Brookton Co-operative Society Ltd v Federal Commissioner of Taxation

[1981] HCA 28

HIGH COURT OF AUSTRALIA

Gibbs C.J., Mason, Murphy, Aickin and Wilson JJ.

BROOKTON CO-OPERATIVE SOCIETY LIMITED v. FEDERAL COMMISSIONER OF TAXATION

(1981) 147 CLR 441

12 June 1981

Income Tax (Cth)

Income Tax (Cth)—Co-operative company—Primary object—Company incorporated under Co-operation Act 1923, (N.S.W.)—Rules containing various objects of co-operative character—Purchases of wine arranged for members—Small commissions earned thereby—Subsidiaries acquired by gifts to company of all issued shares in other companies—Engagement by subsidiaries in share acquisition and dividend stripping—Dividends paid to company by subsidiaries—Income Tax Assessment Act 1936 (Cth), s. 117 (1) "co-operative company" (d)*. Income Tax (Cth)—Income—Dividend—Whether paid—Declaration of interim dividend by subsidiary—Resolution of holding company to invest dividend when received—Credit of dividend in subsidiary's journal and ledger—Dividend reflected in financial statements of both companies—Revocation of declaration by subsidiary—Acceptance of revocation by holding company—Income Tax Assessment Act 1936 (Cth), ss. 6 (1), 44 (1) (a). *Section 117 (1) of the Income Tax Assessment Act 1936 provides than in Div. 9 of Pt III of the Act "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 whatsoever . . . 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".

Decisions

1981, June 12.
The following written judgments were delivered: -
GIBBS C.J. I have had the advantage of reading the reasons for judgment prepared by my brother Mason and those prepared by my brother Aickin. I agree with them that the appellant company did not fall within the description of a "co-operative company" contained in s. 117 (1) of the Income Tax Assessment Act 1936 (Cth), as amended. In other words it was not "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". Since the material facts and the questions raised are stated in the judgments of my brethren I may express my reasons very shortly. The evidence establishes that one purpose for which the appellant was established was to render services to its shareholders in relation to the purchase of wine, but that the dominant purpose for which it was established was to hold shares in subsidiary companies which would engage in share trading and dividend stripping, so that both the appellant and the subsidiaries would benefit, from the point of view of income tax, from the circumstance that the appellant was a public company. This conclusion of fact disposes of the matter; the appellant does not answer the description contained in s. 117 (1). The main argument presented for the appellant was that the appellant was established for the purpose of carrying on only one business - that relating to the purchasing of wine - and that such business was one whose primary object was the rendering of services to its shareholders. It was then said that the other purpose for which the appellant was established, not being the purpose of carrying on a business, was irrelevant. This argument proceeds on a view of the effect of the sub-section which cannot be accepted. The relevant words of s. 117 (1) require that two questions should be considered - first, whether the company is established for the purpose of carrying on any business, and, if so, whether such business had as its primary object or objects any one of those described in the lettered paragraphs of the sub-section. The use of the present tense in the phrase "is established" makes it necessary to consider the purpose for which the company was carried on in the relevant income year, rather than at the time of its formation. If the company is established for a purpose other than that of carrying on a business, it does not answer the description. It is therefore immaterial whether or not the activities which the appellant carried on in relation to its subsidiaries could be described as a business. If they could be so described, the business did not have as its primary object the rendering of services to its shareholders, and on no view could it be said that the purpose for which the company was established at the relevant times was that of carrying on a business of the kind described in s. 117 (1). (at p445)

2. A further submission advanced on behalf of the appellant was that it was wrong to consider the subjective motives and intentions of the promoters of the company and the directors of the subsidiary companies. It is clear that in deciding whether a company comes within s. 117 (1) the court must consider the activities which it actually carried on: see A. &S. Ruffy Pty. Ltd. v. Federal Commissioner of Taxation (1958) 98 CLR 637, at pp 649,-656 ; Revesby Credit Union Co-operative Ltd. v. Federal Commissioner of Taxation (1965) 112 CLR 564, at p 576 ; Social Credit Savings and Loans Society Ltd. v. Federal Commissioner of Taxation (1971) 125 CLR 560, at p 567 . Whether it is permissible also to have regard to the motives of those concerned with the company is a question that need not be decided in the present case, since if the actual activities of the appellant alone are regarded it is clear that the appellant is not a co-operative company, and a consideration of the motives of the promoters and directors does no more than strengthen this view. During argument we did not find it necessary to call upon counsel for the Commissioner to address us in relation to the appeal, and in the circumstances I consider it better not to express a concluded view on the question. (at p446)

3. I agree with the reasons given by my brother Mason for dismissing the cross-appeal and could not usefully add to them. (at p446)

4. I would dismiss the appeal and the cross-appeal. It follows that the applications for special leave to appeal should be refused. (at p446)

MASON J. This is an appeal by the taxpayer, a co-operative formed under the Co-operation Act 1923 (N.S.W.), as amended, against an order of the Full Court of the Federal Court (1979) 39 FLR 130; 9 ATR 763; 79 ATC 4217 setting aside an order of the Supreme Court of New South Wales (1977) 7 ATR 587; 77 ATC 4283 dismissing an appeal from the Board of Review which in turn dismissed the taxpayer's appeal against its assessment to Div. 7 tax for the year ended 30 June 1973. The Federal Court amended the assessment by reducing the taxpayer's taxable income for that year by $47,914.97 and by consequentially reducing the assessment of the undistributed amount and of Div. 7 tax. By its appeal the taxpayer seeks to establish what has been denied by the Courts below, namely, that it was at all material times a co-operative company as defined by s. 117 (1) of the Income Tax Assessment Act 1936, as amended, ("the Act") and that, as a result, it is entitled to be assessed to tax as a co-operative company under Div. 9 of the Act and as a public company under Div. 7. If the taxpayer were assessed as a co-operative company under Div. 9 it would be assessed on the footing that it is a public company (see s. 103A (2)). As such it would not be liable to undistributed profits tax under Div. 7. There is a cross-appeal by the Commissioner who argues that the Federal Court was in error in reducing the taxpayer's taxable income. The Commissioner had assessed the taxpayer to tax on the basis that a dividend of $47,914.97 declared and credited by its subsidiary company, Tunwin Pty. Ltd. ("Tunwin"), formed part of its income for the year. The Federal Court held that the dividend, the declaration of which was subsequently rescinded by Tunwin, was neither credited nor paid and that it did not constitute a debt owing by Tunwin. (at p446)

