John v The Commissioner of Taxation

[1988] HCATrans 14

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No S97 of 1987

B e t w e e n -

MARGARET RUTH JOHN

Applicant

and

THE COMMISSIONER OF TAXATION OF

THE COMMONWEALTH OF AUSTRALIA

Respondent

Application for special leave

to appeal

MASON CJ
DEANE J

TOOHEY J

John

TRANSCRIPT OF PROCEEDINGS

AT SYDNEY ON FRIDAY, 19 FEBRUARY 1988, AT 10.18 AM

Copyright in the High Court of Australia

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MR A.M. GLEESON, QC:  May it please the Court, in this

matter I appear for the applicant with my learned friend,

HR A.H. SLATER. (instr.ucted by R.I. Rosenblum & Partners)

MASON CJ: Yes. Mr Gleeson, we have a little problem at

the moment. If you are as succinct as you usually

are, we are going to run out of work before the next

marking.

MR GLEESON:  I think I might be able to solve that problem

for Your Honours.

MASON CJ:	Not in the way that you have in mind, I hope.
MR GLEESON:	Mr Hughes here is ready to go on with the next

case anyway, I think.

MASON CJ:  Good. I think that is a preferable solution to

the one that you had in mind. Yes, Mr Gleeson.

MR GLEESON:  May I hand up to Your Honours four copies of

a collection of some authorities referred to in our

application book and the affidavit in that.

MASON CJ: This seems a very good reason for refusing special

leave.

MR GLEESON:  Your Honours, the taxpayer was successful before

Mr Justice Yeldham and failed three nil in the

Full Court of the Federal Court. The relevant facts,
the primary facts, are not in dispute and the

relevant facts appear on pages 4 and 5 of the application

book, if I could go to that briefly.

The taxpayer and 19 other persons entered into

a partnership for the stated purpose of engaging in

a business of share trading. The taxpayer's primary

motive for entering into the partnership was that of

obtaining an income tax benefit by way of a share in

a partnership deduction arising from the application

to the partnership's activities of the decision in

CURRAN's case. $100,000 was contributed to the partnership by the members and was deployed in the purchase of shares for resale. During the period

ended 30 June 1977 the partnership engaged in the
transactions sunnnarized on page 4. The terms on

which unlisted shares were to be purchased - they are

shares in the Compinge companies, which corresponded

with the Stewart Bacon shares in CURRAN's case - had

substantially been negotiated by some members of the
partnership and their adivsers prior to the formation

of the partnership. The partnership continued to

purchase and sell shares actively from its formation

at least until 1980. There was a licensed investment

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John

adviser who conducted the buying and selling activities

of thep:3.rtnership and there was not any suggestion

that the transactions were sham transactions.

Now, Your Honours, Mr Justice Yeldham held

that the partnership was carrying on a business
of share trading and that the purchase or that
the dealings in the Compinge shares were entered
into in the course of that business and applied the

decision of this Court in CURRAN's case. It is,

perhaps, important briefly to notice the essence of

the decision in CURRAN's case. Once it is accepted
that the shares in question, here the Compinge shares,

are trading stock then there is no doubt as to how

one accounts for the relevant transaction

connnercially.

The share trader in CURRAN's case bought

shares in Stewart Bacon which then had a bonus issue

and he then sold the original shares and the bonus

shares. As a matter of proper accounting, it was

clear that one treats the original shares as costing

the amount paid for them and it was also held in

CURRAN's case that one treats the bonus shares as

costing the amount of the dividend declared and

applied in paying them up. One then treats the

taxpayer as receiving the proceeds of sale of the

shares and the dividend declared and applied in

paying them up and that produces the connnercial

result, which in this case produced a small profit

to the taxpayers.

