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Chief Collecter of Taxes v Bailes and Bailes [1973] PGSC 8; [1973] PNGLR 411 (17 May 1973)

Papua New Guinea Law Reports - 1973

[1973] PNGLR 411 - The Chief Collecter of Taxes v Bailes and Bailes

[1973] PNGLR 411

PAPUA NEW GUINEA

[SUPREME COURT OF JUSTICE]

THE CHIEF COLLECTOR OF TAXES

V

BAILES AND BAILES

Port Moresby

Minogue CJ Clarkson Prentice JJ

1-2 March 1973

5 March 1973

17 May 1973

INCOME TAX- Scheme or arrangement for avoiding payment of tax - Companies - Division of profits as capital and not income - Income Tax Ordinance 1959-1969 ss. 255[cdlv]1, 361[cdlvi]2.

N1>APPEAL- Questions of law - Income tax - Scheme or arrangement for avoiding payment of tax - Income Tax Ordinance 1959-1969 ss. 255[cdlvii]3, 361[cdlviii]4.

Rabaul Metal Industries Pty. Ltd.�the operating company�was incorporated in 1960 and carried on business with increasing financial success. The respondent G. G. Bailes was the governing director and entitled to 76% of the voting rights.

Bailes & Co. Pty. Ltd.�the Bailes Co. was incorporated in 1962 with a capital of 50 �A� class 5% preference shares of $2.00 each, 100 �B� class shares of $2.00 each, 15 �C� class shares of $2.00 each and 7 ordinary shares of $2.00 each. The respondent G. G. Bailes held the 50 �A� class shares (the only shares conferring any voting rights), 51 �B� class shares and the 15 �C� class shares. The respondent, Mrs. V. Bailes held 49 �B� class shares and the 7 ordinary shares. The only source of income of the Bailes Co. was the dividends it received from the operating company, which was $42,280.00 in the year ending 30th June, 1965, and $37,516.00 in the year ending 30th June, 1966. In these years also the respondents were paid dividends of $35,604.00 and $42,605.00.

Rabaul Metal Industries Holdings Pty. Ltd.�the Holdings company�was incorporated on 3rd February, 1967, with a capital of 2 ordinary shares of $1.00 each held by the respondents.

On 10th April, 1967, G. G. Bailes sold his 51 �B� and 15 �C� class shares in the Bailes Co. to the Holdings company for $335,299.80 and Mrs. V. Bailes sold her 49 �B� shares to it for $248,934.70, the purchase price being credited by Holdings to loan accounts opened in the names of the two respondents.

In the year ending 30th June, 1966, the Bailes Co. had over $36,000.00 in undistributed profits. On 25th April, 1967, Bailes & Co. declared a dividend of $39,995.00 to Holdings. On 25th June, 1967, at an extraordinary general meeting of the shareholders of Holdings a special resolution was passed altering the Articles to permit the issue of redeemable preference shares and a sufficient number were issued before 30th June to confer public company status for the purposes of s. 139 of the Income Tax Ordinance.

Up until 30th June, 1961, Holdings received $325,995.00 by way of dividends from Bailes Co.; apart from an annual dividend of $5.00 on redeemable preference shares no further dividends had been declared by Holdings and the respondents had together received approximately $319,000.00 in reduction of loans to Holdings.

The Chief Collector of Taxes assessed tax on the basis that the amounts received by the respondents were income. The Income Tax Review Tribunal allowed objections made by the respondents. On appeal to the Full Court.

Held

N1>(1)����� The question was whether the course of action taken by the taxpayers was of such a nature as to have the legal effect of attracting s. 361 of the Income Tax Ordinance 1959-1969: as such it was a question of law within s. 255 of the Income Tax Ordinance.

Krew v. Commissioner of Taxation (Cth) (1971), 45 A.L.JR. 324 referred to.

N1>(2)����� The only conclusion possible from the overt facts was that it was a dominant purpose, if not the dominant purpose, of the arrangement whereby profits of the company would be diverted, that the respondents were to receive amounts proportionate to their respective shareholding in the Bailes Co. as capital and not as income. Accordingly it was an arrangement to which s. 361 of the Income Tax Ordinance 1959-1969 applied so as to enable tax to be assessed as if they had remained its �B� and �C� class shareholders.

Propositions of Kitto J in Hancock v. Federal Commissioner of Taxation [1961] HCA 90; (1962-63), 108 C.L.R. 258 at pp. 283-4 adopted and applied.