2. Associated with the appeal and the cross-appeal are three applications by the taxpayer for special leave to appeal. They relate to an assessment to Div. 7 tax for the year ended 30 June 1972, an assessment to primary tax for the year ended 30 June 1973 and an assessment to primary tax for the year ended 30 June 1974. The taxpayer failed in its objections to these assessments and on appeal, the Federal Court and the Supreme Court holding that it was not a co-operative company as defined by s. 117 (1), this being the critical issue. It is common ground that, if the taxpayer fails in its appeal against the assessment to Div. 7 tax in respect of the year ended 30 June 1973, the assessments which are the subject of the special leave applications must stand. (at p447)

3. The taxpayer argues that it falls within that part of s. 117 (1) (d) which is expressed 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 p447)

4. The circumstances in which the taxpayer came to be formed are set out in the judgment of Brennan J. It has been accepted by the taxpayer's counsel as containing an accurate record of the facts. The account which follows has been taken from his Honour's judgment. (at p447)

5. The taxpayer was formed by a group of professional men who encountered difficulties in looking after their personal affairs and who appreciated that a co-operative society was entitled to deduct from its assessable income the rebates distributed among its shareholders. They decided to form a co-operative that would buy commodities required by the members, the first commodity to be wine and other beverages. (at p447)

6. The taxpayer was formed on 28 July 1971. According to its rules, the objects of the Society are:
"(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 clauses (a) and (b) the objects of the society shall include -
(i) the purchase for re-sale to its shareholders, but no others, of consumer goods including foodstuffs, liquors, 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 purchase on their behalf of consumer goods, including foodstuffs, liquors, 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, advisory 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 p448)

7. The taxpayer appointed a manager who had experience with wines and who was employed in the office of an accountant who was one of the promoters of the taxpayer. The functions of the manager in connexion with wine were described by the primary judge (Helsham C.J. in Eq.) in these terms (1977) 7 ATR, at p 4288; 77 ATC, at p 590 :
"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 71/2-10 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 recieve 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." (at p448)

8. These activities continued in later years. From them the taxpayer earned commissions of $408, $1,178 and $1,443 in the respective income years 1972, 1973 and 1974. Drawing on other sources of income the taxpayer 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 income years 1973 and 1974. (at p449)

9. The taxpayer 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 because the Co-operation Act did not authorize the investment of the funds of the taxpayer in its subsidiary companies (see s. 68). The subsidiaries were engaged in purchasing 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, known as "dividend stripping", were conducted on a large scale. By way of example, it is sufficient to refer to one subsidiary, Boongil Investments Pty. Ltd. ("Boongil"), which was acquired on 27th June 1972. Between 29 April 1971 and 30 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 shares on hand at $30. Between 1 July 1972 and 30 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 also disclosed large financial transactions. (at p449)

10. Some of the moneys received by the subsidiaries as profits were distributed to the taxpayer as dividends. In 1972 those dividends amounted to $3,000; in 1973 to $130,202 (subsequently reduced by $47,914.97); and in 1974 to $8,500. Other profits were held and not distributed. The commercial success of the subsidiaries' businesses depended on their acquisition of the status of public companies. To achieve this status the holding company of the subsidiaries had to be a public company. (at p449)

11. The benefit to the subsidiaries of acquiring the status of a public company was foreseen by the promoters of the taxpayer before its formation. The three principal promoters to the taxpayer were all aware of it. On the day after the taxpayer's incorporation action was put in hand to acquire subsidiary companies. (at p449)

12. The subsidiaries became subsidiaries of the taxpayer in one of three ways. It is unnecessary to relate the details. It is enough to say that shares were transferred to the taxpayer or to its nominee or shares were held in trust for the taxpayer. At least fourteen subsidiaries were acquired, eight in the 1972 year and three each in the 1973 and 1974 years. The dividends received by the taxpayer were paid by four of the subsidiary companies. (at p450)

13. In order to ensure the continuance of the taxpayer's activities as a wine-buying co-operative the promoters secured options in favour of a company which they controlled, September Six Pty. Ltd. over fourty-five of each parcel of fifty shares issued to a member of the taxpayer. (at p450)

14. According to the interpretation placed on s. 117 (1) by the Federal Court, a company, in order to qualify as a co-operative company within the meaning of the statutory definition, must show that it is established "for the sole or dominant purpose" of carrying on any business having as its primary object or objects one or more of the activities enumerated in the sub-section. The Federal Court then concluded that the taxpayer was not established in the relevant years for such a purpose. The reasons which led the Court to this conclusion are sufficiently set out in two passages of the judgment of Fisher J., a judgment in which on this point Deane J. agreed. (at p450)

15. Fisher J. said (1979) 39 FLR, at p 154; 9 ATR, at pp 781-782; 77 ATC, at p 4234 :
". . . the Society was not established for the purpose of rendering wine services to its members. Doubtless these were an important part of the Society's operations but only as a means to an end. The Society's establishment was part of a grander design. It was established for the purpose of obtaining for an overall scheme of profit making the benefits of public company status. It was a scheme that encompassed the activities of a number of companies, each playing a separate but crucial role in the scheme. The aim of the scheme as visualized by the promoters was to participate in the profitable business of dividend stripping and share dealing etc. but to operate in such a way as to minimise the extent to which these profits would be subject to tax."
Subsequently, his Honour said (1979) 39 FLR, at p 155; 9 ATR, at p 782; 79 ATC, at p 4235 :
"It follows that I see the purpose of the establishment of the Society as the acquisition of public company status so as to pass such status to its subsidiaries. If the commercial activities as above described comprise business activities, then the Society performed two business activities, wine services and commercial activities. The commercial activities in my opinion comprised the primary object of the Society's business." (at p450)

16. The Federal Court proceeded, in conformity with authority in this Court, according to the view that in ascertaining the purpose for which a company "is established" it is necessary to look, not only to circumstances existing at the time of incorporation, but also to the activities of the company at the time when its status as a co-operative company is to be determined. No doubt it was the presence of the words "is established" and the purpose of the section that led Fullagar J. in A. &S. Ruffy Pty. Ltd. v. Federal Commissioner of Taxation (1958) 98 CLR 637, at p 656 and Menzies J. in Renmark Fruitgrowers Co-operated Ltd. v. Federal Commissioner of Taxation (1969) 121 CLR 501, at p 506 to adopt this approach. To my mind it is evidently correct, allowing, as it does, that the purpose for which a company is established may change in the course of time and that with the change of purpose there may come a change in status as a co-operative company. Moreover, in Ruffy (1958) 98 CLR 637 the Court explicitly rejected the suggestion that the objects of the business were to be gathered solely from the objects clause in the memorandum. In that case the Court, in characterizing the object of the business, looked to the business activities of the company after its incorporation as well as to the purpose of its incorporation - see the joint judgment of Dixon C.J., Williams and Webb JJ. (1958) 98 CLR, at pp 649-650 ; see also Gibbs J. in Social Credit Savings and Loans Society Ltd. v. Federal Commissioner of Taxation (1971) 125 CLR 560, at p 567 . In Revesby Credit Union Co-operative Ltd. v. Federal Commissioner of Taxation (1965) 112 CLR 564, at p 576 , McTiernan J. said: "The main test to be adopted in ascertaining the primary object is to ask what the actual activities of the appellant society indicate it to be." (at p451)

