Brookton Co-op Society Ltd v The Commissioner of Taxation

BROOKTON CO-OPERATIVE SOCIETY LTD. v. FEDERAL COMMISSIONER OF TAXATION (1979)
39 FLR 130
Income Tax

COURT

FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION
Brennan(1), Deane(2) and Fisher(3) JJ.

CATCHWORDS

Income Tax - Division 7 tax - Co-operative companies - Holding company engaged in wine merchandising - Subsidiaries engaged in other activities - Definition of "co-operative company" - Primary object of business - Purpose of establishment - Dominant purpose - Income Tax Assessment Act 1936 (Cth.), Divns 7, 9, ss. 103A (2) (b), (d) (v), 177, 120 (1) (c).

Income Tax - Division 7 tax - Dividends - Resolution to pay interim dividend to holding company - Book entries - Resolution to rescind interim dividend - Reversal of book entries - Whether dividend "paid" or "credited" - Whether assessable - Income Tax Assessment Act 1936 (Cth.), Divn 7, ss. 6 (1) definition of "paid", 44 (1) (a).

HEADNOTE

Brookton appealed against a decision of Helsham C.J. in Eq. of the Supreme Court of New South Wales that it was not a co-operative company for the purposes of s. 117 (1) (d) of the Income Tax Assessment Act 1936, and therefore not entitled to be assessed under Divn 9 as a co-operative and under Divn 7 as a public company. Brookton's members were a group of professional men. Over three years, Brookton purchased relatively small amounts of wine for its members, and distributed rebates on wines purchased by them. At the same time, its subsidiaries engaged on a large scale in "dividend stripping" activities. The success of these operations depended on Brookton's public company status. Some of the profit of the subsidiaries' operations were distributed to Brookton's members.

In one year, one of Brookton's subsidiaries declared an interim dividend to it . The dividend was expressed not to be payable until Brookton demanded it. The dividend was not demanded or paid, and the declaration of dividend was subsequently rescinded. The Commissioner assessed Brookton on the dividend.

Held: (1) Brookton was not a public company for the purposes of s. 117 (1), the relevant test of which was the dominant purpose for establishing the company. On the evidence, this was not wine-buying for members, it was to hold shares in the subsidiaries, and thereby confer subsidiary status on them.

(2) Per Brennan and Deane JJ., Fisher J. dissenting - On the facts, the interim dividend was not paid, so it should not have been included in the assessable income of Brookton.

HEARING

Sydney, 1978, June 15-16; 1979, May 1. #DATE 1:5:1979

C. V. Cullinan Q.C. and B. C. Oslington, for the appellant.

F. M. McAlary Q.C. and D. D. Levine, for the respondent.

Cur. adv. vult.

Solicitors for the appellant: Francis, White, Baines & McGuire.

Solicitor for the respondent: Alan R. Neaves (Commonwealth Crown Solicitor).

J. H. TELFER

JUDGE1

May 1.

The following judgments were delivered.

BRENNAN J. The Brookton Co-operative Society Ltd. (the appellant) is a company formed under the Co-operation Act, 1923 (N.S.W.). It seeks to show that at all times during the income years ended 30th June, 1972, 1973 and 1974 it was a co-operative company as defined in s. 117 of the Income Tax Assessment Act 1936 and that, in consequence, it is entitled to be assessed to tax in those years as a co-operative company under Divn 9 and as a public company under Divn 7 (s. 103A (2) (b)). It was assessed on the footing that it was not a co-operative company. It pursued objections to its assessments for those income years before a Board of Review, and on appeal to the Supreme Court of New South Wales. It failed in those proceedings and by leave appeals to this Court. (at p131)

The primary question upon which the appellant's status depends is whether the company satisfies that part of the definition of "co-operative company" which is expressed in s. 117 (1) (d) in these terms:

". . . a company . . . which . . . is established for the purpose of carrying on any business having as its primary object or objects one or more of the following:. . .

(d) the rendering of services to its shareholders." (at p131)

Evidence relevant to the elements of this definition was led before the Board of Review and, by consent, tendered before the Supreme Court without alteration or addition. Oral evidence was given by Mr. Bainton Q.C. He explained how a group of professional men who encountered difficulties in looking after their respective personal affairs, and who appreciated that a co-operative society was entitled to deduct from its assessable income the rebates distributed among its shareholders, thought of forming a co-operative society to render services of varying kinds to its members. Finding a considerable interest among their colleagues for the proposal, they decided to form a co-operative that might buy different commodities required by the members, the first commodities to be wine and other beverages. (at p131)
The appellant was formed accordingly on 28th July, 1971, and its rules contained its objects:

"The objects of the society shall be: (a) the acquisition of commodities for disposal or distribution among its shareholders and no others; (b) the rendering of services to its shareholders and no others; (c) without prejudice to the generality of cll. (a) and (b) the objects of the society shall include - (i) the purchase for resale to its shareholders, but no others, of consumer goods including foodstuffs, liquours (sic), electrical appliances, motor vehicles, accessories, furniture and furnishings, stationery and goods and chattels of any description, (ii) to act as the agent of its shareholders, but no others for the purpose on their behalf of consumer goods, including foodstuffs, liquours (sic), electrical appliances, motor vehicles, accessories, furniture and furnishings,

stationery and goods and chattels of any description, and the arranging of travel, accommodation, holiday and the like services, (iii) to provide to shareholders, but no others, stenographical, secretarial, accounting, advisary (sic) and any other services desired or required by the society's shareholders or any of them, (iv) the transaction of any business in furtherance of or in accordance with any of the society's objects in any other State and in any Territory of the Commonwealth of Australia,

(v) the establishment of branches or agencies in any State or Territory of the Commonwealth for the more convenient carrying out in any such place of the business of the society." (at p132)