Commissioner of Taxation v. Ellers Motor Sales & Others [1972] HCA 17; (1972), 46 A.L.JR. 181 referred to.

N1>(3)����� The appeal should be allowed.

Appeals

These were appeals by the Chief Collector of Taxes against a decision of the Income Tax Review Tribunal allowing objections by each of the respondents to their assessments to income tax in respect of the years ended 30th June, 1967, 1968 and 1969. By consent the appeals were referred into the Full Court and heard together.

Counsel

R. Bainton Q.C. and J Kinna, for the appellant.

P. D. Connolly Q.C. and I. Gzell, for the respondents.

Cur. adv. vult.

MINOGUE CJ: These are appeals by the Chief Collector of Taxes against the decision of the Income Tax Review Tribunal allowing the objections of each of the respondents to their assessments to income tax in respect of the years ended 30th June, 1967, 1968 and 1969. By consent the appeals were referred into the Full Court and heard together. In effect what the Chief Collector asserted was that the taxpayers had by an agreement or arrangement purported to receive large amounts as capital receipts which should properly have been characterized as receipts of income and so taxable. The Income Tax Review Tribunal was unable to find any arrangement whereby monies which would otherwise constitute dividends derived by the taxpayer were returned to the taxpayers in the guise of capital.

To understand the respective contentions of the parties it is necessary to enter in some detail into the transactions of the taxpayers and a group of companies in which they were the principal shareholders.

Rabaul Metal Industries Pty. Ltd., which I shall hereafter call �the operating Company�, was incorporated on 13th July, 1960, and has carried on business since that date with increasing financial success. This is evidenced by the steady growth of its profit after tax from the sum of �43,679 ($87,358) in 1965 to $176,493 in 1971. It has at all times been controlled by the respondent G. G. Bailes who is its governing director and who while he remains such is at any general meeting entitled to 76% of the votes which might be cast at such meeting. In November, 1962, G. G. Bailes and Co. Pty. Ltd., which I shall hereafter refer to as �the Bailes Company� was incorporated. Its issued capital in the relevant years was 50 �A� class 5% preference shares of $2.00 each, 100 �B� class shares of $2.00 each, 15 �C� class shares of $2.00 each and 7 ordinary shares of $2.00 each. As at 30th June, 1966, the 50 �A� class shares were held by G. G. Bailes who also held 51 �B� class shares and the 15 �C� class shares. The respondent Mrs. Veronica Bailes held 49 �B� class shares and the 7 ordinary shares were held by various subscribers. Whilst G. G. Bailes holds the 50 �A� class shares they are the only shares conferring any right to vote. Differential dividends could and can be declared on the �B� class shares and the �C� class shares. The only source of income of the Bailes Company was the dividend which it received from the operating Company.

In the year ended 30th June, 1965, the Bailes Company received a dividend from the operating Company of �21,140 ($42,280). In the following year it received $37,576 and in those years $35,604 and $42,605 were paid to the respondents as dividends.

On 3rd February, 1967, Rabaul Metal Industries Holdings Pty. Ltd., to which I shall hereafter refer as �Holdings�, was incorporated and at that stage its issued capital comprised 2 ordinary shares of $1.00 each, one being held by each of the respondents. On 10th April, 1967, G. G. Bailes sold his 51 �B� and 15 �C� shares in the Bailes Company to Holdings for $335,299.80 and Mrs. V. Bailes sold her 49 �B� shares to it for $248,934.70. G. G. Bailes retained his 50 �A� shares. At the time of this sale the funds of Holdings were $2.00, being its paid-up capital, and the purchase price was credited to loan accounts opened in the names of the two vendors.

In the year of income ended 30th June, 1966, the Bailes Company appears to have had something over $36,000 in undistributed profits which would have attracted Division 7 tax if not distributed before 30th April, 1967. If it were entirely distributed both the taxpayers would have been liable to pay substantially increased tax. On 25th April, 1967, the Bailes Company declared a dividend of $39,995 to Holdings. On 25th June an extraordinary general meeting of the shareholders of Holdings (i.e. the two respondent taxpayers) passed a special resolution altering the Articles to permit the issue of redeemable preference shares and on the following day a sufficient number of redeemable preference shares were issued to a sufficient number of people to confer public company status for the purpose of the Income Tax Ordinance on Holdings on 30th June, 1967, the relevant date for testing that status under s. 139 of the Ordinance[cdlix]5.

