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

[2003] HCATrans 501

[2003] HCATrans 501

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S177 of 2003

B e t w e e n -

COMMISSIONER OF TAXATION

Applicant

and

LINTER TEXTILES AUSTRALIA LTD (IN LIQUIDATION)

Respondent

Application for special leave to appeal

McHUGH J
GUMMOW J

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON TUESDAY, 2 DECEMBER 2003, AT 10.01 AM

Copyright in the High Court of Australia

MR M.R. ALDRIDGE, SC:   May it please the Court, I appear for the applicant with my learned friend, MR S.J. McMILLAN.  (instructed by Australian Government Solicitor) 

MR D.H. BLOOM, QC:   May it please the Court, I appear with MS J. DAVIES for the respondent.  (instructed by Phillips Fox) 

McHUGH J:   Yes, Mr Aldridge. 

MR ALDRIDGE:   Your Honours, could I commence by seeking to expand a little on paragraphs 15 and 16 of our written summary.  Those paragraphs deal with the issue of whether the shares continue to carry the rights or control of the kind mentioned in sections 80A(1) and 80A(3).  In section 80A(1) ‑ ‑ ‑

GUMMOW J:   Sorry, what page are you on? 

McHUGH J:   Page 71, is it not? 

MR ALDRIDGE:   Yes.  If I could take your Honours to section 80A(1) itself, it refers to the requirement that there are shares that are beneficially owned throughout the year, that carry with them ‑ ‑ ‑

GUMMOW J:   Wait a minute.  Where do we find that? 

MR ALDRIDGE:   If your Honours have the bundle of authorities that my learned friends have provided to the Court.  It is also set out at page 37 of the application book, your Honour. 

GUMMOW J:   Yes, thank you. 

MR ALDRIDGE:   There is a requirement that certain kinds of shares be beneficially owned, that they are the shares that carry between the rights set out in subsections (c), (d) and (e), which is: 

(c)the right to exercise more than one‑half of the voting power in the company;

(d)the right to receive more than one‑half of any dividends that may be paid by the company; and

(e)the right to receive more than one‑half of any distribution of capital of the company. 

Section 80A(3), which can be applied where the Commissioner considers it reasonable, requires, in subsections (b) and (c), there to be: 

(b)a person . . . who had . . . a right to receive, directly or indirectly, for his or their own benefit more than one‑half of any dividends ‑ 

or: 

(c) . . . distribution of capital –

Subsection (a) is a slightly different test.  It requires: 

(a). . . the voting power in the loss company –

to be “controlled” or be “capable of” control “by a person”. 

The submission we put to the court below was that those rights must be rights that are immediately exercisable, that is to say, rights that are capable of immediate use, as opposed to rights that are lost or suspended during a liquidation.  Each of those rights is lost or suspended when the company goes into liquidation. 

McHUGH J:   I know, but this notion of suspension itself seems very odd, does it not?  If the company is not wound up, then it may regain its rights, so it goes in and out of section 80A. 

MR ALDRIDGE:   Yes, it does, in a sense, but a winding‑up order is a final order.  It is capable of termination or stay by a later court order, but until that happens it is a final order and during the currency of winding up shareholders do not control the company.  This Court in Keighery v Federal Commissioner of Taxation held, in relation to a slightly different section, but a section that required control of a company to be in seven or fewer persons at the end of the financial year, that control had to be immediately exercisable control.  Their Honours in ‑ ‑ ‑

GUMMOW J:   On a particular day. 

MR ALDRIDGE:   Yes.  What we say section 80A(1) and (3) require - particularly 80A(3)(a) - require control on each day of the year, so that you must have the right immediately to exercise your voting power to control the company on each day of the loss year.  Similarly, you must have the right to receive at that time, or immediately, any dividends, any distribution of capital, for section 80A(3) or, under 80A(1), you have to have shares that carry the rights set out there.  We say, for the same reasoning, relying on Keighery, that they must be immediately exercisable rights.  A right that is not immediately exercisable, or not exercisable at all, is simply no right at all. 

Their Honours in the court below found that it is simply enough that you have a piece of paper that would, if the company were not in liquidation, give you those rights.  You have the share certificate that has rights attached, without looking at the issue of whether or not they can be exercised.  In doing that, their Honours did not refer to Keighery, which was cited to their Honours. 

GUMMOW J:   Well, now, looking at it the way you are looking at it now, does that push to one side the attention in the Federal Court to general law questions of beneficial ownership? 