The services of a manager were obtained. The first manager had had some experience with wines, and was in the office of an accountant who was one of the promoters of the appellant. The functions which the manager performed in connexion with wine were described by the learned trial judge (Helsham C.J. in Eq.) in these terms: "Basically there was a manager who arranged for supplies to members from one or more retailers; deliveries were made to members, who paid the supplier; the supplier then paid a commission on wines so bought to the society of the nature of seven to ten per cent. The Liquor Act prevented the society from buying and re-selling liquor, so it acted really as an intermediary to take orders, pass them on, and receive a commission from sellers who delivered to members. The society, through the manager, gave periodic information to members in monthly bulletins about what was available and other matters of interest; the bulletins started in October 1971. It seems that the supplying of wine from retailers to members began about October 1971 also." The wine activities continued in later years, and the appellant earned commissions of $408, $1,178 and $1,443 in the respective income years of 1972, 1973 and 1974. Drawing on other sources of income presently to be mentioned, the appellant resolved to distribute rebates or bonuses to its members based upon their wine purchases, in the amounts of $2,500, $8,615 and $12,521 respectively on purchases made in the years 1972, 1973 and 1974, the distribution to be made in the year after the year in which the purchases were made. In fact, only $2,295 and $4,316 were distributed in the respective income years 1973 and 1974. (at p132)
The conduct of the wine activities of the appellant was relied on to constitute the "carrying on of a business having the rendering of services to its shareholders as its primary object", and it was submitted that the appellant was established for the purpose of carrying on that business, and that it was therefore a "co-operative company". In order to consider that submission, it is necessary to refer to some other matters in which the appellant had an interest. (at p132)
The appellant invested its capital and derived a small income from that source. It also held shares in a number of wholly-owned subsidiary companies, the shares in which were given to it. (The Co-operation Act prohibited the appellant from investing its funds in these subsidiaries.) The subsidiaries were engaged in purchasing the shares in companies which were in a position to distribute dividends or assets in specie to their shareholders, and in procuring those companies after purchase to make those distributions. These activities, which were sometimes referred to in the evidence as "dividend stripping", were on a large scale. The share trading accounts of a number of subsidiaries were tendered, and it suffices to refer to one, Boongil Investments Pty. Ltd., which was one of the first subsidiaries acquired by the appellant (it was acquired on 27th June, 1972), and which appears to have had the largest share-trading account. Between 29th April, 1971, and 30th June, 1972, Boongil acquired shares for a cost of $1,132,146, received dividends of $1,230,130, and at the end of the year valued the shares on hand at $30. Between 1st July, 1972, and 30th June, 1973, it sold the shares on hand for $30, acquired other shares for a cost of $4,416,681, received dividends of $427,589, sold some of the shares for a further $3,853,897, and at the end of the year valued the shares on hand at $287,424. The share-trading accounts of other subsidiaries likewise show large financial transactions. (at p133)
Some of the moneys received by the subsidiaries as profits were distributed to the appellant as dividends, and were included in the returns of income furnished by the appellant to the respondent in respect of the income years 1972, 1973 and 1974: in 1972 those dividends amounted to $3,000; in 1973, to $130,202 (subsequently reduced by $47,915); and in 1974, to $8,500. Other profits were held and not distributed by the subsidiaries. The commercial success of the subsidiaries' businesses depended upon their shedding the status of private companies for the purposes of Divn 7. In order to become public companies as defined by s.103A (2) (d) (v), the holding company of the subsidiaries had to be a public company, and the appellant's promoters hoped that it would have that status. The benefit to the subsidiaries of acquiring the status of a public company was foreseen by the promoters of the appellant before its formation. Mr. Bainton deposed: ". . . some one or more of us realized that such companies have public company status under the Income Tax Assessment Act and that at that time there was a great deal of traffic in what was then known as excess distribution companies. It may be (subsidiaries of) a co-operative society could enjoy some of the business that was apparently about. After the co-operative had in fact been formed it acquire, I think initially one, but it may be two subsidiary companies." He explained that he foresaw the advantage of subsidiary companies acquiring public company status to avoid the application of Divn 7 and to permit the profitable undertaking by the subsidiaries of dividend stripping and capital reduction operations. (at p134)
The subsidiaries became subsidiaries of the appellant in one of three ways, as Mr. Bainton's evidence showed. The first way was by the gift of September Six Pty. Ltd., a company controlled by the promoters of the appellant. The shares given were transferred to and held by the appellant or its nominee. One of the companies which became a subsidiary in this way was R.H.D. Investments Pty. Ltd. The arrangements for the formation of R.H.D. Investments Pty. Ltd. and for its becoming a subsidiary were made prior to or, at the latest, contemporaneously with the formation of the appellant. The second way was by the gift of R.H.D. Investments Pty. Ltd. after it became a subsidiary. The shares given were transferred to and held by the appellant or its nominee. The third way was under a settlement of money made by September Six Pty. Ltd. The trustees of the settlement applied the funds made available to them in subscribing for or purchasing shares in companies, some of which they held in trust for the appellant, some of which they transferred to the appellant to be held by it. At least fourteen subsidiaries were acquired in this way; eight in the 1972 year, and three each in the 1973 and 1974 years. The dividends received by the appellant were paid by the subsidiary companies Tunwin Pty. Ltd., R.H.D. Investments Pty. Ltd., Sans Holdings Pty. Ltd. and Wyomee Investments Pty. Ltd. (at p134)