The relevant financial transactions for the years in question in this case can I think best be seen by a tabulation:

1968-69

<

$71,079

From a perusal of the figures up to 30th June, 1971, it appears that Holdings has received by way of dividends from the Bailes Company $325,995, that apart from an annual dividend of $5.00 on redeemable preference shares no further dividend has been declared by Holdings, and that the respondents have together received approximately $319,000 in reduction of their loans to Holdings. It is on the foregoing facts that this court is asked to decide that the Income Tax Review Tribunal was wrong in being unable to find a scheme or arrangement which s. 361 of the Income Tax Ordinance would have the effect of annihilating.

It seems clear that one of the reasons motivating the respondents to set up what has come to be known as a �Keighery� type company must have been to avoid either the payment of Division 7 tax or of personal tax if the dividends were to come into their hands. They would not have known that in October of 1967 Division 7 tax was to be abandoned as from the year of tax beginning 1st July, 1967. The Review Tribunal came to the conclusion that avoidance of this tax was one of the purposes of the formation of Holdings. No attempt was made on the part of the appellant to challenge the incorporation of Holdings on this score nor in the light of Commissioner of Taxation (Cth) v. Casuarina Pty. Ltd.[cdlx]⁶�could such an attempt have succeeded. But the real basis of the Collector�s case is that the formation or existence of the �Keighery� type company does not really affect the issue in this case.

Mr. Connolly, for the respondent, submitted that no appeal lay because there was no question of law involved. Section 255 of the Income Tax Ordinance only allows an appeal to this court from a decision of the Review Tribunal that involves a question of law. In his submission there was no error of law below and the question whether s. 361 was attracted is ultimately a question of fact. This he said was the view taken by the Tribunal itself when it stated that it was unable to find any arrangement whereby monies which would otherwise constitute dividends derived by the taxpayers were fed through to the non-private company and returned to the taxpayers in the guise of capital. This in his submission was the critical finding of fact and the only question of law which could arise is whether the evidence is incapable of supporting such a conclusion. Unless this court can reach the view that it was so incapable there is no question of law to be decided and therefore no jurisdiction in the court.

I am unable to agree with this submission. The proper legal effect of a proved fact is essentially a question of law. The question in this case is whether the course of action shown to have been taken by the taxpayers is of such a nature as to have the legal effect of attracting s. 361. I cannot see that this is other than a question of law. This being so the whole decision of the Tribunal is open to review, with the further consequence that the onus lies upon the respondents to prove that the assessment is excessive (s. 250[cdlxi]7). See Krew v. Commissioner of Taxation (Cth)[cdlxii]⁸. It could be said that the Collector�s argument before the Review Tribunal was founded upon the proposition that the only conclusion possible on the facts found was that the arrangement was one to which s. 361 applied. I respectfully agree with Walsh J in the case I have just cited that this is a contention which raises a question of law. See op. cit. p. 325.

The argument for the Chief Collector rests squarely on the result achieved by the taxpayers which is that from the date of the formation of Holdings in February 1967 until 30th June, 1971, they have had between them out of the profits of the business of the operating Company $319,000 in a form which but for the operation of s. 361 would be non-taxable. Counsel for the taxpayers also informed us that each taxpayer has received a further $79,500 in the year ended 30th June, 1972. The means employed to achieve this result included the formation of a �Keighery� type company. Counsel for the Chief Collector conceded that the decisions in W. P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation[cdlxiii]⁹�and Federal Commissioner of Taxation v. Casuarina Pty. Ltd.[cdlxiv]¹⁰�establish that the Chief Collector cannot avail himself of s. 361 to annihilate the issue of the redeemable preference shares which had the effect of conferring public status upon Holdings. But he submits that the entirety of the arrangement which the taxpayers entered into and carried into effect was one whereby they transferred the shares which they held in the Bailes Company to a newly-formed company which they in fact controlled, in consequence of which income from the Bailes Company received by it from the operating Company instead of being received by the taxpayers in the form of dividends declared by the Bailes Company and therefore part of their assessable income has followed a course which has carried it through Holdings to the taxpayers but so as to reach them with the character of capital. This he submitted was clearly an arrangement which had both the purpose and effect of an avoidance of liability for tax by the respondents.