MR ALDRIDGE:   No, your Honour, they are two or three separate issues.  There is some debate whether the issues I have just described are two issues or one.  We see them as perhaps different sides of the same coin, and substantially the same answer would follow.  They are a different argument to the beneficial ownership argument, and success on either the argument I have just put to your Honour or the beneficial ownership argument, we would submit, would see us win the appeal. 

GUMMOW J:   What I am trying to get out of you is, you could lose on the beneficial ownership argument, but still win on what you have just been putting to us.  That is what it comes to.

MR ALDRIDGE:   Yes, your Honour.  We say, in relation to that, with respect, the Full Court got this issue completely wrong.  Their Honours did not address in terms section 80A(3). 

McHUGH J:   Mr Aldridge, this is an appeal by the Commissioner and you know what this Court has said in the past about the relationship of the Court and the Full Court.  If leave were granted, are you prepared to give an undertaking to pay the respondent’s costs in any event? 

MR ALDRIDGE:   Yes, your Honour. 

McHUGH J:   Yes.  Yes, Mr Bloom. 

MR BLOOM:   Your Honours, we would still suggest, with respect, that special leave should not be granted.  The case was argued below upon the basis that two real issues arose, both concerning section 80A(1), and section 80A(3) was only relied upon as giving some sort of content to section 80A(1).  Your Honours will see from section 80A that the two sections are alternatives, because one goes first to section 80A(1), and then 80A(2) says: 

Where –

(a)    subsection (1) would, but for this subsection, apply . . . 

. . . 

(c)  the first‑mentioned company requests the Commissioner –

or the Commissioner makes up his own mind to do so –

then subsection (3) applies for that purpose in lieu of subsection (1). 

There was no separate reliance by our learned friends at either place below upon section 80A(3) separately.  What was suggested was that the words in section 80A(1)(c): 

the right to exercise more than one‑half of the voting power in the company –

should somehow receive some content from section 80A(3)(a), which talks about control of the voting power. 

Your Honours, those two issues are set out clearly, firstly, by Justice Hely, at page 7 of the application book.  In paragraph 9, his Honour says: 

In substance, two issues arise.  First, does the making of a winding up order in relation to the parent company (LGL) have the result that LGL ceases to be the beneficial owner of its assets, including the shares which it holds in LTAL?  Second, does the making of a winding up order in relation to the subsidiary company (LTAL) have the result that [the parent’s] status as a member of [the subsidiary] becomes that of a contributory, such that LGL’s shares –

that is, the parent’s –

in [the subsidiary] cease to carry the rights referred to in s 80A(1)(c), (d) or (e)? 

The Full Court deals with this at pages 38 to 39, in paragraph 9, where they say: 

Two issues arise on the appeal.  The first is whether –

and they really pose the same two questions, again, in the context of 80A(1).  Then, in paragraph 10, they say: 

Counsel for the Commissioner submitted that there was a third issue which arose for decision, that being whether the making of a winding up order in relation to LTAL had the consequence that the persons referred to in s 80A(3) of the 1936 Act ceased to have the control or rights of the kind identified in the section.  However, it was common ground that if the other two questions were answered in favour of the respondent LTAL then this third question would likewise be answered in favour of LTAL –

So no separate question in the way in which this case has been argued arises in relation to section 80A(3). 

Your Honours, going back to section 80A(1), your Honours see that, really, three things can be said about it.  It is at page 37.  Firstly, it implicitly assumes that one or more persons can be identified as beneficial owner of the shares in the income year.  Second, it identifies the shares in question by reference to the rights conferred upon them, presumably by the company’s constitution.  Then it asks the question whether the beneficial owner of the shares in the earlier year continues to be the beneficial owner in the later year. 

Both the trial judge and the Full Court, having regard to context, in the wider sense of that term, had held that disentitlement to carry forward of losses only occurred where there was between the two years in question a change in identity of beneficial owners of the relevant shares, that is, shares carrying those particular rights.  In this regard, your Honours, they noted that the provisions had always listed bankruptcy, though not liquidation, as a disqualifying factor. 

If your Honours would turn to the application book at page 11, in the judgment of his Honour the trial judge, paragraph 18 at the top of the page: 

Thus s 80(4) of the ITAA –

that became section 79E(8) and it is now in the new provisions, in the 1997 Act, in the same form –

provided that if, prior to a year of income, a taxpayer became bankrupt, or was released from his debts by the operation of the Bankruptcy Act 1966 (Cth), then no loss incurred by the taxpayer before his bankruptcy is an allowable deduction. There is no corresponding provision in relation to companies which are placed into liquidation. An explanatory note circulated by the Treasurer –

in 1944 –

stated, in relation to subsection (4) of s 80: 

“This sub‑section, however, does not apply to companies because section 5 of the Bankruptcy Act excludes companies from the operation of the Bankruptcy Act.” 