The fiscal benefit of the transaction results

from the fact that the INCO}:E TAX ASSESSMENT ACT in section 44 required you to treat the dividend

as exempt income. Just as in an ordinary dividend

stripping case the fiscal benefit to the dividend

stripper arose from the circumstance that he was

usually entitled to a rebate in respect of the

dividend declared, the fiscal benefit in the present

case results from the fact that under section 44 of

the Act the dividend was to be treated as exempt

income. That that is the substance of the matter

appears from CURRAN's case itself which is number 2

in this bundle that has been handed up. And the

relevant passages that make that point are in the

judgment of the Chief Justice at pages 415 to 416.

At the bottom of 415, His Honour said:

In the present case, s. 44(2)(b)(iii) of

the Act in the circumstances of the issue

of the bonus shares by Stewart Bacon exempts

from income tax the amount credited to the

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John

appellant in respect of the issue of the
shares. But that does not mean, in my

opinion, that the appellant is not to

be regarded as having paid for those shares

the amount of their paid-up value.

And Mr Justice Gibbs at page 421, about a third

of the way down the page, says:

In my opinion it was not possible to

arrive at the appellant's true income without

taking the bonus shares into account as
trading stock acquired, whether or not those

shares could properly be regarded as having

been purchased. The appellant's trading

account would not reveal the real situation

if it brought in at no value shares which

were in fact valuable.

And at the bottom, he says:

That which made the transactions profitable was

the receipt of the shares as a bonus. If it

were not for s. 44(2)(b)(iii), it would have

been necessary to show the value of those

shares on the income side of the trading account

when they were allotted.

That is of some significance if one were ever to
consider the question that has not been considered

in the courts below of the application of section 260

to a transaction like this because on the view

expounded in GALLAND and WATSON to the effect that

the old cases on section 260 are explicable by

reference to the fact that there was a specific

section of the INCOME TAX ASSESSMENT ACT that gave

rise to the tax benefit in question,which specific

provision could not be overridden by the general

provisons of section 260,a CURRAN transaction would

be almost a copy-book example of such a case.

Now, the taxpayer failed in the Full Court

of the Federal Court on either of two slightly

different issues. The partnership that engaged in

the transactions of buying and selling shares

was called the Malindi Trading Company. One of

the views adopted in the Full Court of the

Federal Court, and in particular it seems to have

been the view of His Honour the Chief Judge, was

that the Malindi Trading Company did not carry on
the business of buying and selling shares. The

narrower view, which seems to have been the view of

Mr Justice Fox, was that although the Malindi

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John

Trading Company carried on the business of buying

and selling shares, the Compinge transactions were

special and not part of such a business. Either

way the existence of the relevant business was

denied on the ground that it was only the fiscal

benefits of the transaction, or series of transactions,

that made it, or them, financially advantageous

for the taxpayer. So, the critical issue as it
emerges from the decision of the Full Court of the
Federal Court is whether the fact that a

transaction or a series of transactions are entered into for the primary motive, or the sole motive, of obtaining a fiscal benefit produces the consequence

that those transactions are not to be regarded as

business transactions for the purposes of the

INCOME TAX ASSESSMENT ACT.

Now, we say two things about that. First,

it is directly contrary to a line of authority in

this Court which was not satisfactorily distinguished

by the Full Court of the Federal Court. And, second,

for reasons that we give in the affidavit in support

of the application on pages 12 to 14 of the

application book, if it be an error it is an error

of pervading importance in relation to the application

of numerous provisions of the INCOME TAX ASSESSMENT ACT.

There are many forms of transaction which are

financially advantageous to those who enter into them, either primarily or solely, because of the

fiscal benefits which they attract.

MASON CJ:  Now, on this aspect of the case, can I ask you

this question, Mr Gleeson? My impression is that

a number of other cases depend on the outcome of

this case.

MR GLEESON:	Yes, that is so.
MASON CJ:	Is it possible to quantify the number of other cases that depend on the outcome of this case?

MR GLEESON:  Mr Grieve would know this better than I do -

about a thousand, Your Honour.

MASON CJ:	About a thousand?
MR GLEESON:	Yes.