Mr. Connolly on the other hand, whilst in his turn conceding that there was obviously concerted action, went on to submit that an arrangement to avoid Division 7 tax was prima facie outside s. 361. In his contention the solution of a Division 7 problem by the incorporation of Holdings and the insertion of that company at the head of the chain was an exercise of choice presented by the Ordinance. This was so held in the Keighery[cdlxv]¹¹�and Casuarina[cdlxvi]¹²�cases. It could be seen he said that G. G. Bailes could not control the companies on the relevant date, that is 30th June, in each year, and he also pointed out that for the proper avoidance of Division 7 tax the non-private company had to gain control and to do this it had to get in the shares of the Bailes Company. The shares could not be transferred for less than their worth and, so he contended, a way had to be found to transfer them at their true value. And he was quick to point out that the purchase price on any basis of valuation was a reasonable and proper consideration for the transfer of the shares. Further he pointed out that there was no correspondence between the amount agreed to be paid for the purchase of the shares by Holdings and the dividend monies available for distribution by that Company at the date of the purchase. With these last two propositions I agree. Counsel went on to submit that in the cases relied upon by Mr. Bainton, for the Collector, (Bell v. Commissioner of Taxation [cdlxvii]¹³, Newton v. Commissioner of Taxation [cdlxviii]¹⁴, Hancock v. Commissioner of Taxation [cdlxix]¹⁵, Mayfield v. Commissioner of Taxation [cdlxx]¹⁶, Ellers Motor Sales v. Commissioner of Taxation [cdlxxi]¹⁷) it could be seen that there were readily available dividends or unappropriated profits which the arrangement devised was designed to embrace, and each of the cases could be described as a true dividend stripping operation. He urged upon us that if the Collector were to succeed in this appeal the boundaries of s. 361 would be pushed to an extent that has never been sought to achieve before. In his submission if the Collector be right then any sale of shares where payment is to be made out of future profits is caught by s. 361. The cases show that there has to be a liquid fund awaiting distribution, that is, that an arrangement to be capable of being struck down must be one dealing with available distributable profits. In my view Mr. Connolly�s argument cannot succeed.

To explain why it cannot succeed I can do no better than begin by repeating and respectfully adopting the general propositions formulated by Kitto J in Hancock v. Federal Commissioner of Taxation [cdlxxii]¹⁸: �(1) The word �arrangement� in s. 260 comprehends a plan made between two or more persons (whether it be legally enforceable or not) and all the transactions by which it is carried into effect. (2) An arrangement �has or purports to have the purpose or effect� referred to in the section if, and only if, the concerted action consisting of the making of the plan and the carrying out of the transactions by which it is given effect is properly to be characterized as a means to avoid income tax. (3) Whether it is to be so characterized is a question to be answered upon consideration of the overt acts by which the plan has been implemented. (4) If those acts are capable of explanation by reference to ordinary dealing, such as business or family dealing, without necessarily being labelled as a means to avoid tax, the arrangement does not come within the section. An example would be a simple sale or gift of shares even though the motive of the seller or donor may have been to avoid receiving future dividends and incurring the liability to income tax which the receipt of them would have entailed. (5) But the overt acts will enable the arrangement to be characterized as a means for the avoidance of tax, if they have included a transfer of property from the taxpayer in consequence of which income from the property, instead of being received as such by the taxpayer, has followed either of two courses: (i) a course which has carried it through the hands of other persons to the taxpayer, but so as to reach him with the character of capital; or (ii) a course which has amounted in effect to an application of the moneys by the taxpayer, and so has been a practical equivalent of a receipt by him followed by an expenditure by him. (6) If an arrangement has been a means for the avoidance of tax, the fact (if it be a fact) that it has been a means to other ends as well does not prevent the application of s. 260. (7) Where an arrangement is found to be within the section because of a transfer having such a consequence as is mentioned in (5) above, the transfer is to be considered as void to the extent mentioned in the section. The result is that income which has followed either of the courses referred to in (5) is to be regarded as income to which the taxpayer was entitled. Consequently the receipt of the income by the transferee in pursuance of the arrangement is properly to be treated by the Commissioner as a derivation of it, as income, by the taxpayer.

