Finance Facilities Pty Ltd v Federal Commissioner of Taxation

[1971] HCA 12

HIGH COURT OF AUSTRALIA

Gibbs J. Barwick C.J., McTiernan, Windeyer and Owen JJ.

FINANCE FACILITIES PTY. LTD. v. FEDERAL COMMISSIONER OF TAXATION

(1971) 127 CLR 106

27 April 1971

Income Tax (Cth)

Income Tax (Cth)—Dividend received by company—Private company dividend—Rebate—Discretion of Commissioner—Scheme to avoid undistributed profits tax—What are relevant considerations—Income Tax Assessment Act 1936-1968 (Cth), s. 46 (3). Income Tax (Cth)—Private company—Undistributed profits tax—Subsidiary of public company—Beneficial ownership of shares—Income Tax Assessment Act 1936-1968 (Cth), s. 103A (1), (2) (d) (v), (4). Income Tax (Cth)—Contract or arrangement for avoiding liability to tax—Creation of subsidiary of public company—Choice presented by provisions of Act—Income Tax Assessment Act 1936-1968 (Cth), s. 260.

Decisions

1971, April 27.
GIBBS J. delivered the following written judgment: -
These appeals under s. 187 of the Income Tax Assessment Act 1936-1968 (Cth) ("the Act") are heard together by consent. In three of the appeals, Nos. 36 of 1969, 37 of 1969 and 33 of 1969, brought respectively by Talford Investments Pty. Ltd. ("Talford"), Steed Investments Pty. Ltd. ("Steed") and Cargill Investments Pty. Ltd. ("Cargill"), from assessments based on income derived by each taxpayer during the year ended 30th June 1968, each taxpayer claims to be entitled to a rebate under s. 46 (2) (b) of the Act obtained by applying the average rate of tax payable by the taxpayer to the full amount of the dividends included in its assessable income, whereas the Commissioner, acting under s. 46 (2) (a), has allowed a rebate based on only half of such dividends. Three further appeals by the same taxpayers, Nos. 24 of 1970, 25 of 1970 and 23 of 1970, are from assessments to additional tax under Div. 7 of Pt III of the Act in respect of the same income year. In all those six appeals each assessment was made on the basis that the taxpayer was a private company within the meaning of the Act in relation to the year of income that ended on 30th June 1968 and the case for each taxpayer is that it was a public company in relation to that year of income. The remaining appeal, No. 11 of 1939, is brought by Finance Facilities Pty. Ltd. ("Finance Facilities") against an assessment based on income derived during the year ended 30th June 1967 by which the Commissioner allowed a rebate under s. 46 (2) (a) based on one-half of the private company dividends included in the taxpayer's assessable income. In that appeal the taxpayer concedes that it was rightly regarded as a private company but claims that it should have been allowed a further rebate under s. 46 (3) of the Act. (at p110)

2. Talford, Steed and Finance Facilities are associated, in the manner which I shall describe, to serve the interests of Jorge Yacobi and his family. Cargill is conducted for the purposes of John Hitter and his family. The only connexion between Talford, Steed and Finance Facilities on the one hand and Cargill on the other is that Talford, Steed and Cargill were all brought into existence by another company, Securities &Management Ltd. ("Securities &Management"), with the design that they should be public companies for taxation purposes, with the taxation advantages that that status may entail. That they may have that status, it is necessary that Securities &Management should be a public company and it is convenient, first, to consider the evidence as to its position. (at p110)

3. Securities &Management was incorporated on 2nd January 1959 at the instance of a firm of accountants, Charles J. Berg &Associates. From its formation it was intended that it should be a public company and that it should provide taxation advantages for the clients of Charles J. Berg &Associates. By February 1961, 12,900 shares of 50c each fully paid had been issued in Securities &Management and were held by 79 shareholders each of whom held 100 or 200 (or in one case 300) shares. Clearly, Securities &Management was at this time a public company. However after the publication in June 1961 of the report of a committee under the chairmanship of Sir George Ligertwood which recommended certain changes in the income tax laws, it was thought desirable to alter the shareholding of the company to ensure that if the changes were made the company would continue to be a public company. Accordingly on 26th June 1962, 7,000 shares of 50c each were allotted to each of Development Underwriting Ltd. ("D.U.L.") and Stocks &Realty Corporation Ltd. ("Stocks &Realty"). Both D.U.L. and Stocks &Realty were public companies and as a result of these allotments they held between them more than half the issued shares of Securities &Management. Applications for these shares were made by D.U.L. and Stocks &Realty at the suggestion of Securities &Management and on the understanding that Securities &Management would pay dividends of twenty per cent per annum. At about the same time loans of $3,600 ($100 more than the amount payable for each parcel of shares) were made by Securities &Management (Nominees) Pty. Ltd. (a subsidiary of Securities &Management) to Mercantile Estates Pty. Ltd. (a subsidiary of Stocks &Realty) and to D.U.L. respectively. These loans carried interest at five per cent. The minutes of D.U.L. show that the loan to that company was repayable only in the event of a winding-up of Securities &Management; the relevant minutes of Mercantile Estates Pty. Ltd. were not produced but Mr. Graf, a director of Stocks &Realty, said in evidence that the loan was repayable on demand. In effect, D.U.L. and Stocks &Realty were promised a net return of fifteen per cent on an investment of $3,500 which they did not have to provide out of their own resources, as an inducement to become the controlling shareholders of Securities &Management. After the enactment of the Income Tax and Social Services Contribution Assessment Act (No. 3) 1964 (Cth) some further steps were taken to ensure that Securities &Management would remain a public company, although it seems that it was not necessary to take those steps to achieve that end. On 18th February 1966 Charles J. Berg &Associates sent a circular to all the shareholders in Securities &Management, except D.U.L. and Stocks &Realty, offering, on behalf of Eaton Investment Pty. Ltd., to buy all their shares at 70c per share. The circular stated that the flow of income to Securities &Management had dried up because all the companies in which it held investments in redeemable preference shares had redeemed their shares and that it would be in the best interests of all individual shareholders that they should dispose of their shares. This offer was accepted by all the shareholders to whom it was addressed, except the trustees of the estate of a deceased shareholder who held 200 shares, and on 5th May 1966 12,700 shares in Securities &Management were transferred to Eaton Investment Pty. Ltd. On 29th June 1966 Eaton Investment Pty. Ltd. transferred 4,000 shares to E. A. Greenwood Ltd., 4,000 shares to Epstein &Co. Ltd. and 4,700 shares to Kolotex Holdings Ltd., at a consideration of 75c per share. All these transferees were public companies, and each was induced to take up the shares by an arrangement similar to those made with D.U.L. and Stocks &Realty, In each case, at about the time the shares were transferred, Securities &Management made to a subsidiary of the transferee a loan bearing five per cent interest of a sum equal to the purchase price of the shares or thereabouts; however, according to the evidence of Mr. Borough, in 1966 there was no certainty that a dividend of twenty per cent would continue to be paid. On 6th November 1967 the 200 shares belonging to the deceased estate were transferred to Kolotex Holdings Ltd. On 19th March 1968 Epstein &Co. Ltd., which had fallen into financial difficulty, transferred its shares to Osti Holdings Ltd. The moneys lent to Epstein &Co. Ltd. were repaid and a similar loan was made to a subsidiary of Osti Holdings Ltd. Since that date the shareholders of Securities &Management have been D.U.L. (7,000 shares), Stocks &Realty (7,000 shares), Kolotex Holdings Ltd. (4,900 shares), E. A. Greenwood Ltd. (4,000 shares) and Osti Holdings Ltd. (4,000 shares). All of these companies, except Stocks &Realty, are now and have at all material times been public companies whose shares are listed on the stock exchange. Until 1965 the shares of Stocks &Realty were listed on the stock exchange but since that year Stocks &Realty has been a whollyowned subsidiary of Stocks &Holdings Ltd. which was and is a public company whose shares are listed on the stock exchange. (at p112)

