Federal Commissioner of Taxation v Students World (Aust) Pty Ltd [1978] HCA 1; (1978) 138 CLR 251 (22 February 1978)

HIGH COURT OF AUSTRALIA

FEDERAL COMMISSIONER OF TAXATION v. STUDENTS WORLD (AUST.) PTY. LTD. [1978] HCA 1; (1978) 138 CLR 251

Income Tax (Cth)

High Court of Australia
Mason(1), Jacobs(2) and Aickin(3) JJ.

CATCHWORDS

Income Tax (Cth)-Deductions-Taxpayer company-Losses in previous years of income-Scheme of arrangement-Acquistion of 60 per cent of shares- Whether arrangement existed relating to balance of shares-Executory and executed arrangements-Purpose-Income Tax Assessment Act 1936 (Cth), ss. 80A, 80B (5).

HEARING

Sydney, 1977, August 15.
Melbourne, 1978, February 22. 22:2:1978
APPEAL from the Supreme Court of New South Wales.

DECISION

1978, February 22.
The following written judgments were delivered: -
MASON J. The respondent taxpayer accumulated losses totalling more than returns of income for the years ended 30th June 1967 and 1968 it claimed to be entitled to allowable deductions in respect of these losses. The appellant Commissioner rejected the claim, relying upon s. 80A of the Income Tax Assessment Act 1936, as amended, and, alternatively, upon that section and s. 80B (5). On appeal to the Commonwealth Taxation Board of Review No. 1 the Commissioner's assessment was upheld. Before the Board two substantial issues arose: (1) Whether Mrs. Macpherson was at all relevant times the beneficial owner of the shares in the respondent which during the years of income stood in her name; and (2) Whether the Commissioner was authorized by s. 80B (5) to treat those shares as not having been beneficially owned by her at the relevant time. The Board found the first issue in favour of the respondent and the second in favour of the Commissioner. (at p254)

2. On appeal to the Supreme Court of New South Wales the Commissioner accepted the correctness of the finding of the Board upon the first question. In the Supreme Court, Mahoney J. found the second issue in favour of the respondent and allowed its appeal (1976) 9 ALR 333; 6 ATR 163; 76 ATC 4031 . The Commissioner's appeal to this Court challenges the correctness of his Honour's finding upon this question. (at p254)

3. In the Supreme Court the respondent by consent tendered a copy of the reasons for decision of the three members of the Board and the transcript of the oral evidence, including the exhibits, presented to the Board. It was accepted that the issues of fact were to be determined upon the basis of this material. Mahoney J. appears to have endorsed the findings of fact which were set forth in the reasons for decision of Mr. O'Neill, a member of the Board. (at p255)

4. The facts are summarized in his Honour's reasons for judgment, from which it appears that the respondent was incorporated under another name in June 1957. Mr. and Mrs. Macpherson were then, and still remained in March 1967, the sole shareholders. Ultimately they each held 12,501 fully paid $2 shares and 5,000 fully paid $1 shares. On 6th February 1961 the respondent went into creditors' voluntary liquidation. On 11th September 1961 Mr. Partridge, who had formerly been appointed liquidator, was appointed receiver of the company under an equitable mortgage held by the Bank of New South Wales. (at p255)

5. In November 1964 a draft scheme of arrangement was prepared which contemplated that steps would be taken to secure the company against claims by its then creditors and that shares in the respondent would be transferred to a purchaser prepared to provide an appropriate sum for the creditors. The primary judge found that Mr. and Mrs. Macpherson had indicated their willingness to transfer their shares as part of the proposed scheme of arrangement. However, the scheme did not proceed owing to reluctance on the part of the purchaser. (at p255)

6. On 17th November 1966 a further application was made to the court for an order for creditors' meetings to consider a new scheme of arrangement. The draft scheme was approved at creditors' meetings held on 31st January 1967 and by the court on 21st February 1967. The draft scheme contemplated that a purchaser would pay to the trustee sufficient moneys to provide about 1.75c in the dollar for the unsecured creditors, in consideration of which their debts were to be assigned to a person nominated by the trustee. Mr. and Mrs. Macpherson were to be paid $225 in respect of debts owing to them by the respondent and $1,000 in consideration of a covenant to transfer up to 60 per cent of the share capital in the respondent which they held. The two amounts were to be paid to the Bank of New South Wales in partial discharge of their guarantee of the respondent's indebtedness to the bank, leaving them indebted to the bank in the sum of $10,700 (approximately). The statement prepared pursuant to s. 182 of the Companies Act, 1961 (N.S.W.), AS AMENDED, and furnished to the creditors said, "the directors will continue to hold at least 40 per cent of the capital of the company but, by reason of the assignment of debts, the company will continue to be insolvent to the extent of about $310,000 so that the shares are presently valueless". (at p256)

7. As finally formulated the scheme contained cl. 27 the first paragraph of which was expressed in these terms:

"The Trustee is hereby authorised by the members Kenneth
Robert Macpherson and Margaret Macdonald Macpherson to
arrange if he shall in his absolute discretion think fit for the
transfer of not more than three-fifths of the total number of
Ordinary 1 pound shares and not more than three-fifths of the total
number of Ordinary 10/- shares issued in the capital of the
Company, and for that purpose and to that extent only the
Trustee may give Notice in writing to them or either of them
requiring them or either of them to transfer such shares as
the Trustee shall nominate to such person or persons as the
Trustee shall nominate."