A word may be added in explanation of propositions (5) and (7). A clear example of income following the first of the courses mentioned is provided by Bell�s case [1952] HCA 34; (1953) 87 C.L.R. 548, where it was found possible to trace dividend moneys from a company to Bell, and show that although they had in fact reached Bell as capital they were the produce of shares formerly held by him and transferred under an arrangement which ensured that he would receive them, but receive them transformed into capital and so made free of income tax. The Privy Council regarded the bulk of the moneys in question in Newton�s case [1958] UKPCHCA 1; [1958] A.C. 450; (1958) 98 C.L.R. 1 as in the same category. The second of the courses described in (5) above is illustrated by the Privy Council�s treatment of the moneys retained by Pactolus in Newton�s case [1958] UKPCHCA 1; [1958] A.C. 450; (1958) 98 C.L.R. 1. It is easy to imagine other possible instances of it. One would be the case in which, by arrangement between A and B, A has transferred his shares to B, and B has applied dividend moneys therefrom in making a payment to C but really as a gift to C from A, or in paying for property to be transferred by C to A, or in securing some benefit or advantage for A, and then (making plain the tax-avoiding nature of the whole arrangement) B has retransferred the shares to A. The contrast with the case of an ordinary straight-out sale or gift by a taxpayer is clear. Such a sale or gift does result, it is true, in the future dividends going to the buyer or donee instead of to the taxpayer; but the diversion of the money from the taxpayer is neither to enable it to be received by him as capital instead of income and therefore free of income tax, nor to enable such an application of it to be made that there is achieved by a single step what, but for the arrangement, would have required the two steps of a receipt by the taxpayer (with consequential tax liability) and an expenditure by him.�

It seems to me that proposition (5) is squarely applicable to this case. Both the taxpayers have transferred their shares in the Bailes Company and a consequence of that transfer is that the income (dividend) from those shares instead of being received as such by the taxpayer has followed a course which has carried it through the hands of other persons to the taxpayer but so as to reach him with the character of capital. No explanation was offered as to the reason for Holdings with a paid-up capital of $2.00 borrowing over $580,000, apparently at call and apparently with no interest chargeable, and the only conclusion I can come to is that it was part of an arrangement to avoid tax. That one of the reasons for the arrangement may well have been to avoid Division 7 tax and to do so by permissible means is not to the point. Once the loan has been repaid in full if this arrangement is permissible there is as I see it nothing to prevent Holdings selling to yet another company and the process here adopted being repeated all over again, with the result that none of the profits of the operating Company available for dividends would ever be taxed in the hands of the recipients.

The Review Tribunal felt itself bound by the decision of Menzies J in Ellers Motor Sales & Others v. Commissioner of Taxation[cdlxxiii]¹⁹. I do not attempt to set out the facts of what Windeyer J in the appeal from that decision described as an involved and difficult appeal. Basically Mr. & Mrs. Ellers attempted to achieve much the same result as Mr. & Mrs. Bailes appear to have set out to achieve here. The formation of a �Keighery� type company was a necessary step in the procedure adopted but the ultimate objective was to convert the profits made by operating companies into a capital receipt in the hands of taxpayers who would in the ordinary course of events have had to receive the monies concerned as income. Menzies J felt that the decision in W. P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation[cdlxxiv]²⁰�protected the taxpayer from the application of s. 260.

When the case went on appeal (Commissioner of Taxation v. Ellers Motor Sales & Others [cdlxxv]²¹) it was held by the High Court that upon the facts a dominant purpose of the transactions was to arrange matters in such a way that the former shareholders in one of the holding companies received amounts proportionate to their respective shareholdings as capital and not as income and it was held that this was an arrangement to which s. 260 of the Act applied so as to enable the Commissioner to assess tax on the former shareholders in the holding company as if they had remained its shareholders. The Commissioner had contended that upon the question whether s. 260 applies so as to prevent shareholders from asserting against him that the monies which came into their hands were capital receipts and not income the principle upon which Keighery�s case[cdlxxvi]²²�was decided had no bearing and that that question fell to be determined upon considerations which made the formation of a �Keighery� type company, although that was one step in the scheme, an irrelevant factor. Walsh J with whom Windeyer J and Gibbs J agreed said at p. 188:

�... it is important, in my opinion, to distinguish between the tax liability of a company which has been formed or reconstructed in such a manner that its character is, for the purposes of the Act, that of a non-private company and the liabilities for tax assessed upon their own incomes of others who have been concerned in that formation or reconstruction. In my opinion it is possible that the circumstances may be such that s. 260 may be used in assessing the latter liabilities, notwithstanding that it cannot be applied in assessing the tax liability of a company so as to treat the company as having a character different from that which it bears according to the terms of the Act as applied to the facts which exist at the relevant date. In Commissioner of Taxation (Cth) v. Casuarina Pty. Ltd. (1971), 45 A.L.JR. 213, at p. 221, in referring to the fact that the taxation liabilities of the Sternberg companies or the Sternbergs were not in question, I recognized that possibility; so also did Gibbs J at pp. 223-224.�

And earlier at p. 187 the learned judge had set out the position in this way:

� Before the transactions in question took place, profits were held by the companies and they were ultimately concentrated in Harcourt, which then had a large sum available for distribution. At the end of the transaction, Harcourt had distributed that money and its former shareholders had received amounts, proportionate to their respective shareholdings, the total of which corresponded closely to the amount distributed by Harcourt. It seems to me upon the facts that a dominant purpose of the transactions was to arrange matters in such a way that money would be received as capital and not as income. At the same time the tax problems were resolved which would afterwards have confronted Harcourt, or alternatively its shareholders, if nothing had been done and if the money had simply been retained by Harcourt, namely the prospect that it would become liable for div. 7 tax if it did not make a distribution; and if it did distribute subsequently to its shareholders by way of dividend the money that it held, Mr. & Mrs. Ellers would have been taxable on the dividends received by them and the shareholders who were companies might not have obtained a full rebate.�

True it is that in Ellers� case[cdlxxvii]²³�as in the other cases cited by Mr. Bainton there was a large amount of accumulated profit presently in existence when the arrangement was initiated and the arrangement did not seek to operate on profits in future years of income. But I cannot see that distinction as material to the matter which the court has to consider. In this case clearly there was an arrangement whereby profits of a company would be diverted. The destination of these profits was controlled by G. G. Bailes and they came into his and his wife�s hands ostensibly for the sale of their shares. But the operating business went on as before under the control of G. G. Bailes. It was within his power to redeem the preference shares in Holdings and to sell the source of the profits as a going concern�and it may well be that he did not even have to take the step of redeeming to achieve such a result.

In my view the only conclusion possible from the overt facts is that it was a dominant purpose, if not the dominant purpose, of the arrangement that Mr. & Mrs. Bailes were to receive amounts proportionate to their respective shareholding in the Bailes Company as capital and not as income. And as in Ellers� case[cdlxxviii]²⁴�this was an arrangement to which s. 361 of the Ordinance applied so as to enable the Chief Collector to assess tax on them as if they had remained its �B� and �C� class shareholders.

In the result I am of opinion that the sale of these shares by Mr. and Mrs. Bailes is to be ignored so that the dividends declared in the years ending on 30th June, 1967, 1968 and 1969 respectively by the Bailes Company are to be treated as forming part of their assessable income.

CLARKSON J: I agree in substance with the Chief Justice and wish to add only a short comment by way of qualification.

Counsel for the respondents argued that the present cases were distinguishable from such cases as Bell [cdlxxix]²⁵, Newton [cdlxxx]²⁶, Hancock [cdlxxxi]²⁷, Mayfield[cdlxxxii]²⁸�and Ellers Motor Sales Pty. Ltd.[cdlxxxiii]²⁹�in all of which the distribution attacked was made from undistributed profits already accumulated at the time of distribution. In the present cases, it was argued, the payments were to be made from future profits but this is true of only about one-sixth of the total payable. The purchase price or loan�whichever it be�was something in excess of $580,000. The sale occurred in April, 1967, when the accumulated profits of the group at the end of that financial year could no doubt have been estimated with some degree of accuracy and the total of the accumulated undistributed profits of the group at 30th June, 1967, had in fact grown to approximately $480,000 compared with approximately $356,000 at the end of the previous year. We were not told of the precise terms of payment to the respondents and on this subject the minutes of the holding company are silent, but as at 30th June, 1971, $319,000 had been paid and as at 30th June, 1972, $478,000. It is only payments after 30th June, 1972, on account of the balance of approximately $102,000, which will bring the total paid to the respondents to a figure in excess of the group�s accumulated profits at 30th June, 1967.

In the cases to which we were referred, the fact that the money paid to the taxpayer could be identified as undistributed profits appears to have been relevant in determining the purpose or effect of the arrangement and I do not wish to express any view on how that determination might be affected if, for instance, only a small part of the �real money��to adapt an expression of Fullagar J in Newton[cdlxxxiv]³⁰�was undistributed profits. It is sufficient to say that these appeals are not concerned with cases of that sort.