The promoters, sensing the risk to the continuance of the appellant as a wine-buying co-operative if it acquired cash resources, secured options in favour of September Six Pty. Ltd. over forty-five of each parcel of fifty shares issued to the appellant's members. The options given by the original members of the appellant were dated prior to the formation of the appellant, though they may have been given later. The reason for requiring the members to give options over their shares in the appellant was stated by Mr. Bainton: ". . . if those dividends turned out to be substantial there was an obvious temptation to the majority of members to want to get their hands on cash. We did not want that to occur. We wanted the society to continue." (at p134)
The promoters doubtless wanted the society to continue to carry on a co-operative business of buying wine and other commodities, and to confer public company status upon the subsidiaries. But the question which is posed by s. 117 (1) is not whether the promoters, or some of them, wanted the appellant to perform the functions which they had assigned to it, but whether the appellant "is established for the purpose" specified in the subsection. (at p134)
The subsection requires that a defined purpose should be the purpose for which the company is established; it does not suffice that a defined purpose be merely a purpose of establishment. The establishment of a company can be said to be for the purpose of carrying on a business of a stated kind when the dominant purpose of the company's existence is the carrying on of that business (cf. Jacob v. Federal Commissioner of Taxation (1971) 45 ALJR 568, at p 569 ). If the company exists for a number of purposes, only one of which is the statutory purpose, and the statutory purpose is not dominant, it is not right to describe the statutory purpose as the purpose of the company's establishment. On the other hand, if the statutory purpose be the dominant purpose, it is the purpose of the company's establishment though other and subsidiary purposes may be found. (at p135)
To attribute a purpose to the establishment of a company, reference must be made to the whole of the surrounding circumstances. It is not the purpose of an individual mind which is determinative, but the purpose which an observer who knows the material facts and circumstances (including those which are foreseen as possible future events) would predicate of the establishment. The material facts and circumstances include the company's constitution, the activities actually carried on, the company's history and its control (per Fullagar J. in A. & S. Ruffy Pty. Ltd. v. Federal Commissioner of Taxation (1958) 98 CLR 637, at p 656 ). These facts and circumstances may alter from time to time, and the purpose of establishment may correspondingly change. (at p135)
It is not sufficient to look to the formation of the company and to ascertain what was, at that time, the purpose of its formation. In Renmark Fruitgrowers Co-operated Ltd. v. Federal Commissioner of Taxation (1969) 121 CLR 501, at p 506 Menzies J. held that the relevant question "is whether, at a particular time, the company is established for the purpose stated". The periodic operation thus given to the words "is established" requires a determination whether, at a given time, the company is then established for the statutory purpose. If the purpose of its establishment at a given time is not the purpose defined by s. 117 (1), the company does not, at that time, have the status of a co-operative company. The statutory purpose is the carrying on of a business of a kind stated in the subsection. The kind of business which falls within the statutory purpose is stated to be a business "having as its primary object or objects one or more of the" objects specified in the lettered pars. (a) to (e). Provided any one of the objects enumerated in pars. (a) to (e) of sub-s. (1) is a primary object of the business, it is immaterial that the business has another of those objects either as a primary or non-primary object. The reference to "object" in the definition tends to lead the reader, by an association of ideas familar in the context of company law, to consider the company's memorandum of association; but the object to which the definition refers is not an object of the company, but an object of the company's business (a distinction not observed in s. 120 (1) (c), perhaps because the statutory antecedents of s. 117 (1) and s. 120 (1) (c) were introduced into income tax legislation by different amending Acts: s. 117 (1) may be traced to s. 4 of the Income Tax Assessment Act 1925, and s. 120 (1) (c) to s. 8 of the Income Tax Assessment Act 1930). An inquiry as to the primary of a given object of the business does not depend exclusively upon the objects contained in the company's memorandum (Ruffy's case per Dixon C.J., Williams and Webb JJ. (1958) 98 CLR, at p 649 ). The memorandum may be regarded, however, as a relevant factor in the inquiry (per Fullagar J., in Ruffy's case (1958) 98 CLR, at p 656 ; Revesby Credit Union Co-operative Ltd. v. Federal Commissioner of Taxation (1965) 112 CLR, 564, at p 576 ), and it is material to ascertain whether the business which is in fact being carried on is within the company's objects (Renmark Fruitgrowers' case per Menzies J. (1969) 121 CLR, at p 506 ). (at p136)
The test of primacy, as the majority judgment pointed out in Ruffy's case, "may not always be quite easy, but relatively speaking, the test . . . may be considered practicable" (1958) 98 CLR, at p 649 . Fullagar J. thought that light may be thrown on the primary object of the business (as well as on the purpose of the company's establishment) by "the activities actually carried on by the company . . . its history, constitution and control" (1958) 98 CLR, at p 656 . In Social Credit Savings and Loans Society Ltd. v. Federal Commissioner of Taxation (1971) 125 CLR 560, at p 567 Gibbs J. thought it right to refer to "the activities actually carried on by the company". (at p136)
In the present case, the evidence shows that there was only one business carried on by the appellant, and that business had but one object: the object of buying wine for, or of facilitating the buying of wine by, the company's shareholders - an object to which I shall refer as the wine-buying object. Wine-buying was within the appellant's constitution, it is to be found in the history of the business, and was perhaps the only activity in which the appellant was engaged. The businesses of dividend stripping were the businesses of the subsidiaries, not of the appellant. And thus one is not concerned to inquire whether dividend stripping rather than wine-buying is the primary object of the appellant's business. The appellant's activities with respect to its subsidiaries were those of a holding company, but the evidence is not sufficiently precise to show that the appellant engaged in a business of managing the portfolio of shares which it held in the subsidiaries. Although the only business shown to have been carried on by the appellant had wine-buying as its primary object, that does not determine the application of s. 117 (1). The basic question of purpose of establishment remains to be answered. (at p137)