The clause went on to provide that upon the giving of a notice Mr. and Mrs. Macpherson should be paid $1,000 and that contemporaneously with the payment they should transfer the specified shares to the person or persons nominated by the trustee. The clause concluded by specifically providing that until receipt of such a notice Mr. and Mrs. Macpherson should be as fully entitled to deal with and dispose of any share or shares beneficially owned by them and any proceeds of sale as if the scheme had not come into effect and the voting, dividend and capital distribution rights attached to the shares should not in any manner be deemed impaired or otherwise affected. In its final form the scheme made provision of a payment of 1.25c in the dollar to the general body of unsecured creditors. It also provided that the debts owing to creditors not paid in full should be deemed to be beneficially assigned in the transferee of the shares (cl. 30). (at p256)

8. Mr. and Mrs. Macpherson signed a statement dated 20th February 1967 which was written on a copy of the scheme as finally approved. The statement was in these terms: "We ... hereby consent to the within scheme including the amendments noted hereon." On 28th February 1967 the scheme became operative and on 13th March 1967 the court ordered that the winding up of the respondent be stayed. (at p256)

9. By a deed dated 13th March 1967 between Mr. and Mrs. Macpherson as vendors, the liquidator, the receiver, the respondent, the trustee and Purchaser Pty. Ltd. as purchaser, it was agreed that subject to the giving by the trustee in his absolute discretion of the notice referred to in the scheme of arrangement Mr. and Mrs. Macpherson would sell and the purchaser would buy for $1,000 15,000 $2 ordinary shares and 5,999 $1 ordinary shares in the respondent. As a condition of the sale of the shares the purchaser agreed to pay to the trustee $12,100 for distribution to the creditors as provided for under the scheme and to lend to the respondent an amount sufficient to discharge all moneys owing by the respondent to the Commonwealth. For their part Mr. and Mrs. Macpherson, the liquidator, the receiver and the trustee agreed to cause the transfers to be registered and to cause two nominees of the purchaser to be appointed as directors of the respondent and deliver resignations of the existing directors and officers. A copy of the 1967 scheme of arrangement was annexed to the deed and the agreement for the sale and transfer of the shares contained in the deed was expressed to be subject to the trustee giving notice under the scheme requiring Mr. and Mrs. Macpherson to transfer shares as provided for in the deed. It seems that such a notice was given by the trustee, although he had no specific recollection of it. (at p257)

10. On the date which the deed bears, 13th March 1967, the Supreme Court made an order staying the winding up of the respondent. The scheme, which came into operation on 28th February, made provision for the obtaining of such an order. (at p257)

11. Two days later the directors of the respondent approved a transfer of the shares by Mr. and Mrs. Macpherson and in accordance with that approval the shareholding in the company on that day was as follows:

Mrs. Macpherson 10,002 $2 shares and 4,001 $1 shares
Mr. H. P. West 1 $2 share
Mr. V. Smorgan 1 $2 share
Mr. R. E. Vidor 1 $2 share
Students World (Collection) Pty. Ltd. 14,997 $2 shares and 5,999 $1 shares.

At no material time has there been any change in this shareholding. (at p257)

12. At this meeting it was resolved that an extraordinary general meeting of the respondent be convened at 4 p.m. that day for the purpose of changing the company's name. The notice was signed by Mr. and Mrs. Macpherson who gave their written consent to the holding of the meeting without due notice. They were present at the meeting at which a resolution changing the respondent's name was passed and a resolution accepting the resignations of Mr. and Mrs. Macpherson as directors was passed, as was a resolution appointing new directors as from the close of the meeting. (at p257)

13. After 15th March 1967 neither Mr. nor Mrs. Macpherson displayed any interest in the affairs of the respondent. Nor did they receive any notice in connexion with its affairs. The absence of notice to them was explained by the general manager of the respondent on the ground that he thought that they would have no interest in the company until such time as there were prospects of its paying dividends. Although the company made profits in 1967 and 1968 there were no funds available for distribution. By 1969 the original losses were recouped but in 1970 the respondent incurred a loss on its own trading. (at p258)

14. Under the 1967 scheme the respondent's liabilities to unsecured creditors which totalled $270,000 (approximately) were assigned to Students World (Collection) Pty. Ltd. Shortly after that company acquired 60 per cent of the shares in the respondent, the respondent acquired the business of another company in the group at a price which included $540,000 for goodwill, this sum being left outstanding. (at p258)

15. Mahoney J. found that the Commissioner was not authorized to treat Mrs. Macpherson's shares as not being beneficially owned by her after 15th March 1967 because the facts did not satisfy the requirements of s. 80B (5) (c). Section 80B (5) is in these terms:

"Where -
(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,
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, 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." (at p259)

16. The judge found that Mrs. Macpherson by consenting to the 1967 scheme of arrangement was party to an arrangement in respect of all her previous shareholding, including the shares which she retained. As the arrangement conferred on the trustee of the scheme the right, on giving notice to her, to require her to transfer all or any of her shares to any person, it was one which "affected" her "right to sell or otherwise dispose of" her shares within par. (b) (ii). His Honour then held that a mere agreement to sell 60 per cent of the shares in a company would not satisfy par. (c) - something more was required, as for example some arrangement that Mrs. Macpherson would or would not exercise rights in relation to her retained shareholding. (at p259)

17. The Commissioner attacks this conclusion on various bases. First, he submits that instead of the arrangement found by the primary judge this Court should find that Mrs. Macpherson was a party to a somewhat different arrangement from which the existence of the purpose stated in par. (c) of s. 80B (5) could more readily be inferred. Secondly, the Commissioner argues that the shares in the respondent company were worthless except in so far as tax losses could be recouped for the benefit of the purchaser of 60 per cent of the share capital. This, so the argument proceeds, invites the inference that the arrangement in cl. 27 of the scheme was specifically entered into for the purpose of preserving the tax losses of the respondent for deduction against future profits. Finally the Commissioner submits that on the evidence the primary judge should have found that the purchaser's intention was to obtain the benefit of the respondent's losses for tax purposes, that this intention was known to the Macphersons and that they entered into the arrangement for this purpose, the purpose being sufficient to satisfy the requirements of s. 80B (5) (c). (at p259)