In my view all the appeals should be allowed and it should be declared in respect of each taxpayer that the dividends declared in each of the three relevant years by G. G. Bailes & Co. Pty. Ltd. on the shares in that Company held by the taxpayer immediately prior to 10th April, 1967, constitute part of the assessable income of the taxpayer for that year.

The relevant assessments should be remitted to the Chief Collector for amendment in accordance with this declaration.

PRENTICE J: I concur with the judgments of the Chief Justice and my brother Clarkson.

Order of the Court

In the case of G. G. Bailes:

N2>(1)����� Appeal allowed with costs.

N2>(2)����� Declare that the dividends declared by G. G. Bailes & Co. Pty. Ltd. during the respective years of income ended 30th June 1967, 1968 and 1969 inclusive on the shares which had been held by G. G. Bailes in that Company prior to his transferring the same to Rabaul Metal Industries Holdings Pty. Ltd. constitute part of the assessable income of G. G. Bailes in those respective years.

N2>(3)����� Remit the assessments for the above years to the Chief Collector for amendment in accordance with the above declaration.

In the case of V. Bailes:

N2>(1)����� Appeal allowed with costs.

N2>(2)����� Declare that the dividends declared by G. G. Bailes & Co. Pty. Ltd. during the respective years of income ended 30th June 1967, 1968 and 1969 inclusive on the shares which had been held by V. Bailes in that company prior to her transferring the same to Rabaul Metal Industries Holdings Pty. Ltd. constitute part of the assessable income of V. Bailes in those respective years.

N2>(3)����� Remit the assessments for the above years to the Chief Collector for amendment in accordance with the above declaration.

Solicitor for the appellant: P. J Clay, Crown Solicitor

Solicitors for the respondents: Cyril P. McCubbery & Co.

[cdlv]Section 255 of the Income Tax Ordinance 1959-1969 is as follows:�

N2>(1)������� The Chief Collector or taxpayer may appeal to the Supreme Court from any decision of the Review Tribunal that involves a question of law.

N2>(2)������� The Tribunal shall, upon the request of the Chief Collector or taxpayer, refer to the Supreme Court any question of law arising before the Tribunal.

[cdlvi]Section 361 of the Income Tax Ordinance, 1959-1969, is as follows:

N2>A contract, agreement or arrangement made or entered into, orally or in writing, whether before or after the commencement of this Ordinance, is, so far as it has or purports to have the purpose or effect of in any way, directly or indirectly�

N2>(a)������� altering the incidence of any income tax:

N2>(b)������� relieving any person from liability to pay any income tax or make any return:

N2>(c)������� defeating, evading, or avoiding any duty or liability imposed on any person by this Ordinance: or

N2>(d)������� preventing the operation of this Ordinance in any respect,

N1>absolutely void, as against the Chief Collector, or in regard to and proceeding under this Ordinance, but without prejudice to such validity as it may have in any other respect or for any other purpose.

[cdlvii]Section 255 of the Income Tax Ordinance 1959-1969 is as follows:�

N2>(1)������� The Chief Collector or taxpayer may appeal to the Supreme Court from any decision of the Review Tribunal that involves a question of law.

N2>(2)������� The Tribunal shall, upon the request of the Chief Collector or taxpayer, refer to the Supreme Court any question of law arising before the Tribunal.

[cdlviii]Section 361 of the Income Tax Ordinance, 1959-1969, is as follows:

N2>A contract, agreement or arrangement made or entered into, orally or in writing, whether before or after the commencement of this Ordinance, is, so far as it has or purports to have the purpose or effect of in any way, directly or indirectly�

(a)������� altering the incidence of any income tax:

(b)������� relieving any person from liability to pay any income tax or make any return:

(c)������� defeating, evading, or avoiding any duty or liability imposed on any person by this Ordinance: or

(d)������� preventing the operation of this Ordinance in any respect,

N2>absolutely void, as against the Chief Collector, or in regard to and proceeding under this Ordinance, but without prejudice to such validity as it may have in any other respect or for any other purpose.

