Commissioner of Taxation v Linter Textiles Australia Ltd (in liq)

Case [2005] HCA 20

HIGH COURT OF AUSTRALIA

GLEESON CJ,
McHUGH, GUMMOW, KIRBY, HAYNE, CALLINAN AND HEYDON JJ

COMMISSIONER OF TAXATION  APPELLANT

AND

LINTER TEXTILES AUSTRALIA LTD (IN LIQUIDATION)             RESPONDENT

Commissioner of Taxation v Linter Textiles Australia Ltd (In Liquidation)

[2005] HCA 20
26 April 2005
S606/2003

ORDER

1.Leave to amend notice of appeal granted and amended notice of appeal treated as filed and served. 

2.Appeal allowed.

3.Set aside the orders of the Full Court of the Federal Court of Australia made on 14 April 2003 and in their place order:

(a)appeal allowed with costs;

(b)set aside the orders of Hely J made on 6 September 2002 and in their place order:

(i)objection decision dated 9 February 2001 affirmed;

(ii)applicant to pay the costs of the proceedings before Hely J.

4.Appellant to pay the respondent's costs of and incidental to the proceedings in this Court.

On appeal from the Federal Court of Australia

Representation:

M R Aldridge SC with S J McMillan and N Perram for the appellant (instructed by Australian Government Solicitor) at the hearing on 3 August 2004

A Robertson SC with M R Aldridge SC and S J McMillan for the appellant (instructed by Australian Government Solicitor) at the hearing on 9 December 2004

D H Bloom QC with J Davies SC and S H Steward for the respondent (instructed by Phillips Fox)

Notice:  This copy of the Court's Reasons for Judgment is subject to formal revision prior to publication in the Commonwealth Law Reports.

CATCHWORDS

Commissioner of Taxation v Linter Textiles Australia Ltd (In Liquidation)

Income tax – Allowable deductions – Loss carry forward provisions – Losses incurred by taxpayer company in preceding years – Requirement of continuity during year of income of beneficial ownership in shares in the taxpayer company that carry between them various rights – Winding-up order made in respect of parent of taxpayer company and subsequently in respect of taxpayer company – Liquidators appointed in each case – Whether shares in the taxpayer company still carried between them the rights required to be attached to those shares.

Income tax – Allowable deductions – Loss carry forward provisions – Losses incurred by taxpayer company in preceding years – Requirement of continuity during year of income of beneficial ownership in shares in the taxpayer company that carry between them various rights – Winding-up order made in respect of parent of taxpayer company and subsequently in respect of taxpayer company – Liquidators appointed in each case – Whether, subsequent to winding up of parent company, the shares held by parent company in the taxpayer company were not "beneficially owned" by the parent company.

Income tax – Allowable deductions – Loss carry forward provisions – Losses incurred by taxpayer company in preceding years – Discretion in Commissioner of Taxation to apply additional requirements for carrying forward previous tax losses – Requirement that voting power in taxpayer company be controlled, or capable of being controlled, by an individual or two or more persons not being companies – Ultimate holding company of…

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Details
AGLC
Commissioner of Taxation v Linter Textiles Australia Ltd (in liq) [2005] HCA 20
Case
[2005] HCA 20
Decision Date

CaseChat Overview and Summary

The Commissioner of Taxation appealed to the High Court of Australia against a decision of the Full Court of the Federal Court of Australia concerning the deductibility of prior year tax losses for Linter Textiles Australia Ltd (in liq). The dispute centred on whether Linter Textiles, which had incurred substantial losses in preceding income years, could carry forward those losses to offset its assessable income in the year ended 30 June 1992. Linter Textiles was a wholly owned subsidiary of Linter Group Ltd (in liq), which in turn was indirectly held by discretionary trusts for the benefit of the Goldberg family. Both Linter Group and Linter Textiles were placed into liquidation in 1991 and 1992 respectively, with liquidators appointed in each case.

The primary legal issues before the High Court were whether the winding-up orders made in respect of Linter Group and Linter Textiles prevented Linter Textiles from satisfying the continuity of ownership requirements stipulated by sections 80A(1) and 80A(3) of the *Income Tax Assessment Act 1936* (Cth). Specifically, the court had to determine whether, following the liquidations, the shares held by Linter Group in Linter Textiles still carried the requisite rights concerning voting power, dividends, and capital distributions, and whether Linter Group continued to "beneficially own" those shares. Additionally, the court considered whether the Goldberg family, as the ultimate beneficiaries, still controlled or were capable of controlling the voting power in Linter Textiles, or held the requisite rights to dividends and capital distributions, as required by section 80A(3).

The High Court allowed the Commissioner's appeal, setting aside the orders of the Full Court of the Federal Court. The Court reasoned that the appointment of liquidators did not divest the companies of the beneficial ownership of their assets, nor did it alter the fundamental rights attached to the shares in Linter Textiles. The Court found that the shares continued to carry the necessary rights and that Linter Group remained the beneficial owner of its shares in Linter Textiles, notwithstanding the liquidation. Furthermore, the Court determined that the Goldberg family retained control of the voting power and the rights to dividends and capital distributions, satisfying the conditions under section 80A(3). Consequently, Linter Textiles was permitted to carry forward its prior year losses.