17. In this Court the taxpayer's case centred on two submissions: (1) that, in considering the purpose for which the taxpayer is established in the relevant year or years, the Court looks not to the subjective motives or intentions of the promoters or of those directing the affairs of the taxpayer's subsidiaries, but to the activities of the taxpayer itself; and (2) that, in considering purpose, the Court looks to purpose in relation to the business carried on by the taxpayer and not to any other purpose. (at p451)

18. Because there is in the second of the two submissions an implicit rejection of the view that "purpose" in s. 117 (1) means "sole or dominant purpose" we must look initially to what is meant by the reference to "purpose" in the sub-section. (at p451)

19. As a matter of common experience, companies are usually established for the purpose of carrying on a business. Consequently, to the question, "For what purpose is the X company established?", we expect to hear the response, "For the purpose of carrying on the business of . . . . " It is on this platform, founded on common experience and expectation, that the taxpayer's second submission is constructed. Unfortunately for the taxpayer, it has no foothold in the language of the sub-section, for the question posed above, if asked of the taxpayer, readily admits of the answer, "For the purpose of holding shares in subsidiary companies which engage in share dealing and dividend stripping operations and conferring on those subsidiaries the status of a public company." (at p452)

20. As a matter of language there is no reason why the word "purpose" should be artificially restricted in the manner suggested by the taxpayer and no reason for denying its ordinary generality of application. Indeed, it is difficult to assign a meaning to the word which would accommodate the sub-section to the exigencies of the taxpayer's situation. The expression "business purpose" used as a shorthand description by the taxpayer's counsel in argument would not avail the taxpayer because the purpose for which it is established, as found by Fisher J., is on any view a business or commercial purpose. (at p452)

21. It was rightly conceded on behalf of the taxpayer that a company which is established for two purposes, one a minor purpose being the carrying on of a business having as its primary object the rendering of services to its shareholders, the other and major purpose being the carrying on of a business having as its primary object the pursuit of activities outside the sub-section, is not a co-operative company within the statutory definition. But then one is forced to ask: "Why should it make any difference that a company is established for the major purpose, not of carrying on a business at all, but of engaging in activities which are outside the sub-section?" It is impossible to divine in Div. 9 a rational purpose or policy which would account for the drawing of a distinction between the two situations. (at p452)

22. Indeed, reflection on the terms of s. 117 (1) and the purpose which it seeks to serve leads to the conclusion that both examples fall outside the purview of the sub-section. The status of a co-operative company within s. 117 (1) brings with it certain advantages under the Act. One such advantage, as we have seen, is exclusion from undistributed profits tax levied under Div. 7. Another is to be found in s. 120 which makes certain distributions and payments made by a co-operative company allowable deductions. By virtue of the statutory definition, advantages are enjoyed by companies which are established for the purpose of carrying on any business which has as its primary object or objects the performance of one or more prescribed functions for its shareholders. As Dixon C.J., Williams and Webb JJ. said in Ruffy (1958) 98 CLR, at p 650 :
"But it is because the company's business is to render what in a wide sense may be called the services to the shareholders that it is considered proper for it to return the profit to them as dividend etc. without paying tax upon it. That seems to us to be the factor which limits the operation of the wide formula of s. 117 and excludes the present case from it." (at p453)

23. In this setting it seems evident that the carrying on of a business having as its primary object or objects the performance of one or more of the stipulated services for shareholders is central to the purpose for which a co-operative company is established. The sub-section speaks of it as "the purpose". Text and context combine in opposition to the taxpayer's second submission and to support the Federal Court's acceptance of "the sole or dominant purpose" construction. (at p453)

24. The rejection of the taxpayer's second submission and the acceptance of "the sole or dominant purpose" construction are fatal to the taxpayer's appeal. But in disposing of the appeal on this ground I should not wish it to be thought that by holding shares in subsidiary companies and by distributing dividends on shares so held the taxpayer was not carrying on a business. In my view it was carrying on business as an investment company notwithstanding the assets which it held were acquired by way of gift and not by way of subscription or purchase. (at p453)

25. As for the taxpayer's first submission, it is my opinion that, in determining the purpose for which the taxpayer is established the courts below were entitled to look not merely to the activities of the taxpayer and its directors, but also to the intentions of the promoters. In general a distinction is to be drawn between purpose on the one hand and motives and intentions of the promoters on the other hand, but I do not see why the intentions of the promoters may not be relevant in determining what is the purpose for which a company is established. If authority be needed to support this view it is to be found in Ruffy (1958) 98 CLR, at p 651 . Likewise, in determining the purpose for which a company is established, it is permissible to look at the business carried on by its subsidiary companies, at least when action to make the companies subsidiaries is taken by the promoters on the incorporation of the holding company and pursuant to plans which they have previously made as promoters of the holding company. (at p453)

26. The cross-appeal relates to the sum of $47,914.97 which, by an amended return, was excluded from the taxpayer's assessable income of $130,202 as first returned for the 1973 year. The amount in question was declared on 29 April 1973 by the directors of Tunwin as an interim dividend to be paid to the taxpayer. The declaration was in these terms:
"Resolved - that an interim dividend of $47,914.97 be declared and credited to the accounts of Brookton Co-operative Society Limited and be available to that company on demand."
The Tunwin directors were also directors of the taxpayer. The minutes of the taxpayer's directors' meeting held on 15 May 1973 record that advice was given to the meeting that the Tunwin dividend "had been declared and (was) due to the Society". The meeting resolved that "upon receipt of these dividends the money be invested on fixed deposit". An appropriate journal entry was made in the books of Tunwin and credited to the taxpayer in Tunwin's "Sundry Creditors" ledger. The amount of the dividend was reflected in the financial statements of both companies as at 30 June 1973. (at p454)

27. In accordance with usual practice Tunwin's Articles did not authorize the directors to declare a dividend. Article 99 was in common form. It 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". (at p454)