MASON CJ: Now, to what extent do those cases involve what

for the moment I will call this preliminary issue

of fact, namely, the question whether the transaction

forms part of the business of buying and selling

shares?

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John
MR GLEESON:	Mr Grieve knows better than I do but cases

where I have had contact in terms of preparing

arguments for the taxpayer indicate that this

issue is always raised. This is the

Mr Justice Rogers' "you do not make yourself a

warrior by putting on warpaint" issue.

MASON CJ:	I am afraid that is lost on me.
MR GLEESON:	I see. Your Honours, that is the argument

that is the argument that is always advanced and

put in the forefront by the Connnissioner in the CURRAN cases and, indeed, I do not think I have

ever come across an appeal involving a CURRAN

transaction where, if this argument is correct,

the taxpayer could succeed.

I would have to say that Mr Slater has

probably had more acquaintance with actual appeals

of these than I have.

MASON CJ: Perhaps, we ought to call on all the other counsel

in the case.

MR GLEESON:  I hope Your Honour only means at the bar table.

It is a threshold issue that is always raised by the Connnissioner in these appeals and, as I say,

has in most of the cases that have been decided in

the past been fatal to the taxpayer if this line of

argument is followed and I find it hard to think of

a case where it would not always be fatal to the

taxpayer.

MASON CJ: Yes. The reason why I raise the point is that

my initial impression on looking at the case was

that you did have a threshold finding of fact

against you; that finding, perhaps, not being

pervaded by any misapprehension as to what this

Court had said in the long line of decisions in

the past and taking that view of it, and I am not

suggesting that it is necessarily right for one

minute, you would have to displace that finding

of fact before you could get to the position where

you raise these very important questions.

MR GLEESON:  Yes. Your Honour, as I say there are two lines

running through the judgments in the Federal Court.

One possible explanation of the decision is that

the Malindi Trading Company was not carrying on a

business of buying and selling shares and the other

is that it was but this particular transaction was

outside that business. Of course, precisely the

same could have been said of Mr Curran.

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John

Now, both of those conclusions, whichever one

is regarded as critical in the case, are applicable

in almost all other CURRAN cases, I would imagine.

The second is most certainly applicable to them

all, it is in the nature of the thing	that the
second is involved in them.	In the case of both

of them,whether one takes the broader view of the
principle or the narrower view, the reason for

the decision - and it is the reason that was assigned

by the Full Court quite clearly - the reason must

be that a transaction cannot be regarded as a

transaction in the course of carrying on a business if the primary, or sole, financial advantage sought to be obtained by the participant in the transaction

is a fiscal advantage.

Now, the importance of that, of course, goes a long way beyond CURRAN schemes. That particular

point affects all CURRAN schemes but the importance

of it goes through, for example, to people who carry

on a business of investing in Australian films. The
Government seems to take the view, or took the view,

that in order to encourage people to invest in

Australian films it was necessary to give them an

income tax deduction of more than 100 per cent

which seems to reflect a judgment as to how

business-like investing in Australian films would be

if it were not for the financial advantage

deliberately created. But what I would seek to do is to compare what this Court has said in a number of cases on that point with what the Federal Court

said about that principle to illustrate that there

really was a fundamental error in approach.

Your Honours, INVESTMENT AND :MERCHANT

FINANCE CORPORATION, 125 CLR 249, is the first of

the bundle that we handed up. The headnote shows

that this was a dividend-stripping operation and

about four or five lines down under the description

of the holding, it said:

that the shares were trading stock ..... even

though they had been acquired for the

purpose of a dividend-stripping operation.

And as I said the CURRAN scheme is only a particular example of a dividend-stripping operation.