18. The word "arrangement" in s. 80B (5) is sufficiently comprehensive to catch within its sweep a plan or understanding which is not enforceable at law. It may also include acts or transactions undertaken in execution of the plan or understanding. A beneficial owner of shares in a company may enter into an arrangement by giving his assent to a plan formulated by others. The respondent disputes his Honour's finding that Mrs. Macpherson, the beneficial owner of the relevant shares, entered into an arrangement that fell within par. (b) of s. 80B (5). What is in question therefore is the nature or substance of the arrangement to which Mrs. Macpherson became a party, whether it fell within s. 80B (5) (b) and whether its purpose was or included the purpose stated in s. 80B (5) (c). (at p260)

19. The primary judge found, and in my opinion correctly found, that Mrs. Macpherson in common with her husband assented to the scheme of arrangement. But his Honour rejected the suggestion that there was an arrangement or, to be specific, an understanding (i) that Mrs. Macpherson would not dispose of her residual 40 per cent shareholding so as to preserve the deductibility of past losses against future profits, and (ii) that she would not receive dividends on the shares which she retained. His Honour's refusal to make this finding was challenged by the Commissioner. (at p260)

20. There is an initial difficulty in dealing with this question which arises from the manner in which the proceedings were conducted in the Supreme Court and the approach taken by his Honour to the issues of fact. Although in form an appeal, the proceedings in the Supreme Court were an exercise of original jurisdiction in which it was for the judge to decide issues of fact, without being constrained to accept the findings made by the Board of Review - see Federal Commissioner of Taxation v. Finn [1960] HCA 69; (1960) 103 CLR 165 and the cases there cited. The issues of fact in this case evidently involved questions of credibility of witnesses, yet the parties contented themselves with presenting the transcript of evidence taken before the Board. No oral evidence was called, the case before his Honour being conducted exclusively by reference to the materials before the Board. How his Honour could adequately determine questions of credibility in these circumstances does not readily emerge. It is not surprising that the judge seems to have embraced the evaluation of the witnesses and the findings of fact made by Mr. O'Neill in the Board of Review. (at p260)

21. I am not suggesting that on appeal from the Board the Supreme Court is not at liberty to conduct the case by reference to the materials before the Board. But where there is an issue of fact involving credibility it is desirable that the witnesses whose evidence is in question should be recalled - see, e.g. Moruben Gardens Pty. Ltd. v. Federal Commissioner of Taxation (1972) 46 ALJR 559, at pp 560- 561; 3 ATR 225, at pp. 228-229; 72 ATC 4147, at pp. 4151-4152. - so that the judge may evaluate the oral testimony and form his own impressions of what it is worth. If this course is not pursued the judge will be restricted in deciding whose evidence is to be accepted. Certainly it will not be easy for a party who seeks to show that findings of fact made by a Board of Review are erroneous. (at p261)

22. The Commissioner's case that there was an understanding that Mrs. Macpherson would retain her 40 per cent of the share capital and that she would not receive dividends on her shares was founded on the contents of the statement sent to shareholders under s. 182 of the Companies Act, and Mrs. Macpherson's evidence and that of her husband, supported by a letter dated 6th September 1969 addressed to the Deputy Commissioner of Taxation in which they asserted that "we signed a statement to the effect that although we were to remain shareholders we would not be entitled to any dividends". In evidence they said that they had been told that by law Mrs. Macpherson was required to retain her shares, though she could not expect to get dividends. Mr. Macpherson seems to have thought that they were told that they were no longer shareholders. Mrs. Macpherson did not confirm him in this. His impression was no doubt based on his own circumstances as he had parted with his shares. Notices of meetings and copies of accounts and reports were not sent by the respondent to Mrs. Macpherson on the ground that she would not be interested. Perhaps the real reason for failing to send her these documents was an apprehension that if she was reminded of her position as a shareholder she might assert her rights even to the extent of threatening to transfer her shares, thereby putting in peril the deductibility of the accumulated losses. (at p261)

23. Be that as it may, Mr. O'Neill described the evidence of the Macphersons on this aspect of the case as "uncertain". The accuracy of this description is confirmed by my reading of the transcript. Their evidence was to my mind so uncertain as to be unreliable and it has to be weighed against the contrary evidence of the solicitor and the accountant of the purchaser, the liquidator and the trustee each of whom was acquainted with the relevant statutory provisions and was alive to the necessity of ensuring that there was no understanding of a kind that would fall within s. 80B (5) (b) and (c). Each of the four witnesses was described by Mr. O'Neill as "truthful", a description which on my reading of the transcript would seem to be deserved. (at p261)

24. According to the evidence of the witnesses associated with the purchaser, in particular Mr. Janover the solicitor, the purchaser was informed that Mrs. Macpherson would be at liberty to dispose of the shares which she retained and expressed its willingness to run the risk that this possibility presented. After all, the purchaser would have control of the board of directors of the respondent and of its affairs through its majority shareholding. Furthermore, as the debts owing by the respondent were to be assigned to the purchaser by the scheme, it could effectively prevent payment of dividends until the accumulated losses had been offset against profits. (at p262)

25. The assertion in the statement under s. 182 that the old directors would continue to hold at least 40 per cent of the capital no doubt reflected the immediate expectation of the purchaser, the liquidator and the trustee. But in my view it was not the product of any agreement, engagement or informal understanding on the part of Mrs. Macpherson. There is, accordingly, no substance in the contention that the arrangement entered into by Mrs. Macpherson included an understanding that she would not dispose of her retained shares or derive benefits from them. (at p262)