The Full Court, at pages 40 to 41, turned to that provision and they do so in paragraph 13, at about line 20.  They then set out ‑ ‑ ‑

McHUGH J:   They differentiate.  They gave the three grounds. 

MR BLOOM:   Three differences between bankruptcy and liquidation.  Then they say, over at page 41: 

These differences, together with a lack of specific provision dealing with companies which have been the subject of a winding up, might tend to the conclusion that it has never been contemplated since the commencement of the 1936 Act that companies in liquidation would by virtue of that fact alone cease to be entitled to an allowable deduction for losses incurred in prior years of income. 

They also, your Honours, note that there seems to be no policy reason for disallowing a company in liquidation the benefit of the losses incurred by it in previous years.  They do that at page 58, in paragraph 59: 

It is difficult to see what policy reason there would be for Parliament to disallow as a deduction to a company which had losses available to carry forward, those losses in a case where there was no change of ownership of the shares at all, but simply because the necessary percentage of shares have been held by a company which, while still on the register of members, has gone into liquidation.  And –

they point out –

liquidation might be voluntary or involuntary –

and there might be solvency or insolvency.  Thirdly, your Honours, they point out that the Act and what has been said about it in Parliament at various times clearly contemplated the necessity for a disqualifying change in beneficial ownership, in the sense of from one person to another. 

Your Honours will have in our folder of materials – it is not elsewhere set out – section 80E, which is behind tab 1.  It is the “Same business test”, and it says – it is at page numbered 8,151 in the top right‑hand corner of the statute:

Subject to subsection (2), where –

(a)the whole or a part of a loss incurred by a taxpayer, being a company, in a year before the year of income would not, but for this section, by reason of a change that has taken place in the beneficial ownership of shares –

Then, in 80E(2), over the page: 

Subsection (1) does not apply in respect of a loss . . . if –

(a)before the change took place –

If your Honours go to the application book at page 13, your Honours will see, in paragraph 28, where the trial judge refers to the insertion of section 80E, the last four lines of that paragraph: 

The Explanatory Memorandum for the 1965 Bill stated that a company will be entitled to deductions for losses of previous years notwithstanding a “substantial or total change in the identity of the owners of shares in the company” –

It followed, in their Honours’ view, that what had been said much earlier by Sir Douglas Menzies in the Franklin’s Selfserve Case about the former carry‑forward loss provisions remained true. 

McHUGH J:   Yes, but in St Hubert’s, Justice Aickin thought there was a difference between what Justice Menzies said in Franklin’s Selfserve and what Lord Diplock had said in Ayerst. 

MR BLOOM:   There is a difference, of course, your Honour, in the result, but each is construing a different statute.  What, I think ‑ ‑ ‑

McHUGH J:   Yes, I know.  That is the strength of your point.  It is a different history, a different mischief. 

MR BLOOM:   A different mischief and a different statutory context.  I am going to come to Ayerst and show your Honours why the context so ruled there, but neither Sir Douglas Menzies nor Lord Diplock were considering the term “beneficial ownership” in abstract.  Insofar as Lord Diplock relied upon earlier Chancery cases which had used the expression “trust”, they were applying what, we say, this Court has recently termed “analogical reasoning” in the Tanwar Case – the idea being that one has certain analogies with a trust, but still does not have a trust.  So there is no concept of beneficial ownership independently of the context, and certainly Lord Diplock turns to that.  But I will come to that. 

The Commissioner accepted there had been no change in beneficial ownership.  So within the words that are used in section 80E or in the explanatory memoranda, he accepted there had been no change from one person to another.  What he said was the sort of suspension that Livingston’s Case had dealt with in the case of an administrator, where, of course, the assets vest in that administrator. 

Your Honours, at page 48 of the application book, at the end of the extract from the speech of Lord Diplock, at about line 8: 

My Lords, the expression ‘beneficial owner’ in relation to the proprietary interest of a company in its assets was first used in a taxing statute in 1927 . . . 

So when those words were repeated in the Finance Act 1954 not only was there a consistent line of judicial authority that upon going into liquidation a company ceases to be ‘beneficial owner’ of its assets as that expression has been used as a term of legal art since 1874, but also there has been a consistent use in taxing statutes of the expressions ‘beneficial owner’ and ‘beneficial ownership’ in relation to the proprietary interest of a company in its assets which started with the Finance Act 1927, where the context makes it clear that a company upon going into liquidation ceases to be ‘beneficial owner’ of its assets as that expression is used in a taxing statute.” 