Now the Chief Justice at pages 254-5, at

the bottom of 254 and the top of 255, said:

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John

The Connnissioner sought to avoid this consequence by asserting that the purchase

and sale of these shares was outside the

scope of the appellant's share trading

business and ought to be regarded as an

isolated transaction. I am unable to agree

with this proposition. It is based

apparently upon the supposition that because

the appellant saw fiscal advantages in buying
the shares cum-dividend and disposing of the

them ex-dividend at a diminished price the

transaction could not be regarded as a

transaction of share dealing in the course

of its business as a dealer in shares: but
quite clearly neither the attainment of profit

nor the expectation of it is essential for a

particular commercial transaction to form

part of the business of dealing in the connnodity

purchased.

And then at pages262 to 263, to like effect was

Mr Justice Menzies.

Now, again, in PATCORP INVESTMENTS LIMITED, 140 CLR 247 -it is the third of the cases in this

bundle - the statement of facts in the headnote,

about seven-tenths of the way down the page, says

that:

The stripping company carried' on share

trading business in each of the years in

which it was engaged in share-stripping

transactions.

And the question was whether those share-stripping

transactions were part of the business.

Your Honour the Chief Justice said at pages252 to

253:

As might be expected, in the course of

their share trading business the companies

had regard to the fiscal advantages which

were available under the INCOME TAX

ASSESSMENT ACT ..... The Act encouraged mining

activity and investment in the class of

companies -

and then Your Honour referred to section 77A.	And
at the top of 253:

The availability of an income tax deduction

might make an investment economically

attractive, although it was anticipated at the

time of purchase that the shares to be acquired

would yield less on sale than their purchase

price.

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John

No less important a consideration

to a company carrying on business as a
share trader was the deductibility for tax
purposes of losses which the company
sustained on the purchase and sale of shares
acquired in the course of carrying on that
business. Again, I have no doubt that the
availability of a tax deduction for such

losses was an important factor in

determining whether a company carrying on

such a business would enter into a particular

transaction.

And Your Honour dealt with the same matter

distinguishing some decisions of the House of Lords,
which apparently attracted the Court of Appeal in
the present case, in the middle of page 254, and

again at pages 273 to 274. At the bottom of 273

Your Honour said:

When the Full Court decided the IMF case

it had before it two decisions of the

House of Lords which supported the conclusion

reached by the majority of this Court. Since

then the House of Lords has held that where

a taxpayer enters into a transaction for the

purpose of a dividend-stripping operation
with the manifest object of securing a tax

advantage the transaction does not constitute

a dealing in stocks and shares and therefore

forms no part of the trading activities of

a dealer in stocks and shares. The Commissioner

relied on this decision but in my view,

having regard to this Court's decision in
the IMF case, I should not follow it.

And to the like effect was Mr Justice Gibbs at pages 291 to 292 where His Honour dealt with, and

declined to follow, the specific basis upon which

this Court declined to follow those House of Lords

decisions. Supreme Court of Canada, in a case to which I will It was explained at more length by the	come in a moment, but it relies, or it turns, upon
the presence in our INCOME TAX ASSESSMENT ACT of
section 260 and the fact that there being a section 260 in the INCOME TAX ASSESSMENT ACT you
cannot, as it were, import anti-avoidance implications
into other specific provisions of the Act.

MASON CJ: The other judgments are, perhaps, of more

assistance to you than my judgment because after all

I was sitting at first instance and it could hardly

be suggested that I should depart from the IMF case.

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John

MR GLEESON:  Yes. Mr Justice Gibbs at 291 to 292 supported

that line of reasoning and Mr Justice Stephen at

page 300. At page 300, at the bottom,

Mr Justice Stephen said that he agreed with the

judgment of Mr Justice Gibbs.

Perhaps the most important case,and one

that was not mentioned at all in two of the

judgments in the court below and was erroneously
described in the third judgment is WESTRADERS,

144 CLR 55, which is at number 4 of this bundle.

Now, the important feature of WESTRADERS is that there was, contrary to what one of the judges in the court below said, a vigorous contest as to

whether or not the company in question was

carrying on, at the relevant time, a business of

share trading and whether a particular transaction

was part of that business. At the bottom of page 55

the Commissioner's contention is referred to and,

in argument, at page 58, Mr Priestley is reported

as having submitted that:

The shares were not bought as part of a

share trading business but as part of a
business which dividends were to be
obtained in excess of the purchase price

of the shares.