4. Two of the directors of Securities &Management, Messrs. Berg and Tribe, gave evidence that they knew of no arrangement between Securities &Management and any of the public companies that acquired shares in Securities &Management as to the beneficial ownership of those shares or as to any dividends they might produce or, Berg added, as to the voting power they conferred or as to the distribution of capital on a winding-up or redemption of capital. This evidence was supported as to D.U.L. by the evidence of Messrs. Somervaille and Strauss, as to Stocks &Realty by the evidence of Mr. Graf, as to Kolotex Holdings Ltd. by the evidence of Mr. Strauss and as to E. A. Greenwood Ltd. and Osti Holdings Ltd. by the evidence of Mr. Kirby. (at p112)

5. Before 1966 the procedure followed to give the desired taxation advantage to the clients of Charles J. Berg &Associates had involved the issue to Securities &Management of redeemable preference shares in the various private companies associated with those clients but in 1966 a new method was devised. On 8th June 1966 Securities &Management resolved to arrange for the incorporation of a number of subsidiary companies each of which was to have a paid-up capital of ten shares of $1 each fully paid and all of which (after the transfer of a subscriber's share) were to be registered in the name of Securities &Management. Pursuant to this resolution more than twenty subsidiaries (including Talford, Steed and Cargill) were incorporated in June 1966. Since that month Securities &Management has held the ten ordinary shares in the capital of Talford, Steed and Cargill and the directors of these companies have been Messrs. Steiner and Stanton (and in the case of Cargill, since 1969, Mr. Tribe also). The directors of Securities &Management since November 1966 have been Messrs. Tribe, Steiner and Stanton. (at p113)

6. Finance Facilities had been incorporated on 8th June 1956 as an investment company for Jorge Yacobi and the members of his family which included Paul Strasser. One hundred thousand shares of $2 each in Finance Facilities were issued and at all material times most of these shares were held by three private companies (including Assets Holdings Pty. Ltd. ("Assets") and P. &S. Holdings Pty. Ltd. ("P. &S.")) controlled by members of the Yacobi family, although in addition 840 shares were held by Messrs. Tribe and Strasser as trustees for a superannuation fund and 167 shares were held by Mr. Tribe individually. By April 1967 Finance Facilities had prospered and the Yacobi family faced the usual taxation difficulty : if the profits made by Finance Facilities were distributed they would attract tax in the hands of the recipients and if they were not distributed they would attract additional tax under Div. 7. It was, therefore, decided to adopt the scheme which Charles J. Berg &Associates had devised to prevent this result. (at p113)

7. On 20th April 1967 the articles of association of Finance Facilities were altered so as to increase the nominal capital of that company from $200,000 to $220,000 by creating an additional 6,000 ordinary shares of $2 each and 4,000 redeemable preference shares of $2 each divided into 1,000 class A redeemable preference shares and 3,000 class B redeemable preference shares. The articles, as amended, provided that so long as any redeemable preference shares should remain issued no dividend should be payable in respect of any other shares in the company and that the redeemable preference shares until redeemed should confer on their holders the right to receive the whole of the dividends, including interim dividends, that may be declared. The directors were empowered to declare what proportion of any dividend should be payable in respect of class A and class B redeemable preference shares respectively. The redeemable preference shares were in a winding-up or on a reduction of capital entitled to rank as regards the return of capital in priority to all other shares in the capital of the company but did not confer the right to any further participation in the distribution of assets. The redeemable preference shares carried no voting rights. They might at any time prior to 1st April 2125 be redeemed on seven days' notice. (at p114)

8. On 21st April 1967 Talford applied for 3,000 class B redeemable preferences share and Steed applied for 1,000 class A redeemable preference shares in Finance Facilities and on 24th April 1967 shares were allotted in accordance with these applications. On 21st April 1967 Assets made a loan to Talford of $9,750 and P. &S. made a loan to Steed of the same amount. In each case the loan was secured by a debenture. Inter alia, each debenture provided that the advance should be repayable on three months' notice and should carry interest at the rate of four per cent. By cl. 4 of each debenture the borrowing company gave a floating charge over the whole of its undertaking and property. By cl. 13 of each debenture it was provided that the debenture holder should until the redemption of the debenture be entitled to have two nominees on the board of directors of the borrowing company and provision was made with regard to the appointment and removal of such directors. Clause 14 of each debenture provided that in consideration of the advance made by the debenture holder to the borrowing company the debenture holder or such person as the debenture holder might nominate should have the option prior to the redemption of the debenture at any time and irrespective of whether notice of intention of repayment had been given by the borrowing company of taking up at par ordinary shares in the capital of the company of a nominal value equal to the amount secured by the debenture in exchange for and in full satisfaction of the debenture. The clause went on to provide that the option should be exercised by notice in writing in a specified form and it contained the following provision :

"(b) Upon exercise of the option by the debenture holder or its nominee the company shall forthwith allot the shares which are the subject of the option to the debenture holder or to such person or corporation as specified by the debenture holder in the said notice and such allotment shall take effect immediately upon allotment thereof or upon the expiry of three days from the delivering or posting of the notice of exercise of the option (whichever is the earlier date) provided always that no such notice shall be delivered or posted and no such allotment or issue of shares shall be made between the first day of June and the second day of July (both dates inclusive) in any one year."

The clause went on to provide that the exercise of the option should be valid notwithstanding the appointment of a receiver or liquidator, that shares allotted pursuant to the exercise of the option should be issued as fully paid and should rank pari passu with existing shares, that the option should lapse forthwith upon redemption of the debenture and that upon surrender of the debenture in exchange for the issue of shares pursuant to the option the borrowing company should pay to the debenture holder a proportionate part of the current interest due upon the debenture calculated up to the date of allotment of the shares. By cl. 15 each borrowing company was required, until redemption of the debenture, to reserve and keep available for the purpose of the debenture a sufficient number of shares to satisfy the requirement of the option. (at p115)

9. On 28th April 1967 Finance Facilities declared a dividend of $20,000 payable as to $15,000 to Talford and $5,000 to Steed. On 11th April 1968 Finance Facilities declared a dividend of $56,000 payable as to $42,000 to Talford and $14,000 to Steed. This dividend was paid before 30th April 1968. (at p115)

10. During the year ended 30th June 1968 Talford received from various private companies including Finance Facilities dividends totalling $120,000. After payment of a dividend of $200 to Securities &Management its unappropriated profits (including the balance from previous years) amounted to $134,096. In that income year Talford invested $134,100 in the purchase of 67,050 redeemable second preference shares of $2 each in Parkes Development Pty. Ltd. During the same year Steed received from private companies including Finance Facilities dividends totalling $40,000 and, after payment of a dividend of $200 to Securities &Management, had left unappropriated profits of $43,751. It invested $44,700 in the purchase of 22,350 redeemable second preference shares of $2 each in Parkes Development Pty. Ltd. The evidence as to the control of Parkes Development Pty. Ltd. is not full and complete but it appears that it was a company associated with the Yacobi interests and that Strasser was a director of it. Under the articles of Parkes Development Pty. Ltd. the redeemable second preference shares conferred on the holders thereof no right to vote and no right to any dividend but in the event of a winding up or a reduction of capital they entitled the holders to repayment of capital in priority to all other shares, excepting preference and redeemable preference shares. The articles provided that these shares might be redeemable on seven days' notice at any time before 30th September 2012. (at p115)

11. Cargill has played for the Hitter family a similar role to that which Talford and Steed played for the Yacobis. On 21st April 1967 Hitter Foundation Pty. Ltd. lent $9,750 to Cargill on the security of a debenture in terms very similar to those of the debentures given by Talford and Steed ; the only difference appears to be that under the debenture given by Cargill the right of the debenture holder to appoint directors of the borrowing company is not limited to two but extends to the appointment of such number as may be necessary from time to time to constitute a majority of directors. Hitter Foundation Pty. Ltd. at the material time was a company of which John Hitter was governing director and in which John Hitter (Management) Pty. Ltd. (as trustee for the children, wife and brother of John Hitter), John Hitter and his wife, Mrs. Toby Hitter, were shareholders. During the year ended 30th June 1968 Cargill received dividends totalling $509,490 from a number of private companies controlled by the Hitter family. In that income year it distributed by way of dividend $200 to Securities &Management, and made to another company, Bor Lend Pty. Ltd., substantial advances including an interest-free loan of $476,500. (at p116)

