Marsh & Anor v. Federal Commissioner of Taxation.

85 ATC 4345

Judges:
Ryan J

Court:
Supreme Court of Queensland

Judgment date: Judgment handed down 24 June 1985.


Ryan J.: Mr R. Marsh and Mrs Y. Marsh are each appealing against decisions of the Deputy Commissioner of Taxation upon their objections against assessment of vendors recoupment tax in relation to the liability of certain companies to ordinary company tax and undistributed profits tax based on income derived by the companies during the year ended 30 June 1973. The assessments were made on 16 February 1984 and the objections are dated 13 April 1984. The companies are the following:

Bayside Developments Pty. Ltd.
Central Lands Pty. Ltd.
Hanlon Park Development Pty. Ltd.
Metropolitan Development Pty. Ltd.
Midlands Pty. Ltd.
Southlands Pty. Ltd.
Westlands Pty. Ltd.

The fourteen appeals were heard together.

The assessments against each of the appellants were as follows:

In respect to Bayside Developments Pty. Ltd.: $891.75.
In respect to Central Lands Pty. Ltd.: $7,734.88.
In respect to Hanlon Park Development Pty. Ltd.: $2,439.33.
In respect to Metropolitan Development Pty. Ltd.: $2,401.26.
In respect to Midlands Pty. Ltd.: $1,201.95.
In respect to Southlands Pty. Ltd.: $206.51.
In respect to Westlands Pty. Ltd.: $736.77.

The notices of objections claimed in each case that the assessment was excessive, void, ultra vires and of no effect in law and that the assessment should be withdrawn or reduced to nil. The grounds were divided into constitutional grounds which were not argued before me, presumably in consequence of the decision of the High Court in
MacCormick v. F.C. of T. 84 ATC 4230; (1984) 58 A.L.J.R. 268; 52 A.L.R. 53; and grounds relating to the Taxation (Unpaid Company Tax) Assessment Act 1982. The general contention of the taxpayers was that no primary taxable amount existed in relation to the companies.

The appellants were engaged in the business of real estate development through two groups of companies. The first group may be referred to as the Marsh Group. Mr Marsh was the registered holder of five ordinary shares in the capital of Marsh (Companies) Pty. Ltd. and Mrs Marsh was the registered holder of three ordinary shares in Marsh (Companies) Pty. Ltd. Mr Marsh was also the registered holder of two A preference shares in the capital of Marsh Holdings Pty. Ltd. and Mrs Marsh was the registered holder of one A preference share in the capital of Marsh Holdings Pty. Ltd. All ordinary shares in Marsh Holdings Pty. Ltd. were held by Marsh (Companies) Pty. Ltd., and five B preference shares were held by one R.L. Norris. There were three subsidiary companies of Marsh Holdings Pty. Ltd., namely Affiliated Finance Company Pty. Ltd., Casuarina Beach Pty. Ltd. and Richard Marsh Pty. Ltd. All of these companies were incorporated in Queensland, and had their registered offices in Brisbane.

The second group of companies may be referred to as the Zorimba Plastics Group. Zorimba Plastics Pty. Ltd. was a company incorporated in what was in 1973 the territory of Papua New Guinea, and it had its registered office in Port Moresby. The two ordinary shares in that company were held by one B.E. Green for Mr Marsh, and by one J.N. Green for Mrs Marsh. One redeemable preference share in Zorimba Plastics Pty. Ltd. was held by Mr A.P. Cherry, and one also by Mr J.D. Warner. Zorimba Plastics Pty. Ltd. was held all the ordinary shares in New Guinea Queensland Lands Sales Pty. Ltd. which was also incorporated in the territory and had its registered office in Port Moresby. New Guinea Queensland Lands Sales Pty. Ltd. held all the ordinary shares in eighteen subsidiary companies all of which were incorporated in Queensland and had their


85 ATC 4348

registered offices in Brisbane. Preference shares in those subsidiary companies were held by New Guinea Queensland Lands Sales Pty. Ltd. and Marsh Holdings Pty. Ltd.

Mr Marsh had been engaged in the land development industry since the late 1950's, but he decided to get out of it in early 1973. In March 1973 he told his general manager Mr T. Phillips to look for a buyer. Mr Phillips was a director of Affiliated Finance and Casuarina Beach and of all the companies in the Zorimba Plastics Group. His duties within the Marsh organisation were mainly on the selling side. Following his discussion with Mr Marsh early in 1973 he made an assessment of the value of the properties and informed Mr Marsh that a fair price to sell his interest was $4 million. Mr Marsh also formed the view that a reasonable price for the sale of his interests in the companies was about $4 million.

Mr Phillips made his assessment for Mr Marsh's guidance by going through the list of properties and assessing the acreage and the number of subdivided allotments in each development by market value. He took the initiative of telephoning two potential purchasers. One of these was Beneficial Finance Corporation Ltd. (Beneficial Finance). Mr Phillips showed the properties to a valuer at the request of Mr O. Smith of Beneficial Finance. Shortly afterwards Mr Smith indicated to Mr Phillips that Beneficial Finance was interested in buying.

In early May 1973 there was a contact from Beneficial Finance to a person employed by Mr Hutchins who is an accountant and company director resident in Victoria. The name of Mr Hutchins was given to Mr Smith by a Brisbane solicitor who acted for Mr Hutchins and his companies in the subsequent negotiations. A letter was sent to Beneficial Finance on behalf of Mr Hutchins setting out what was referred to as the modus operandi in connection with the acquisition by Beneficial Finance of land owned by the Marsh Group. This involved three steps: the acquisition of share capital from the Marsh interests by a company within Mr Hutchins' Group; the transfer of the land from the Marsh subsidiaries to a company within Mr Hutchins group; and the transfer of the land from that company to Beneficial Finance. The company which was eventually used to acquire the share capital was Wandeet Pty. Ltd. (Wandeet).

Mr Hutchins sought to obtain figures from Beneficial Finance as to the price they were prepared to pay for the land. The purpose of this, as he explained, was to give him a valuation of what the assets of the Marsh Companies were worth so that he could arrive at a figure which he was prepared to pay the Marsh interests for the shares in the group of companies.

For its part, Beneficial Finance determined on a figure of $4,521,750 as the price at which it would offer to acquire the land. Mr Barton, the secretary of Beneficial Finance who is resident in Adelaide, had been advised by Mr Smith of his Brisbane office of the interest of Mr Hutchins. The original offer price was $5,500,000 but this included land at Toorbil Point which Mr Marsh did not wish to sell, and which so Mr Barton said turned out he preferred not to purchase. The sum of $4,521,750 was the price finally paid by Beneficial Finance to acquire the land including land which belonged to the Marshes personally.

Mr Barton gave evidence which I accept that Beneficial Finance negotiated with Mr Hutchins to acquire the land and that it had no interest in acquiring the company structures. He said that its only interest was to acquire the land for a price of $4,521,750. The title to the land was to be held by Beacon Credit Corporation Ltd. (Beacon), a subsidiary of Beneficial Finance, but it was always intended to set up a separate company purely for the sale and development of the land. The company so set up was Marland Pty. Ltd.

Mr Hutchins had access to certain documents with regard to the land that was to be sold in the process of arriving at a figure between his interests and Beneficial Finance. These included a schedule with each company name, the land it owned, a brief description of it, a price that Beneficial Finance was prepared to pay for it, and the book value for the land in the Marsh companies' books. He obtained this information from Mr K. Marlow, who is Mr Marsh's senior bookkeeper. Mr Marlow was introduced to Mr Hutchins by Mr Marsh, and he prepared financial information for Mr Hutchins. I accept the evidence presented to me that members of the Marsh organisation thought until during the settlement itself that Mr Hutchins was connected with Beneficial Finance with which the Marsh organisation had a history of dealings.