28. 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 not thought it necessary to make provision for the contingent liability before declaring the dividend. Subsequently, Tunwin was required to meet the liability. Having done so, it had insufficient funds for remaining profits out of which to pay the dividend. On 10 December 1973 the Tunwin directors endeavoured to rescind the declaration of the dividend by passing the following resolution:
"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 30/6/72 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 Limited be reversed and that Brookton Co-operative Society Limited be requested to acknowledge and accept the reversal of this credit."
On the same day the taxpayer's directors resolved to "accept the said rescission and the corresponding alteration in the credit to it". (at p454)

29. The Commissioner's assessment to primary tax, based on the taxpayer's first return, was issued on 30 April 1974. The objection which the taxpayer made to that assessment made no mention of the rescission of the dividend. A notice of assessment to Div. 7 tax was issued on 17 March 1975 to which an objection was lodged dated 13 May 1975. The objections raised the ground that the sum in question had not been received as a dividend. Subsequently, on 2 June 1975, the taxpayer lodged its amended return. (at p455)

30. The declaration of an interim dividend by directors, whose relevant power under the articles is to pay a dividend, does not create a debt owing by the company to the shareholders (Industrial Equity Ltd. v. Blackburn (1977) 137 CLR 567, at p 572 ; Potel v. Inland Revenue Commissioners (1971) 2 All ER 504, at pp 511-512 ). Consequently, the declaration of an interim dividend may be revoked before payment because it is subject to the will of the directors until payment (Lagunas Nitrate Co. Ltd. v. Schroeder &Co. and Schmidt (1901) 85 LT 22 ). Accordingly, the first question for decision is: Do the circumstances amount to a payment of the dividend by Tunwin to the taxpayer? Payment of a dividend may occur in a variety of ways not involving payment in cash or by bill of exchange, as, for example, by an agreed set-off, account stated or an agreement which acknowledges that the amount of the dividend is to be lent by the shareholder to the company and is to be repaid to the shareholder in accordance with the terms of that agreement. It is, however, well settled that the making of a mere entry in the books of a company without the assent of the shareholder does not establish a payment to the shareholder (Manzi v. Smith (1975) 132 CLR 671, at p 674 ). (at p455)

31. In the present case the taxpayer accepted the correctness of the entry made by Tunwin in its books. This acceptance, it is said, constituted an agreement which amounted to payment. The argument is that from this acceptance there is to be implied an agreement that the amount was lent to Tunwin on terms that it was payable on demand. But the resolution of the Tunwin directors on 29 April 1973 said nothing about loan or deposit; it merely stated that the dividend was to be payable on demand. The resolution passed by the taxpayer's directors on 15 May 1973 did not evidence any agreement to lend moneys to Tunwin; on the contrary, it indicated that the taxpayer was awaiting payment so as to enable it to make an investment "on fixed deposit". (at p455)

32. The strongest point against the taxpayer is that Tunwin's accounts for the 1973 year reflected a debt owing to the taxpayer and the taxpayer's accounts for the same year reflected that debt as an asset of the taxpayer. But when we look beyond the accounts to the resolutions we see that there was no agreement of the king suggested. It seems that the common directors thought, erroneously as it happens, that the declaration of an interim dividend created a debt, for the resolution passed by the directors of the taxpayer speaks of the dividend being "due". In error they found salvation; no doubt it was due to this error that the accounts of the two companies took the form that they did. (at p456)

33. My conclusion, therefore, is that there was no payment by the directors of the taxpayer of an interim dividend and that the directors were entitled to rescind their declaration. Is this conclusion affected by s. 44 (1) (a) of the Act and the extended definition of "debt" in s. 6 (1)? That is the final question. (at p456)

34. Section 44 (1) (a) includes in the assessable income of the taxpayer "dividends paid" to it by Tunwin "out of profits derived by it from any source". "Paid" is defined by s. 6 (1) in relation to dividends so as to include dividends "credited or distributed". By virtue of s. 44 (1) (a) and the statutory definition, a dividend does not form part of the assessable income of a shareholder unless it is paid or credited, notwithstanding that the declaration of a final dividend by the company in general meeting creates a debt and an enforceable right on the part of the shareholder to the dividend. Consequently, in its application to a final dividend the extended statutory definition does nothing to disturb or qualify, as between company and shareholder, the characteristic of a dividend as a debt which is owing by the company to the shareholder. As this is the effect of the extended definition in its application to a final dividend, it would be irrational and incongruous to give it a more radical application when applied to an interim dividend. The reference to "dividends" in s. 44 (1) (a) must be read as a reference to dividends the payment of which is enforceable by the shareholder because they have been declared so as to create a debt, or to dividends which are no longer revocable because, as between company and shareholder, they have been satisfied by payment. When s. 44 (1) (a) is so read, the purpose of the extended definition becomes clear - it is to guard against the possibility, perhaps remote, that the word "paid" might be so narrowly construed that dividends credited or distributed to shareholders in circumstances where they can no longer be revoked or rescinded by the company would not constitute assessable income in the hands of shareholders. (at p456)

35. In the result I would dismiss the appeal and the cross-appeal. I would also refuse the applications for special leave to appeal. (at p457)

MURPHY J. The case arises out of an attempt to misuse the provisions of the Co-operation Act 1923 (N.S.W.) as part of a tax avoidance scheme. The magnitude of the share trading and stripping contrasted with the minimal activities of wine purchasing and distribution and the artificiality of the "gifts" to the appellant company show that it was an instrument or front for tax avoidance, and not at the relevant times "established for the purpose of carrying on any business having as its primary object or objects . . . the rendering of services to its shareholders" within s. 117 (1) of the Income Tax Assessment Act 1936. (at p457)

2. The appeal should be dismissed. The cross-appeal should be dismissed for the reasons given by Mason J. The applications for special leave should be dismissed. (at p457)

AICKIN J. The facts proved in evidence, including the extensive documentary records, are summarized in the reasons for judgment of my brother Mason which I have had the advantage of reading. To a substantial extent the facts were not in dispute though they are not stated in an identical manner in the judgments of the courts below. For present purposes it will be sufficient for me to summarize what in my view are the material facts. (at p457)