12. The evidence shows that a dividend of $200 was each year declared in favour of Securities &Management not only by Talford, Steed and Cargill, but also by the various other subsidiaries of Securities &Management which were used by other persons for tax purposes. There was no evidence that this was the result of any agreement. Mr. Tribe said that he knew of no arrangement between Securities &Management, on the one hand, and Talford or Steed, on the other, as to the beneficial ownership of the shares which were allotted by those companies to Securities &Management or as to the beneficial ownership of any dividends. He further said that he knew of no arrangement restricting the amount of any dividends which Talford or Steed might declare, although he said that his own understanding was that all that Securities &Management would receive was a dividend which was reasonable in terms of the service which it was providing. Mr. Tribe said that before the shares were allotted by Finance Facilities to Talford and Steed he had some discussions with Strasser but that there was no discussion as to the amount of the dividends which Talford and Steed might pay to Securities &Management. He thought that Mr. Borough (who was a member of Charles J. Berg &Associates) or Mr. Stanton might have handled matters of this kind. Mr. Borough said that he explained to a number of clients of the firm that the dividends payable to Securities &Management would be approximately $200 and that the dividends and share capital would be beneficially owned by Securities &Management However, so far as Finance Facilities was concerned, he thought that Mr. Strauss would probably have been the person who had the discussions with Mr. Strasser. Mr. Strauss, however, said that he did no more than arrange introductions between the parties. Mr. Stanton was not called as a witness. No person who represented the Yacobi interests in any discussions of this kind gave evidence ; Strasser had left Australia for overseas a few weeks before the hearing (although it was suggested on behalf of the Commissioner that his visit might have been postponed in view of the importance of the case) and Yacobi lives in Spain. No evidence was given by any person who had represented the Hitter group in any discussions in relation to the formation of Cargill and no explanation was given of the failure to call any such person. (at p117)

13. For the scheme devised by the accountants to succeed, and for Talford, Steed and Cargill to escape tax under Div. 7 and to be entitled to a rebate under s. 46 of the Act in respect of the whole of the private company dividends included in their respective assessable incomes, it was, as I have indicated, necessary that these companies should not be private companies within the meaning of the Act. The case for the taxpayers is that during the income year in question Securities &Management was "a subsidiary of a public company" as defined in s. 103A (4) of the Act and, therefore, because of the provisions of s. 103A (2) (d) (v), itself a public company for the purposes of Div. 3, and that Talford, Steed and Cargill were subsidiaries of Securities &Management and thus, as subsidiaries of a public company, were themselves public companies for the purposes of the division. If this is so they were not private companies for the purposes of that division (s. 103A (1)) or within the meaning of the Act (s. 6 (1), definition of "private company"). (at p117)

14. Section 103A (4) provides as follows :

"(4) For the purposes of this section, a company is a subsidiary of a public company in relation to the year of income if, at the end of the year of income, one or more companies that are public companies for the purposes of sub-section (1) of this section in relation to the year of income but none of which is a company referred to in paragraph (c) of sub-section (2) of this section -

(a) beneficially owns or own shares representing more than one-half of the paid-up capital of the first-mentioned company ;

(b) is or are, by reason of its or their beneficial ownership of shares in the first-mentioned company, capable of controlling or of obtaining control of more than one-half of the voting power in that company ;

(c) would be beneficially entitled to receive more than one-half of any dividends paid by the first-mentioned company; and

(d) would be beneficially entitled to receive more than one-half of any distribution of capital of the first-mentioned company in the event of the winding up, or of a reduction in the capital, of that company." (at p118)

15. Putting aside for the moment s. 260, on which the Commissioner relies, it is clear that Securities &Management was, in relation to the year of income ending on 30th June 1968, a subsidiary of a public company within this definition. On 30th June 1968, all of its shares were owned by five companies, all of which were public companies for the purposes of s. 103A (1), and none of which was a company referred to in s. 103A (2) (c). At that date, those companies were, by reason of their ownership of the shares, capable of controlling the entire voting power in Securities &Management, and would have been entitled to receive any dividends paid by Securities &Management and to receive the whole of any distribution of capital of Securities &Management in the event of a winding up or a reduction of capital. Their entitlement was beneficial as well as legal. In other words, Securities &Management answered the description contained in s. 103A (4). (at p118)

16. The question also arises whether, again putting aside s. 260, Talford, Steed and Cargill were subsidiaries of Securities &Management within s. 103 A(4). Ostensibly in each case all the conditions of s. 103A (4) were satisfied. However, the Commissioner submits that it should not be held that they were subsidiaries of Securities &Management within that sub-section, for two reasons. In the first place, the Commissioner relies on matters of fact. He submits that the evidence led for the taxpayers on this issue is quite unsatisfactory and that the burden which s. 190 (b) of the Act casts on a taxpayer of proving that the assessment is excessive has not been discharged. It is obvious that the fact that a dividend of $200 per annum was regularly paid to Securities &Management by all the companies concerned could not have been the result of mere coincidence. Theoretically, Securities &Management could have used its power to control Talford, Steed and Cargill by causing those companies to declare dividends large enough to absorb all their profits. Any such diversion of funds from the control of the Yacobi and Hitter interests respectively into other hands was, of course, no part of the arrangement between the parties, and in deciding whether or not to embark on the scheme the representatives of the Yacobis and the Hitters must have been concerned to ensure that there would be some limit on the size of the dividends that would be declared. In the circumstances, it cannot be believed that there was no discussion as to the amount of dividend that the subsidiaries of Securities &Management would declare. The failure of the taxpayers to call as a witness anyone who engaged in any discussion on the subject, or to account convincingly for the absence of any such witness, would be a circumstance in favour of drawing any inference adverse to the taxpayers which the facts given in evidence support : Jones v. Dunkel (1959) 101 CLR 298, at pp 308, 312, 320-321 It is accordingly submitted on behalf of the Commissioner that it should be inferred that there was an agreement pursuant to which Securities &Management held the shares in Talford, Steed and Cargill for the benefit of others, and that the taxpayers have failed to discharge the burden that lies upon them of showing that Securities &Management was beneficially, as well as legally, entitled to the shares and to the rights which they conferred. However, the failure of the taxpayers to call any evidence of this kind does not justify me in drawing an inference which would be contrary to the weight of the evidence. It is undisputed that the purpose of the creation of Talford, Steed and Cargill, and of the acquisition by Securities &Management of all their issued shares, was to render them subsidiaries of Securities &Management for the purposes of s. 103A (4). The whole object of what was done would be frustrated if Securities &Management did not have the beneficial, as well as the legal, rights which the shares conferred, and there is no justification for inferring that this carefully prepared scheme contained an element which would have rendered it futile. The fact that debentures were given which enabled the debenture holders to obtain control of Talford, Steed and Cargill supports the view that until the power given by the debentures was exercised the control remained in Securities &Management. It is true that the powers given by the debentures might not have enabled the debenture holders to assume control in time to prevent a declaration of dividends in favour of Securities &Management, and this circumstance does afford a point of distinction from Federal Commissioner of Taxation v. Casuarina Pty. Ltd. (1971) 127 CLR 62 whose facts are otherwise similar. If Securities &Management had used its powers to cause its subsidiaries to declare dividends which were thought to be excessive, no doubt action would have been taken under the debentures, the scheme would have come to an end and the reputation of the members of Charles J. Berg &Associates would have suffered. It may well be that the clients of the accountants trusted them, and were content to rely on the fact that from a practical point of view it was most unlikely that the scheme would be abused. However, if they sought protection in a binding agreement, I find it impossible to infer that the agreement took the form of an undertaking that any dividends declared, or any capital distributed on a winding up or distribution of capital, would be held in trust. The representatives of the Yacobi and the Hitter interests would have been likely strongly to oppose any suggestion that dividends be declared in excess of the amount which it was intended that Securities &Management should retain, or that the companies should be would up, or should have their capital reduced, while Securities &Management continued to hold all the issued shares. The probable inference is that there was either an agreement or an understanding that excessive dividends (i.e. dividends greater than an agreed amount, or an amount which could be regarded as representing reasonable remuneration for services rendered) would not be declared. There seems to me no reason to doubt that it was intended that Securities &Management should be beneficially entitled to receive whatever dividends were declared, and in fact the evidence shows that the dividends of $200 a year were received by Securities &Management and retained by it for its own purposes. Notwithstanding the legitimate criticism of the failure of the taxpayers to call knowledgeable witnesses, and notwithstanding the fact that the onus lies on the taxpayers of showing the assessments to be erroneous, I cannot infer that there was any arrangement that would have deprived Securities &Management of the beneficial interests in the shares held by that company in Talford, Steed and Cargill. (at p120)