85 ATC 4349

Mr Marlow made a listing of assets as at 31 May 1973 for the company and business names in the Marsh Group. He obtained this information from the ledgers of the companies. He updated this to 15 June 1973. He also prepared other schedules, including schedules of the expenses of the Marsh group for the period 1 July 1972 to 31 May 1973 and from 31 May to 15 June 1973; schedules of their liabilities up to 31 May and variations of this up to 15 June 1973; schedules of income items from 1 July 1972 to 31 May 1973 and from 31 May 1973 to 15 June 1973; a schedule of additional expenditure on land from 1 April 1973 to 15 June 1973; a schedule of the terms debtors of the companies as at 31 May 1973; a schedule relating to dividends received by New Guinea Queensland Lands Sales in each of the years ended 30 June 1966 through to 1972; a document to establish the indebtedness of Mr Marsh to the companies in the Marsh Group as at 31 May 1973; a schedule of land items in respect of each company as at 31 May 1973; a listing of outstanding cash sales due from purchasers as at 31 May 1973; a schedule of estimated tax on taxable profit to 30 June 1973; a dissection of expenditure of all types between 1 April 1973 and 23 May 1973; and a consolidated profit and loss statement to 15 June 1973.

On Friday 15 June 1973 a meeting took place in the office of a Brisbane firm of solicitors which started in the morning and concluded in the early hours of the following day. Those present were Mr and Mrs Marsh, Mr Phillips, Mr Marlow and a solicitor for the Marsh interests; Mr Barton, Mr Smith, and a solicitor representing Beneficial Finance; and Mr Hutchins, Mr Arnott, one of his associates, and a solicitor representing Mr Hutchins' interests. At the morning meeting negotiations were conducted as to the final figures for the sales. There were arguments as to the valuation of the lands. According to Mr Marsh, any valuations he sought were given to him. Mr Marsh said that Mr Smith indicated that $4 million was as high as Beneficial Finance could possibly go, and so he removed from the negotiations a property referred to as Toorbil Point which was held by him personally. Land referred to as Sonter land at Park Ridge was also excluded at the insistence of Beneficial Finance. Another property named Toorbil or Meldale (which was different from the Toorbil Point land) was also excluded, as were the house occupied by the appellants, the cars they drove, and a boat. The house was shown in the balance sheet of Richard Marsh Pty. Ltd. at a figure of $41,860. The boat was owned by Bayside Developments Pty. Ltd. and is shown in its balance sheet at the figure of $3,225. The cars were owned by Edward Bowman Pty. Ltd. with a balance sheet value of $2,931, and Pastoral reserves Pty. Ltd. with a balance sheet value of $826.

Land referred to as the Kerrin Land which Mr Marsh had bought personally and on which money was still owing on 15 June 1973 was not sold to Beacon, because of uncertainty created by litigation related to it. The Sonter land was eventually sold six years later for $350,000.

Contracts which had been previously drafted by Mr Hutchins' solicitor were adjusted to take account of these withdrawals. I am satisfied that these contracts represented the agreement made by the parties.

While the meeting was taking place in Brisbane, a meeting was also taking place in Port Moresby at the office of a solicitor, Mr Train, who acted as the agent of Mr Hutchins' solicitor in Brisbane to complete the settlement of purchase of the Papua New Guinea shares. At the meeting of Zorimba Plastics Pty. Ltd., Mr Train tabled a notice by Mr Marsh appointing Train his alternate director. It was resolved that the company execute an agreement for the sale by Mr and Mrs Marsh to Steven Philip Train of shares in the Zorimba Plastics Group of companies. Then approval was given to the following transfers of shares and to their registration forthwith in the books of the company: transfer by J.N. Green to Train of one ordinary share; transfer by B.E. Green to Train of one ordinary share; transfer by A.P. Cherry to Train of one preference share; transfer by J.D. Warner to Train of one preference share. The resignations as directors of Mr Marsh, Mr Cherry and Mr Swanson were accepted.

In Brisbane, transfers were executed of shares in the capital of Marsh (Companies) Pty. Ltd. and Marsh Holdings Pty. Ltd. and of shares in the Zorimba Plastics subsidiary companies to Wandeet Limited.

Two agreements were executed. The first was an agreement for the sale of the five ordinary shares in the capital of Marsh (Companies) Pty. Ltd. registered in the name of


85 ATC 4350

Mr Marsh and the three ordinary shares registered in the name of Mrs Marsh, and of the two A preference shares in the capital of Marsh Holdings Pty. Ltd. registered in the name of Mr Marsh and the one A preference share in the company registered in the name of Mrs Marsh for the sum of $400,000. The purchaser was Wandeet. One share in the capital of Marsh (Companies) Pty. Ltd. was transferred to Mr Hutchins in order that Marsh (Companies) Pty. Ltd. might continue to comply with the Companies Act by having at least two members on its share register. Mr Hutchins took this transfer as nominee of Wandeet which provided the purchase moneys.

The second agreement was one for the sale by Mr and Mrs Marsh to Steven Philip Train of Port Moresby as trustee of the two shares comprising the issue ordinary capital of Zorimba Plastics Pty. Ltd. to transfer its shares in the companies which were its subsidiaries to Wandeet. The A preference shares held by New Guinea Queensland Lands Sales Pty. Ltd. were converted to ordinary shares, and the ordinary shares which previously existed together with the ordinary shares as converted were transferred by New Guinea Queensland Lands Sales Pty. Ltd. to Wandeet. In this case also one B preference share in each of the subsidiary companies was transferred to Mr Hutchins by Marsh Holdings Pty. Ltd. as nominee for Wandeet which provided the purchase money.

The result of the transactions on 15 June 1973 was that (a) Wandeet Pty. Ltd. purchased all the issued shares in the capital of Marsh Holdings Pty. Ltd. and in Marsh (Companies) Pty. Ltd.; (b) a trust established in Papua New Guinea of which Mr Hutchins and his family were beneficiaries purchased all the issued shares in the capital of Zorimba Plastics Pty. Ltd.; (c) New Guinea Queensland Lands Sales Pty. Ltd. transferred to Wandeet all of the shares owned by it in the eighteen subsidiary companies; (d) the business name R. Marsh and Co. of which Mr Marsh was the proprietor was transferred to Central Lands Pty. Ltd., which then transferred it to Marland Pty. Ltd.; at the same time Mr Phillips transferred the business name Queensland Finance and Land to Central Lands Pty. Ltd. for $20,000 and it transferred this to Marland Pty. Ltd.

After the agreement for the sale of the shares had been executed, shares in the eighteen subsidiary companies in Marsh Holdings Pty. Ltd. and in Marsh (Companies) Pty. Ltd. were transferred to Wandeet, the parcels of land held by the various companies the shares of which were transferred to Wandeet or to Mr Train as trustee were transferred to Wandeet and then further transferred by Wandeet to Beacon. The shares in the eighteen subsidiary companies in Marsh Holdings Pty. Ltd. and Marsh (Companies) Pty. Ltd. were transferred to Wandeet.

The land held by the subsidiary companies had been revalued to the sale price which had been arranged between Mr Hutchins and Beneficial Finance, and transfers were made to Wandeet by way of distribution in specie and payment of dividend. It is necessary to set out the position in relation to each subsidiary company.

(a) Bayside Pty. Ltd.

The land was revalued in the books of the company by increasing its valuation by the sum of $353,306.65. A mortgage secured on the land for $150,000 was obtained from I. & I. Pty. Ltd. of which Mr Hutchins is a director. The terms of the loan were that it would be repayable on demand; until repayment the loan would carry interest at the rate of eight per cent per annum on daily rates; and that repayment would be secured by a Bill of Mortgage over the freehold property registered in the name of the company. The net value of the land was calculated to be $529,000. The dividend of $379,000 was declared in favour of Wandeet to be satisfied by the distribution in specie to Wandeet of the land subject to the Bill of Mortgage.

It will be observed that the net value of the land ($529,000) less the amount of the mortgage ($150,000) was the amount of the dividend. A cheque for this amount was paid to Bayside Pty. Ltd. and then endorsed to Wandeet.

(b) Central Lands Pty. Ltd.

This company does not appear to have owned any land, and no dividend was declared on 15 June 1973.

