to it from the tax standpoint it did not thereby attract s. 260. So too if no question arises of a choice between two courses of conduct but instead the Act offers certain tax benefits to taxpayers who adopt a particular course of conduct, the adoption of that course does not establish any purpose or effect such as is described in s. 260. Indeed an assessment which reflects the tax consequences of the course of conduct which the taxpayer has in fact adopted will then represent a due and proper incidence of tax, there will be no relief from or defeating of liability to tax and the Act will have the very operation which the legislature intended."
That principle equally applies in a case of receipts with which the Act simply does not deal, i.e. capital receipts, save such as are for the purpose of the Act deemed to be income. To adopt a course which produces a result outside the scope of the Act is not to alter the incidence of tax, or to defeat any liability to tax or prevent the operation of the Act, notwithstanding that such course is adopted with full knowledge of the provisions of the Act and with a conscious intention that the proceeds should not fall within the operation of the Act. (at p327)

13. If the arrangement however is something more than the mere sale of a capital asset not acquired for the purposes of re-sale at a profit, different questions may arise such as the possibility discussed, but rejected, in Mullens' Case [1976] HCA 47; (1976) 135 CLR 290 that there was some other earlier transaction which was abandoned and some other course substituted in order to achieve a tax advantage. It is necessary to consider whether Rath J. took that view as the basis for deciding that s. 260 applied. His Honour said (1976) 6 ATR, at pp 90-91; 76 ATC, at p 4028 :
"There is here the contract of sale of 12th November 1968 and that is a subject matter to which the section could apply. But there is a wider transaction involved, commencing from the approach on behalf of the appellants to Cadiz Corporation, and culminating with the sale itself. It is consistent with the authorities to have regard to 'the purpose or effect' of this wider transaction. . . In the present case the final transaction in the arrangement was the approval by the company of the transfers. The earlier transactions commence with the shares taken to convert the assets of the company to cash as required by Cadiz Corporation."
He then stated an alternative approach to the facts as follows (1976) 6 ATR, at pp 90-91; 76 ATC, at p 4028 :
"On this approach the arrangement is among shareholders and the company, and again commences with the moves to convert the company's assets into cash and ends with the approval by the company of the share transfers to Cadiz Corporation and its nominee Mr. Wallace. Whichever view of the arrangements is taken its purpose or effect will, in my opinion, be the same."
He then said (1976) 6 ATR, at p 92; 76 ATC, at p 4029 :
"I have already said that in the present case the appellants were desirous of obtaining for themselves the reserves and profits of the company and were aware of the taxation consequences of achieving their object by a declaration of dividends or liquidation. Mr. Slutzkin and Mr. Rosenblum took counsel's advice as to the taxation consequences of the sale of shares to Cadiz Corporation, and it is obvious that the sale was made with the object of obtaining an amount equivalent to those reserves and profits but without the tax consequences of the alternative methods. It follows from this reasoning that the arrangement is necessarily labelled (to use Lord Denning's words) as a means to avoid tax unless the transactions are capable of explanation by reference to ordinary business or family dealing."
His Honour then considered the question of whether the arrangement can be described as an ordinary business or family dealing. (at p328)

14. It is plain from what his Honour has said that he did not find that there was some antecedent arrangement which was changed in order to avoid the tax consequences which would have followed from the earlier arrangement. He did find that what was done was to obtain "an amount equivalent to those reserves and profits", but as I have said above the cases demonstrate that that is not enough to attract s. 260. (at p328)

15. Even if it were correct to say, as he does in the passage just quoted, that "the appellants were desirous of obtaining for themselves the reserves and profits of the company" that would not constitute either an arrangement or a transaction within the meaning of s. 260. It has long been settled that s. 260 is not concerned with the subjective purposes, motives or intentions of taxpayers but with the character of the acts done and transactions entered into (see Newton's Case [1958] UKPCHCA 1; (1958) 98 CLR 1, at p 8; (1958) AC, at p 465 ) where the Privy Council approved a passage in the judgment of Williams J. in this Court [1956] HCA 39; (1957) 96 CLR 577, at p 630 that what must be looked at is the "overt acts by which it (i.e. the arrangement) was implemented" in order to ascertain its purpose. Moreover, I do not think that there is any evidence to warrant a finding that the "appellants were desirous of obtaining for themselves the reserves and profits of the company". The evidence makes it plain that the only step comtemplated was the sale of the shares and the initial conversation was directed to the finding of a purchaser who would be prepared to pay a price approximately equivalent to the value of the net assets of the company. (at p329)

16. In view of the conclusions which I have reached above it is not necessary for me to consider whether the arrangements actually made and the acts done should be regarded as an "ordinary business or family dealing" but I should say that I am not satisfied as to the correctness of Rath J.'s conclusion on this point and would myself have been satisfied, if it were material, that this was an ordinary business dealing in the light of the evidence given. (at p329)

17. I agree that these appeals should be allowed. (at p329)

ORDER

Appeals allowed with costs.

Orders of the Supreme Court of New South Wales set aside and in lieu thereof order that the appeals to that Court be allowed with costs and that each assessment be set aside.