2. The taxpayer, Brookton Co-operative Society Ltd., was incorporated on 28 July 1971 under the provisions of the Co-operation Act 1923 (N.S.W.), as amended, as a co-operative company. Its objects as set out in r. 5 of its rules in accordance with the provisions of that Act, may be summarized by saying that they were the acquisition of commodities for disposal or distribution among its shareholders and no others, and the rendering of services to its shareholders and no others. Those two "objects" were expanded in par. (c) which specified a variety of commodities to be sold to the shareholders or specified a variety of commodities to be purchased on behalf of the shareholders or to be sold to them and a variety of services to be provided to the shareholders. The evidence, in so far as it may be material, shows that the promoters of the society and its original shareholders and directors had at the time of the incorporation intended that the society would engage in buying wine for its members. However it was not intended that its activities would be restricted to buying and selling wine. It appears that the provision of a service to shareholders by procuring wine on their behalf was first raised at a meeting of directors on 12 August 1971. A manager was appointed and he made arrangements with various suppliers and placed orders with them on behalf of shareholders, the taxpayer receiving a commission from the vendor on those orders. That activity began in October 1971 and continued in a small way throughout the years of income in question. The total orders in the first year were a little over $4,000 on which the taxpayer earned a commission of $408. At the time of its incorporation or immediately thereafter there were seven directors and, subject to one change which occured in August 1971, those directors remained in office throughout the first year of income. Two other directors resigned and were replaced in the two succeeding income years. Three of the directors, Messrs. Bainton, Grant and Smith, remained directors throughout the relevant period. At the time of incorporation there were approximately thirty members. The number increased to about fifty by 30 June 1974, although it appears that only about half of the members took advantage of the services provided by the taxpayer in relation to the purchase of wine. It is not in dispute that purchase of wine and supply was the only service to members which was provided by the taxpayer which fell within the objects set out in the rules and was within the scope of the Co-operation Act. (at p458)

3. According to the material before this Court, on 29 April 1971 prior to the incorporation of the taxpayer a company called R.H.D. Investments Pty. Ltd. ("R.H.D. Investments") had been incorporated; its shares were held by or on behalf of another company named September Six Pty. Ltd. ("September Six"). There were also incorporated on 29 April 1971 two other companies, Boongil Investments Pty. Ltd. ("Boongil") and Wyomee Investments Pty. Ltd. ("Wyomee"). The latter two companies became subsidiary companies of R.H.D. Investments at a stage which does not precisely appear. On 3 August 1971 at a meeting of directors of R.H.D. Investments it was resolved that a transfer of shares by September Six of three ordinary shares in R.H.D. Investments to the taxpayer would be approved subject to being duly stamped. It also appears that the remaining two issued shares in R.H.D. Investments were held upon trust for the taxpayer, presumably on and from that date or a date shortly thereafter. (at p458)

4. The directors of Boongil and Wyomee as from April and May of 1971 were Messrs. Grant, Hay and Smith. Mr. Hay resigned on 12 August 1971 and was replaced by Mr. Bainton in each case. (at p458)

5. On 9 July 1971 a company named Yorta Pty. Ltd. ("Yorta") was incorporated and its issued shares were held by or on behalf of R.H.D. Investments. Its initial directors were the same as those of Boongil and Wyomee and again Mr. Hay resigned in August 1971 and was replaced by Mr. Bainton. On 3 September 1971 another company, Demise Pty. Ltd. ("Demise") was incorporated, all the issued shares being held by or on behalf of Yorta. The directors of Demise as at 27 September 1971 were Messrs. Gilmore and Grant. Mr. B. H. Smith was appointed on 8 June 1972, as was Mr. Bainton, on which date Mr. Gilmore resigned. (at p459)

6. On 14 March 1972, another company, Tunwin Pty. Ltd. ("Tunwin") was incorporated, its two issued shares being held by Grant and Miller and they held their shares upon trust for September Six. On that same date one of those shares was transferred to the taxpayer and the holder of the other share thereafter held that share also on behalf of the taxpayer. The same course was followed with respect of two other companies. Sans Holdings Pty. Ltd. ("Sans Holdings") was incorporated on 20 April 1972, and on the same day one share was transferred to the taxpayer, the other being held upon trust for the taxpayer. On that same day a similar procedure took place in relation to a company called Tovella Traders Pty. Ltd. ("Tovella Traders"). Thus in March and April 1972 the taxpayer acquired three subsidiary companies. On 27 June 1972 R.H.D. Investments made a gift to the taxpayer company of all the shares in Boongil, Wyomee and Yorta. Those companies therefore became subsidiaries of the taxpayer and Demise, which was a subsidiary of Yorta, thus became a sub-subsidiary of the taxpayer. (at p459)

7. Each of those companies had as their directors Messrs. Grant, Smith and Bainton, save that in the case of Demise, Mr. Gilmour was a director until 8 June 1972 when he was replaced by Mr. Bainton. These subsidiary companies had during the income year ending 30 June 1972 carried on business by trading in shares, by "dividend stripping" and other financial transactions of a profit-making character. In particular Boongil in the period from 29 April 1971 to 30 June 1972 had acquired shares in various companies and received dividends totalling over $1.2 million and held shares in the companies from which those dividends had been derived still on hand at 30 June 1972, but then valued at a total of $30. Tunwin also engaged in similar dealings in shares in the year ended 30 June 1972, receiving dividends in that year of more than $1.6 million and disposing of the shares in question for a total of $145,244 before the end of the year. Those subsidiaries and others also engaged in like activities in the following year. In addition Tovella carried on share trading and dividend stripping in the period 20 April 1972 to 30 June 1972. Sans Holdings also engaged in activities of that kind in the year ended 30 June 1972. (at p460)

8. Towards the end of that year of income Tunwin declared a dividend of some $3000 in favour of the taxpayer, of which it was then a direct subsidiary. As I have already noted, the taxpayer in the year to 30 June 1972 earned commission of some $400. It resolved to pay a rebate amounting to $2,500 to members in respect of business done in the year ended 30 June 1972. In so far as it may be relevant it is clear enough that the source of the funds out of which the rebate was paid must have been the dividend received from the subsidiary company. (at p460)

9. At a meeting of directors of R.H.D. Investments held on 3 August 1971 it was resolved to apply for 100 ordinary shares in Yorta, Wyomee and Boongil, and it is to be assumed that those shares were in fact issued and were the shares ultimately transferred to the taxpayer or a trustee for it just prior to the end of that year of income. (at p460)

10. The appeal raises the question whether the taxpayer was in the relevant years a "co-operative company" within the meaning of s. 117 (1) of the Income Tax Assessment Act 1936 (Cth), as amended, ("the Act") which so far as is material provides as follows:
"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:
(a) the acquisition of commodities or animals for disposal or distribution among its shareholders;
(b) the acquisition of commodities or animals from its shareholders for disposal or distribution;
(c) the storage, marketing, packing or processing of commodities of its shareholders;
(d) the rendering of services to its shareholders;
(e) the obtaining of funds from its shareholders for the purpose of making loans to its shareholders to enable them to acquire land or buildings to be used for the purpose of residence or of residence and business." (at p460)

