69 ATC 225
JL Burke Ch
RC Smith M
RE O'Neill M
No. 1 Board of Review
Judgment date: 18 July 1969.
JL. Burke (Chairman) and RC. Smith QC. and RE. O'Neill (Members): X Pty. Ltd. was incorporated in November 1952 to take over a business of manufacturers and wholesalers of women's garments theretofore carried on by two brothers as equal partners. They became the only shareholders in the company, each subscribing and paying in full for 1,000 ``A'' shares of $2 each issued at par. Each became a permanent director entitled to retain office so long as he held any ``A'' shares. They have in fact been the only directors since the company was incorporated and each has been wholly engaged in conducting the business of the company.
2. In April 1959 a deed for the establishment of a superannuation fund was executed. In June 1959 the company contributed to the Fund $400 in respect of each director and it made another such contribution in March 1960. Having $1,600 in hand the Fund's trustees on 19 April 1960 expended $1,000 thereof in paying in full for 500 ``A'' shares of $2 each allotted at par in X Pty. Ltd. Under the Articles the company's shares were under the control of the directors who might allot them to such persons on such terms as they thought fit. The company has made no other issue of shares, at least up to 30 June 1966.
3. At 30 June 1959 the net tangible assets backing for the then 2,000 $2 ``A'' shares was $12,884, equal to $6.40 per $2 share. Up to that time each year of trading excepting 1957 had yielded a reasonable profit. Accordingly, we infer that in allotting to the Fund 500 $2 ``A'' shares at par in April 1960 the directors knew that the issue was being made at substantially less than the real value of the shares. In each of the years ended 30 June 1960 to 1961 the company has made profits and has paid dividends to the holders of its issued and paid up capital of 2,500 $2 ``A'' shares, the average rate of dividend over those seven years being 36 per cent per annum.
4. In April 1966 the company distributed by way of dividend $2,000 at the rate of 40 per cent on its capital of 2,500 ``A'' shares of $2 fully paid up, the rate of dividend being determined by the ``sufficient distribution'' provisions of Div. 7, Part III, of the Assessment Act. As the holder of 500 such shares the Fund's trustees received $400. The question is whether in terms of sec. 23F(16) it would be reasonable to exempt that dividend from income tax. The Commissioner did not form the opinion that such would be reasonable. Hence unless the Board is of the opinion that it would be reasonable to exempt it, the dividend remains assessable income in respect of which the Fund's trustees are taxable pursuant to sec. 121CA.
5. The Fund is non-contributory in the sense that the members do not contribute. However, the company has in each year contributed $400 in respect of each of its two directors, who are the only members of the Fund. At 30 June 1966 the total Fund was $9,498, built up from the following sources-
Company contributions $6,400
Dividends from X Pty. Ltd. 2,520
Income from investments 883
Bank interest 158
Less expenses and losses on shares 463
The assets of the Fund comprised shares in X Pty. Ltd., $1,000; shares in public companies, $5,857; Commonwealth Bonds, $2,500; and cash in bank, $141.
6. Having regard to the matters specified in para. (a) to (e) of sec. 23F(16), it is against the claim for exemption of the dividend received from X Pty. Ltd. that the Fund obtained its shares for less than their fair value. We turn, also, to other matters to which we think regard should be had pursuant to para. (f). The fact that membership of the Fund is confined to the two shareholder-directors we regard as a neutral circumstance in this case because they are virtually the only permanent employees of the company. A female secretary is employed, but the company finds difficulty in keeping any one person in that position for any long time. A dividend of 40 per cent of the paid up value of shares may perhaps be thought to be not excessive in a private
69 ATC 227
company context in which, as in this case, paid up capital is kept low relatively to working capital needs which are met with moneys left with the company by shareholders in the form of unsecured loans. Nevertheless, the facts that the company is the only contributor to the Fund and that the Fund's shareholding entitles it to one-fifth of all distributed profit combine to persuade us against concluding that it would be reasonable to exempt from tax the dividend of $400 received from the private company. We should add that in reaching the above conclusion we have not been influenced by the provisions of sec. 23F(18), upon which the Commissioner's representatives placed some stress in this case.