26. We are left then with Mrs. Macpherson's assent to the scheme of arrangement with its inclusion of cl. 27 and its provision for a stay of the winding up, her execution of the deed dated 13th March 1967, her transfer of shares pursuant to that deed and to a notice given by the trustee, her conduct in resigning as a director and her co-operation in the appointment of directors nominated by the purchaser so as to place it in control of the affairs of the respondent. The presence of cl. 27 of the scheme was enough in itself to bring the arrangement embodied in the scheme within par. (b) of s. 80B (5). The clause conferred on the trustee"a right, power or option" that "directly or indirectly" "related to" or "affected" Mrs. Macpherson's "beneficial interest" in the totality of her shares, her right to sell those shares or the exercise of rights carried by those shares within the meaning of par. (b) (i), (ii) and (iii). As Mr. and Mrs. Macpherson each owned one-half of the share capital the trustee could exercise the power conferred by cl. 27 of the scheme by requiring her to transfer all her shares. In fact he chose not to do this. He required Mr. Macpherson to transfer all his shares and called upon Mrs. Macpherson to transfer 10 per cent only of her holding. On this aspect of the case what he could have done, rather than what he did, is all-important. (at p262)

27. Paragraphs (b) and (c) of s. 80B (5) are not without their difficulties. They are perhaps more comprehensible when read with the provisions with which they are associated and in the light of their history. The Act permits the deduction of losses incurred in the preceding seven years (s. 80 (2) ), subject in the case of companies to the qualifications and restrictions prescribed by ss. 80A to 80E. The consequence is that a company can deduct past losses in a year of income if it satisfies the continuing ownership provisions of s. 80A or the "same business" criterion contained in s. 80E. Section 80A (1) provides that a company may deduct past losses provided that there is a continuing beneficial ownership of not less than 40 per cent of the relevant share capital. Section 80A, along with s. 80B and s. 80C, was introduced by Act No. 110 of 1964. (at p263)

28. Before 1964 a company could deduct past losses if there was a continuity of beneficial ownership as to 25 per cent of its share capital between the year of loss and the year of income. By s. 80A this was altered to 40 per cent of the share capital. Although s. 80A was not expressed to be subject to s. 80B, sub-s. (1) of the latter section provided that for the purpose of applying the former section the provisions of s. 80B were to have effect. When introduced in 1964 s. 80B (5) conferred on the Commissioner a discretion to treat shares which were the subject of an option in favour of a person who was not a beneficial owner of shares in the company in the year of loss as being beneficially owned by the holder of the option. No doubt this provision was aimed at the practice adopted by purchasers of the share capital in loss companies of taking an option over the shares retained by continuing shareholders so as to deter any dealing with them which would imperil the future deduction of losses, and with a view to excluding the continuing shareholder from any benefits referable to them once the company could earn profits and distribute them by way of dividend. (at p263)

29. Act No. 103 of 1965 amended s. 80A so as to make it subject to ss. 80B to 80E. It also introduced s. 80B (5) in the form in which it applies to this case, an amended s. 80C and a new s. 80D and s. 80E. The amendments made it very clear that s. 80A (1) is subject to s. 80B and enlarged the events in which the Commissioner could exercise his discretion to treat shares beneficially owned by a person under the general law as not being beneficially owned by that person. (at p263)

30. The legislative history suggests that the purpose of entrusting this broad discretion to the Commissioner in the events upon which it was conditioned by the 1965 amendment was to enable the Commissioner to deny to a company the deduction of its past losses if arrangements were made in consequence of which the continuing shareholders are or might be deprived of some of the rights, privileges, benefits or advantages generally associated with the ownership of shares. An arrangement of the kind described in par. (b) will often, if not always, be inconsistent with the retention of these rights, privileges, benefits or advantages by a continuing beneficial owner of shares, though it will not in itself destroy his beneficial ownership as such. (at p264)

31. It is the presence in par. (c) of the requirement that the arrangement "was entered into ... for the purpose ... of enabling the company to take into account for the purposes of" s. 80 of s. 80AA that is the principal cause of difficulty. There is an apparent contradiction in the notion that an arrangement the making of which entitles the Commissioner to exercise a discretion so as to preclude a company from deducting losses is one which was entered into for the purpose of enabling the company to deduct those losses. The explanation lies in the fact that the class of arrangements to which the sub-section is directed include arrangements made before Act No. 103 of 1965 came into operation. (at p264)

32. Another problem is that the arrangements which naturally fall within par. (b) are of different kinds and may be designed to achieve different objects. A promise by which the continuing shareholder promises that he will not dispose of his shares until the losses have been offset against future income might, but for the operation of s. 80B (5), be thought to have as its object the retention by the company of its eligibility to deduct losses if and when profits are earned. But the grant by the continuing shareholder of an option over his shares in favour of the purchaser of 60 per cent of the share capital might be thought to have as its sole or principal object the exclusion of the continuing shareholder from participation in the benefits which will arise when the company is able to distribute profits. The grant of a proxy by a continuing shareholder in favour of the nominee of the purchaser may have as its object the placing of the purchaser in control of the company so as to facilitate the derivation of income against which losses might be deducted (see Federal Commissioner of Taxation v. Brian Hatch Timber Co. (Sales) Pty. Ltd. [1972] HCA 73; (1972) 128 CLR 28, at pp 55-56 ). (at p264)

33. As Mahoney J. pointed out in K. Porter & Co. Pty. Ltd. v. Commissioner of Taxation (1974) 1 NSWLR 536, at pp 551-552 (decision affirmed by this Court (1977) 52 ALJR 41; 19 ALR 510; 8 ATR 88; 77 ATC 4472 ) a problem arises when one seeks to apply par. (c) of s. 80B (5) to the grant of the option in the example given above. It is an arrangement which falls within par. (b). But does it fall within par. (c)? If it does not, it seems to belie the purpose which the legislative history would seem to attribute to s. 80B (5). (at p265)

34. At this point we must note that par. (c) does not speak only of the sole purpose; it speaks also of one purpose included in a number of purposes. In most cases a transaction which involves the grant of an option by a continuing shareholder in favour of the purchaser of a substantial proportion of the share capital does not stand in lonely isolation; it is associated with the transaction by which the purchaser acquires his proportion of the share capital. In these cases it may be proper to conclude that the arrangement involves both transactions in which event the entire arrangement will, subject to considerations still to be examined, be stamped with a par. (c) purpose. (at p265)