(c) Hanlon Park Pty. Ltd.

The book value of this land was $65,588.07. It was revalued to a total value of $152,000. On


85 ATC 4351

15 June 1973 a dividend was declared in favour of Wandeet of $152,000 to be satisfied by the distribution in specie of the land to Wandeet. No mortgage was executed.

(d)Metropolitan Development Pty. Ltd.

This company does not appear to have owned any land and no dividend was declared on 15 June 1973.

(e) Midlands Pty. Ltd.

This followed the course as Hanlon Park Pty. Ltd. The land was revalued, a dividend of $496,300 was declared and it was satisfied by the distribution in specie of the land to Wandeet. No mortgage was executed.

(f) Southlands Pty. Ltd.

This also followed the same pattern as with Hanlon Park Pty. Ltd. There was a revaluation of land, a declaration of dividend satisfied by distribution in specie of the land, and no mortgage was executed. The amount of the dividend was $19,500.

(g)Westlands Pty. Ltd.

This followed the model of Bayside Pty. Ltd. The land was revalued to $175,000, the mortgage to I. & I Pty. Ltd. was in the sum of $120,000, and the dividend which was declared and satisfied by the distribution in specie of the land subject to the mortgage was $55,000.

(h) Northlands Pty. Ltd.

This company appears to have had no land, and no dividend was declared on 15 June 1973.

(i) Plantation Reserves Pty. Ltd.

This also followed the same course as Bayside Pty. Ltd. The land was revalued with a net value of $162,500 the mortgage to I. & I. Pty. Ltd. was in the sum of $15,000, and the dividend declared which was satisfied by the distribution in specie of the land subject of the mortgage was $147,500.

(j) Transcontinental Developments Pty. Ltd.

This followed the same course as Hanlon Park Pty. Ltd. The land was revalued at $76,000, and a dividend for that amount was declared to be satisfied by a distribution in specie. No mortgage was executed.

(k) Grazing Reserves Pty. Ltd.

As in the preceding case the land was revalued and a dividend declared of $346,600 satisfied by the distribution in specie of the land. No mortgage was executed.

(l) Edward Bowman Pty. Ltd.

As in the preceding case, the land was revalued and the amount of the dividend satisfied by a transfer of the land was $43,000. No mortgage was executed.

(m) Animats Pty. Ltd.

Here also there was a revaluation of land and declaration of a dividend in the amount of $29,000, which was satisfied by a distribution in specie of the land.

(n) Coastal Reserves Pty. Ltd.

Here again there was a revaluation of the land and a declaration of a dividend of $600,000 satisfied by an specie distribution of the land.

Memoranda of transfer of land had been executed from the following companies to Wandeet Pty. Ltd. (a) Animats Pty. Ltd.; (b) Bayside Developments Pty. Ltd.; (c) Coastal Reserves Pty. Ltd.; (d) Eastlands Pty. Ltd.; (e) Edward Bowman Pty. Ltd.; (f) Grazing Reserves Pty. Ltd.; (g) Hanlon Park Pty. Ltd.; (h) Midlands Pty. Ltd.; (i) Pastoral Reserves Pty. Ltd.; (j) Plantation Reserves Pty. Ltd.; (k) Samford Development Pty. Ltd.; (l) Southlands Pty. Ltd.; (m) Transcontinental Developments Pty. Ltd.; (n) Westlands Pty. Ltd. In the case of (b), (d), (i), (j), (k) and (n), Bills of Mortgage were also executed.

The amounts mentioned in the Bills of Mortgage were advanced and repaid by bank cheque. I. & I. Pty. Ltd. made an advance to the relevant company, the company transferred the title to Wandeet subject to the Bill of Mortgage, and then I. & I. Pty. Ltd. executed the release of the mortgage after Wandeet repaid the advance.

The next step was the transfer of the land by Wandeet to Beacon Finance. It also assigned to Beacon Finance the benefit of contracts under which money was owed to the Marsh Companies from people who had bought land.

After the sale; Mr Marsh became a director and employee of Marland Pty. Ltd., and drew a salary of $500 a week from it. He said that he was asked to stay on to keep the business going until new staff could be obtained. He stayed a little longer than a year. Marland Pty. Ltd. took over the premises and the staff as well as office equipment which the Marsh Companies had previously used. Mr Marsh agreed that the business that his companies had carried on


85 ATC 4352

before were then carried on by Marland Pty. Ltd., which was controlled by Beneficial Finance, and that as far as he knew the companies he had controlled prior to 15 June 1973 were no longer carrying on any business of land development or selling after 15 June.

Mr Phillips also worked for Marland Pty. Ltd. after 15 June 1973 as manager for two years. He agreed that part of what Marland did was to market the land that formerly had belonged to the Marsh Companies and which had been sold through the Beneficial Finance Group. He agreed also that the former companies that had been Marsh Companies did not engage in the business of land development after 15 June 1973 or in purchasing land for sale after that date.

The fact that the subsidiary companies did not engage in the land development business after 15 June 1973 or buy more land to deal in after that date is also confirmed by Mr Hutchins and by Mr Marlow. According to Mr Hutchins the companies he took over on 15 June did not thereafter buy more land or deal in land. Mr Marlow said that after 15 June the activity on behalf of those companies consisted in collecting from debtors of the companies sums for remittance to the Hutchins Group.

On 30 April 1974, which is within the prescribed period within which a private company may make a sufficient distribution in relation to the 1973 year of income, the following dividends were paid by the subsidiary companies to Wandeet: (a) Edward Bowman Pty. Ltd. $10,000; (b) Central Lands Pty. Ltd. $203,319.97; (c) Transcontinental Developments Pty. Ltd. $18,156.74; (d) Grazing Reserves Pty. Ltd. $71,830.49; (e) Northlands Pty. Ltd. $15,541.17; (f) Hanlon Park Pty. Ltd. $14,164.89; (g) Midlands Pty. Ltd. $31,913.93; (h) Southlands Pty. Ltd. $47,819.03; (i) Westlands Pty. Ltd. $11,158.92; (j) Coastal Reserves Pty. Ltd. $16,500; (k) Animats Pty. Ltd. $11,381.36.

Notices of assessment of tax issued against the companies on 10 May 1974. Notices of objections to the assessments dated 3 July 1974 were sent to the Commissioner objecting to the disallowance of accountancy fees and of an apportionment of the retiring allowance paid to Mr Phillips which was paid on behalf of each of the companies on a predetermined basis. The Commissioner eventually on 3 March 1976 allowed the objection in relation to the accountancy fees, but disallowed the objections in respect of the retiring allowance. By letter dated 26 April 1976 notice was sent to the Commissioner requiring the decision on the objections to be forwarded to a Board of Review. No such reference was in fact made. No notice to refer was given to the Commissioner pursuant to sec. 189 of the Income Tax Assessment Act 1936.

In March 1976 the Commissioner had petitioned for the winding up of the companies. The petition was not defended and the companies went into liquidation in April 1976. On 17 June 1978 all the taxable companies except Bayside Developments Pty. Ltd. were struck off the register pursuant to sec. 308 of the Companies Act 1961. Bayside Developments Pty. Ltd. was struck off on 6 February 1982.

It is admitted by the appellants that a notice under sec. 18 of the Taxation (Unpaid Company Tax) Assessment Act was served upon them in respect of each of the seven taxable companies, and that no objection was taken in respect of the companies tax referred to in the copy notices of assessment contained in those notices. After the time for objection in respect of the notices expired, notices of assessment in respect of vendors recoupment tax were served.

I turn now to examine the applicability of the Taxation (Unpaid Company Tax) Assessment Act, and begin with an examination of the terms of sec. 5(2). Its structure is that where matters listed as sec. 5(2)(a) to (2)(j) exist, certain other provisions have effect, of which the relevant one in this case is (n).

Section 5(2)(a) requires that under a scheme entered into whether in Australia or out of Australia on or after 1 January 1972 and before 4 December 1980 some or all of the shares in one or more companies must have been sold. The word ``scheme'' is defined in sec. 3(1) to mean any agreement or arrangement, transaction, understanding or scheme, whether formal or informal, whether expressed or implied, and whether or not enforceable, or intended to be enforceable, by legal proceedings.