In my view, what emerges from the evidence, and it emerges with clarity, is that the dominant purpose of the appellant's establishment from its formation to the end of the relevant income years, was not the purpose of carrying on a business having wine-buying as its primary object. Rather, the dominant purpose of establishing the appellant was to hold shares in, and thereby to confer the status of subsidiary upon, the companies whose shares should be transferred to it. No doubt it was hoped that the operation of s. 103A (2) (d) (v) would thereby clothe the subsidiaries with the tax-protective mantle of public company status. The dominance of one purpose of a company's establishment over another is not necessarily to be answered by a comparision of the degree of activity involved in fulfilling one purpose or the other, for a purpose may be susceptible of fulfilment with little or no activity on the part of the company. Little or no activity was required on the part of the appellant to hold the shares in the subsidiaries, yet the dominance of that purpose appears from a consideration of the financial importance of the subsidiaries' activities to the appellant and its members, the magnitude of those activities and the fiscal significance of public company status upon the results of those activities to the subsidiaries and to the appellant. (at p137)
The dominant purpose of the appellant's establishment is not a purpose defined by s. 117 (1), and the appellant therefore did not acquire the status of a co-operative company under Divn 9 or of a public company under Divn 7. Paradoxically, it was the very importance of clothing the subsidiaries with the mantle of public company status which rendered ineffective the attempt to do so. It was not sufficient to attract the operation of s. 117 (1) that the appellant was established for the subsidiary purpose of carrying on a business having the primary object of wine-buying - a purpose which, had it been the dominant purpose, would have conferred the status of a co-operative company on the appellant. It follows that, in my judgment, Helsham C.J. in Eq., was right in dismissing the appeals to the Supreme Court in relation to the appellant's status. (at p137)
A further question relates to the assessable income of the appellant in the 1973 tax year. Its income was at first returned at $130,202, but subsequently an amended return excluded $47,915 of this sum. The excluded sum represents the amount declared as an interim dividend to be paid by Tunwin Pty. Ltd. to the appellant. The resolution declaring the dividend was passed on 23rd April, 1973, by the directors of Tunwin, Messrs. Bainton, Grant and Smith in the following terms: "RESOLVED that an interim dividend of $47914.97 be declared and credited to the accounts of Brookton Co-operative Society Ltd. and be available to that company on demand." The Tunwin directors were also directors of the appellant. The minutes of the appellant's directors' meeting of 15th May, 1973, note the advice given to that meeting that the Tunwin dividend, inter alia, "had been declared and (was) due to the society". It was resolved that "upon receipt of these dividends the money be invested on fixed deposit". The relevant journal entry was made in the books of Tunwin and credited to the appellant in Tunwin's "Sundry Creditors" ledger. The amount of $47,914.97 was reflected in the financial statements of both companies at 30th June, 1973. (at p138)
At the time when the interim dividend was declared, Tunwin was under a contingent liability to make certain payments pursuant to a contract which had yielded the profit required to support the interim dividend. The Tunwin directors had thought it right not to make provision, or sufficient provision, for the contingent liability before declaring the interim dividend. Subsequently, Tunwin was required to meet that liability and, after meeting it, it had insufficient funds or remaining profits out of which to pay $47,914.97 to the appellant. When the liability was met, the Tunwin directors purported to rescind the declaration of the dividend, by passing the following resolution at a meeting held on 10th December, 1973: "RESOLVED that it now being apparent from an examination of certain share sale agreements from which the company had anticipated deriving of profit in respect of the year ended 30th June, 1972, that there were not profits of $47,914.97 derived during that period, the declaration of a dividend of $47,914.97 on 29th April, 1973, be rescinded, the credit of $47,914.97 to Brookton Co-operative Society Ltd. be reversed and that Brookton Co-operative Society Ltd. be requested to acknowledge and accept the reversal of this credit." On the same day the appellant's directors resolved to "accept the said rescission and the corresponding alteration in the credit to it". The question is whether the amount which was credited to the appellant's account with Tunwin forms part of its assessable income for the 1973 income year. (at p138)
Its first return of that year's income, which included the relevant amount, formed the basis of an assessment to primary and Divn 7 tax. The notice of assessment to primary tax was issued on 30th April, 1974, and the objection which the appellant made to that assessment was limited to challenging the respondent's basis for assessing the appellant to tax as a private company. A notice of assessment to Divn 7 tax was issued on 17th March, 1975, to which an objection was lodged dated 13th May, 1975. The objection raised the ground that: "The undistributed amount of income derived during the year ended 30th June, 1973, is not more than $82,287 for the reason that the amount of dividends received during the said year was in fact $82,287 and not $130,202 as included in the taxpable income of the said year in the income tax return submitted." On 2nd June, 1975, the appellant wrote a letter to the Deputy Commissioner of Taxation enclosing an amended 1973 return to exclude "the amount of a dividend from Tunwin Pty. Ltd. which was reversed in the 1974 accounts when it was found that Tunwin did not have enough funds to pay the dividend". The respondent disallowed the objection and contends that the amount was a dividend "paid" to the appellant within the meaning of that term when used in reference to dividends in the Income Tax Assessment Act 1936 and thus formed part of the appellant's assessable income (s. 44 (1) (a)). "Paid" is given an extended meaning in the Act, and it includes "credited" (s. 6 (1)). The meaning of "credited" was referred to by Isaacs J. in Webb v. Federal Commissioner of Taxation (1922) 30 CLR 450 : "The Legislature, as it appears to me, has by the word 'credited' sought to reach cases where, through a member or shareholder who has been 'paid' the dividend or bonus, there has been credit in the company's books imputed to the share he holds. . . . But, at all events, 'profits credited or paid' are, as it seems to me, pointed to 'profits' which have in some way been made a debt by the company to the shareholder, &c. In the case of a shareholder, that would be by a 'dividend or bonus' - or even by 'interest' used in the sense of distribution of profits. But the declaration of a 'dividend' creates a debt (Re Severn and Wye and Severn Bridge Railway Co. (1896) 1 Ch 559, at p 564 )" (1922) 30 CLR, at p 479 . And in Inland Revenue Commissioner (N.Z.) v. Taylor (1964) 9 AITR 374 Henry J. referred to Webb's case and said: "The essence of the expression is that a debt by the company to the shareholder is recorded as a credit in his account with the company. The inquiry is thus narrowed down to a consideration whether or not the directors did create a debt between the company and the shareholder and recorded that debt in an account with the shareholder. . . . The entry could become a 'credit in account' only when the directors decided to pay it" (1964) 9 AITR, at p 383 . Provided the credit shown in a taxpayer's account with the company declaring the dividend represents a debt owing to the taxpayer, the dividend is "credited" and, in that sense, "paid" for the purpose of the Act. (at p139)
Where a final dividend is credited after it is declared, as in the Severn Bridge Railway Co. case, the amount credited is a debt and may form part of a shareholder's assessable income as a "dividend paid". But it is otherwise where an interim dividend is declared by directors whose powers are expressed in the terms of Tunwin's art. 99. That article provided that the directors "may from time to time pay to the members such interim dividends as appear to the directors to be justified by the profits of the company". Where directors, acting under such a good power, resolve either to declare or to pay an interim dividend, the resolution itself does not create a debt owing by the company to the shareholders, as Brightman J. said quoting the 13th edition of Buckley on the Companies Act in Potel v. Inland Revenue Commissioners (1971) 2 All ER 504 : "The passage in Buckley reads: 'Where the directors are authorised to pay interim dividends, a mere resolution to pay does not create a debt as between the company and the member so as to prevent the directors from subsequently rescinding the resolution.' I think that is a correct conclusion from the decision in the Lagunas Nitrate case (Lagunas Nitrate Co. Ltd. v. Schroeder & Co. & Schmidt) (1901) 85 LT 22 which establishes that an interim dividend is, as it were, subject to the will of the directors until it is actually paid" (1971) 2 All ER, at p 513 . In Industrial Equity Ltd. v. Blackburn (1977) 52 ALJR 89 Mason J. cited Potel's case with approval saying:

"There is a well recognized distinction between a power to declare a final dividend and a power to pay an interim dividend. One consequence of the distinction is that although the declaration of a final dividend gives rise to a debt payable by the company to the shareholder immediately or from the date stipulated for payment, a resolution for the payment of an interim dividend does not create such a debt in favour of the shareholder"

(1977) 52 ALJR, at p 91

. (at p140)

The Tunwin directors, acting in pursuance of art. 99 had no power to create a debt enforceable by the members against the company. They had power to pay an interim dividend, but they could not create an obligation to pay it. Of course, payment may be made otherwise than in cash (Thairlwall v. Great Northern Railway Company (1910) 2 KB 509 ) and in some circumstances the entering of items in accounts between the company and the shareholder may be an effective means of making a payment (Re Harmony and Montague Tin and Copper Mining Company (Spargo's case) (1873) LR 8 Ch App 407 ; Re Paraguassu Steam Tramroad Company (Ferrao's case) (1874) LR 9 Ch App 355 ). But the mere entering of a credit in the books of a company in favour of a shareholder does not necessarily pay the amount so entered. As Barwick C.J. said in Manzi v. Smith (1975) 49 ALJR 376 : "We were referred to cases in which a payment of money was held to have been made by means of entries in books of account. But in those cases the entries represented the agreement of the appropriate parties e.g., Eyles v. Ellis (1827) 4 Bing 112; 130 ER 710 and Re Harmony and Montague Tin and Copper Mining Company (Spargo's case) (1873) LR 8 Ch App 407 . These decisions, quite clearly, are not authority for the proposition for which they were advanced, namely, that a payment of money was made by the making by the company of a journal entry in the books of account without reference to, or without the agreement of, the persons said to be the recipients of the money. The company's assertions in its books of account did not establish the indebtedness of the appellants or any payment of money in discharge of that indebtedness" (1975) 49 ALJR, at p 377 . (at p141)
No doubt it is open to a company and its shareholder to agree that the amount of an interim dividend to be paid should, on payment, be lent by the shareholder to the company, and to give effect to that agreement by appropriate book entries which effect a payment of an interim dividend and a lending of the amount so paid to the company (Eyles v. Ellis (1827) 4 Bing 112; 130 ER 710 ; Joseph v. Campbell (1933) 50 CLR 317, at p 324 ). Where an agreement of that kind is made, the shareholder acquires a debt for the money lent. The company's obligation is then to repay the money lent, and a payment in discharge of that obligation is not to be characterized as the payment of an interim dividend. (It may be different where an existing liability to pay a final dividend is sought to be exchanged for an identical liability for moneys lent: Re Associated Electronic Services Pty. Ltd. (1965) Qd R 36 ). Where the entry of a credit item representing an interim dividend is allowed to remain by consent of the shareholder in the company's books, a nice question arises as to whether the shareholder has been paid and has then deposited the amount of the dividend on loan with the company, or whether the dividend has not been paid at all. The answer to this question must turn upon the intention of the parties. In the present case, the intention of the Tunwin directors as expressed by their resolution was not to pay the dividend until demand was made for it. It does not appear that any demand was made prior to the rescission of the resolution declaring the interim dividend, and the payment of the dividend thus remained "subject to the will of the directors". There is no evidence of the appellant's making of a loan of the amount of the dividend to Tunwin. The entries made in the books and financial statements of Tunwin and of the appellant do not show a payment of the dividend by Tunwin and a lending of the amount paid to Tunwin. Tunwin's journal records the amount to be paid upon the authority of the directors' resolution declaring the interim dividend, and records the reversal of that entry on the authority of the directors' resolution rescinding the prior resolution. There is no journal entry which records a payment and a lending of the amount paid. The resolutions and the journal entries are consistent only with the non-payment of the interim dividend. As the interim dividend was not paid, and as it was incapable of giving rise to a debt before payment, the amount of the interim dividend was not part of the appellant's assessable income for the 1973 year. This conclusion makes it unnecessary to examine the submission that the declaration of the interim dividend was invalid because there were no profits out of which that dividend might have been paid - a submission which might have required consideration of the reference in s. 44 (1) (a) to dividends "paid out of profits". But as the dividend declared was not "paid" it is unnecessary to consider this submission. (at p142)
In my view, the dividend of $47,915 should not have been included in the amount first returned by the appellant as its 1973 income. Although the assessment to Divn 7 tax assessed the undistributed amount upon which the tax was calculated in accordance with the appellant's original return of income, it was assumed in argument both before the Supreme Court and this Court that it was open to the court to direct an amendment of the assessment to reduce the taxable income of the appellant by the amount of the Tunwin dividend consequent upon the objection which was lodged to the assessment to Divn 7 tax. Though I should not wish to comment upon the correctness of the assumption in the absence of argument, it is right that the order of this Court should adopt the common basis of the submissions made, and direct the amendment of the assessment in accordance with its view of the true quantification of the taxable income. The taxable income for the purposes of calculating Divn 7 tax should therefore be reduced by deducting the amount of the Tunwin dividend. (at p142)
This conclusion produces a difference between the taxable income upon which primary tax is assessed and the taxable income which is used to determine the undistributed amount upon which Divn 7 tax was calculated in the 1973 year; but that consequence flows from the appellant's failure to raise the relevant ground in its objection to the assessment to primary tax and its consequent inability to seek relief upon that ground by pursuing such an objection on appeal against that assessment (cf. Cappid Pty. Ltd. v. Federal Commissioner of Taxation per Menzies J. (1970) 44 ALJR 437 ). (at p142)
The objection to the assessment to Divn 7 tax in the 1973 year should be allowed in part, and the appellant's taxable income for the purposes of calculating Divn 7 tax should be reduced by $47,915. The judgment of the Supreme Court should be varied accordingly with consequential orders as to costs here and in the Supreme Court. The judgments of the Supreme Court in respect of the status of the appellant should be affirmed and, subject to the variation mentioned, the appeals should be dismissed with costs. (at p142)

JUDGE2

DEANE J. The context in which these appeals fall to be determined appear from the judgments of Brennan J., and Fisher J., which I have had the benefit of reading. (at p142)

On the principal point involved in the appeals, namely whether the taxpayer company was a "co-operative company" within the definition contained in s. 117 of the Income Tax Assessment Act 1936 during the relevant years, I agree with Fisher J.'s conclusion that it was not and with his reasons for that conclusion. (at p143)
On the subsidiary point, namely whether the amount of the interim dividend of $47,914.97 purportedly "declared" by the directors of Tunwin Pty. Ltd. ("Tunwin") in favour of the taxpayer should properly have been included in the taxable income of the taxpayer of the year ended 30th June, 1973, I agree for the reasons which he gives, with the conclusion of Brennan J., that it should not. (at p143)
I agree with the orders proposed by Brennan J. (at p143)

JUDGE3

FISHER J. These are four appeals brought by Brookton Co-operative Society Ltd. ("the society") against a decision of the Supreme Court of New South Wales in its Administrative Law Division. That court confirmed the decision of Board of Review No. 1 which by a majority upheld income tax assessments issued against the society by the Commissioner of Taxation ("the Commissioner") in respect of the years of income ended 30th June, 1972, 1973 and 1974. (at p143)

The society lodged its returns for each of the said years of income contending that at all material times it was a "co-operative company" within the provisions of s. 117 of the Income Tax Assessment Act 1936 ("the Act"), and thus a "public company" pursuant to s. 103A (2) (b) of the Act. The Commissioner did not concede that the society was a "co-operative company" and his notices of assessment were issued on the basis that, not being a co-operative company (and thus not a public company) the society was a private company. Notices of assessment for income tax and for additional tax pursuant to Divn 7 of the Act were issued by the Commissioner on this footing. Objections lodged by the society were disallowed by the Commissioner and by a majority of the Board such disallowances were upheld and the assessments confirmed. The society appealed to the Supreme Court from the decision of the Board which court on 24th June, 1977, dismissed the appeal. There is an additional dispute arising out of an amended return lodged by the society in respect of the year ended 30th June, 1973. This amended return was lodged because, the society contended, it was necessary to delete a dividend shown in the original return as having been received during that year in the circumstances that the dividend had been reversed. This matter is dealt with later in these reasons in some detail, but is mentioned at this stage as it is the only area in which there is any dispute as to amount of income or amount of tax. In these circumstances there is no point in referring in greater detail to the assessments or objections thereto. (at p144)

The principal issue which fell for consideration by the Board of Review and the Supreme Court was whether the society qualified as a co-operative company in accordance with s. 117 of the Act during the relevant years. It is only if it did so qualify that what I will call subsidiary questions are necessary to be determined. Section 117 as relevant is as follows:

"(1) In this division 'co-operative company' means a company the rules of which limit the number of shares which may be held by, or by and on behalf of, any one shareholder, and prohibit the quotation of the shares for sale or purchase at any stock exchange or in any other public manner whatever, and includes a company which has no share capital, and which in either case is established for the purpose of carrying on any business having as its primary object or objects one or more of the following: . . .