35. The word "enabling" is generally understood to mean "make able", "make easy" or "make possible". In an appropriate context it may mean "assist in making able or possible" or "contribute to making able or possible", more particularly where as here, the word is used in association with the prescription of qualifications or conditions of eligibility necessary to entitle a taxpayer to take into account past losses for tax purposes. Although the traditional rule has been that clear words are required to impose a tax, so that the taxpayer has the benefit of any doubts or ambiguities, a provision introduced by way of an attack on tax avoidance should be given the wide meaning evidently intended; it should not be cut down in the interest of precision (Greenberg v. Inland Revenue Commissioners (1972) AC 109, at p 137 ; Inland Revenue Commissioners v. Joiner (1975) 1 WLR 1701, at p 1706; (1975) 3 All ER 1050, at p 1055 ). (at p265)

36. A company is unable to take into account its losses for income tax purposes unless it satisfies the prescription and it derives assessable income from which the losses may be deducted. The category of arrangements which falls within pars. (b) and (c) is not limited to those which provide the company with assessable income. The nature and the variety of the arrangements described in par. (b) deny that the arrangements to which the sub-section is directed are so restricted in character. And the interrelationship which exists between s. 80A (1) and s. 80B (5) indicates that the sub-section is addressed to a very much wider class. The history of the legislation and the interrelationship between s. 80A (1) and s. 80B (5) suggest that the class of arrangements aimed at are those which fall within par. (b) and have as the ultimate end in view that the company will be able to take into account its past losses for tax purposes. An arrangement whose tendency is to secure or bring about a compliance with the continuing ownership requirements is such an arrangement. So also is an arrangement which makes it possible for the purchaser to take control of the company, thereby putting it in a position in which it will be able to derive income against which the losses may be offset. (at p266)

37. Consequently, a promise by a continuing shareholder not to dispose of his shares until losses are taken into account would in my opinion fall within s. 80B (5), though it is the performance of the promise, rather than the promise itself, which will ensure that the company retains its eligibility to deduct losses from future income. It is enough that the promise is given with as the stipulated end in view the taking into account of the losses, for the promise makes it more likely that the thing promised will come to pass. (at p266)

38. The reference to purpose in par. (c) seems to have been understood by Menzies J. (with whom Barwick C.J. agreed) in the Brian Hatch Case [1972] HCA 73; (1972) 128 CLR 28 as a reference to the subjective intention of the continuing shareholder. There, Menzies J. said that the grantors of the proxies were aware that the purpose of the sale was to take advantage of tax losses and that if the proxies were given for that purpose par. (c) would be satisfied (1972) 128 CLR, at pp 55-56 . What the reference to purpose in par. (c) means is by no means clear. Whether it refers to the purpose of the continuing shareholder and whether the purpose is subjective or objective are questions that need to be answered. (at p266)

39. At first sight it seems odd that the purpose of the continuing shareholder should be singled out as a relevant or critical factor. It is the purchaser, rather than the continuing shareholder, who might ordinarily be expected to have the stated purpose in mind. However, it is with the ownership of shares by the continuing shareholder that the sub-section is concerned. And in speaking of the purpose for which "the right, power or option was granted" par. (c) seems to have in mind the purpose of the grantor. This in itself points to a subjective, rather than objective, purpose, a notion which gains some support from the fact that in the case of a contract, agreement or arrangement it is the purpose for which it was entered into that is important, there being a prior reference in par. (b) to the continuing shareholder having entered into the contract, agreement or arrangement. This view of purpose in par. (c) has been taken not only by Barwick C.J. and Menzies J. in the Brian Hatch Case but also more recently by Stephen and Murphy JJ. in K. Porter & Co. Pty. Ltd. v. Commissioner of Taxation (1977) 52 ALJR, at p 45; 19 ALR, at pp 516-517; 8 ATR, at pp 93-94; 77 ATC, at pp. 4477-4478. . (at p267)

40. In their joint judgment their Honours also expressed the view that to fall within par. (b) it is not essential that the arrangement should continue in operation during the years of income (1977) 52 ALJR, at pp 45-46; 8 ATR, at pp 93-94; 77 ATC, at pp. 4477-4478. . With that conclusion, which is supported by the decision of Menzies J. in Franklin's Selfserve Pty. Ltd. v. Federal Commissioner of Taxation [1970] HCA 33; (1970) 125 CLR 52, at pp 81-82 , I would agree. The presence in par. (c) of the reference to the purpose of enabling the taxpayer to take into account the losses, a factor not adverted to by their Honours, is consistent with this conclusion so long as the word "enabling" is understood in the sense which I have assigned to it. (at p267)

41. It is perhaps tempting to say, in light of the legislative history to which reference has already been made, that to fall within par. (b) it must appear that the arrangement, even if it is not required to continue in operation in the year of income, continues to have effect in relation to the shares of a continuing shareholder after the purchaser has acquired his proportion of the share capital. If this were so, it would not be sufficient to point to an arrangement which fell literally within par. (b) but which had no effect in relation to the shares of continuing shareholders after the purchaser acquired his interest in the share capital. However, to give effect to this interpretation it would be necessary to make an implication and this could not, I think, be justified as a necessary implication. At the most it can be said that pars. (b) and (c) look to the making of an arrangement which contributes to the attainment of the purpose stated in par. (c) and has been entered into for that purpose. (at p267)

42. It is not to the point to say that, on the interpretation which I have given to s. 80B (5), the Commissioner will have a discretion to deny the deduction of past losses to a taxpayer which falls within s. 80A (1) viewed in isolation. As I have pointed out, s. 80A is subject to s. 80B and the very purpose of sub-s. (5) is to arm the Commissioner with a discretion the exercise of which will enable him to disregard the beneficial ownership of relevant shares. (at p267)