[cdlix]Section 139 of the Income Tax Ordinance 1959-1969 is as follows:

N2>(1)������� For the purposes of this Division but subject to this section, a company is a private company if it is not a company in which the public are substantially interested and on the last day of the year of income, it is not a subsidiary of a public company and is a company of any one or more of the following descriptions:

(a)������� a company all the issued shares of which are held by not more than twenty persons;

(b)������� a company in which more than half of the voting power is capable (having regard to the operation of the next succeeding subsection) of being exercised by one person or by persons not more than seven in number:

(c)������� a company in which shares representing more than half of the paid-up capital, other than capital regard to the operation of the next succeeding subsection) by one person or by persons not more than seven in number;

(d)������� a company in which not less than three-quarters of the voting power is capable (having regard to the operation of subsection (3) of this section) of being exercised by one person or by persons not more than seven in number;

(e)������� a company in which shares representing not less than three-quarters of the paid-up capital, other held (having regard to the operation of subsection (3) of this section) by one person or by persons not more than seven in number; and

(f)�������� a company that is capable of being controlled by any means by one person or by persons not more than seven in number.

N2>(2)������� For the purposes of paragraphs (b) and (c) of the last preceding subsection, a person and his nominees shall be deemed to be one person.

N2>(3)������� For the purposes of paragraphs (d) and (e) of subsection (1) of this section, a person (whether or not he holds shares in the company concerned) and his relatives and (in relation to any shares in respect of which they are such nominees) his nominees, or nominees of any of his relatives, shall be deemed to be one person.

N2>(4)������� For the purposes of this section�

(a)������� a company is a company in which the public are substantially interested if shares of the without a further right to participate in profits) have, in the course of the year of income, been quoted in the official list of a stock exchange, unless shares carrying not less than three-quarters of the voting power in the company are, at the end of the year of income, beneficially held by, or held directly or indirectly on behalf of or for the benefit of, one person, or persons not more than twenty in number;

(b)������� a company is a subsidiary of a public company if, by reason of the beneficial ownership of the shares, the control of the company is in the hands of one or more companies none of which is a private company; and

(c)������� shares of a company shall be deemed to be held indirectly on behalf of or for the benefit of a person (not being a company, trustee or partnership) if, in the event of the and by each of any companies, trustees or partnerships interposed between the

N2>(5)������� Where it is established to the satisfaction of the Chief Collector that, because of special circumstances existing on the last day of the year of income in the constitution or control of a company (being a company that would, but for this subsection, be a private company), it is unreasonable that the company should be treated as a private company, the company shall be deemed not to be a private company for the purposes of this Division.

N2>(6)������� The last preceding subsection does not apply to a company in respect of a year of income unless, on or before the date on which it lodges its return of income of that year of income, or on or before such later date as the Chief Collector determines, the company lodges with the Chief Collector a statement in writing claiming to have that subsection applied to the company in respect of that year of income and setting out the special circumstances upon which the company relies.

[cdlx](1971) 45 A.L.J.R. 213.

[cdlxi]Section 250 of the Income Tax Ordinance 1959-1969 is as follows:

N2>250. Upon a reference or appeal�

(a)������� the taxpayer is limited to the grounds stated in his objection; and

(b)������� the burden of proving that the assessment is excessive lies upon the taxpayer.

[cdlxii](1971) 45 A.L.J.R. 324.

[cdlxiii](1958) 100 C.L.R. 66.

[cdlxiv](1971) 45 A.L.J.R. 213.

[cdlxv](1958) 100 C.L.R. 66.

[cdlxvi](1971) 45 A.L.J.R. 213.

[cdlxvii](1953) 87 C.L.R. 548.

[cdlxviii](1958) 98 C.L.R. 1.

[cdlxix](1962-63) 108 C.L.R. 258.

[cdlxx](1961) 108 C.L.R. 303.

[cdlxxi](1972) 46 A.L.J.R. 181.

[cdlxxii][1961] HCA 90; (1962-63) 108 C.L.R. 258, at pp. 283-4.

[cdlxxiii](1969) 121 C.L.R. 665.

[cdlxxiv](1958) 100 C.L.R. 66.

[cdlxxv](1972) 46 A.L.J.R. 181.

[cdlxxvi](1958) 100 C.L.R. 66.

[cdlxxvii](1972) 46 A.L.J.R. 181.

[cdlxxviii](1972) 46 A.L.J.R. 181.

[cdlxxix](1953) 87 C.L.R. 548.

[cdlxxx](1958) 98 C.L.R. 1.

[cdlxxxi](1962-63) 108 C.L.R. 258.

[cdlxxxii](1961) 108 C.L.R. 323.

[cdlxxxiii](1972) 46 A.L.J.R. 181.

[cdlxxxiv][1958] UKPCHCA 1; (1958) 98 C.L.R. 1.