Now, the Chief Justice at pages 59 and 60,

citing a judgment of Your Honour Mr Justice Deane

in the court below in a well-known passage, raised

a matter of general principle relevant to the

interpretation of the INCOME TAX ASSESSMENT ACT

and Your Honour Mr Justice Mason dealt with the

issue of business of share trading on pages 66 to 67

and 70 to 71. It is to be noted that the company

in question during the three years that were

relevant to the INCOME TAX ASSESSMENT ACT carried

on no activitites except the dividend-stripping

activities which were an issue in this case. At

the bottom of 66, Your Honour says:  Jensen was at all material times a public

company -

and then you give something of its history. And at

about seven-tenths of the way down 66, Mr Justice Rath:

also found that Jensen continued its share

trading and dealing activities in the years ended

30th June 1973 to 1975 inclusive, notwithstanding

that in the latter years Jensen's activity in

buying and selling shares was apparently confined

to the carrying out of schemes known in taxation

circles as "Division 7 schemes".

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John

And at the bottom of 67, Your Honour said:

It is convenient in the first instance to consider the Commissioner's contentions

that Jensen was not carrying on business

as a share trader in the 1975 year -

could I just underline that part of Your Honour's

judgment having regard to what was said in the

Federal Court about this case. Then at page 71 -

at the bottom of 70 - Your Honour said:

However, neither the cirucmstance that

Jensen was "on the take-over trail", whatever

the colourful expression may mean, nor the

fact that it derived special advantages from

its acquisitions, not being the making of a

profit on resale, nor the fact that the

acquisitions took place in the course of

carrying out "Division 7 schemes", in enough

not, or had ceased to be, a share trader in	to justify the conclusion that Jensen was
the 1975 year.

The point is that Jensen engaged in diverse

share trading activities and that the character

of those activities changed over the years.

The case:; of INVESTMENT AND MERCHANT FINANCE

CORPORATION LTD V FEDERAL COMMISSIONER OF TAXATION

and FEDERAL COMMISSIONER OF TAXATION V

PATCORP INVESTMENTS LTD, clearly establish that

the purchase of shares in companies having

large amounts of undistributed profits, the

payment by way of dividends from those profits

and then the sale of the shares at a reduced

price are transactions of a trading nature and

may therefore form part of the activities of

a share trader. The two cases also establish

that shares so acquired may be considered

trading stock. (Continued on page 12)

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John

MR GLEESON (continuing):  Then the important paragraph is the

next one:

I acknowledge that in the present case

Jensen was not in 1975 buying and selling

shares through brokers as an orthodox share

trader would. Indeed, Jensen's transactions

in the later years were limited to Division 7

schemes and the promotion of section 36A

partnerships. None the less I regard its

activities in buying and selling shares,

connected though they were with the carrying

out of Divisi:on 7 schemes, as constituting

the business of share trading -

Then I emphasize the following two sentences -

Jensen's earlier activities as an orthodox

share trader assist in arriving at this

conclusion. But I do not regard them as

essential to the conclusion.

Could I indicate how the Federal Court dealt with

WESTRADERS. Two members of the court - - -

MASON CJ:  By the way, was that approach taken by all the other

members of the Court except Justice Murphy who

dissented?

MR GLEESON:  Yes. Mr Justice Wilson also dissented, but

on a different point.

MASON CJ:	Yes.
MR GLEESON:	Mr Justice Wilson's reason for dissent is at the bottom of page 80 and the top of page 81.
Mr Justice Aickin had earlier said that he agreed
with Your Honour, and Mr Justice Wilson said he had had the advantage of reading Your Honour's judgment:

With one important exception, I agree

with what Their Honours have said in

relation to the different issues canvassed

in the case. However, the matter on which

I have come to a different conclusion

is fundamental

and it is a question of construction of section 36A.

