Jaques v Federal Commissioner of Taxation

Charles Alfred Jaques appealed to the High Court of Australia against an assessment by the Federal Commissioner of Taxation disallowing deductions claimed for calls paid on shares in two companies, Kandos Cement Co. Ltd. and Kandos Collieries Ltd. The dispute centred on whether these calls qualified for deduction under section 18(1)(i) of the Income Tax Assessment Act 1915-1918, which allowed deductions for calls paid on shares in mining companies, and whether the transactions were voided by section 53 of the Act, which rendered arrangements void if their purpose or effect was to alter the incidence of income tax or relieve a person from liability.

The legal issues before the High Court were twofold. Firstly, whether the Kandos Cement Co. Ltd. and Kandos Collieries Ltd. were "mining companies" within the meaning of section 18(1)(i) of the Act. Secondly, and more crucially, whether the scheme under which the calls were made constituted a "contract, agreement, or arrangement" that was void under section 53 of the Act, either because it was not a genuine transaction or because its purpose or effect was to relieve the appellant from income tax liability.

The Court, comprising Knox C.J., Isaacs and Starke JJ., delivered separate judgments but reached a common outcome. Knox C.J. found that the new scheme was not a genuine transaction but was designed to conceal the true agreement, which was the issue of fully paid shares in the new companies. He held that the scheme's purpose was to enable shareholders to obtain an unwarranted deduction under section 18(1)(i) and thus avoid tax, rendering it void under section 53. Isaacs and Starke JJ., while accepting that the transactions under the new scheme were genuine, concluded that they fell within section 53 because they had or purported to have the effect of relieving shareholders from income tax liability. They also expressed the view that a company whose predominant business was cement manufacturing, even if it extracted raw materials, was not a "mining company" for the purposes of section 18(1)(i).

The appeal was dismissed. The Court held that the appellant was not entitled to the claimed deductions. Knox C.J. based his decision on the lack of genuineness of the transaction and its purpose to avoid tax, while Isaacs and Starke JJ. found the arrangement void under section 53 due to its effect of relieving tax liability, irrespective of its genuineness. Furthermore, Isaacs and Starke JJ. indicated that the Kandos Cement Co. Ltd. was likely not a mining company.