So their Honours point out, in the following paragraphs, that that was a particular case of context and that Ayerst perhaps should not be taken as standing for any further or different point.  Indeed, if my memory serves me correctly, in St Hubert’s Island, both Sir Anthony Mason and Sir Keith Aickin said the “apparent” conflict might need to be resolved at another point in time, and “apparent” conflict might only have been because of different contexts.  There might be no real conflict at all. 

Your Honours, for those reasons, in our respectful submission, special leave should be refused. 

McHUGH J:   Yes, Mr Aldridge. 

GUMMOW J:   Now, Mr Aldridge, just assume for a minute that what Mr Bloom has said about the Full Court’s treatment of Ayerst and so on is correct.  If that is right, how then – I am looking and reading off the statute, the text of the section, which is at page 37 – can you win?  Focusing on 80A(1), which I think you have to, have you not? 

MR ALDRIDGE:   Yes.  Because it is still a question of seeing what “beneficially own” means in its context, your Honour, and whilst certainly the mischief identified by the explanatory memoranda was trafficking in share loss companies, the words “beneficially owned” would go far beyond what would be necessary for the mere prevention of the mischief identified.  They must have some further and other meaning, and we say it is the further and other meaning identified by Lord Diplock. 

We would, however, also take issue with the proposition that the Full Court was right to confine Ayerst to as relying on the finance statutes in England, because Ayerst itself starts with a line of authority that started with Oriental Steamship in 1873, and Oriental Steamship was a pure winding‑up case that involved no revenue concepts whatsoever.  So the concept of a loss of beneficial ownership in a winding‑up did not start in 1927 with the revenue statutes, but started in 1873 or 1874 with the decision of the Court of Appeal in Oriental Steamship, a non‑revenue case. 

GUMMOW J:   Yes, I understand that.  How do you use section 80A(3) to drive a bridgehead into subsection (1)? 

MR ALDRIDGE:   We put it two ways – well, the way we put it, your Honour, is that one would expect the test in 80A(1) and 80A(3) to get the same result.  It would be an odd thing if it did not.  So one can look at 80A(3) to see what the concepts are that flow through.  We would submit it is clear ‑ ‑ ‑

GUMMOW J:   What is the relation between (3) and (1)?  Are they independent? 

MR ALDRIDGE:   They can apply where the Commissioner decides – the Commissioner can apply (3) if he chooses to.  It is commonly called a “tracing test”, so that one can trace through larger numbers of companies to see who the ultimate owner is, and subsection (3) presupposes that there is a person at the head of the chain, who is not a company, who is entitled to half of the control, half of the dividends, and so on.  It is a tracing test, rather than a more direct test.  So one can look at the words: 

controlled, or capable of being controlled –

continues that one must have during the year of the loss in the chain subsection (3) the requisite control or rights.  Independently, but supported by subsection (3), in 80A(1) you must have: 

at all times during the year of income, shares in the company carrying between them –

(c)  the right to exercise more than one‑half of the voting power –

Now, that is a control test, the right to exercise one‑half of the voting power.  We say Keighery operates directly on that to make that voting power to be a presently exercisable voting power; otherwise, the section is meaningless.  Keighery also operates on subsection (3) to bring about the same result, but, in my submission, we can get the same result by Keighery operating directly on section 80A(1).  But we do say both sections are consistent, and we did put these submissions to the court below, both in writing and orally. 

At the last page of the transcript, without taking your Honours to it, Justice Hill put to me there are really two issues, the two issues stated by Justice Hely.  We said, well, there are three, but the last two are just different ways of saying the same thing, different sides of the same coin.  So that was the way we put those issues and, at the risk of repeating myself, your Honours, Keighery was not cited by the court. 

On the making of the winding‑up order, the shares that carried the voting power were not capable of being used to control the company.  They had lost that power, therefore there was that break in the chain.  The chain can be broken not just by a change in beneficial ownership, but also by a change in the rights that the shares carry. 

McHUGH J:   Well, Keighery held that there must be an enforceable and immediately exercisable right. 

MR ALDRIDGE:   Yes, that is so, your Honour. 

McHUGH J:   Yes, thank you, Mr Aldridge.  There will be a grant of leave in this matter, subject to the Commissioner giving an undertaking to pay the respondent’s costs of and incidental to the appeal, irrespective of the result.  Do you give that undertaking on behalf of the Commissioner, Mr Aldridge? 

MR ALDRIDGE:   Yes, I do, your Honours. 

McHUGH J:   Thank you.

AT 10.26 AM THE MATTER WAS CONCLUDED