11. The test which s. 117, as construed in earlier decisions of this Court, provides is a compound one. There must be ascertained first the purpose for which the company "is established". For a company to qualify as a co-operative company that purpose must be the carrying on of a business which has as its primary object or objects one or more of the activities specified in s. 117 (1). Thus the second aspect of the test is the ascertainment of the primary object or objects of the business carried on by the company. (at p461)

12. It has been held in earlier decisions of this Court that the expression "is established" indicates that the company and its activities must be looked at year by year, and not merely at the time of its incorporation. That expression therefore has the significance of "maintained" or "kept in operation". This Court has held that the objects as set out in the company's memorandum of association or other constituent documents cannot be decisive and perhaps may be of only remote relevance. (at p461)

13. In A. &S. Ruffy Pty. Ltd. v. Federal Commissioner of Taxation (1958) 98 CLR, at pp 648-649 Dixon C.J., Williams and Webb JJ. said of s. 117:
"Section 117 sets out a number of objects any one or more of which will suffice if it is the primary object, or they are the primary objects, of a business for the carrying on of which the company was established. Notice that it is the object or objects of the business, not the object or objects of the company, to which the section, in terms, refers. Is this an accident and does the section really intend to make the definition turn on the primacy of some object or objects of the company as contained in its memorandum? In such a provision as that under consideration one cannot be certain that distinctions of language are a safe guide to the draftsman's meaning. But at all events what he has said is 'any business having as its primary object or objects'. Further, the difficulties are notorious of any attempt to sort out the objects expressed in a modern memorandum of association and form a judgment as to which matters most or is 'primary'.
To say what the primary purpose of a business is may not always be quite easy, but relatively speaking the test it provides may be considered practicable. We are therefore disposed, not only in the general interest but as a matter of meaning, to reject the idea that you should look, at all events exclusively or even initially, at the objects expressed in the company's memorandum."
Their Honours also said (1958) 98 CLR, at p 650 :
"But the words 'company which . . . is established for the purpose of carrying on a business having as its primary object or objects' are the all-important words of the provision; and it is apparent that these words must be read in the closest apposition with the description of objects contained in the respective lettered paragraphs. Each paragraph emphasises the relation of the shareholder to the activity which represents the business. The business must be conducted for performing a particular function for the shareholders. Thus its primary object must be to distribute among them animals or commodities acquired for that purpose or to dispose of such animals or commodities to them. Or it must be to acquire animals or commodities from them for the purpose of disposal or distribution. Or it must be to provide the shareholders with such facilities or requirements as storage, packing, processing or marketing. Or it must be to provide them with services. Finally, there is par. (e) concerning loans to them for the purposes specified. The purpose of the business must be to provide the shareholders with these services, facilities or advantages. True it is that the shareholders will obtain these things on a business footing. They will sell or buy the goods, pay for the storage and so on, as any customer would. But it is because the company's business is to render what in a wide sense may be called the services to the shareholders that it is considered proper for it to return the profit to them as dividend etc. without paying tax upon it. That seems to us to be the factor which limits the operation of the wide formula of s. 117 and excludes the present case from it."
And again their Honours said (1958) 98 CLR, at pp 650-651 :
"Yet what s. 117 demands is a business whose primary object was to do that or to render some other of the specified services to the shareholders. Neither in the hands of the old company nor in the hands of the new company was the business conducted for the primary object of serving the purposes of the wholesale butchers as shareholders by acquiring the runners forming a by-product of their trade. The dominating motive so it would seem was to earn profits for the holders of A and B class shares. The motive of allotting shares to the suppliers of runners was subordinate even if powerful. No one can doubt that one motive was to obtain the advantage of the allowance or allowances given by s. 120 (1) (a) and (b). Motive, of course, is not purpose, that is to say it is not necessarily purpose or object. But it seems clear enough that it was not the primary object of the business to acquire the runners from the shareholders of the company or to process their commodities. But for the tax allowance, the runners of any one else would have done as well."
On this point, Fullagar J. said (1958) 98 CLR, at p 656 :
"It would be dangerous, I think, to begin in this case with any a priori conception of the differentia between a co-operative company and companies generally, and of the reason or reasons for showing favour to such a company in matters of taxation. The only proper course is to take the words of the statute, and inquire whether this company comes within them. The first thing to be noted is that the section speaks of the primary object of the business for the purpose of carrying on which the company is established. We may, of course - and indeed, I think, must - look at the company's memorandum of association, but this cannot be conclusive either way. We must in addition look at the activities actually carried on by the company, and at its history, constitution and control, for all or any of these things may throw light on the purpose of its establishment and the primary object of its business."
He also said (1958) 98 CLR, at p 657 :
"The memorandum is inconclusive. When, however, we look at the history of the company, its constitution, and the activities actually carried on by it, it becomes plain, in my opinion, that the company does not fulfil the third condition prescribed by s. 117. Its predecessor was an ordinary trading company, which in 1946 created a new class of shares - 'C' shares - and issued some 600 of them to certain wholesale butchers, who happened to be suppliers of runners to the company. The sole purpose of the creation and allotment of the 'C' shares and of the establishment of the new company was to seek the benefit of s. 120 of the Assessment Act. This was perfectly legitimate, but it was not a purpose mentioned in s. 117." (at p463)

14. No member of the Court treated the subjective, or the expressed, intentions of the promoters or directors of the company as being in any way material to the determination of its status under s. 117 but treated what the company actually did, including the taking over of the former business and the like, as being the determinative factors. In my opinion the subjective intentions of the promoters, the original subscribers or shareholders and the original directors, whether formed prior to or at the time of incorporation are of no assistance in determining whether the taxpayer company is, as it claims to be, a co-operative company within the meaning of s. 117. For reasons which I indicate below what matters is what the company did. The purpose of its incorporation must be ascertained from what it did. In my opinion no significance is to be attributed to the fact that what the company actually did had been planned in advance by those who may be described as "its promoters"; it would be very surprising if the activities were not so planned, unless the company were a "shelf company". (at p463)

15. Section 117 contemplates that there may be several primary objects of the business carried on by the company and moreover that there may be one or more secondary or subsidiary objects. This is involved in the notion that the status of the company may vary from year to year according to the nature of the business which it carries on and the primacy or otherwise of a particular business carried on. (at p464)

16. The section gives no express guidance as to the criteria by which primary and other objects of the business may be distinguished; nor does it indicate expressly the significance (if any) of carrying on concurrently another separate business. The words "any business" would cover a situation in which a company carried on several businesses, only one of which had, as its primary object or objects, the carrying on of one or more of the specified activities, and would also cover a situation in which a company carried on several businesses separate from one another each of which had as its primary object or objects the carrying on of one or more of the specified activities. (at p464)