There is no doubt that an agreement was made for the sale of shares in Marsh Holdings, Marsh Companies and Zorimba Plastics that was made after 1 January 1972 and before 4


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December 1980 and that shares in those companies were sold.

Section 5(2)(b) requires that the sale or sales of the shares occurred before the commencement of the Act. That is satisfied since the sale occurred in 1973.

The third requirement expressed in sec. 5(2)(c) is that immediately before the first sale time the person or persons who sold the shares referred to in sec. 5(2)(a) was or were, by virtue of rights attaching to their shares, capable of controlling either directly or through one or more interposed companies trustees or partnerships more than 90 per cent of the voting power in each of two or more companies (in this subsection referred to as the ``eligible companies''). A reference to the ``first sale time'' is stated in sec. 3(5) to be a reference to (1) if all the shares that were sold under the scheme were sold at the same time - that time; and (i) in any other case, the time when the first of the shares that were sold under the scheme were sold. A reference to ``last sale time'' is a reference to (1) if all the shares that were sold under the scheme were sold at the same time - that time; and (ii) in any other case, the time when the last of the shares that were sold under the schemes were sold.

There is no doubt that Mr and Mrs Marsh were capable of controlling the Marsh Companies at the time when the sale of the shares occurred. The position is more clouded so far as concerns their capacity to control more than 90 per cent of the voting in Zorimba Plastics. An accountant, Mr Wruck, gave evidence that he advised Mr Marsh in relation to the formation of Zorimba Plastics which he said was constructed in the form considered in Keighery's case. He said that Mr Cherry was an accountant in Papua New Guinea through whom he dealt with most of their Papua New Guinea companies, and that he asked him and a solicitor Mr Warner to be subscribers to the memorandum and articles of the company and to be issued with one redeemable preference share. Two ordinary shares were to be issued to a party as nominees for Mr and Mrs Marsh. The three directors appointed were Mr Cherry, a Mr Swanson, and Mr Marsh.

According to Mr Wruck the purpose of having Cherry and Warner as shareholders was so that two of the shareholders at least having half the power of the company at general meetings would be residents of Papua New Guinea. He said it was not true, as he knew the position, that Cherry and Warner were holding their shares on behalf of the Marshes, and he said that he expected them to act as entirely independent individuals.

The memorandum of association of Zorimba Plastics Pty. Ltd. shows as subscribers Mr Cherry and Mr Warner each for one unfixed redeemable participating preference share. They are also the subscribers to the articles of association.

Article 7(c) of the articles provides that unfixed redeemable participating preference shares shall confer on the holders the same right of voting at general meetings as shall for the time being be conferred on the holders of ordinary shares of the company.

Mr Cherry was a manager of a firm of accountants in Port Moresby for three years prior to 30 June 1972. His evidence was not challenged. He said that he held the legal and beneficial interest in the share. He did not recall the sale of the share, or signing a blank transfer form in respect to it, but said that in all probability he would have signed it because in Port Moresby it was difficult to keep contact or trace of people after they left Port Moresby, and it was common in his office to get people to sign blank transfers when they subscribe to shares. He did not remember resigning as a director of the company but he was ``pretty sure he would have'' when he left the firm in Port Moresby. On 15 June 1973 he presumed he would have been in the western highlands of New Guinea. At no time after the end of March 1972 did have any discussions with Mr Marsh about Zorimba Plastics Pty. Ltd.

Mr Warner had been a solicitor in Papua New Guinea since September 1969. He could not recall what part if any he played in the management of Zorimba Plastics; he could not recall signing a transfer of his share; and he was sure for whose benefit he held the share in Zorimba Plastics.

Section 5(2)(c) requires me to consider the position immediately before 15 June 1973. The onus is on the appellants to show that at the date they were not capable of controlling more than 90 per cent of the voting powers of the companies. The evidence given by Mr Wruck and Mr Cherry goes no further at the most than to establish that the appellants may not have


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been able to control more that 90 per cent of the voting powers in the companies at some stage prior to 15 June 1973, but at that date the shares were in fact transferred as they directed. A transfer of the shares from Cherry and Warner to Train did occur on 15 June 1973, and no evidence was given to establish how it was that Mr and Mrs Marsh were able to secure the transfers of those shares to Mr Train. In those circumstances I consider that the appellants have not discharged the onus cast upon them.

Section 5(2)(d) requires that the total consideration paid or given in respect of the sale or sales under the scheme of the shares referred to in para. (a) exceeds an amount ascertained in accordance with the formula A - (L + T) where:

A is the aggregate of the total values, immediately before the last sale time, of the assets of the eligible companies;
L is the aggregate of the total amount of the liabilities of the eligible companies immediately before the last sale time; and
T is the aggregate of the amounts of the company tax liabilities of the eligible companies immediately before the last sale time, reduced by any part of those company tax liabilities that is taken into account in ascertaining component L.

Section 5(7) provides that for the purposes of the application of para. (2)(d) in relation to a sale or sales of shares under a scheme:

(a) the total value of the assets of the company immediately before the last sale time shall be taken to be -
(i) where, for the purposes of the sale or sales of their shares under this scheme it was agreed by the parties to the sale or to each of the sales that the assets of the company were to be taken to have a particular value - that value; and
(ii) in any other case - such amount as the Commissioner determines;
(b) the total amount of the liabilities of a company immediately before the last sale time shall be taken to be -
(i) where, for the purposes of the sale or sales of the shares under the scheme, it was agreed by the parties to the sale or to each of the sales that the total amount of the liabilities of the company was to be taken to be a particular amount - that amount; and
(ii) in any other case - such amount as the Commissioner determines.

The Commissioner made the assessment on the basis that the value or values of the total assets of the eligible companies was calculated pursuant to sec. 5(7)(a)(i) of the Act. There was no determination of the value of the aggregate of the assets of the eligible companies in accordance with sec. 5(7)(a)(ii) of the Act. It was submitted for the Commissioner that there had been an agreement between the parties as to the value of the assets and liabilities and that it was an agreement for the purposes of the sale of the shares. Referring to the contract for the sale of the shares set out in ex. 7, it was pointed out that in recital B it is stated that the vendors (that is, the Marshes) are the principal directors of the companies and in such capacity in addition to their capacity as vendors give the warranties, make the representations, and enter into the covenants and agreements thereinafter set forth. In cl. 4, the vendors covenant, represent, warrant and agree with the purchaser and with the companies as set forth in the sixth schedule.

The sixth schedule is headed ``Warranties, Representations, Covenants and Agreements made and given by the Vendors to the Purchaser and to all the Companies for the purposes of clause 4 hereof''. Paragraph (b) of the sixth schedule states that the balance sheets exhibit and will exhibit correctly the financial position of the companies as at the effective date (that is, 31 March 1973). It was submitted that balance sheets are summaries of assets and liabilities, and that an agreement and warranty that the balance sheets showed correctly the financial position of the companies was an agreement that the assets of the companies were taken to have a particular value. Reference was made also to para. J, K, P, Q, R, & S of Sch. Six.

For the appellants, it was submitted that the covenant in para. (b) of the sixth Schedule was a covenant in relation to a financial position, and said nothing about the values of assets or liabilities, and that it was a covenant about a financial position as at the effective date, that is, 31 March 1973 and not as at the date of the agreement, namely 15 June 1973. It was said


85 ATC 4355

that the purpose of the Warranty, Covenant and Representation was that the balance sheets would present a ``true and fair view of the state of affairs of the companies'' as at the effective date, and that the balance sheets did present a true and fair view of the financial position though the assets were set out at book values.