(d) the rendering of services to its shareholders." (at p144)

It is common ground that the society has complied with the limitation on the number of shares and the prohibition on quotation of shares, and that the issue at this stage is whether it is established for the purpose of carrying on any business having as its primary object or objects the rendering of services to its shareholders. The trial judge found that it was encumbent on the applicant to satisfy him that it was so established, and he held that the appellant failed to do so. Counsel for the appellant conceded, in my view correctly, in the course of the hearing before us that this finding was a finding of fact. It was in my opinion a finding which was without doubt open on the evidence. In my view the trial judge was both justified and correct in making the finding that he was not satisfied that the society was established for the relevant purpose. (at p144)
The trial judge was assisted in arriving at his conclusion by his finding that the society used its public company status to acquire profits from share dealing activities and that this constituted a business activity of the society even though implemented through subsidiaries. This may well be so but I would prefer to found my decision on a consideration of the purpose of establishment of the society rather than on a finding that the society was conducting such a business activity. I will deal with this aspect of the matter and the facts relevant to its determination before turning to the subsidiary questions. As the trial judge has set these facts out carefully and they are undisputed except as to the inferences to be drawn therefrom, I need not deal with them in detail. (at p144)
The formation of the society was the consequence of the ingenuity of three Sydney professional men. Mr. Bainton Q.C., the only one of them to give evidence in the hearing, acknowledged that they could fairly be called the promoters of the society. Mr. Bainton gave evidence that the society had its origin in discussions between a number of professional men relating to their inability to find time to care for their personal affairs. There arose out of these discussions the idea of forming a service company. Mr. Bainton acknowledged that the promoters were aware of the benefits of a co-operative company under the Act in that rebates were allowable deductions. Subsequently the evidence discloses that they ascertained that a co-operative company had, under the Act, the status of a public company, which status followed through and attached to its wholly-owned subsidiaries. The promoters were likewise aware of the existence of profitable business that was available in the nature of dividend stripping, share dealing and acquisition of excess distribution companies. It was readily apparent to them that this type of business could very appropriately be developed by subsidiaries of a co-operative company. In considering the manner in which such a company could render a service to its members, they came up with the concept of a "wine-buying society". However the trial judge found as a fact that although the promoters and their friends may have had in mind this activity, it was not the reason for its incorporation. In fact the society never at any stage engaged in buying wine, but limited its service activities to assisting with the acquisition of wine by its members from suppliers. (at p145)
The preliminary inaugural meeting of the members of the proposed society which is required to be held prior to incorporation was held on 24th June, 1971, and the society was incorporated on 28th July, 1971, on which day its first meeting of directors was held. The three promoters were amongst the first directors of the society. At this inaugural meeting the objects of the society were discussed, model rules were adopted and the initial statement required by s. 39 (3) (a) of the Co-operation Act, 1923 (N.S.W.), was signed at the meeting by the chairman and the secretary. There is in the evidence no indication that anywhere in the discussions or relevant documents was any reference made to the anticipated wine-buying activities of the society, and there is no such reference in the minutes of either of the meetings. The objects of the society set out in cl. 5 of the rules are however appropriate for a society the business of which was to be the rendering of services to its members. (at p145)
However, prior to the incorporation of the society and in fact the day upon which it was incorporated, its first meeting of directors was held, and much occurred which is of relevance to the subsequent activities of the society. It is significant that none of these occurrences had any relevance to the service or wine-buying activities proposed for the society. I will deal with these happenings in chronological order. (at p145)
On 9th October, 1970, a company September Six Pty. Ltd. ("September Six") was incorporated, and its shares were held equally by companies owned by the two promoters other than Mr. Bainton. September Six arranged for the incorporation on 29th April, 1971, of three shelf companies R.H.D. Investments Pty. Ltd. ("R.H.D."), Boongil Investments Pty. Ltd. ("Boongil") and Wyomee Investments Pty. Ltd. ("Wyomee"). (at p146)
The preliminary inaugural meeting of the members of the society was, as already stated, held on 24th June, 1971, on which day and the succeeding day a number of members of the proposed society executed options over the majority of the shares which it was intended the proposed society would allot to each of them. These options were in favour of September Six and were granted in respect of the purchase of forty-five of the fifty shares each member contemplated being alloted. The price payable upon exercise of the option was $2, being the par value for each share. The option was initially only capable of being exercised between 1st July, 1974, and 30th June, 1975. It was conceded in evidence that the taking of the options had nothing to do with the wine-buying or wine service activities of the society but that they were taken because it was feared members might desire to terminate the society and distribute its assets. Certainly the holding of the options gave to September Six the capacity ultimately to control the society and prevent its premature dissolution. But additionally to the extent that the asset backing of the issued shares in the society exceeded at any time their par value, September Six had, by virtue of its right to purchase the shares at par, acquired a beneficial interest in ninety per cent of such excess. (at p146)
On 9th July, 1971, another company Yorta Pty. Ltd. ("Yorta") was incorporated at the behest of September Six as a shelf company. On 16th July, 1971, Boongil entered into agreements to buy shares in three companies, which shares it ultimately acquired for $1,132,146.08. Further options were executed by prospective members of the society on 27th July, 1971. (at p146)
The society was, as already stated, incorporated on 28th July, 1971, on which day was held the first meeting of its directors. September Six held on the same day a meeting of its directors and its shareholders. R.H.D. also held a meeting of its directors on the same day. At the meeting of directors of September Six Mr. Bainton was allotted a share and appointed a director. The three original promoters of the society were now the sole directors of September Six and as well directors of the society and the sole directors of R.H.D. September Six applied for three shares in R.H.D. (which shares were allotted by that company on that day) and September Six resolved to make a gift to the society of its shares in R.H.D., the two issued shares which it already held and the three allotted that day. Additionally September Six resolved to make a gift of $50 to trustees to enable the trustees to acquire shares for the society. The decision to make the gift was recorded as having been made on this day and thereafter shares were subscribed or acquired on behalf of the society in companies which in consequence became its subsidiaries. However, it would appear probable that the deed of gift was not executed until 11th December, 1972. (at p147)
On 3rd August, 1971, the society accepted the gift of shares in R.H.D. from September Six. On the same day the former company was allotted 100 shares in each of them, Boongil, Wyomee and Yorta. (at p147)
Thus within six days of its incorporation the society had acquired in consequence of the gifts the ownership of four subsidiary companies, all of which had originally been shelf companies incorporated by September Six. Moreover the latter company had the potential capacity to control the society by virtue of its holding of the options, and its directors were directors of the subsidiaries. To complete the picture at this stage, it is noteworthy that by 11th August, 1971, Boongil had received dividends totalling $1,297,640 declared on the shares which it agreed to buy on 16th July, 1971, for $1,132,146.08. (at p147)
At a meeting of directors of the society held on 12th August, 1971, the wine service activity of the society was raised for the first time at any meeting of the society. Before dealing with the part that this played in the activities of the society it is appropriate to carry the story of the acquisition of subsidiaries by the society to the end of its first financial year. (at p147)