17. The second argument advanced on behalf of the Commissioner is that, even if it be accepted that the shares in Talford, Steed and Cargill were beneficially owned by Securities &Management, nevertheless the tests laid down by s. 103A(4) have not been satisfied. The Commissioner submits, rightly in my opinion, that s. 103A (4) requires one to look, not merely at the company's share register, but at all the circumstances, in determining whether the beneficial ownership and beneficial entitlement referred to in the subsection exists. He further submits that in the present case the existence of the debentures meant that it could not be said that Securities &Management answered the requirements of pars. (b), (c) and (d) of s. 103A (4). For convenience I shall deal with this argument in its relation to Talford, although what I say will also apply to Steed and Cargill. The Commissioner relies to some extent on the right given to Assets by cl. 13 of the debenture to have nominees on the board of Talford, but this seems to me an irrelevant matter. Clause 13 did not give Assets the capacity to obtain control of the voting power in Talford within par. (b) of s. 103A (4), which must mean he voting power attached to shares and not the voting power of directors. Stronger reliance is, however, placed on cl. 14 of the debenture under which Assets was entitled to require Talford to allot 9,750 shares in that company. When the allotment took effect, as it would no later than three days from the expiration of a notice given in accordance with cl. 14, Assets would, by reason of its beneficial ownership of those shares, have been capable of controlling Talford and would have been beneficially entitled to receive more than one-half of any dividends paid by that company and more than one-half of any distribution of capital in the event of the winding up, or of a reduction in the capital, of that company. However the fact that Assets was able to obtain control of Talford in the future did not mean that Securities &Management was not capable of controlling the voting power of Talford at the end of the year of income. Section 103A (4) requires the position to be considered at the end of the year of income and at that time Securities &Management, by reason of its beneficial ownership of shares in Talford, was capable of controlling the voting power in that company. The decision in Federal Commissioner of Taxation v. Casuarina Pty. Ltd. (1971) 127 CLR 62 is decisive against the Commissioner on this point. Similarly the existence of the debentures did not render pars. (c) and (d) inapplicable. Those paragraphs are expressed in the subjunctive mood, not in the future tense ; they do not require the Court to consider who would be entitled to dividends or to a distribution of capital at some date in the futre but whether the public company in question would be beneficially entitled, at the end of the year of income, to receive the dividends or the distribution of capital on the hypothesis that dividends were paid or capital was distributed at that time. Again, the decision in Federal Commissioner of Taxation v. Casuarina Pty. Ltd. (1) is fatal to the Commissioner's argument. If any dividends had been paid or any capital distributed at the end of the year of income in question, Securities &Management would have been beneficially entitled to it. It is not relevant to enquire whether or not it was likely that dividends would have been declared or a distribution of capital made. (at p121)

18. I hold, therefore, that unless s. 260 of the Act leads to a different result, Talford, Steed and Cargill have established that they were public companies within s. 103A (2) (d) (v) and, therefore, not private companies within the meaning of the Act in relation to the relevant income year. (at p122)

19. The Commissioner, however, submits that in each case there was an arrangement which had the purpose of defeating, evading or avoiding a liability to income tax and that s. 260 renders those arrangements void with the result that in the circumstances that remain after the arrangements have been annihilated Talford, Steed and Cargill are seen to be private companies. It is submitted that s. 260 operates at two levels. In the first place, it is said that the allotments of the shares in Securities &Management to the five public companies were made in circumstances which cannot be explained by reference to ordinary business dealing, but were made for the purpose of avoiding tax, and that if those allotments are treated as void Securities &Management no longer answers the description of a public company. The circumstances certainly showed that Securities &Management was determined to do all it could to ensure that the public companies should take up the shares, but it is quite impossible to regard the steps taken on behalf of Securities &Management to preserve its status as a public company as a means to avoid tax. Secondly, it is said that the allotment of shares by Talford, Steed and Cargill to Securities &Management must similarly be treated as void so that those companies are not to be regarded as subsidiaries of Securities &Management and, therefore, not to be regarded as public companies. This argument is similar to that rejected in Federal Commissioner of Taxation v. Casuarina Pty. Ltd.(1971) 127 CLR 62 and, that decision, which was argued after the present appeals were heard, completely governs this question. The allotments of shares in Talford, Steed and Cargill were made in the exercise of a right of choice recognized by the Act, and, on the authority of W. P. Keighery Pty. Ltd. v. Federal Commissioner of Taxation (1957) 100 CLR 66, Federal Commissioner of Taxation v. Sidney Williams (Holdings) Ltd.(1957) 100 CLR 95 and Federal Commissioner of Taxation v. Casuarina Pty. Ltd. (1971) 127 CLR 62, are not rendered void by s. 260. (at p122)

20. It follows that Talford, Steed and Cargill have shown that they were not private companies within the meaning of the Act and that in the case of each of those companies the Commissioner should have allowed a rebate under s. 46 (2) (b) based on the full amount of the dividends included in its taxable income and that the assessments to additional tax under Div. 7 cannot be sustained. (at p122)

21. It remains to consider the appeal by Finance Facilities. That company is a private company and was, therefore, not entitled to a rebate under s. 46 (2) (b) of the Act. It was allowed a rebate under s. 46 (2) (a) but submits that the Commissioner was bound to allow a further rebate under s. 46 (3). That sub-section reads as follows :

"(3) Subject to the succeeding provisions of this section, the Commissioner may allow a shareholder, being a company that is a private company in relation to the year of income and is a resident, a further rebate in its assessment of the amount obtained by applying the average rate of tax payable by the shareholder to one-half of the part of any private company dividends that is included in its taxable income if the Commissioner is satisfied that -

(a) the shareholder has not paid, and will not pay, a dividend during the period commencing at the beginning of the year of income of the shareholder and ending at the expiration of ten months after that year of income to another private company ;

(b) where the shareholder has paid, or may pay, a dividend during the period -

(i) commencing at the beginning of the year of income of the shareholders ; and

(ii) ending at the expiration of ten months after that year of income, to a company, being a private company in relation to the year of income of the company in which the dividend was, or may be, paid, the company has not paid, and will not pay, a dividend during the period -

(iii) commencing at the beginning of the year of income of the company in which the dividend has been, or may be, paid by the shareholder ; and

(iv) ending at the expiration of ten months after that year of income, to another private company ; or

(c) having regard to all the circumstances, it would be reasonable to allow the further rebate."

The evidence clearly establishes that Finance Facilities did not pay any dividend during the period specified in s. 46 (3) (a) to any person, except Talford and Steed which I have held wee not private companies. The Commissioner was, therefore, bound to be satisfied that the case fell within s. 46 (3) (a). In these circumstances, it is submitted on behalf of Finance Facilities that the Commissioner had no discretion to refuse to allow a further rebate. It is submitted that the word "may" in s. 46 (3) does not import a discretion, and that when the conditions specified in the sub-section are satisfied the Commissioner is under a duty to exercise the power which the sub-section confers. This argument is supported by particular reference to the provisions of par. (c) of s. 46 (3), which, although inapplicable to the present case, are said to provide a clue to the proper construction of the sub-section. Paragraph (c) itself clearly requires the Commissioner to make a discretionary judgment as to whether it would be reasonable to allow a further rebate, but, it is said, if the Commissioner was satisfied that it would be reasonable to allow the further rebate, it is an unlikely construction of the subsection that it should permit him to exercise a further discretion, and disallow the rebate which he had decided ought in reason to be allowed. Therefore, it is said, it is intended that the Commissioner is bound to exercise his power to allow a further rebate once the condition of par. (c) is fulfilled, and the same conclusion ought to be reached in relation to pars. (a) and (b). (at p124)