Orders

Orders of the court

1. Leave to amend notice of appeal granted and amended notice of appeal treated as filed and served.

2. Appeal allowed.

3. Set aside the orders of the Full Court of the Federal Court of Australia made on 14 April 2003 and in their place order:

(a) appeal allowed with costs;

(b) set aside the orders of Hely J made on 6 September 2002 and in their place order:

(i) objection decision dated 9 February 2001 affirmed;

(ii) applicant to pay the costs of the proceedings before Hely J.

4. Appellant to pay the respondent's costs of and incidental to the proceedings in this Court.

Background

Background to the litigation

This Court subsequently granted the Commissioner special leave to appeal against the orders of the Full Court.Statement of the material facts At all material times the respondent, Linter Textiles, was a wholly owned subsidiary of Linter Group Ltd (in Liq) ("Linter Group"). Pochette Nominees Pty Ltd, as trustee for two discretionary trusts – the Goldberg Family (Deborah) Trust and the Goldberg Family (Faye) Trust ("the Goldberg Family Trusts") – indirectly held shares in Linter Group. Members of the Goldberg family were the beneficiaries under the Trusts. In April 1991, the Supreme Court of New South Wales ordered that Linter Group be wound up under the Companies (New South Wales) Code ("the Companies Code"). In February 1992, that Court ordered that Linter Textiles be wound up under the Corporations Law. In each case a liquidator was appointed[92].[92]By way of background, the Linter group of companies were associated with Mr Abraham Goldberg and carried on business primarily as manufacturers and distributors of clothing and handled brands such as King Gee, Speedo, Pelaco, Exacto, Formfit, Kortex and Stubbies. The group collapsed in January 1990 with an estimated deficiency of approximately $550 million. Linter Group and all of its operating companies were put into receivership. The receivers sold each of the businesses and brand names. During 1991 and 1992 the companies, by then each a shell, were serially put into liquidation. In the year of income ended 30 June 1992, Linter Textiles had derived an assessable income of $10,163,773. Linter Textiles had also incurred losses in the year of income ended 30 June 1990 totalling $10,393,871 that it sought to carry forward. Section 80G of the Income Tax Assessment Act 1936 (Cth) ("the 1936 Act") also deemed the company to have incurred losses of $9,929,676. That deemed loss was a consequence of the transfer to it, under s 80G, of losses that had been incurred by Linter Group in the year of income ended 30 June 1990. There was no change in the natural persons who were the ultimate beneficiaries of the Goldberg Family Trusts between the loss year (ended 30 June 1990) and the income year (ended 30 June 1992). In the hearing before Hely J, the parties agreed that, but for the winding up orders that were made with respect to Linter Group and Linter Textiles, the requirements of s 80A(1) or (3) and s 80G(6) of the 1936 Act were met. Accordingly, the losses would have been available to Linter Textiles as an offset to the assessable income derived by it in the 1992 year of income. Neither Hely J nor the Full Court dealt with the question whether s 80A(3) was an alternative test to s 80A(1) or whether it was cumulative. As I later show, the omission of the primary judge and the Full Court to deal with this matter and the agreement of the parties does not prevent this Court from examining the issue.The issues The main issue in the appeal is whether the orders for the winding up of both Linter Group and Linter Textiles brought about the result that, in the 1992 year of income, Linter Textiles could not comply with the requirements of s 80A(1) or (3). Unless it satisfied those conditions, it could not deduct against the assessable income of that year under s 79E of the 1936 Act the prior year losses it had incurred. The issue raises several questions in respect of the application of s 80A(1) and s 80A(3) of the Act:1.In relation to s 80A(1):(a)whether, by reason of the order for the winding up of Linter Textiles, the shares of Linter Group in Linter Textiles ceased to be shares "carrying between them" the rights in s 80A(1)(c)-(e), that is, the rights to exercise more than one-half of the voting power, to receive more than one-half of any dividends that may be paid and to receive more than one-half of any distribution of capital; and(b)whether, by reason of the order for the winding up of Linter Group, it no longer "beneficially owned" the shares it held in Linter Textiles within the meaning of s 80A(1).2.If the requirements of s 80A(1) were satisfied and it was reasonable for the Commissioner under s 80A(2) to determine that s 80A(3) applied, whether, by reason of the order for the winding up of Linter Group, the Goldberg family ceased:.to control or be capable of controlling the voting power in Linter Textiles; or.to have a right to receive (directly or indirectly and for their own benefit) more than one-half of any dividends that may be paid and more than one-half of any distribution of capital within the meaning of s 80A(3).

Evidence

Evidence Before The Court

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Decision

Reasons for decision

GLEESON CJ, GUMMOW, HAYNE, CALLINAN AND HEYDON JJ HUGH J

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Ratio Decidendi

Legal Principle Established

Established by: GLEESON CJ, GUMMOW, HAYNE, CALLINAN AND HEYDON JJ, HUGH J

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