Evidence was given by a chartered accountant, Mr Hodsdon, that there was a practice adopted in the accounting profession on the use of balance sheets as a starting point in negotiations in relation to the purchase of shares. He said that it was essential that the balance sheets of the companies that are to be acquired are produced, and normally they are taken up to a point of time convenient to the date of the negotiations to enable both the purchaser and the vendor to enter into proper negotiations. He was asked:

``If there were in a balance sheet of a company no asset revaluation account, what would you say - from an accounting point of view - in relation to the figures for assets in that balance sheet.''

He replied: ``You would have to assume that they were being carried at cost.''

The essential question is, however, whether a warranty that the balance sheets show correctly the financial position of the companies is a warranty that the assets of the companies are to be taken to have a particular value. In my opinion it is not. It amounts to a warranty that the balance sheets give a true and fair view of the state of affairs of the companies as at the effective date. It does not amount to a warranty that the assets of the companies as disclosed in the balance sheets bear a particular value at the relevant date. As Gower observes (Modern Company Law, 4th ed., p. 513) ``despite efforts to make it less so, the balance sheet is still essentially a historical document and not one which purports to show the net worth of the company's business at the present time''. That remark is echoed by the statement of Nicholas J. in Stephenson,
Hardie & Co. Ltd. v. Smith Wylie Australia Limited (1939) 39 S.R. (N.S.W.) 388 at p. 407 that ``a balance sheet is a historical statement of affairs''. The purpose of the balance sheet said Buckley J. in
Newton v. Birmingham Small Arms Co. Ltd. (1906) 2 Ch. 378 at p. 387 is ``primarily to show that the financial position of the company is at least as good as there stated, not to show that it is not or may not be better''. That statement was quoted with approval by Evatt J. in
Dickson v. F.C. of T. (1939-1940) 62 C.L.R. 687 at p. 727.

In my judgment, an agreement that the financial position of the company is as good as is stated in the balance sheet is not an agreement that the assets are to be taken to have a particular value for the purpose of the sale of the shares.

It was submitted further on behalf of the appellants that the parties did not rely on the balance sheets either as to asset values or as to liabilities. It was said that the buyers relied so far as the assets were concerned not upon the balance sheets but upon buying price valuations which are contained in Mr Barton's work sheets, and that the vendors were aware that there was a document being used by Mr Hutchins in the negotiations which contained the valuation of the assets. In so far as the liabilities were concerned, it was pointed out that Mr Marlow had calculated liabilities up to 15 June 1973 and it was upon this and not upon the balance sheets that reliance was placed in the computation of the liabilities. The reply made to this on behalf of the Commissioner was that there was no evidence that the work sheets prepared by Mr Barton were used as a basis of discussion between Mr Hutchins and Mr Marsh for valuing the assets for the purposes of the sales of the shares, and I agree that this is so. The matter is however in my opinion irrelevant. All that is required by the terms of sec. 5(7)(a)(i) is that for the purposes of the sale of the shares under the scheme it must have been agreed by the parties to the sale that the assets of the company were taken to have a particular value. It is not required that that value is the figure upon which the price is calculated. Parties may rely upon other data than the value which they have agreed that the assets were to be taken to have for the purposes of the sale, but the requirement of sec. 5(7)(a)(i) will be satisfied if they did in fact agree that the assets were to be taken to have a particular value.

If, as I have held, sec. 5(7)(a)(i) is not applicable in determining the total value of the assets immediately before the last sale time, then the amount will be such as the Commissioner determines. It is not for me to make such a determination and the proper course for me to follow, as I perceive it, is to


85 ATC 4356

remit the matter to the Commissioner so that he may make the necessary determination. It was however submitted for the appellants that I should not do so, since any determination by the Commissioner must result in a situation where the formula set out in sec. 5(2)(d) of the Act could not be satisfied.

Section 5(2)(d) requires a determination of the components A, L, and T and of the total consideration paid or given in respect of the sale or sales under the scheme of the shares.

In determining component A, which is the aggregate of the total values immediately before the last sale time of the assets of the eligible companies, the Commissioner's representative, Mr Dziedzic, had recourse to the balance sheets set out in the two sales agreements. He computed A as having a value of $6,502,120. Similarly in determining component L, which is the aggregate of the total amounts of the liabilities of the eligible companies immediately before the last sale time, he had recourse to the same balance sheets and arrived at a total of $3,484,783. Mr Dziedzic then estimated component T which is the aggregate of the amounts of the company tax liabilities of the eligible companies immediately before the last sale time reduced by any part of those company tax liabilities that is taken into account in ascertaining component L. Mr Dziedzic estimated T at a figure of $1,509,732.66. The result was that A - (L + T) amounted to $1,507,604.34. As the consideration clearly exceeded that amount the formula set out in sec. 5(2)(d) was satisfied on these calculations.

The appellants submitted that the figure of $6,502,120 for A should be adjusted by substituting for the value of land as shown in the balance sheets, namely $1,382,074 a figure of $3,531,750, which is derived from the buying price valuation made by Mr Barton. The total value of assets on that calculation was submitted to be $8,651,798. The total amount of liabilities was accepted to be $3,484,783. It was however submitted that the computation of T should be adjusted in various ways so as to leave a total of $688,147.17. On these computations, the formula A - (L + T) would give an amount of $4,498,867.83. Accordingly, the requirement of sec. 5(2)(d) of the Act would not be satisfied unless the total consideration paid or given in respect of the sale or sales under the scheme of the shares exceeded that amount.

I turn now to the matter of consideration for the sale of the shares. It is necessary to calculate the total value of the consideration paid or given in respect to the sale of the shares under the scheme. In my judgment, the consideration must include the sum of $400,000 which was the contract price for the sale of the Marsh Company shares, and $2,657,946 for the sale of Zorimba Plastics shares making a total of $3,057,940. But evidence given by Mr Marsh shows that he wanted $4,000,000 for their shares, and he said that in the end he did hold onto that figure. He said in cross-examination that he received slightly over $3,000,000 under the two agreements, and that he and Mrs Marsh were released from their debts to the companies and the debts which the companies owed him and Mrs Marsh were released. He agreed that the net figure which the appellants owed the companies was somewhere between $900,000 and $1,000,000 and accepted that the figure was $982,984. He agreed that in effect at settlement each released the other. This is borne out by an unexecuted instrument addressed to the companies which were acquired by Wandeet, and by a similar document dated 15 June 1973 addressed to Mr and Mrs Marsh and Mr Phillips. Mr Hutchins gave evidence that ex. 68 was executed simultaneously with ex. 9 after the settlement had been completed. By ex. 68, Mr and Mrs Marsh and Mr Phillips acknowledged that no moneys are owing to them by the companies or any of them. By ex. 9, the companies and Wandeet acknowledge that no moneys are owing to the companies by Mr and Mrs Marsh and Mr Phillips.

Mr Marsh said that figures were arrived at in relation to the price at which he was prepared to transfer land in the individual names of himself and Mrs Marsh at the time of the settlement. On 15 June 1973 that land was sold to Beacon. It appears that he was paid $632,175 for his land, and that Mrs Marsh was paid $67,000 for her land. In reply to a suggestion that this was not included in the $3,000,000 Mr Marsh said ``I don't think that you are correct''. However, I consider that his evidence discloses that so far as the consideration for the shares is concerned, he was to receive not only the amounts stated in the two agreements, but also the benefit of an


85 ATC 4357

extinguishment of the debts owed by and to the companies.

Mr Marlow stated his understanding of the effect of the settlement as being that the loans were being accounted for in the settlement figure, and that at the end of the day the liabilities to and from the Marsh Group of companies and to and from Richard Marsh and Co., were to be all liquidated in effect by the settlement. Mr Hutchins, however, claimed that the debts due to Richard Marsh & Co. had not been extinguished and were paid on 14 December 1973. He said that a mistake was made on 15 June which was subsequently fixed up when the accounts were being prepared and completed by an exchange of cheques in December 1973. He said that ex. 9 was an incorrect document which was signed in error and that the error was corrected by repayment of the debts. He said that it was not a release of debt but an acknowledgment that nothing was owing, and the matter was adjusted after this was subsequently shown not to be the situation. His account of the exchange of the cheques in December 1973 was that an error had been made in the first settlement in June 1973 when Richard Marsh & Co. had been treated as a company. The adjustment was made to clear indebtedness, as should have happened on 15 June. He said that the debts due to Richard Marsh and Co., had not been extinguished on 15 June and that they were paid on 14 December 1973 by an exchange of cheques. Questioned about the two acknowledgments (in ex. 9 and 68) he said that on doing the books after the settlement the position was seen to be not as set out in the acknowledgments, and the matter was adjusted. He was asked:

``At the time when the Marshes sold the shares in the holding companies to your company Wandeet and also sold it to Mr Train, the amount which they received for their shares was an amount which was reduced because the net amount which was owed by Richard Marsh & Co. to those subsidiary companies was taken into account?''