22. The word "may", in its natural meaning, is permissive or enabling only, and it lies on those who assert that there is an obligation to exercise the power conferred to show, as a matter of construction of the Act as a whole, that this is so : see Julius v. Lord Bishop of Oxford(1880) 5 App Cas 214 and Ward v. Williams (1955) 92 CLR 496, at p 505. Although the form of par. (c) does lend some force to the taxpayer's argument, it seems to me clear, upon the proper construction of s. 46, that the power given by s. 46 (3) is discretionary. Sub-section (3) deals only with private companies. By sub-s. (2) (a) a private company "is entitled" to a rebate obtained by reference to one-half of the private company dividends included in its assessable income. The Commissioner has no discretion to refuse to allow the rebate provided by that subsection. On the other hand, sub-s. (3) says that, in certain specified circumstances, the Commissioner "may allow" a private company a further rebate obtained by reference to one-half of the private company dividends included in its assessable income. The contrast between the words of the two sub-sections leads firmly to the conclusion that sub-s. (3) confers on the Commissioner a discretionary power to grant a rebate and does not impose on him a duty to allow it when the circumstances mentioned in the sub-section are satisfied. The Commissioner points to the facts that "the prescribed period" within which dividends must be paid to amount to "a sufficient distribution" within Div. 7, is defined by s. 103 (1) so as to include the ten months' period referred to in s. 46 (3), and that under s. 105AA the Commissioner is given power to extend the period in which a company may pay dividends for the purpose of making a sufficient distribution in relation to the year of income. It is said that if s. 46 (3) confers no discretion, a taxpayer to whom an extension of time had been granted under s. 105AA might obtain a rebate under s. 46 (3) (a) or (b) and yet make a distribution to a private company within the extended period and escape liability to additional tax under Div. 7, and that since s. 46 and Div. 7 are obviously complementary, this is an unlikely result, even though it might in some cases be avoided by administrative action. However, the words of s. 46 themselves make it clear that the power given by sub-s. (3) is discretionary, and it is unnecessary to support this conclusion by this further argument. (at p125)

23. Finally, it is submitted on behalf of Finance Facilities that the Commissioner has not properly exercised his discretion in the present case. The Commissioner has, without prejudice to the question whether he is obliged to do so, furnished a statement of the grounds on which the discretion was exercised. The statement reads :

"The Commissioner decided not to allow the further rebate provided for in s. 46 (3) because he was of the view that even if and upon the basis that the conditions set forth in pars. (a) or (b) were met he had a discretion to refuse to allow the further rebate and in the circumstances which are in evidence before the Court he was of the opinion that the further rebates should not be allowed and, in so far as the provisions of s. 46 (3) (c) were concerned, that it was not reasonable to allow it because, inter alia, the facts which are now before the Court disclose what was in his view a tax avoidance scheme aimed at avoiding liability to tax pursuant to the provisions of Div. 7 of the Act".

The statement is somewhat ambiguously expressed, but it seems to me right to construe the concluding words as relating to the exercise of the discretion under pars. (a) and (b) as well as under (c). It is submitted on behalf of the taxpayer that s. 260 deals exclusively with the consequences of tax avoidance schemes and that, if an alleged scheme is not avoided by s. 260, the Commissioner is not entitled to consider its existence or base the exercise of his discretion under s. 46 (3) on the view he has formed about it. Of course, if the Commissioner does consider an extraneous matter in exercising his discretion, his decision is liable to review : see Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation (1949) 78 CLR 353, at p 360 . However, I cannot accept that it was the intention of the legislature that s. 260 should operate as a fetter on the discretion given to the Commissioner by other sections of the Act, or that it should be wrong of the Commissioner in exercising his discretion to take into account the existence of a scheme to escape tax. In the present case the scheme was successful, and it is not right to call it "a tax avoidance scheme" if by that expression is meant a scheme within s. 260. However, it seems to me that the Commissioner is entitled to consider the fact that, although a case comes within the words of par. (a) or par. (b) of s. 46 (3), it only does so because the parties have implemented a scheme for the purpose of ensuring that Div. 7 tax is not attracted, and to form the view that although the scheme was lawful and proper it was nevertheless an artifice designed to take advantage of a loophole in the Act, and acting on that view to refuse to allow a further rebate which the Act leaves within his discretion to allow or withhold. Once this conclusion is reached I can find no ground for holding that the Commissioner did not make proper exercise of his discretion. (at p126)

24. The appeal by Finance Facilities will be dismissed and the other appeals allowed.

In matter No. 11 of 1969 - Appeal dismissed with costs.

In matters Nos. 36 of 1969, 37 of 1969 and 33 of 1969 - Appeals allowed with costs. Assessments remitted to the Commissioner to be varied in accordance with the reasons for judgment.

In matters Nos. 24 of 1970, 25 of 1970 and 23 of 1970 - Appeals allowed with costs. Assessments set aside.

Costs of the parties to be taxed on the basis that the matters were heard together.

Usual order as to exhibits. (at p126)

25. From this decision Finance Facilities Pty. Ltd. appealed to the Full Court. (at p126)

26. D. L. Mahoney Q.C. (with M. H. Byers Q.C. and with them J. S. Lockhart), for the appellant. The word "may" when used in s. 46 (3) gives a power, but that power must be exercised if the appropriate circumstances, that is, if the circumstances specified in s. 46 (3), arise : see Julius v. Bishop of Oxford (1880) 5 App Cas 214 . Paragraph (c) has been inserted in the subsection so that a person who does not fall strictly under the terms of pars. (a) or (b) can obtain a further rebate where it is just that he should do so. The word "may" gives a faculty and the various paragraphs provide the duty. The history of the section supports this view, for it was passed in its present form in order to prevent the avoidance of tax by passing income through a string of private companies. Further, the history explains the use of the expression "is entitled" in sub-s. (2), for various parts of the section were drafted at different times. The language of sub-s. (4) suggests that there can be an entitlement under sub-s. (3) (a), for example, before the allowance by the Commissioner takes place. Alternatively, even if the Commissioner had a discretion he did not exercise it properly. The nature of such a discretion is seen from Reg. v. Anderson ; Ex parte Ipec-Air Pty. Ltd. (1965) 113 CLR 177, at p 189. The statement of the Commissioner is ambiguous, but it should be taken to indicate that he was taking into account, in refusing a further rebate, that the taxpayer was so acting as to prevent any incidence of Div. 7 tax from taking place ; and this was not a relevant or admissible consideration. Further, in this context he ought to have looked upon sub-s. (3) (c) as a provision to be exercised in favour of the taxpayer, and not to cut down rights to a further rebate otherwise arising. (at p127)

27. W. P. Deane Q.C. (with him C. V. Cullinan), for the respondent. The judgments of Menzies J. in Ellers Motors Sales Pty. Ltd. v. Federal Commissioner of Taxation(1969) 121 CLR 665 and of McTiernan and Gibbs JJ. in Federal Commissioner of Taxation v. Casuarina Pty. Ltd. (1971) 127 CLR 62 support the view that the word "may" used in s. 46 (3) merely confers a general discretion. Only in most exceptional circumstances is the word "may" construed as mandatory. The use of the word "may" is discussed in Ward v. Williams (1955) 92 CLR 496. A careful distinction is maintained in the Act between the usages of the words "may" and "shall": see, for example, s. 103A. Further, if in s. 46 (3) "may" is given a mandatory sense the consequences from the point of view of the Act as a whole are unsatisfactory ; the periods of time referred to in s. 46 (3) and in Div. 7 are supposed to run together, and as there is no provision in s. 46 (3) for extensions of that period (cf. Div. 7) this discrepancy is lessened if the words of that subsection are construed as merely conferring a discretion. Further, in exercising his discretion the Commissioner is entitled to take into account the general protection of the revenue, that is, the saving of Commonwealth revenue. Here although what was done by the taxpayer company was lawful, and did not attract the operation of s. 260, nonetheless it was an artifice designed to take advantage of a loophole in the Act. Further, in any event the Commissioner has been given a mere faculty or power and he is not accountable at all for a failure or refusal to exercise it ; it is a semi-legislative and unreviewable discretion. Even if it must be shown that he has acted on admisssible - and not on inadmissible - grounds, a consideration of the arrangements to which the taxpayer company was a party shows that he did in fact act properly in refusing a further rebate : they were arrangements that were directed to take advantage of Div. 7 and s. 46 (3) itself so that in substance an accumulation of the income of private companies could take place. As to the relevance of this consideration, see generally Giris v. Federal Commissioner of Taxation(1969) 119 CLR 365 and Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation(1949) 78 CLR 353. (at p128)

28. J. S. Lockhart, in reply. The Commissioner must not take irrelevant considerations into account : Swan Hill Corporation v. Bradbury(1937) 56 CLR 746 and Jekyll v. Commissioner of Stamp Duties (Q.) (1962) 106 CLR 353.