Your Honours, two members of the Federal Court did

not mention WESTRADERS in their judgment.

MASON CJ:	Before you leave this case, what did the Full Court of the Federal Court say about this issue before it
came to the High Court in WESTRADERS? Can you tell
us that?

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John

MR GLEESON:  This case does not - - -

MASON CJ:  It is not of much importance. I would not worry

about it, Mr Gleeson.

MR GLEESON:	Your Honour, two members of the Full Court of the Federal Court did not mention WESTRADERS at all,
and explained, or distinguished, PATCORP and IMF upon a basis quite inconsistent with what Your Honour said at page 71. They explained PATCORP and IMF upon
the basis that in that case there had been an anterior business of share trading and they said that made all the difference. I said two members - that is perhaps not entirely fair.

The Chief Judge, as I have said, decided the

case on the basis that the Malindi Trading Company

did not carry on a business of buying and selling

shares, and his decision is directly inconsistent with

what Your Honour said in WESTRADERS and does not

mention WESTRADERS. Mr Justice Fox decided the case

on the narrower issue, also inconsistent with the

authorities, that this particular transaction was not

part of the business of share trading.

The way in which Mr Justice Beaumont dealt with

WESTRADERS is, with respect, surprising. His Honour

said on page 65 of the application book at line 10:

WESTRADERS was a case of an admitted share trader.

Now in WESTRADERS and he says again at lines 13 to 15:

IMF, CURRAN, PATCORP and WESTRADERS may

be distinguished ..... they were all

cases of acknowledged and established

share traders.

WESTRADERS was a case where the company over a period

of three years, which were the relevant years for the
assessment, had not done anything except engage in

tax schemes, and there was a vigorous contest before

the High Court as to whether the company was a share

trader at the relevant time. Now, the basis of

the reasoning of the Full Court of the Federal Court

in the present case appears first of all in the

judgment of the Chief Judge at page 28,at line 17.

His Honour, having referred to PATCORP and IMF, says:

It will be noted that in all of these cases

the taxpayer company was engaged in the

business of dealing in shares on an established

basis ..... In the present case the position is

different. Here there was no established

business of trading in shares. Here 20 persons,

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John

in the main strangers to each other,

were brought into a partnership for the

purpose of taking advantage of the decision

in CURRAN's case. There was a pre-arrangement

to purchase shares in the Compinge companies -

and so forth, and he says -

In my opinion, it is necessary to look at the whole of the circumstances of the case

when determining whether the Compinge

transactions were carried out in the course

of a business of trading in shares.

But he is unable to conclude that because that would:

be contrary to ordinary concepts of

business.

Now, that seems to involve the proposition that ordinary

concepts of business require your first of all to
consider whether a transaction is financially

beneficial, without having regard to its taxation

implications, and it is only if you conclude that a

transaction is financially advantageous to the
participants, without regard to the fiscal implications,
that you are justified in concluding that within the

ordinary concepts of business it is a business-like

transaction. That, in our respectful submission, is

the error of principle that was identified in the cases

to which reference has already been made.

Mr Justice Fox, at pages 34 to 36, put the matter

on a narrower basis - that appears at page 35,

line 13, where His Honour says:

The transaction was not repeated, and

so far as it appears it was a unique

activity distinctly outside the mainstream

of the alleged business.

Well then, so was the transaction in IMF and PATCORP,

and for that matter CURRAN, and WESTRADERS, and

His Honour says that, in line 9, the reason why it

was not a business-like transaction was because:

A painless taxation loss, not profit,

was the motive.

As a statement of primary fact, that is undoubtedly
true, but as a statement of principle it involves the
proposition that a transaction will not be
business-like where the primary or sole motive for
which the transaction is entered into is the

obtaining of a fiscal benefit, and I have read to

Your Honour what Mr Justice Beaumont said.