His answer was no. He was asked further:

``It is the fact, is it not, that the number of dollars which the Marshes received for their shares was reduced by reason of the fact that the loan accounts were to be treated as coming to an end?''

His answer was again no. However he was asked further:

``But the amount which the Marshes received from you for the shares in the companies that were being sold to Wandeet and Train was reduced by reason of the fact that the Marshes, or Mr Marsh to be precise, owed the companies a lot of money?''

His answer was: ``That is correct, owed the companies, right.'' Mr Hutchins was then asked:

``What I am suggesting to you is this: the number of dollars which were paid to Mr and Mrs Marsh were lower than they might have been because the Marshes owed the companies in net terms a sum of around $1,000,000.''

He replied:

``The amount that was paid to them after they directed that certain payments be made on their behalf was reduced by that $1,000,000 yes.''

He was asked:

``We are agreed, then, that the fact that had the Marshes not owed so much money to the companies they would have received about $1,000,000 in the hand?''

He replied: ``Yes.''

At the time when the transactions were entered into on 15 June 1973, Mr Marsh, using his name of R. Marsh & Co., owed money to the companies; some of the companies owed money to Mr Marsh, and one of the companies owed money to Mrs Marsh. Mr Hutchins admitted that he had taken over the former Marsh companies showing debts to and from R. Marsh & Co. up to 14 December 1973 and he said those debts were paid on 14 December 1973 by means of a cheque.

The submission made on behalf of the Commissioner was that there should be added to the total amounts of the agreements the sum of $913,261.93 which was paid in December 1973 by Wandeet. This figure is derived by subtracting from an amount of $1,857,377.99 paid by the Marshes to Wandeet an amount of $944,200.06 received by them together with a sum of $84. The figure of $1,857,377.99 is derived from the amounts set out in ex. 117 and


85 ATC 4358

120, while the figure of $944,200.06 is derived from ex. 118 and 119.

For the appellants it was submitted that the amount to be added was $378,339 since they paid that amount less than they ought to have done to discharge the individual indebtednesses of the Marshes. The effect of the exchange of acknowledgments was, so it was claimed, that they received the benefit of never being able to be sued for that amount. The amount of $378,339 is derived from the schedule prepared by Mr Marlow (ex. 60) of the amount that should have been taken into account if he was excluding the notion of Richard Marsh & Co. and Queensland Finance & Land being separate entities (namely $1,361,323) and the figure already taken into account (in ex. 53) to discharge the Marsh indebtedness (namely $982,984).

I am not satisfied that either of these approaches is correct. I accept the evidence that as a consequence of treating Richard Marsh & Co. as a separate entity from Mr Marsh, adjustments had to be made in the accounts of the various companies to reflect the correct position. But the critical question is whether it was part of the scheme relating to the sale of the shares that the vendors would receive in addition to the amounts payable in accordance with the agreements the benefit of having their net indebtedness to the companies extinguished. I am satisfied that it was. As to the amount, I consider the best evidence is provided by ex. 53, but from the figure of $982,984 shown in this, there should be deducted the sum of $81,310 which is shown as the amount owing to Mrs Marsh,leaving an amount of $901,674.

This would make the consideration $3,959,620. However, one adjustment must be made to this amount. In cl. 7 of the agreements, the vendors warrant that the taxable profits of each company and the income tax payable by each company are as stated in the balance sheets. In the sixth schedule to the agreements, they warrant that the income of each company subject to Australian tax derived or to be derived by the companies up to the effective date and the amounts of tax payable thereon are the sums set opposite that company's name in the ninth schedule. It is then provided:

``In the event of any increase in the rates of income tax for the companies upon the basis of which such amounts have been calculated or in the event of the liability for tax of the companies being increased over such amounts for any reason whatsoever, the vendors forthwith upon demand after receipt of an income tax assessment will notwithstanding the provisions of Clause 7 hereof refund or cause to be refunded to the purchaser an amount equal to such increased liability.''

An amount of $39,300.19 was sent by Mr Marlow late in May 1974 to the purchaser, on the ground that there had been an increase of taxation on profits of this amount. Accordingly, I consider that this amount should be deducted in arriving at the consideration which amounts to $3,920,300.

The computation by the Commissioner for T amounted to $1,509,732.68. Section 5(2)(d) defines T as the aggregate of the amounts of the company tax liabilities of the eligible companies immediately before the last sale time, reduced by any part of those company tax liabilities that is taken into account in ascertaining component L. Section 5(7)(c) states that the amount of the company tax liability of the company immediately before the last sale time shall be taken to be the aggregate of certain amounts. The first of these is any amount of ordinary company tax or undistributed profits tax payable by the company immediately before the last sale time. The Commissioner had computed at a figure of $189,107.87 the tax due and payable as at 15 June 1973, and $37,428.04 for sec. 207 charges on tax due and payable by two companies, namely New Guinea Queensland Lands Sales Pty. Ltd. and Midlands Pty. Ltd. The second is any amount of ordinary company tax (not including additional tax payable under sec. 207 of the Assessment Act) that immediately before the last sale time might reasonably have expected to become payable by the company 'at a later time in relation to the year of income. The third is any amount of undistributed profits tax (not including additional tax payable under sec. 207 of the Assessment Act) that immediately before the last sale time might reasonably have been expected to become payable by the company at a later time in relation to the year of income in which the last sale time occured or a preceding year of income.


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The Commissioner calculated the taxable incomes of the companies for 15 June at the figure of $2,293,481. That figure was derived from the balance sheets attached to the two agreements (ex. 6 and 7). From that amount he assessed ordinary company tax for the 1973 rate of 45 cents in the dollar at an amount of $1,021,880.25. Division 7 tax at a rate of 50 cents in the dollar was then calculated at an amount of $259,655.50 giving a total 1973 tax figure of $1,281,535.75. To this was added a figure of $1,661 for Div. 7 tax in the 1972 year in respect of Transcontinental Developments Pty. Ltd. Adding to this the amounts referred to above of $189,107.87 and $37,428.04, computation by the Commissioner of the component T amounted to $1,509,732.66.

This computation cannot be supported. In the first place, Div. 7 tax for the 1973 year was included on the basis that there had not been a sufficient distribution of dividends within the prescribed period, which extended till 30 April 1974. No account has been taken of the fact that dividends were declared by the companies on 15 June 1973 and dividends declared on 30 April 1974 were also disregarded. It was admitted by the Commissioner's representative that if the evidence given in relation to the dividends declared by the companies on 15 June 1973 and on 30 April 1974 was correct there would be no Div.7 tax problem for the companies for the 1973 year, and I have accepted that evidence as correct. Secondly it was admitted that the figure of $1,661 was an error. Thirdly there was failure to subtract a provision for taxation raised in the books of Midlands Pty. Ltd. of $13,963.55.

In calculating T, the Commissioner applied a rate of 45 cents in the dollar to the taxable income of the companies. The rates of company tax which applied as at 15 June 1973 were 37.5 per cent for the first $10,000 of taxable income and 42.25 per cent thereafter. The 45 per cent rate was declared some time late in 1973. There was evidence by some witnesses to the effect that there was an expectation that rises in taxation were likely to take place with the advent of a new government, but there was speculation as to whether this would be in company taxation or personal taxation or indirect taxation. I consider that the amount of ordinary company tax that on 15 June 1973 might reasonably have been expected to become payable later in relation to the 1973 year of income was an amount based upon the rates prevailing at that time. It was not reasonable to expect that higher rates would be imposed, at a time when future company tax rates was purely a speculative matter.