17. The analysis of the facts made in the courts below does not in my opinion separate what appears to be two quite distinct businesses and in some cases their Honours took the view that there was only one business. It is not disputed that the taxpayer carried on the business of rendering services to its shareholders, though only in a relatively small way. (at p464)

18. The facts which I have noted above demonstrate that soon after its incorporation the taxpayer acquired by way of a gift from September Six the beneficial interest in all the issued shares of R.H.D. Investments. By reason of the provisions of the Co-operation Act it was precluded from investing any of its funds in the acquisition of such shares but it was not precluded from accepting gifts, whether of shares or other property. The share transfer was duly registered by the board of directors of R.H.D. Investments. At that time Messrs. Grant, Bainton and Smith were the directors of R.H.D. Investments. At that time Messrs. Grant, Bainton and Smith were the directors of September Six and of R.H.D. Investments. Those same three persons were three out of the seven directors of the taxpayer. (at p464)

19. At various meetings of the board of directors of the taxpayer resolutions were passed accepting the gifts of the various shares in question in the year ended 30 June 1972. Thus on 3 August 1971 the directors resolved to accept the gift from September Six of five ordinary shares in R.H.D. Investments and to affix the seal of the company to the transfers. Some arrangement with respect to the one outstanding share was no doubt made but it is not recorded in the extract of the minutes. On 17 March 1972 the minutes of directors show that the taxpayer accepted the gift from September Six of two ordinary shares in Tunwin held by Messrs. Grant and Miller and that the transfer of one of such shares from Mr. Miller be accepted and that the taxpayer's seal be affixed to the transfer. On 8 May 1972 the directors resolved to accept the gift of two ordinary shares in Sans Holdings and of two ordinary shares in Tovell Traders and that Mr. Grant should hold one share in each company on trust for the taxpayer. On 26 June 1972 it was recorded in the minutes that R.H.D. Investments intended to make a gift of 102 ordinary shares in each of Boongil, Wyomee and Yorta to the taxpayer. The directors of the taxpayer resolved to accept the gifts and that Messrs. Grant and Hay should thereafter hold one share each in all those companies upon trust for the taxpayer. Thus from a few days after its incorporation R.H.D. Investments became a subsidiary of the taxpayer, on 17 March 1972 Tunwin became a subsidiary, on 8 May 1972 Sans Holdings and Tovell Traders became subsidiaries and on 26 June 1972 Boongil, Wyomee and Yorta (which had been subsidiaries of R.H.D. Investments) became subsidiaries of the taxpayer itself. Those three subsidiaries had been subsidiaries of R.H.D. Investments since August 1971. (at p465)

20. The only dividend received by the taxpayer from any of these subsidiaries in the year ended 30 June 1972 was a dividend of $3000 from Tunwin which had declared that dividend on 10 May 1972. Tunwin as I have already mentioned had in the period 14 March 1972 to 30 June 1972 received dividends of some $1.6 million. There is no material difference between the operations of the taxpayer company itself and of the various subsidiaries in the following years of income, i.e. the years ended 30 June 1973 and 30 June 1974. (at p465)

21. The activities of its subsidiaries during such parts of the year ended 30 June 1972 during which they were subsidiaries (or sub-subsidiaries) are also not in dispute. Some or all of them conducted "dividend stripping" activities, purchase and sale of shares and other profit-making undertakings and schemes within the meaning of the Income Tax Assessment Act. The various subsidiaries would have been public companies for the purposes of s. 103A if they were subsidiaries of a public company, and by virtue of s. 103A (2) (b), a company which was a co-operative company as defined in s. 117 of the Act at all times during the year of income would have been a "public company". (at p465)

22. The status of the taxpayer as a co-operative company was thus of importance not only to the taxpayer itself to give it the advantages of the allowable deductions provided for in s. 120, but also to its subsidiaries (and sub-subsidiaries) because they too would be public companies and have the advantage which public companies enjoy of falling outside Div. 7 of Pt III of the Act. (at p466)

23. Assuming for the moment that the taxpayer's activities in relation to the holding of shares in subsidiary companies and the receipt of dividends from one of them in the first year of income constitutes a business or the carrying on of a business the question then arises of what is the significance of such a separate business. Menzies J. in Renmark Fruitgrowers Co-operated Ltd. v. Federal Commissioner of Taxation (1969) 121 CLR 501 adverted to this question but found on the facts before him that there was only one business and therefore did not find it necessary to consider the position which would arise if there were two independent businesses. He said (1969) 121 CLR, at p 507 :
"Here it is convenient to refer to an argument to the effect that the merchandizing business of the company was, in truth, two businesses, one dealing merely in fruitgrowers' requisites and the other in other commodities. This contention I reject and I find that in 1966 there was, as the company's accounts indicate, one merchandizing business. It is not necessary, therefore, to consider the consequences which it was said would flow from accepting the argument that there were two merchandizing businesses." (at p466)

24. The legislation speaks of the object or objects of the business of a company and not of the objects of the company contained in its memorandum of association. The question is: Was the company carrying on "any business having as its primary object or objects one or more of the following" listed activities set out in pars. (a) to (e)? The passages from the reasons for judgment in Ruffy's Case (1958) 98 CLR 637 which I have quoted above demonstrate that this is the critical question and it is one to which the objects set out in the memorandum of association are relevant but unlikely to be helpful. The question is not what was the primary object of the company, or of its "establishment" or of its promoters, directors or shareholders. This distinction has not always been carefully maintained in what has been said about ss. 117-120 of the Act. (at p466)

25. The taxpayer was undoubtedly carrying on a business which had as its primary object the rendering of services to the shareholders, whether or not it may have been embarked upon by the promoters and directors for motives other than the mere conduct of that business. Motive is not necessarily the same thing as purpose (Ruffy's Case (1958) 98 CLR, at p 651 and the motives of the promoters are by no means to be taken to be the primary object of the business carried on by a company or the purpose for which a company is "established". The existence of such a motive would not of itself disqualify the taxpayer from obtaining the status which it sought under s. 117. The fact that a company carries on a business having as its primary object one or more of the permitted activities and was in the relevant year "established" for the purpose of doing so, is not negated by the fact that the promoters or directors regarded it as a means to an end unconnected with that business and would not disqualify the company from attaining that status though it would be relevant to the determination of the purpose for which it was "established" in the year in question. The conduct of some other business, not being one having a permitted primary object or objects, at the same time as a business having as its primary object one or more of the permitted activities raises the question which Menzies J. did not have to answer. The answer to that question appears to me to lie in the force to be given to the word "established" in the light of what has been said about it in decisions of this Court. (at p467)