Cur. adv. vult. (at p128)

November 12.
The following written judgments were delivered : -
BARWICK C.J. In this appeal I have had the advantage of reading the reasons for judgment prepared by my brother Windeyer. I completely agree with all that he has written and do not wish to add anything myself. I agree that for the reasons he gives that as the Commissioner was satisfied of the circumstance described in par (a) s. 46 (3) he came under a duty to exercise the power which that subsection gives him to allow a further rebate to the taxpayer. I also agree that if there were any room in law for justification by the Commissioner of his refusal in this case to allow the further rebate the justification which he attempted was not tenable. (at p128)

2. I would allow the appeal. (at p128)

MCTIERNAN J. This appeal concerns a notice of assessment issued in accordance with the provisions of the Income Tax Assessment Act 1936-1966 ("the Act") to Finance Facilities Pty. Ltd. ("the taxpayer") and based on income derived during the year ended 30th June 1967. The taxpayer's taxable income for that year included private company dividends. The Commissioner allowed a rebate under s. 46 (2) (a) (i) of the Act in respect of $29,916, being one-half of those private company dividends included in the taxpayer's taxable income for the year in question. (at p128)

2. The question to be decided in this appeal is whether the taxpayer was entitled to a further rebate under s. 46 (3) of the Act with respect to the remaining half of the private company dividends included in its taxable income. Section 46 (3) of the Act reads as follows :

"Subject to the succeeding provisions of this section, the Commissioner may allow a shareholder, being a company that is a private company in relation to the year of income and is a resident, a further rebate in its assessment of the amount obtained by applying the average rate of tax payable by the shareholder to one-half of the part of any private company dividends that is included in its taxable income if the Commissioner is satisfied that -

(a) the shareholder has not paid, and will not pay, a dividend during the period commencing at the beginning of the year of income of the shareholder and ending at the expiration of ten months after that year of income to another private company ;

(b) where the shareholder has paid, or may pay, a dividend during the period -

(i) commencing at the beginning of the year of income of the shareholder ; and

(ii) ending at the expiration of ten months after that year of income, to a company, being a private company in relation to the year of income of the company in which the dividend was, or may be, paid, the company has not paid, and will not pay, a dividend during the period -

(iii) commencing at the beginning of the year of income of the company in which the dividend has been, or may be, paid by the shareholder ; and

(iv) ending at the expiration of ten months after that year of income, to another private company ; or

(c) having regard to all the circumstances, it would be reasonable to allow the further rebate."

The evidence shows that the taxpayer met the condition embodied in par. (a) of s. 46 (3) in that all private company dividends included in its taxable income for the year in question were paid to two companies, Talford Investments Pty. Ltd. and Steed Investments Pty. Ltd., both of which fell within the meaning of the term "public company" in s. 103A (2) (d) of the Act by virtue of their being subsidiaries of a public company within the meaning of s. 103A (4). (at p129)

3. In my opinion however the requirements of pars. (a), (b) and (c) are conditions precedent which must be satisfied before the Commissioner is called upon to exercise his discretion. I adhere therefore to the opinions which I expressed with regard to s. 46 (3) in Federal Commissioner of Taxation v. Casuarina Pty. Ltd. (1971) 127 CLR, at p 86, to the effect that the words "may allow" connote a discretion vested in the Commissioner to grant or to refuse a further rebate after satisfying himself that the stated requirements have been met. In my judgment this conclusion gains support by reference to s. 46 (2) which states that a shareholder is "entitled" to a rebate in certain circumstances, thereby explicitly denying any discretion to the Commissioner. (at p130)

4. It is perhaps instructive to compare s. 46 (3) to a provision considered by this Court in R. v. Trebilco ; Ex parte F.S. Falkiner &Sons Ltd. (1936) 56 CLR 20. In that case the Court considered s. 66 (1) of the Land Tax Assessment Act 1910-1934 (Cth). That section read as follows :

"In any case where it is shown to the satisfaction of a Board consisting of the Commissioner, the Secretary to the Treasury and the Comptroller-General of Customs, or of such substitutes for any or all of them as the Minister from to time appoints -

(a) that a taxpayer liable to pay land tax has become bankrupt or insolvent, or has suffered such a loss that the exaction of the full amount of tax would entail serious hardship ;

(b) that, by reason of drought or adverse seasons or other adverse conditions, the returns from any land owned by the taxpayer upon which he carries on agricultural or pastoral pursuits have been seriously impaired ; or

(c) that, owing to low prices in respect of primary products the income derived from the land the subject of land tax has been so reduced that the taxpayer is unable to pay the whole of the tax out of his income derived in the financial year for which the land tax is assessed, and that the financial position of the taxpayer is such that the exaction of the full amount of land tax would entail serious hardship,

the Board may release such taxpayer wholly or in part from his liability for land tax or for land tax in respect of any particular land the returns from which have been so impaired, and the Commissioner shall make such alterations in the amount of tax payable and shall make such refund of tax already paid as is necessary to give effect to the decision of the Board."

The members of the Court were of the opinion that, notwithstanding the fulfilment of one of the conditions (a), (b) or (c), the Board was not bound to exercise its authority in favour of the taxpayer. Dixon J., with whom I agreed, said (1936) 56 CLR, at p 31:

"Pars. (a), (b) and (c) of sub-s. 1 state conditions, one of which must be fulfilled before a taxpayer qualifies for relief. But if a taxpayer does satisfy one of the conditions precedent so laid down, he does not obtain a right to relief. In my opinion, he obtains only a title to the consideration by the Board of the general circumstances of his case and to a determination whether it is just and proper that he should receive any, and if so what, relief."

and (1936) 56 CLR, at p 32 :

"The degree of relief is left to the Board in express terms. A power given by the word 'may' in such a provision must, I think, be understood as discretionary. It confers a discretion to release, or not to release, the taxpayer according to the board's opinion of the justice of the case." (at p131)

5. I feel that I am not at liberty to substitute for the word "may" in s. 46 (3) of the Act the word "shall" and thereby achieve uniformity in the functions of the Commissioner in administering s. 46. (at p131)

6. It was also submitted however for the taxpayer that even if the Commissioner does possess a discretion in this case he has not properly exercised that discretion. The Commissioner furnished the following statement of the grounds on which the discretion was exercised :

"The Commissioner decided not to allow the further rebate provided for in s. 46 (3) because he was of the view that even if and upon the basis that the conditions set forth in pars. (a) or (b) were met he had a discretion to refuse to allow the further rebate and in the circumstances which are in evidence before the Court he was of the opinion that the further rebates should not be allowed and, in so far as the provisions of s. 46 (3) (c) were concerned, that it was not reasonable to allow it because, inter alia, the facts which are now before the Court disclose what was in his view a tax avoidance scheme aimed at avoiding

liability to tax pursuant to the provisions of Div. 7 of the Act." (at p131)

7. The evidence seems to me to show that the payment of the dividends in question by the taxpayer was part of a scheme to avoid liability to tax under Div. 7 of the Act. The core of the scheme took place on 20th April 1967 when the taxpayer, which at that time had a nominal capital of $200,000, increased that capital to $220,000, the increased capital being partially applied to redeemable preference shares which were entitled to the entire dividend declared by the taxpayer and which were allotted soon afterwards to Talford Investments Pty. Ltd. and Steed Investments Pty. Ltd. Those companies received dividends of $20,000 in respect of the newly-allotted shares from the taxpayer and, as subsidiaries of public companies within the meaning of s. 103A of the Act, were not liable to the tax on undistributed profits which would have befallen that $20,000 in the hands of the taxpayer, a private company. (at p132)

8. The principle governing the exercise of a discretion such as that possessed by the Commissioner under s. 46 (3) was expressed by Latham C.J. in Shrimpton v. The Commonwealth (1945) 69 CLR 613, at p 620, where his Honour said:

"The discretion must be used and the power exercised bona fide and with the view of achieving ends or objects not outside the purpose for which the discretion or power is conferred." (at p132)

9. In my opinion it cannot be said that this exercise of the Commissioner's discretion was not directed to the ends and objects of the Income Tax Assessment Act. (at p132)

10. I would therefore dismiss the appeal. (at p132)

WINDEYER J. This is an appeal from a decision of Gibbs J. The appellant is a "private company", as defined by the Income Tax Assessment Act 1936-1968 (Cth). His Honour dismissed its appeal against the Commissioner's assessment of tax for the year of income ended 30th June 1967. The case turns upon the meaning of s. 46 (3) of the Act. Section 46 in the form that it now has, and had at the relevant time, was enacted by s. 10 of Act No.110 of 1964. That Act was passed in consequence of recommendations of the Report of the Commonwealth Committee on Taxation 1961 (the Ligertwood Report). Section 46 is designed to prevent Div. 7 tax on the undistributed income of a private company being avoided by the device, available as the law was before 1964, of passing on of the company's profits through a chain of private companies. (at p132)

2. The present question concerns rebates that, in respect of dividends received by a private company by reason of its being a shareholder in another private company, are to be taken into account in the assessment of its income. By s. 46 (2) a private company "is entitled to a rebate . . . of the amount obtained by applying the average rate of tax payable" by it "in relation to the year of income to the sum of one-half of the part of any private company dividends (as defined by s. 46 (1)) that is included in its taxable income . . . ". (at p132)

3. So far, the section is aimed at preventing tax avoidance by private companies which do not distribute their income. But the next subsection enables "a further rebate" in circumstances specified. It, s. 46 (3), is obviously intended to meet the case of a private company which does not in the year of income in fact avoid undistributed profits tax by means of a dividend paid to another private company. The words of s. 46 (3) that are relevant in this case are as follows : "Subject to the succeeding provisions of this section, the Commissioner may allow . . . a private company . . . a further rebate in its assessment" - amounting to another half, calculated as in s. 46 (2), of private company dividends received -

" if the Commissioner is satisfied that -

(a) the shareholder has not paid, and will not pay, a dividend during the period commencing at the beginning of the year of income of the shareholder and ending at the expiration of ten months after that year of income to another private company ;

(b) . . . (not relevant in present matter) ; or

(c) having regard to all the circumstances, it would be reasonable to allow the further rebate."

The several matters thus specified of which the Commissioner must be satisfied if he is to allow a further rebate are separate and alternatives. The word "or" establishes that. I emphasize this because I have seen the several conditions set out in a textbook as if they must all be fulfilled. And it seems that the Commissioner may have taken the third, (c), as an overriding requirement : as if in order to allow the further rebate he had to be satisfied of (a) or (b) and (c). That is not so. (at p133)

4. In the present case condition (a) was fulfilled. Of that the Commissioner was in fact satisfied. He could not have been otherwise than satisfied. Condition (c) is thus irrelevant, except for such light as it throws upon the critical question in the case, which is, the Commissioner being satisfied of the matters set out as (a), must he allow the further rebate provided for in the sub-section or has he a discretion to refuse to do so? The case for the Commissioner is that, as the Act says that he "may allow a further rebate" he is not bound to do so notwithstanding that a condition precedent be met. The case for the taxpayer, the appellant, is that, if the condition be fulfilled to the satisfaction of the Commissioner, he must allow the rebate. "May", it was said, should be read as if it were "shall". The Commissioner's answer was that the word "may" prima facie imports a discretion to do or not to do. This, it was said, was reinforced by the contrast between the provision in sub-s. (2), by which the taxpayer "is entitled" to a rebate of a half, and that in sub-s. (3), by which the Commissioner "may allow" a rebate of a further half. I see the difference in words : but I do not think that much can be built upon it. The right of a taxpayer to a discount or rebate arising from facts objectively determinable is quite properly called an entitlement. A claim to a discount or rebate dependent upon the Commissioner being satisfied of certain fact is equally properly called an allowance, something to be allowed. In some contexts the word "allow" in the phrase "may allow" might enhance a discretion said to be embodied by the word "may". But not, I think, in this context. The Act is filled with provisions about allowable deductions which are mandatory. The contrast in language in s. 79B (1A) between what is allowable and what a taxpayer is "entitled to" is significant. The question, which comes back to the words "may allow", is not to be solved by concentrating on the word "may" apart from its context. Still less is the question answered by saying that "may" here means "shall". While Parliament uses the English language the word "may" in a statute means may. Used of a person having an official position, it is a word of permission, an authority to do something which otherwise he could not lawfully do. If the scope of the permission be not circumscribed by context or circumstances it enables the doing, or abstaining from doing, at discretion, of the thing so authorized. But the discretion must be exercised bona fide, having regard to the policy and purpose of the statute conferring the authority and the duties of the officer to whom it was given : it may not be exercised for the promotion of some end foreign to that policy and purpose or those duties. However, that general proposition is irrelevant in this case. Here the scope of the permission or power given is circumscribed. Conditions precedent for its exercise are specified as alternatives. The question then is, must the permitted power be exercised if one of those conditions be fulfilled? (at p134)

5. This does not depend on the abstract meaning of the word "may" but of whether the particular context of words and circumstance make it not only an empowering word but indicate circumstances in which the power is to be exercised - so that in those events the "may" becomes a "must". Illustrative cases go back to 1663 : R. v. Barlow (1663) Carth, 293 (90 ER 773); 2 Salk 609 (91 ER 516) . Today it is enough to cite Julius v. Bishop of Oxford (1880) 5 App Cas 214 ; and add in this Court Ward v. Williams (1955) 92 CLR 496, at pp 505-506 . But I select one other reference out of a multitude : Macdougall v. Paterson (1851) 11 CB 755 (138 ER 672) . There Jervis C.J. said in the course of the argument (1851) 11 CB, at p 766 (138 ER, at p 677) "The word 'may' is merely used to confer the authority : and the authority must be exercised, if the circumstances are such as to call for its exercise". And, giving judgment, he said (1851) 11 CB, at p 773 (138 ER, at p 679) :

"We are of opinion that the word 'may' is not used to give a discretion, but to confer a power upon the court and judges ; and that the exercise of such power depends, not upon the discretion of the court or judge, but upon the proof of the particular case out of which such power arises."

I consider that to be directly applicable to the present case. If the Commissioner, having considered the matter, is satisfied of facts out of which the power to allow a rebate arises, he cannot nevertheless refuse to allow it. That is obvious in the case of condition (c) : and it seems to me to be so also in the case of the alternatives (a) and (b). (at p135)

6. It was suggested in the argument for the Commissioner that s. 103 A(6) provided a useful comparison with s. 46 (3) in the use of the word "may" - it being contended that s. 103A (6) gave the Commissioner an unfettered discretion. But, apart from the risks inherent in construing one provision of the Act by reference to the use of the same words in a different context, it seems to me that both provisions raise the same question. It is not apparent to me that the Commissioner can refuse to treat a company as "not a public company" for the purposes of s. 103A (1) if he has formed the opinion as to it stipulated in s. 103A (6). However, that question is not presently before us. (at p135)

7. The Commissioner's contention, that he can in his discretion refuse a further rebate notwithstanding that he is satisfied that the conditions for allowing it exist, leads on to a consideration of the grounds on which he claims he might legitimately do so. In the present case he gave as his reasons that the appellant was a participant in a tax avoidance scheme. But that a taxpayer company is able to avoid a liability which if the law or the facts were different it would incur, cannot be a ground for denying it a rebate that the Commissioner, being satisfied of the relevant facts for allowing it, is empowered to allow. I can well understand that Gibbs J. described the arrangement in which the appellant played a part as an artifice. It was an ingenious and elaborate expedient to avoid taxation. But it was not dishonest. Its legal character was not disguised or recondite. Having regard to recent decisions of this Court, it cannot be said that a taxpayer company by availing itself of a choice that the law allows puts itself within the reach of s. 260. I say nothing as to whether the very incorporation of a company which is called into existence simply to do the bidding of a taxpayer and thereby to enable him to avoid taxation, and which has no other reason for existence and carries on no business, is a matter that can fall within s. 260. That is not this case. The Commissioner does not seek to treat the appellant or any of the other companies whose affairs were linked with it, as if they were not really in existence as entities in law. Such companies may be seen by some people as merely noms de guerre of a taxpayer in his warfare with the Commissioner of Taxation. But the decision in Salomon v. Salomon &Co. ; Salomon &Co. v. Salomon (1897) AC 22 ,and the logic built upon it, require us as lawyers to treat them as separate warriors duly enlisted. The Commissioner does not claim that s. 260 would permit him to ignore their existence. What he here seeks to do is, while recognizing the existence of the appellant, to deny it the rebate that the Act, as I read it, requires him in the circumstances to allow it. (at p136)