Counsel for the Commissioner accepted the accuracy of a schedule of taxable incomes for the year ended 30 June 1973 for the eligible companies which was tendered by the appellants. This showed (ex. 106) a total of $1,237,267 as the original taxable income of the companies, and $1,201,903 as the amended taxable income. If that income was taxed at the rate of 37.5 per cent for the first $10,000 of taxable income and 42.25 per cent thereafter, then on the figure of $1,201,903 the ordinary company tax payable was 505,151.21. If there is added to this the amounts of $189,107.87 and $37,428.04, one reaches a total of $731,687.16.

A computation made by counsel for the appellants of T resulted in a figure of $668,147.17. I do not consider it necessary to examine the particular adjustments which it was submitted resulted in that figure, since the only relevance of the figure T is to determine whether the total consideration for the sales exceeded an amount given by the formula A - (L + T), and the discrepancy between the amounts calculated by the Commissioner and the appellants will not affect the result. The only point that I should comment upon is whether in the making of the necessary calculations it is appropriate to take 30 June as the end of the financial year, or 31 March, the effective date stated in the agreements. Section 5(7)(c)(ii) refers to the amount of ordinary company tax that immediately before the last sale time might reasonably have expected to become payable at a later time in relation to the year of income in which the last sale time occurred. Section 5(9)(c) provides that in determining for the purposes of sec. 5(7) whether immediately before the last time in relation to a sale or sales of shares under a scheme it might reasonably have been expected that ordinary company tax would become payable by a company at a later time in relation to the year of income in which the last sale time occured, it shall be assumed that in the case of the year of income in which the last sale time occured that the ordinary company tax payable by the company in relation to that year of income would be ascertained on the basis that


85 ATC 4360

the year of income ended immediately before the last sale time. In my opinion, that requires a determination in this case to be made on the assumption that the year of income ended on 15 June 1973. The process of adjustment must therefore be one which would most appropriately show the amount of ordinary company tax that might reasonably have been expected to become payable on the assumption that the year of income ended on 15 June 1973. The process of starting from the position as at 31 March, and making adjustments to determine what might reasonably be expected as at 15 June, seems to me to have been appropriate in this case.

Upon the calculations that I have made the consideration amounts to $3,920,300, and (L + T) amounts at the most to $4,216,470.16. Accordingly, the formula will not apply if A exceeds $8,136,790.16. Even accepting the submission by the Commissioner that the consideration amounted to $3,971,207.93 (that is, $3,057,946 + $913,261.93) the formula will not apply if A exceeds $8,187,678.29. The value of A as computed by Mr Dziedzic was $6,582,120, but he admitted that the assets of the companies appeared to be undervalued by approximately $2.4 million. This figure was based on the purchase price paid by Beacon Corporation to Wandeet, as appeared from reports made in 1976 by investigation officers of the department. If the only determination which the Commissioner could make pursuant to sec. 5(7)(a)(ii) was that this amount should be added to the figure of $6,582,120, the formula would not apply. However, I consider that in the absence of valuation of the land which has been accepted by the Commissioner, the proper course for me to take (subject to what follows) is to set aside the assessments and to remit them to the Commissioner for reassessment upon the basis of a valuation of the assets pursuant to sec. 5(7)(a)(ii).

Section 5(2)(e) requires that an assessment of ordinary company tax or undistributed profits tax must have been made under the Assessment Act in relation to the company, being one of the eligible companies in relation to the relevant year of income being the year of income in which the last sale time occurred or a preceding year of income. There is no doubt that this requirement was fulfilled.

Section 5(2)(f) requires that the period for objecting against the assessment has expired and any objection against the assessment has been finalised.

It was submitted on behalf of the appellants that the objections against the assessments had not been finalised since they had requested their objections to be referred to a Board of Review, and this had not been done before the companies were struck off the register. It was said that the objections had not been finalised because they had lapsed. It was pointed out that sec. 459 of the Companies Code (sec. 308 of the Companies Act 1961) enables companies to be revived and placed as nearly as may be in the position as if they had not been struck off.

There is a statutory definition in sec. 5(10) of the notion of finalisation of an objection against the assessment. It provides that for the purposes of sec. 5(2)(f) an objection against the assessment shall be taken to have been finalised if:

(a) there is no proceeding that has been instituted in relation to the objection under Div. 2 of Pt V of the Assessment Act that has not been determined; and
(b) the time for instituting proceedings under that Division in relation to the objection has expired.

By sec. 5(11), it is provided that for the purposes of sec. 5(10)(a), any proceeding under Div. 2 of Pt V of the Assessment Act that has lapsed or otherwise been terminated shall be taken to have been determined.

In my view the proceedings upon the request to have the objections referred to a Board of Review were terminated by striking the names of the companies off the register and their consequential dissolution. The companies have thereby ceased to exist as legal persons. Non-existing persons cannot sue:
United Insurance Co. Ltd. (in liq.) v. Laing (1935) 35 S.R. (N.S.W.) 487 at p. 495; and a judgment will be set aside and declared a nullity if it appears to the court that the person named as the judgment debtor was, at all material times at the date of the writ and subsequently, non-existent;
Lazard Bros. & Co. v. Midland Bank (1933) A.C. 289 at p. 296. I consider that non-existing persons cannot continue proceedings under Div. 2 of Pt V and accordingly that the proceedings which had been instituted had been terminated. Though a court may order reinstatement of the


85 ATC 4361

registration of the company and that has the consequence that it is deemed to have continued in existence as if its registration had not been cancelled, no such order has been made or applied for in respect to any of these companies.

Section 5(2)(g) requires that at any time after the commencement of the Act, there must remain unpaid an amount of ordinary company tax or undistributed profits tax due and payable by the taxable company in relation to the relevant year of income. That requirement is fulfilled, since amounts totalling to $28,634.58 are due and payable by the taxable companies and no objection was made pursuant to sec. 18 against the assessments of the companies.

The next requirement is set out in sec. 5(2)(h). So far as is relevant in this case, it requires that an arrangement or transaction (whether or not the arrangement or transaction was or was not part of the scheme) must have been entered into that secured or achieved the result that immediately before the taxable company ceased to exist, it would have been unable, having regard to other debts of the taxable company, to pay to the Commissioner all the company tax that would have been due and payable by the taxable company immediately before it ceased to exist, if the company tax due and payable by the taxable company at the relevant time had been due and payable by the taxable company immediately before it ceased to exist.

The taxable companies were in fact unable immediately before they ceased to exist to pay to the Commissioner all the company tax payable by them. They were wound up, and the liquidator was unable to pay the whole of the tax due and payable by them to the Commissioner. The provision is not however fulfilled merely by proof of inability of the companies to pay the tax. It is required that an arrangement or transaction must have been entered into, and that this secured or achieved the result that the companies lacked the ability to pay the taxes.

It is not necessary that the arrangement or transaction was part of the scheme under which shares in the company were sold. The arrangement or transaction upon which the Commissioner relied was one which involved, in the first place, the declaring of dividends by the subsidiary companies after the sales to Wandeet and the distribution in specie of the lands owned by the companies. It was said that the effect of distributing the lands in satisfaction of the dividends so declared was to remove the lands entirely from the assets of the taxable companies. Next, it was said that there was a second transaction relating to the loan accounts which were either forgiven as part of the scheme for the sale of the shares or replaced by loans from Wandeet. The third arrangement or transaction relied on by the Commissioner was the declaration of the dividends on 30 April 1974 in favour of Wandeet which reduced the amount that Wandeet was obliged to repay the companies and thereby the assets of the companies.