On 14th March, 1972, Tunwin Pty. Ltd. ("Tunwin") was incorporated and its directors, the three promoters, held their first meeting on 17th March, 1972. It appears that the subscribers' shares were held in trust for the society, the directors of which accepted the gift at a meeting held on the same day. Two further companies Sans Holdings Pty. Ltd. ("Sans") and Tovella Traders Pty. Ltd. ("Tovella") were incorporated on 20th April, 1972. In each instance it appears that funds for the subscribers' shares were provided out of the $50 settled by September Six on 28th July, 1971. These shares were accepted by the society at a meeting of directors held on 8th May, 1972. At that meeting the directors declared a rebate of $3,000 in respect of wine purchases to be made during the next succeeding financial year. It is accepted that virtually its only funds on hand at this time were members' subscribed capital but the necessary money to pay this rebate fortuitously became available the following day when the directors of Tunwin (the three promoters) declared a dividend of $3,000. (at p147)
On 26th June, 1972, the directors of R.H.D. caused their company to make a gift of the shares their company held in Boongil, Wyomee and Yorta to the society, in consequence of which the three latter companies became direct subsidiaries of the society. Prior thereto they had been subsidiaries of a subsidiary. (at p147)
The position at 30th June, 1972, reported by the society, was that it had acquired seven subsidiaries, all of which other than Yorta had traded in shares or entered into profitable ventures during the past year. Tunwin had paid a dividend of $3,000 and Boongil had received dividends (in respect of its dividend-stripping transactions) totalling $1,297,740. Tovella, Sans and Wyomee had made gross profits during their initial two and a half months of trading totalling $20,049, $25,489.67 and $19,505 respectively. Tunwin's gross profit for the three and a half months it traded was $105,927. (at p148)
Dividends received by the society increased from $3,000 received from one subsidiary in the year ended 30th June, 1972, to at least $130,000 received from four subsidiaries in the succeeding year. (at p148)
The pattern was the same during the year ended 30th June, 1973, in that the society acquired by way of gift shares in three new companies incorporated by September Six, each of which became a wholly-owned subsidiary of the society and it was hoped a public company for tax purposes. Likewise during the year ended 30th June, 1974, three further subsidiaries were acquired by the society each of which achieving in consequence, it was hoped, public company status. In each instance the promoters or at least two of them were the directors or comprised the majority of the directors of each subsidiary. I will hereafter refer to the activities of the society in this regard, namely the acquisition of subsidiaries in consequence of gifts of shares, the achieving of public company status for these subsidiaries and the receipt of dividends from these subsidiaries, as "the commercial activities" of the society. It is unnecessary for me to form a concluded view as to whether these activities can be properly characterized as the carrying on of a business. (at p148)
I turn now to the wine services rendered by the society to its members. These were the only services rendered by the society at least during the years in question. The objects of the society, I repeat, appropriately provided for the rendering of services to the members (but without indicating the nature of the services) and the activity of providing wine services was first discussed at a meeting of directors held on 12th August, 1971, when a manager for that purpose was appointed. It was a part-time position for which he was to be paid $650 per annum. The society appreciated that it was not permitted to buy wine and re-sell it to its members, and thus the manager arranged for supplies to be delivered to members and they paid the suppliers. The society received commissions from the suppliers which ranged from seven and a half per cent to ten per cent. Members were issued with monthly bulletins whereby they were informed of the availability of wines and other related matters of interest. It appears that the bulletins first appeared in October 1971 about which time members received their first supplies. During the year ended 30th June, 1972, eighteen of the thirty-four members took advantage of this service, buying wines totalling $4,245.93. The society earned that year $408.40 by way of commission. In the succeeding year commissions received totalled $1,178 and, in the year ended 30th June, 1974, $1,443. (at p149)
In addition to the dividends and these commissions the society received interest on funds deposited. The funds comprised not only members' subscribed capital but other funds representing dividends received by the society etc. Interest for the first year totalled $75, and for the years ended 30th June, 1973, and 30th June, 1974, $378 and $6,623 respectively. (at p149)
Expenses of the society for the year ended 30th June, 1972, totalled $930, of which $558 was shown as wages doubtless paid to the manager. In the year ended 30th June, 1973, these expenses were $1,313, $791 being wages and in the year ended 30th June, 1974, $1,372 of which $153 was described as wages. Expenses thus in each year exceeded the commission earned by the society except in the third year when commission exceeded expenses by some $70. (at p149)
At the meeting of directors held on 8th May, 1972, the directors of the society resolved that a rebate of $3,000 be given to members during the succeeding financial year. The rebate was stated to be in respect of purchases to be made during that succeeding year. However it was to be calculated on a pro rata basis to purchases made during the earlier year, but was not to exceed in respect of any member fifty per cent of his aggregate purchases during the succeeding year. The explanation for the complexity of the calculation may well be that the directors desired to encourage members to use the society's wine facilities, and in a circular put out the following day the manager referred to the directors' disappointment in this regard. The manager also drew attention to the fact that commissions earned had not covered operating costs, but that dividends totalling $5,000 were expected during the current year. This expectation was not disappointed in that Tunwin declared its dividend of $3,000 on the following day. (at p149)
The rebate was subsequently paid during the succeeding year but as "available profits" were less than anticipated the amount paid was reduced to $2,500. It is apparent that this rebate, as with the rebate paid in the next year, was not a rebate based on purchases made by the members from the society (cf. s. 120 (2)) as the members purchased from the suppliers and not the society. Moreover the rebate was neither paid out of nor bore any relationship to the commissions earned on wine activities. The only link the rebates had with these activities was that the amount of rebate which each member received was calculated in proportion to the value of orders which he had placed through the society with suppliers. (at p149)
It is in these circumstances and against this background that the society's claim to come within the terms of s. 117 of the Act falls for determination. I have already said that the trial judge was not satisfied that the Society qualified as a co-operative company and that I agree with his decision. (at p150)
The crucial question is whether the society "is established for the purpose of carrying on any business having as its primary object or objects one or more of" the objects specified in pars. (a) to (e) of the section. A number of comments may be made on the component parts of this definition. (at p150)
In the first instance it should be noted that the present tense, "is established", has been used. Thus consideration must be given not only to the purpose for which the society was established, i.e., the purpose of its incorporation, but also the purpose for which it is currently conducted. It was argued in Farmers' & Graziers' Co-operative Grain Insurance and Agency Co. Ltd. v. Federal Commissioner of Taxation (1959) 12 ATD 29 that to determine whether a company was a co-operative as defined it was necessary to go back to the establishment of the company to determine whether it then complied with the definition. However, in the circumstances before it the court did not have to rule on the argument. Later in Renmark Fruitgrowers Co-operated Ltd. v. Federal Commissioner of Taxation (1969) 121 CLR 501 Menzies J. was faced with the situation where the company, whilst at the time of its incorporation not carrying on an appropriate business as its primary object, was however in the relevant years pursuing that business as a primary object. His Honour made these comments: "It appears to me, however, that s. 117 requires attention to be directed to the company's business, and its primary objects, at the time when the question whether or not it is to be treated as a co-operative company is to be determined. In my opinion a company which, in accordance with its constitution, is carrying on a business, having as its primary object one or more of those set out in the lettered paragraphs of s. 117 must be regarded as a company 'which is established for the purpose of carrying on' that business, whether that business was carried on from the inception of the company or was developed at some later time" (1969) 121 CLR, at p 506 . Again in A. & S. Ruffy Pty. Ltd. v. Federal Commissioner of Taxation (1958) 98 CLR, at p 656 Fullagar J. stated that, in determining the question whether a company is a co-operative, regard must, inter alia, be paid to the activities of the company. This supports the conclusion that consideration is not restricted to the time when the company was incorporated. The purpose for which the society was incorporated may well be relevant but is certainly not the determining factor. It follows that the purpose for which it is being conducted may be a different purpose from that for which it was incorporated. A company may change its purpose to or from one of the qualifying purposes, and in consequence of the change gain or lose, as the case may be, status as a co-operative. (at p151)