8. If, contrary to my view, the Commissioner may in his discretion refuse this taxpayer the benefit of s. 46 (3), I do not think he could be justified in doing so merely because allowing it would diminish the revenue. That in substance is what is claimed. The proposition that the Commissioner has a discretion in which he can be guided by that consideration reinforces for me the conclusion that he has no discretion to refuse the rebate when he is satisfied that the condition on which he may allow it exists. (at p136)

9. For these reasons I am unable to take the view of the matter that Gibbs J. took. I would therefore allow the appeal. (at p136)

OWEN J. This is an appeal against a decision of Gibbs J. dismissing an appeal by the taxpayer company against an assessment to tax for the year ended 30th June 1967. (at p136)

2. The appellant was at all material times a private company and as such it was allowed a rebate under s. 46 (2) of the Income Tax Assessment Act 1936-1968 (Cth). It claimed to be entitled to a further rebate under s. 46 (3) of the Act but its claim was disallowed by the Commissioner whose decision was upheld by Gibbs J. (at p136)

3. Section 46 (3) is in these terms :

"Subject to the succeeding provisions of this section, the Commissioner may allow a shareholder, being a company that is a private company in relation to the year of income and is a resident, a further rebate in its assessment of the amount obtained by applying the average rate of tax payable by the shareholder to one-half of the part of any private company dividends that is included in its taxable income if the Commissioner is satisfied that -

(a) the shareholder has not paid, and will not pay, a dividend during the period commencing at the beginning of the year of income of the shareholder and ending at the expiration of ten months after that year of income to another private company;

(b) where the shareholder has paid, or may pay, a dividend during the period -

(i) commencing at the beginning of the year of income of the shareholder; and

(ii) ending at the expiration of ten months after that year of income, to a company, being a private company in relation to the year of income of the company in which the dividend was, or may be, paid, the company has not paid, and will not pay, a dividend during the period -

(iii) commencing at the beginning of the year of income of the company in which the dividend has been, or may be, paid by the shareholder; and

(iv) ending at the expiration of ten months after that year of income, to another private company; or

(c) having regard to all the circumstances, it would be reasonable to allow the further rebate." (at p137)

4. The appeal was argued by both parties upon the footing that the Commissioner was satisfied that the conditions set out in s. 46 (3) (a) were fulfilled and the appellant's first contention is that in these circumstances the Commissioner was bound to allow the rebate of which the sub-section speaks. For the Commissioner it was submitted that even if he is satisfied that the requirements of one or other of the lettered paragraphs are fulfilled he may nevertheless in the exercise of his discretion refuse to allow a rebate. This argument is of course based upon the words "may allow" used in the subsection. An alternative submission made on behalf of the appellant was that assuming the Commissioner to have the discretion which he claims to have, he failed to exercise it according to law because he took into account extraneous and irrelevant matters in that he considered that -

". . . even if and upon the basis that the conditions set forth in pars (a) or (b) were met he had a discretion to refuse to allow the further rebate and in the circumstances which are in evidence before the Court he was of the opinion that the further rebates should not be allowed and, in so far as the provisions of s. 46 (3) (c) were concerned, that it was not reasonable to allow it because, inter alia, the facts which are now before the Court disclose what was in his view a tax avoidance scheme aimed at avoiding liability to tax pursuant to the provisions of Div. 7 of the Act." (at p137)

5. The words I have quoted are taken from a statement placed before Gibbs J. on behalf of the Commissioner as being the reasons which led him to refuse to allow the rebate sought by the appellant. Both submissions made for the appellant were rejected by the learned judge of first instance. (at p138)

6. Dealing with the first point his Honour was naturally impressed by a comparison of s. 46 (3), under which the Commissioner "may allow" a rebate in certain circumstances, with s. 46 (2), under which the taxpayer "is entitled" to a rebate in the circumstances set out in that sub-section, and this is undoubtedly a matter of weight. The difficulty that I have felt in accepting that view lies in the existence of par. (c) in s. 46 (3). Put shortly, the appellant's argument is that if the Commissioner is satisfied that, having regard to all the circumstances, it would be reasonable to allow a rebate, it cannot be that in the exercise of some further discretion he could refuse to allow that which he is satisfied it would be reasonable to allow, and if he is bound to exercise his power to allow a rebate once par. (c) is satisfied, he must equally be bound to exercise it if the requirements of pars. (a) or (b) are fulfilled. I have come to the conclusion that this submission should be upheld. The words "may allow" are permissive; they empower the Commissioner to do that which he could not otherwise do. But when regard is had to the fact that the sub-section contains par. (c), I am of opinion that, notwithstanding the difference between the wording of s. 46 (2) and that of s. 46 (3), the Commissioner is bound to exercise the power given to him by s. 46 (3) if he is satisfied that the requirements of any one of the three paragraphs are satisfied. The relevant principles are set out in the joint judgment of this Court in Ward v. Williams (1955) 92 CLR 496, at pp 505-506 . There it was held that:

". . . it is necessary to bear steadily in mind that it is the real intention of the legislature that must be ascertained and that in ascertaining it you begin with the prima facie presumption that permissive or facultative expressions operate according to their ordinary natural meaning. 'The authorities clearly indicate that it lies on those who assert that the word "may" has a compulsory meaning to show, as a matter of construction of the Act, taken as a whole, that the word was intended to have such a meaning' - per Cussen J.: Re Gleeson (1907) VLR 368, at p 373. 'The meaning of such words is the same, whether there is or is not a duty or obligation to use the power which they confer. They are potential, and never (in themselves) significant of any obligation. The question whether a Judge, or a public officer, to whom a power is given by such words, is bound to use it upon any particular occasion, or in any particular manner, must be solved aliunde, and, in general, it is to be solved from the context, from the particular provisions, or from the general scope and objects, of the enactment conferring the power' - per Lord Selborne: Julius v. Bishop of Oxford (1). One situation in which the conclusion is justified that a duty to exercise the power or authority falls upon the officer on whom it is conferred is described by Lord Cairns in his speech in the same case. His Lordship spoke of certain cases and said of them '(they) appear to decide nothing more than this: that where a power is deposited with a public officer for the purpose of being used for the benefit of persons who are specifically pointed out, and with regard to whom a definition is supplied by the legislature of the conditions upon which they are entitled to call for its exercise, that power ought to be exercised, and the Court will require it to be exercised'." (2)

Section 46 (3) does, I think, give rise to a "situation in which the conclusion is justified that a duty to exercise the power or authority falls upon the officer on whom it is conferred" and I am therefore of opinion that the appeal should be allowed. (at p139)

7. I should add that I think the appellant's second submission should also be upheld and for two reasons. One is that if, as is the case here, the Commissioner is satisfied that the requirements of par. (a) are fulfilled, I am of opinion that he cannot call par. (c) in aid to justify a refusal to allow a rebate since I think par. (c) can have no application to a case in which he is satisfied that the conditions of par. (a) or of par. (b) are fulfilled. Paragraph (c) is intended, in my opinion, to cover cases not falling within either of the two earlier paragraphs. Further, in the light of the decision of this Court in Federal Commissioner of Taxation v. Casuarina Pty. Ltd. (3) it does not seem to me that it was open to the Commissioner to conclude that the facts disclosed "a tax avoidance scheme aimed at avoiding liability to tax" under Div. 7 of the Act. (at p139)

Orders

Appeal allowed with costs. Order of Gibbs J. set aside and in lieu thereof order that the taxpayer's appeal be allowed with costs and that the assessment be remitted to the respondent to be amended by allowing the appellant the appropriate rebate under s. 46 (3) of the Income Tax Assessment Act.