43. Here the arrangement to which the respondent became a party fell within par. (b) because it contained cl. 27. It was an arrangement entered into for the purpose stated in par. (c) because on the evidence which I have recounted the purpose of the purchaser was to gain control of the respondent so as to provide it with an income against which the losses could be deducted and this purpose was known to Mrs. Macpherson, the continuing shareholder. Indeed, entry into the arrangement by the purchaser was explicable only on the footing that by obtaining control of the respondent the purchaser would provide it with an income from which the past losses could be deducted. And the inference is irresistible that Mrs. Macpherson was aware that this was the intention of the purchaser, for on no other hypothesis could the purchase of the apparently worthless shares be explained. (at p268)

44. In the result I would allow the appeals. (at p268)

JACOBS J. The facts are fully related in the reasons for judgment prepared by Mason J. which I have had the advantage of reading. I agree that there is no ground for disturbing the findings of fact made by the Board of Review and confirmed by the Supreme Court of New South Wales that there was no arrangement that Mrs. Macpherson would not dispose of her residual shareholding or that she would not receive dividends on the retained shares. I do not wish to add anything to the reasons which Mason J. has expressed for this conclusion. (at p268)

2. There then remains the question whether the agreement arrangement or option contained in cl. 27 of the scheme of arrangement was one falling within s. 80B (5) (b) and entered into for the purpose described in s. 80B (5) (c). The arrangement made was one between the trustee on the one hand and the members Mr. and Mrs. Macpherson jointly on the other hand that the trustee might arrange for the transfer of not more than three-fifths of the total number of ordinary $2 shares and not more than three-fifths of the total number of ordinary $1 shares and that he might to that extent only give notice requiring them or either of them to transfer such shares as the trustee might nominate to such person or persons as the trustee should nominate. (at p268)

3. Since the agreement or arrangement did not nominate particular shares or a proportion of the shares held by either shareholder and since it gave the trustee the right to nominate the shares to be transferred the agreement or arrangement at the time of its making and while it remained executory conditionally affected the beneficial interest of Mrs. Macpherson in all her shares as well as the beneficial interest of Mr. Macpherson in all his shares. However it did so only at the time of its making and while it remained executory. That is to say, it only affected her beneficial interest in shares which fell within s. 80B (5) (a), and was only capable of doing so, until the agreement or arrangement operated or was carried into effect in the manner which the agreement or arrangement itself contemplated. Thereafter the shares which fell within s. 80B (5) (a) were wholly freed from any operation or effect of the agreement or arrangement in any of the ways described in pars (i) to (iv) of s. 80B (5) (b). That is the effect of the finding that there was no arrangement that Mrs. Macpherson would not dispose of her residual shareholding or that she would not receive dividends on the retained shares. (at p269)

4. In my opinion an agreement or arrangement must, in order to come within s. 80B (5) (b), be one which, if it be carried to completion or operate or take effect as intended, will, in respect of shares which fall within s. 80B (5) (a), in some way, directly or indirectly, relate to, affect or depend for its operation on one or more of the matters or things described in pars (i) to (iv) of s. 80B (5) (b). This is not to say that if an agreement or arrangement, when it is made, is capable, should it take effect as then intended, of doing one or more of the things described in s. 80B (5) (b), the sub-section will cease to apply if the agreement or arrangement be rescinded. See Franklin's Selfserve Pty. Ltd. v. Federal Commissioner of Taxation (1970) 125 CLR, at pp 81-82 ; K. Porter & Co. Pty. Ltd. v. Federal Commissioner of Taxation (1977) 52 ALJR 41;19 ALR 510; 8 ATR 88; 77 ATC 4472 . In the latter case I reserved my opinion on this question and I continue to do so. The question now being considered is different. The present is a case where the agreement or arrangement was from its inception incapable in its operative effect, in respect of shares which fall within s. 80B (5) (a), of doing any of the things described in s. 80B (5) (b). In the context of s. 80B (5) it is not possible to regard the agreement or arrangement at its executory stage separately from the intended effect and operation thereof if and when it be executed. If the intended effect and operation cannot affect shares continued to be held, there is no agreement or arrangement which can in any of the ways described in s. 80B (5) (b) affect the shares with which that paragraph deals. (at p269)

5. I would therefore dismiss the appeals. (at p269)

AICKIN J. This is an appeal from a decision of Mahoney J. in the Supreme Court of New South Wales in which he allowed an appeal by the taxpayer company, Students World (Australia) Pty. Ltd. from a Board of Review which had by majority upheld an assessment by the Commissioner. The matter in dispute was whether the taxpayer company was entitled to a deduction in each of the years of income ended 30th June 1967 and 1968 for past losses. The Commissioner had rejected the claim for those losses as allowable deductions and had disallowed the taxpayer company's objection. Before the Board two questions arose, first, whether Mrs. Macpherson, who was the 40 per cent continuing shareholder in the taxpayer company, was at all relevant times the beneficial owner of her shares and, second, whether the Commissioner was authorized by s. 80B (5) of the Income Tax Assessment Act 1936, as amended, ("the Act") to treat the shares as not having been beneficially owned by her at the relevant times. The Board found that Mrs. Macpherson was in fact the beneficial owner of the shares at all relevant times but concluded that the Commissioner was authorized by s. 80B (5) to treat the shares as not having been beneficially owned by her and found no reason for exercising the discretion given by that sub-section in a manner different from that which had been adopted by the Commissioner. (at p270)

2. Before Mahoney J. it was not contended that Mrs. Macpherson was not the beneficial owner of the shares and the only matter argued was the operation of s. 80B (5), and in this Court the argument proceeded on the same basis. (at p270)