In any event there were profits available and the directors were entitled to resolve to pay an interim dividend in accordance with their powers under the articles. It was not the payment of the dividend (which I subsequently shall indicate in my opinion occurred at the time of the resolution) which lost the company's capital but the subsequent crystallization of a pre-existing contingent liability, for which no provision had been made. (at p158)
The taxpayer's alternative submission was that the dividend was liable to be rescinded in that it had neither been validly declared nor been paid to the society. There is no doubt that to resolve to declare, as opposed to pay, an interim dividend was beyond the powers of the directors. Only the company in general meeting could declare a dividend (art. 99), but the directors were empowered to pay an interim dividend, i.e. a dividend between general meetings. Admittedly here the directors purported to "declare" an interim dividend, as did the directors in Potel v. Inland Revenue Commissioners (1971) 2 All ER 504 and in Inland Revenue Commissioner (N.Z.) v. Taylor (1964) 9 AITR 374 . In each instance the directors had the same powers as the directors of Tunwin, and in each instance the resolution was construed as a resolution to pay rather than to declare a dividend. (at p158)
Thus in this matter I would agree with the trial judge that the directors had validly exercised their power to pay an interim dividend. (at p158)
Ultimately the directors resolved to rescind this resolution which action was open to them at any time prior to payment:

"Where the directors are authorised to pay interim dividends, a mere resolution to pay does not create a debt as between the company and the member so as to prevent the directors from subsequently rescinding the resolution" Potel's case per Brightman

J.

(1971) 2 All ER, at p 513

approving a passage in Buckley on the Companies Act 13th ed., p. 897.

The resolution here however went beyond authorizing payment of an interim dividend, it resolved that the dividend be "credited to the accounts of Brookton Co-operative Society Ltd. and available to that society on demand". (at p158)

Counsel for the society contended, in reliance upon Taylor's case (1964) 9 AITR 374 that the directors had no authority to declare a dividend and vote to pay it at some later date, albeit when demanded and that the significance of their purporting to do so was not to create a debt in favour of the society. As I have already said, on similar articles the directors of the company in Taylor's case purported to "declare" an interim dividend which was construed as a resolution to "pay" the same. By way of contrast however the shareholders in Taylor's case were not entitled to the dividend until "cash becomes available and at the sole discretion of the directors" (1964) 9 AITR, at p 378 . It was held that in these circumstances the interim dividend would be payable only in the future event of cash becoming available and then at the directors' discretion. At the date of the declaration of interim dividend the entry in the company's books "acknowledged no present indebtedness and made nothing available to the shareholder and placed nothing at his disposal or for his immediate benefit" (1964) 9 AITR, at p 383 . (at p159)
Such a situation is in sharp contrast to that in the present case, where the dividend was to be credited to the society's account and available on demand. That such a situation is quite different from that in Taylor's case is acknowledged in the reasons of Henry J. who decided that case and gave examples similar to the present situation to illustrate his point. He cited the case of Commissioners of Inland Revenue v. Doncaster (1924) 8 TC 623 which he said, indicates that "a decisive step, divesting the directors of control of the fund, must be taken before the fund becomes income" (1964) 9 AITR, at p 382 . In Doncaster's case the final step in the payment of an interim dividend was to carry the money to what was called a loan account which was really a current account of the shareholders with the company. Rowlatt J. in the latter case commented on the payment of a dividend in circumstances where he held that the final act of crediting it to the shareholder's loan account with the company amounted to distribution or payment of the dividend: "I can conceive nothing more complete in the way of payment. It was simply putting it to the credit of what is equivalent to a banking account. Those loans were money in the hands of the company belonging to the shareholder as an individual" (1924) 8 TC, at p 631 . This passage is quoted in Taylor's case (1964) 9 AITR, at p 382 . (at p159)
In my opinion that is exactly the position here. The directors of Tunwin resolved that the amount of the dividend be credited to the society's account with Tunwin and this was done. Moreover the directors had no further control over the moneys which were, they agreed, payable to the society on demand. A debt was thus created between the society and Tunwin and a debtor-creditor relationship established in consequence of the dividend having been paid. (at p159)
For their part the directors of the society (three of whom being the directors of Tunwin who "declared" the dividend) acknowledged at their meeting on 15th May, 1973, their awareness that the dividend had been "declared" and was "due" to the society and resolved that when received the moneys would be placed on fixed deposit. Moreover the society disclosed "receipt" of the dividend in its profit and loss account and in its tax return, and in its balance sheet disclosed the fact that the amount thereof was owing by its associated company. It seems to me that the society would be hard put to contend (and in fact it did not contend) that it was not aware of and did not consent to the crediting of the dividend to its account. Moreover it was the amount of this credit which was available to the society upon demand, the dividend in my opinion having been paid when it was credited in accordance with the decision of Tunwin's directors. (at p160)
In the circumstances the directors of Tunwin were prevented from subsequently rescinding the resolution for payment of the dividend. (at p160)
In my opinion the appeal should be dismissed with costs. (at p160)

ORDER

Appeal allowed in part.

[1979] FCA 34

01 MAY 1979