26. There are two conceptions involved, the first the purpose of keeping the company in operation (i.e. "established") and the second the primary object of its business. The purpose for which it is established must be the carrying on of a business having one or more of the permitted activities as its "primary object or objects" if it is to be a co-operative company within s. 117 (1) of the Act. If in any particular year the company is not "established", in the sense of being brought into or kept in operation for the purpose of carrying on a business having the requisite primary object, then the fact that it may in that year carry on that business will not be sufficient to make it a co-operative company. The section appears to me to proceed on the basis that there must be a single purpose for which a company was maintained in operation in a particular year in order to qualify as a co-operative company. It is not in my opinion a question of seeking some "principal or dominant purpose"; it is not the same kind of inquiry as is necessary in relation to the ascertainment of "the primary object or objects" of a business actually carried on. If a company is kept in operation in a particular year for the purpose of carrying on a business having as its primary object one of the permitted activities and also for the purpose of carrying on some other activity or for a purpose of carrying on some other business, then it will not qualify as a co-operative company unless that other business has as its primary object one of the permitted activities. I do not consider that the subjective or announced purposes of the promoters of the company or of its directors are material to the consideration of these questions. They are to be answered by reference to what the company actually does. If it embarks on or carries on two or more businesses, only one of which falls within the permitted list, then in my opinion it cannot be said to have been estblished, i.e. brought into or kept in operation for the purpose of carrying on the co-operative business but is so maintained for the purpose of carrying on both the permitted business and the other businesses. The passage which I have quoted above from the judgment of Fullagar J. in Ruffy's Case (1958) 98 CLR, at p 656 makes it clear that it is what the company actually does which determines its status. It may be observed that in Revesby Credit Union Co-operative Ltd. v. Federal Commissioner of Taxation (1965) 112 CLR 564, esp at p 571 McTiernan J. examined in some detail what the Credit Union there did in its actual operations on a day to day basis and the basis upon which the society conducted its operations by the promotion of discussion amongst members, the giving of advice and assistance in relation to financial matters and the like (1965) 112 CLR, at pp 571-574 . McTiernan J. said of Ruffy's Case (1965) 112 CLR, at p 576 :
"Accordingly their Honours took the view that one should not look exclusively or even initially at the objects set out in the memorandum, and went on to examine the actual conduct and structure of the business to ascertain the 'primary' object of the business. However in the present case the objects (quoted above) expressed in the Model Rules governing the constitution of the appellant society are not a collection of unrelated purposes of which none can be considered to be paramount. Taken as a whole they reveal the unified and single purpose to assist the members of the appellant society in solving the various economic problems which arise in the course of a man's life and in particular to achieve this end by lending money to the members and supervising the expenditure of the money lent. But in view of what was said by Dixon C.J., Williams and Webb JJ., I cannot let the matter end there. I consider that I can take this into account but if the conduct of the business by the appellant society reveals that the primary objects are other than that indicated by the object clause in the Model Rules I cannot give the Model Rules precedence. The main test to be adopted in ascertaining the primary object is to ask what the actual activities of the appellant society indicate it to be." (at p468)

27. The conclusion that if a company is maintained or kept in operation for the purpose of carrying on a co-operative business and also some other business it cannot qualify as a co-operative company under s. 117 is in my opinion in accordance not only with the ordinary meaning of the words but also with the manifest purpose of the section. (at p469)

28. There remains the question whether the taxpayer carried on another business in addition to providing services to its members. Its activities (to use a neutral term) have been described above and in the reasons for judgment of my brother Mason. Do they amount to carrying on a business? Generally speaking it is a question of fact whether what an individual or a company does constitutes carrying on a business. It has often been said that it is easier to draw an inference that an income earning activity of a company is a business than to do so when the same activity is undertaken by an individual; see, e.g., the observations of Lord Diplock delivering the advice of the Privy Council in American Leaf Blending Co. Sdn. Bhd. v. Director-General of Inland Revenue (Malaysia) (1979) AC 676, at p 684 . That was a case of a company which had closed down its tobacco business and thereafter let its premises and received the rent therefrom. In the case of a company which had no activity other than receipt of dividends from shares which it had purchased, it would ordinarily be regarded as carrying on a business even if it did not actively manage its portfolio of investments, though an individual who did the same would not necessarily be regarded as carrying on such a business; cp. Esquire Nominees Ltd. v. Federal Commissioner of Taxation (1973) 129 CLR, at p 212 per Barwick C.J. and (1973) 129 CLR, at p 221 per Menzies J. (at p469)

29. The present case presents the unusual feature that the taxpayer did not employ its own funds or borrowed funds in acquiring its shareholding in each of its subsidiaries. Indeed the Co-operation Act prohibited it from so doing. It became a shareholder in those companies as the recipient of gifts from other companies controlled by three of its directors in the manner described above. This does not mean that the taxpayer was entirely passive for its directors resolved to accept each gift and executed the various transfers under its common seal in respect of each of the gifts, including the transfer by one of its subsidiaries of shares in its sub-subsidiaries. (at p469)

30. It is perhaps not surprising that there appears to be no authority dealing expressly with such a situation. It is hard to visualize a situation in which the holding of, and receipt of dividends from, shares the subject of a gift by an individual would be regarded as the carrying on of a business. However a company stands in a different position for most companies are formed for the purpose of carrying on business and having the capacity to carry on business; the taxpayer was certainly so formed. (at p470)

31. All these circumstances, including the repetition of acceptance of gifts of shares constituted activities of a business character designed and intended to obtain a business advantage for the taxpayer, i.e. the acquisition of income-earning assets for the receipt of dividends must have been expected by at least some of its directors, and one would expect that the other directors were informed. It was no doubt a set of unusual transactions but it improved the capital structure of the taxpayer and gave it a prospect, if not a probability, of receiving amounts of income. In my opinion the acquisition of these shares and their retention were business activities and constituted the carrying on of the business of holding investments in the expectation of receiving dividends, notwithstanding that the shares in question were received by way of gift. Such a business however is not within the categories set out in s. 117 (1) of the Act. (at p470)

32. In the result I am of opinion that this appeal should be dismissed. It follows that the applications by the taxpayer for special leave to appeal in respect of assessments in subsequent years should be refused. (at p470)

33. In respect of the cross-appeal by the Commissioner, I agree that it should be dismissed for the reasons given by my brother Mason. (at p470)

WILSON J. I would dismiss the appeal and cross-appeal, and refuse the applications for special leave, for the reasons given by Mason J. (at p470)

Orders

Appeal dismissed with costs.

Cross-appeal dismissed with costs.

Applications for special leave to appeal refused with costs.