3. The detailed facts are set out in the judgment of Mason J. and I shall not repeat them here. I would add only that it seems to me to be clear upon a reading of both the evidence placed before the Board of Review and the reasons of Mr. O'Neill, with whose statement of the facts the other members of the Board agreed, that Mrs. Macpherson had no real recollection of the events of the day upon which the shares had been transferred or of the relevant meetings held, and that she had no understanding of business or corporate matters generally. She said that she was a director "in name only" and took no part in the business operations of the taxpayer company which had in fact been in liquidation since 1961. Her recollection of the events of the relevant day was indeed no worse and no better than that of the liquidator who however did understand the nature of the events. Their lack of recollection is not surprising in view of the fact that the events took place in March 1967 and their evidence was given before the Board in June 1971. In the end the only witnesses who had any reliable recollection of the events were those who kept contemporaneous notes and had access to the contemporaneous documents. The only other observation that I would make about the facts is that I would not myself think that the inference is warranted that the reason why those who assumed control of the taxpayer company did not send notices of meetings to Mrs. Macpherson was an apprehension that if she was reminded of her position she might assert her rights to the extent of threatening to transfer her shares. The witness who dealt with this matter said that the taxpayer company became a member of a large group of companies when 60 per cent of its shares were acquired in the manner referred to. He said first that the failure to send notices to Mrs. Macpherson was accidental in that there were only two or three companies in the group which had among their shareholders persons who were not members of the family group and that all companies in the group were treated alide in respect of notices. He subsequently said that the group adopted the practice of not sending notices of meetings to any of its shareholders and indeed did not hold what were described as "physical meetings" but merely had minutes drawn up and signed. I do not find anything inherently improbable in that statement. In the end however it does not appear to me to matter whether it was apprehension or a standard practice of not sending notices to anybody which produced the result that none were sent to Mrs. Macpherson. (at p271)

4. I agree with the view that there is no ground for disturbing the finding of fact made by the Board of Review and confirmed by Mahoney J. that there was no arrangement that Mrs. Macpherson would not dispose of her residual 40 per cent shareholding or that she would not receive dividends on the retained shares. The reasons given by Mr. O'Neill in the Board of Review and by Mahoney J. for reaching this conclusion appear to me to be correct and they are confirmed by a reading of the evidence recorded in the transcript of the proceedings before the Board of Review. In the circumstances it seems to me to be proper to accept the conclusion reached by Mr. O'Neill that all the witnesses were truthful to the extent of their recollection. That conclusion was not dissented from by the other members of the Board and appears to have been acted on by Mahoney J. I agree with the view expressed by Mason J. that this mode of procedure is unsatisfactory but it was not the subject of objection or comment by either party. It is perhaps not surprising that neither party wished to embark upon a repetition of the original hearing which had occupied some three days, notwithstanding that the so-called appeal from a Board of Review is a proceeding de novo in the original jurisdiction of this Court and of the Supreme Court of New South Wales. That situation does not appear to have been changed by the recent legislation which confines "appeals" from Boards of Review to the Supreme Courts of the States and Territories. It is open to those Courts to adopt their own procedure and, at least in cases where both parties agree, to treat the material placed before a Board of Review as if it were evidence given in the proceedings. Where no critical questions of credibility arise, and where the parties are content to accept the view adopted by a Board, or a majority of its members, on credibility, no serious difficulties are likely to arise. In the present case the whole of the oral evidence and all the documents before the Board were included in the material before Mahoney J. and before this Court. (at p272)

5. The critical questions are whether the 1967 scheme of arrangement fell within s. 80B (5) (b) and whether s. 80B (5) (c) is applicable. (at p272)

6. The scheme of arrangement appears to have been one between the taxpayer company and its creditors as no meeting of members was ordered. It appears that the only two shareholders, Mr. and Mrs. Macpherson, signed a notation on the copy of the scheme presented to the Supreme Court of New South Wales that they "hereby consent to the within scheme including the amendments noted herein". Each of them was also a creditor but whether they attended the meeting of creditors does not appear. It does not appear to matter whether Mr. and Mrs. Macpherson were bound by the scheme of arrangement pursuant to the Companies Act on the basis that it was a scheme between the company, its members and its creditors, though no meeting of members was ordered or held, or became bound by a separate agreement with the scheme trustee, signified by their signing the consent which I have quoted above, though such consent must be regarded as contingent on the scheme coming into effect. (at p272)

7. That arrangement, whether comprised by the scheme as such or by the Macphersons' agreement with the scheme trustee to consent to the scheme, included cl. 27 which is set out in full in the judgment of Mahoney J. and the critical paragraph of which is quoted by Mason J. (at p272)