The position of the taxable companies after the events of 15 June 1973 was that they were all solvent but relied for their solvency on the recovery of amounts from Wandeet. Mr Hodsdon's analysis of the evidence which I accept was that after that date, in order that the companies might pay their liabilities of any size, they had to get from Wandeet some of the moneys owed by Wandeet. He agreed that this depended on Wandeet's ability to pay and on its willingness to pay, given that there was mutual control of the companies. In relation to the ability of Wandeet as at 30 June 1973 to discharge the liabilities it had to the companies, he said that it would be able to do this depending on the realisation of their trading stock, called ``Stock of Shares held for resale at Directors' valuation'' of $2.6 million. Mr Hutchins stated (and this was not challenged) that as at 30 June 1973 Wandeet would have had no problem in satisfying the net liabilities it had to the subsidiary companies.

For the appellants it was argued that the Commissioner had given particulars of the scheme which confined it to matters in 1973 and did not extend to 30 April 1974 when the further dividends were declared. It was argued further that it was not the scheme that secured the lack of ability of the companies to meet their tax liabilities, but the effect of supervening commercial events.

In relation to the second of these matters evidence was given by Mr Hutchins that Wandeet had difficulties about 30 June 1974. He said that it had lent funds to other trading companies over the previous six months and that those companies encountered problems. He described the companies as being trading


85 ATC 4362

companies which were of a quite substantial nature, particularly in the soft-drink industry in Victoria. He said that they had problems over the summer period due to the introduction of the Trade Practices Act which had an adverse effect on trading, due to industrial disputes with the Transport Workers' Union, and due also to ``various other things''.

He said that as a result there was in the June 1974 period a severe liquidity problem for the whole group of companies. He denied that that liquidity problem had anything to do with the acquisition by Wandeet of any of the Marsh interests. He said that when the problem arose within Wandeet there was a problem in realising the assets that the subsidiary companies within the Marsh Group held, represented by a loan due from Wandeet.

The reference to problems caused by the introduction of the Trade Practices Act is obviously wrong, since that Act did not come into operation until later in the year. However, I accept Mr Hutchins'evidence that various things whatever they may be created difficulties for Wandeet in mid-1974 in meeting its indebtedness to the subsidiary companies.

In these circumstances, it seems to me that even if the arrangement or transaction is confined to matters in 1973, the requirement of sec. 5(2)(h) is satisfied. That provision requires a causal connection between entering into an arrangement or transaction and the inability of the taxable company to pay all the company tax that would have been due and payable by it immediately before it ceased to exist. In my opinion that connection will exist if it appears from the evidence that the effect of an arrangement or transaction is to strip a company of assets that would have been available to meet its tax liabilities, that it would have had sufficient assets to meet those liabilities if the arrangement or transaction had not been entered into, and that it was immediately before it ceased to exist unable to meet those liabilities. To establish that after the arrangement or transaction had been entered into Wandeet was able to repay the loans to the companies and that supervening events caused it a lack of liquidity does not indicate a lack of causal connection between the arrangement or transaction and the inability to meet the tax liability.

In this case the total amount of tax that was not paid was comparatively small namely $28,634.58 out of a total tax payable of $329,551.20. If the arrangement or transaction entered into in June 1973 had not been entered into, the companies would have been able to meet this liability. Accordingly I consider that the arrangement or transaction achieved the result that the companies were unable to pay to the Commissioner all the company tax due and payable by them.

Section 5(2)(j) sets out a requirement that if the taxable company carried on a business immediately before the last sale time, not being a business that consisted only in deriving income from property, the taxable company did not continue to carry on that business after the last sale time. The taxable companies carried on immediately before the last sale time the business of land development and buying and selling land. After 15 June 1973 they ceased entirely to carry on that business. Money owing to the companies continued to be collected but no further purchases were made of land for the purpose of developing it or dealing with it. In those circumstances the terms of sec. 5(2)(j) are satisfied.

If all the terms of sec. 5(2)(a) to (j) are satisfied the consequence is that pursuant to sec. 5(2)(n) a primary taxable amount is taken to exist at the relevant time in relation to each of the appellants. However, sec. 5(4) provides that where a primary taxable amount exists or existed in relation to a person in relation to an amount of company tax payable by a company and:

the Commissioner having regard to:
(i) circumstances relating to the sale of the shares or the interest in shares to which the primary taxable amount relates;
(ii) circumstances, whether occuring before or after that sale, that caused or contributed to the failure of the company to pay that company tax; and
(iii) such other circumstances as the Commissioner considers relevant

considers it unreasonable that the primary taxable amount should be taken to exist or to have existed in relation to the person,

the primary taxable amount shall not be taken to exist in or to have existed in relation to the person.


85 ATC 4363

The Commissioner's delegate, Mr Dziedzic, admitted that no consideration was given to an exercise of discretion under sec. 5(4) before the assessments currently under appeal were made. It was submitted on behalf of the appellants that the consequence was that the assessments were bad. It was said that this was not a case where power was given to the Commissioner in the exercise of his discretion to remit tax; the terms of the provision were such that the exercise of discretion was a part of the process of determining whether a taxable amount existed. Accordingly it was said there was a duty on the Commissioner to give consideration to the exercise of his discretion before making the assessments.

After the assessments were made, consideration was given by the Commissioner's delegate to an exercise of discretion pursuant to sec. 5(4). It was however submitted on behalf of the appellants that he had failed to take into account material matters so that the purported exercise of discretion was vitiated. It was argued that he should have taken into account and did not do so the following matters inter alia; (a) that the land had a real value of $2.4 million in excess of book value; (b) that provision for income tax was made in the agreements for sale; (c) that the trading activities of the companies were not first transferred out of the companies; (d) whether the vendors derived a benefit from the non-payment of the company tax.

For the Commissioner it was submitted that there was no reason why a decision may not be made under sec. 5(4) after notice of assessment had issued, or why the power should be exhausted once it had been exercised in a particular way. It was submitted further that there was no ground for saying that the Commissioner's exercise of discretion in this case was wrong.

The conclusion I have reached makes it unnecessary to decide these issues. I have concluded that the assessment must be set aside and the matters remitted to the Commissioner to determine the total value of the assets of the company immediately before the last sale time pursuant to sec. 5(7)(a)(ii) of the Taxation (Unpaid Company Tax) Assessment Act. If the consequence of that determination is that the requirement of sec. 5(2)(d) is satisfied, a primary taxable amount will exist in relation to the appellants in relation to an amount of company tax payable by the companies. The Commissioner will then be required by sec. 5(4) to have regard to the matters set out therein in considering whether it is unreasonable that the primary taxable amount should be taken to exist in relation to the appellants.

Finally, I should refer to a submission for the appellants that the sales bore no resemblance to the type of case against which the Act is directed. It was argued inter alia that the appellants got no advantage out of the scheme; they provided for future tax as well as for past and current tax; they sold the businesses with the shares and did not attempt to dispose of the assets prior to the sale. The submission appears to me to be based upon a view that the Act is directed at what is frequently referred to as a ``Slutzkin scheme'' the reference being to the situation considered in
Slutzkin & Ors v. F.C. of T. ATC 4076; (1977) 140 C.L.R. 314. In my view this approach to the interpretation of the Act cannot be supported. The criteria which must be satisfied before a primary taxable amount exists are set out in precise and elaborate detail in the Act, and the question for determination must be whether these criteria are fulfilled in the circumstances of a particular case. It can only lead to error to start from an assumption as to the scope and purpose of the Act and to deny its applicability though the statutory criteria are fulfilled. The only sure guide to the intention of Parliament in enacting the legislation is the language which it has used to express that intention. It is required by sec. 15AA of the Acts Interpretation Act 1901 that in the interpretation of a provision of an Act a construction that would promote the purpose or object underlying the Act is to be preferred to a construction that would not promote that purpose or object. But that provides no warrant for reading into the language of a provision limitations which are not to be found in it, or for refusing to give effect to the ordinary meaning of a provision by reason of some assumption as to the purpose or object underlying an Act.

The appeals are allowed. The assessments are set aside. I remit the matters to the Commissioner to reassess in accordance with the directions contained in this judgment. The Commissioner will pay the costs of the appellants of and incidental to these appeals.