8. The first question therefore is whether their assent to that scheme, either alone or in combination with their ultimate compliance with the request made by the scheme trustee that Mr. Macpherson should transfer the whole of his shares and that Mrs. Macpherson should transfer 20 per cent of her shares (making a total of 60 per cent of the issued shares), constituted a "contract, agreement or arrangement" falling within s. 80B (5) . It will be seen from the terms of cl. 27 that the scheme trustee could, if he chose, call upon Mrs. Macpherson to transfer the whole of her shares or only part thereof, although it is clear that if he exercised his right to the extent of 60 per cent of the total number of each category of shares he would have to call upon each of the two shareholders to transfer some shares, since each held 50 per cent of each category. It is clear that the scheme of arrangement gave the trustee the right to nominate the number of shares to be transferred by each of the two shareholders. I agree with the conclusion expressed in the judgment of Jacobs J. that the arrangement between the trustee and Mr. and Mrs. Macpherson, approving the scheme of arrangement constituted an "agreement or arrangement" and that such agreement or arrangement "while it remained executory conditionally affected the beneficial interest of Mrs. Macpherson in all her shares as well as the beneficial interest of Mr. Macpherson in all his shares. However it did so only at the time of its making and while it remained executory". During the period when it was executory (i.e. from 28th February 1967, when the scheme became operative, until 15th March 1967 when the transfers were signed, approved by the directors and registered), it affected the whole of the shares held by her (including those which she in fact retained in the year of income). It was however an agreement or arrangement such that, upon the power being exercised by the trustee to the full extent, i.e. exercised in respect of some part of the shareholding of each of Mr. and Mrs. Macpherson to a total extent of 60 per cent of the shares, the power was incapable of further exercise. The agreement or arrangement thereafter ceased to have any effect or operation upon the remaining shareholding of Mrs. Macpherson and could not affect Mr. Macpherson's shares for he no longer held any. The agreement or arrangement was therefore wholly spent. It did not thereafter relate to, affect, or depend for its operation upon any of the matters referred to in pars (i) to (iv) of s. 80B (5) (b). Thus the shares which Mrs. Macpherson held beneficially during the year of loss and had also held beneficially during the year of income were, at the time of the transfer of the balance of her shares in 1967, no longer conditionally or at all subject to or affected by the agreement or arrangement. No other arrangement was made by Mrs. Macpherson which related to, affected or depended for its operation upon any of the matters referred to in pars (i) to (iv) in accordance with the finding of the Board of Review and the trial judge. (at p273)

9. I agree with the construction which Jacobs J. has put in his judgment upon s. 80B (5). Once the shares which fall within the latter part of par. (a) and are referred to in par. (b) of that sub-section are ascertained (i.e. the shares held in the year of income - in this case Mrs. Macpherson's 40 per cent of the total shareholding) it is clear that those shares were not and could not be the subject of any such contract, agreement or arrangement falling within the words of par. (b). There is the express finding that there was no later or other arrangement with respect to those shares. The effect of the giving of the notice was to bring the agreement or arrangement into operation and at the same time to render it no longer capable of any further operation. (at p274)

10. Thus the arrangement was one which, by reason of its very terms, could not relate to, affect or depend for its operation on any of the matters specified in sub-pars (i) to (iv) in respect of the "last mentioned shares", i.e. the shares held in the year of income. Though the identity of those shares was initially unascertained, the arrangement was one which from its inception could not affect such shares. This was its expressed intention and was also the effect of its coming into operation. In my opinion such an agreement or arrangement does not fall within s. 80B (5) (b). (at p274)

11. That view is sufficient to dispose of this appeal but I think that it is none the less desirable that I should express my view on par. (c) in its relation to the facts of this case. Paragraph (c) is set out in full in the judgment of Mason J. and an examination of it demonstrates to my mind that the words "for the purpose, or for purposes that included the purpose" refer to the purpose of the person referred to in pars (a) and (b), i.e. the person who beneficially owned the relevant shares both in the year of loss and in the year of income. I do not think that the context of the whole of this sub-section permits the word "purpose" to be construed as meaning the same as the words "purpose or effect" in s. 260 of the Act. It seems to me to be clear that par. (c), dealing with a contract, agreement or arrangement, refers to the subjective purpose of the continuing shareholder and not with the objective effect of that which is done. It speaks not of the purpose of the contract, agreement or arrangement but of the purpose of entering into it, which must be the purpose of the person doing the relevant act. The contrary view seems to me to be one which (subject to the meaning of the word "enabling") will necessarily produce the result that whenever there is a sale of shares which leaves 40 per cent of the holding in the hands of the shareholders who held such shares in the year of loss, then the discretion given to the Commissioner to treat such shares as not beneficially owned at the relevant time will always arise. If that was the intention of the legislature it could have been expressed in a single sentence. Moreover it would be contrary to the clearly expressed intention that that is not to apply in every case. (at p274)

12. As Mahoney J. says in his reasons for judgment it was conceded by the Commissioner that an agreement to sell 60 per cent of the issued shares would not of itself bring par. (c) into operation. Moreover it cannot, in my opinion, be enough to bring an arrangement within par. (c) that the party or parties thereto knew what the tax consequence of the retention of 40 per cent of the shares in the hands of the original holders would be. It cannot be that some acquaintance with the Act on the part of the shareholder operates to enable the Commissioner to deem that which is beneficially held by such a shareholder not to be so held, whereas in circumstances identical in all respects save that the shareholder is unaware of the provisions of the Act the Commissioner has no such power. What is required is that the purpose of the person who beneficially held the shares, not the purpose of the arrangement, was to enable the company to take into account losses in earlier years. Whatever meaning may be given to the word "enabling", I am unable to see how the mere disposal of 60 per cent of the issued shares in a company or the failure to dispose of 40 per cent thereof can be said to enable that company to take prior losses into account for the purposes of s. 80 or s. 80A. (at p275)

13. The evidence was treated by the trial judge as establishing that the arrangement or transaction to which Mrs. Macpherson was a party did not extend beyond the sale of 60 per cent of the shares by herself and her husband in combination. The trial judge rightly said, "I am satisfied that there was no provision, once the necessary 'forty-six ratio' had been set up by the scheme trustee, that Mrs. Macpherson would or would not exercise any rights in relation to her retained shareholding", and he further said, "I am satisfied that Mrs. Macpherson was not party to any relevant arrangement or transaction which would establish or base an inference that what she did had a purpose within par.(c)." An examination of the evidence before the Board of Review demonstrates that there is ample evidence for that conclusion and indeed that there is no evidence that she did have any such purpose. In the circumstances of this case, including the procedure which was followed, this Court is in as good a position as the trial judge to form that opinion or to form an opinion on that matter. A perusal of the evidence given before the Board of Review leads me to the same conclusion. (at p275)

14. I am therefore of opinion that, even if the arrangement or agreement fell within par. (b), it was not entered into for the purpose specified in par. (c). (at p275)

15. For those reasons I would dismiss each of these appeals. (at p275)

ORDER

Appeals dismissed with costs.