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John

MASON CJ:	Yes.
MR GLEESON:	Now, the overriding importance of this issue was

dealt with by the Supreme Court of Canada in 1984

in this case - - -

MASON CJ:  This is in the STUBART case which is referred to at

the end of your affidavit.

MR GLEESON:  Yes, and interestingly the STUBART case said that

CRIDLAND is a good example of the proper way to

approach the -

MASON CJ:	Yes. We have been told that before.
MR GLESSON:	The theme of the STUBART case is to reject as the

law in Canada the view that was taken both in the

United States and the United Kingdom to the effect -

and the view that is expressed in those cases that

were distinguished by the High Court in IMF and

PATCORP to the effect that a transaction may only be regarded as business-like for the purpose of the Act

if there is what is sometimes referred to as a bona

fides business, the test of bona fides, apparently,

being whether or not the transaction is financially

advantageous apart from its fiscal implications.

Now that view was rejected as the law in Canada, and

at the top of page 12 of the report, under the heading

Business Purpose Test, Mr Justice Estey goes back to

some fundament considerations, and on pages 14 and 15

he says:

The situation in Australia sheds further

light on the problem of applying the

proper interpretive approach to a

taxing act.

He thought that section 260 was a rigorous tax

avoidance provision and then refers to CRIDLAND and

on the top of page 16 says:

The presence of a provision of general

application to control tax avoidance

schemes looms large in the judicial

approach to the taxpayer's right to adjust

his sails to the winds of taxation unless

he thereby navigates into legislatively

forbidden waters. The Legislature has provided

the standards of unacceptable avoidance

procedures, and there being no other limit

imposed by the Act, the court found itself

under no duty, nor indeed possessed of

any authority, to legislate new limits.

Where, as in this appeal, the Act expressly

permits the application of accumulated losses

to reduce taxes on current and future

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John

earnings, the tax collector must

demonstrate a statutory bar to succeed.

Now, in the present case, the taxpayers saw

in section 44(2)(b)(iii) the key to a fiscal benefit

and they went after it, just as -

DEANE J:  This judgment could not even get the name of the

present Chief Justice right.

MASON CJ:  Yes. It severely undermines its authority, does

it not. Have you not got a better case? By the

way, is it still good law in Canada, this case?

MR GLEESON:	Yes, and perhaps I could seek to surrnnarize the essence of the reasoning in it. It is that whereas
it might be one thing in legislation that has no
general anti-avoidance provision, such as the Act in the United States, or the Act in the United Kingdom, to introduce concepts like bona fides when one talks
about financial activities that are engaged in, where
you have, in a taxing statute, an anti-avoidance provision you cannot, by implication, import into other provisions of the Act concepts of anti-avoidance
intention on the part of the legislature. So that
you cannot, for example, say the only people who
are entitled to tax deductions when they invest in Australian investments are bona fides investors,
whatever that might mean.

MASON CJ:  Yes. I think this argument was put to us in the

SI'AMP DUTIES case from Victoria of ASHWICK. I think

we identified the issue and said it was not necessary
in that case, or asked to consider it, and I think
we also indicated that it was an issue that had not

been resolved in this country.

MR GLEESON:  Yes. Now, Your Honours, we submit that the issue

was squarely raised by the facts of this case, as it

is raised by the facts of many other cases, and it was

squarely addressed by the Full Court of the Federal
Court.	The answer that the Full Court of the Federal

Court gave to the issue is, in our respectful submission, unsatisfactory in point of reasoning,

and opposed in point of authority to earlier decisions

of this Court, and should not be permitted to stand.

MASON CJ:	Thank you, Mr Gleeson. Yes, Mr Grieve.
MR GRIEVE:	Your Honours, in our respectful submission, the Full Court correctly identified the issue that was primarily before it, namely whether, as a matter of
fact, the taxpayer was relevantly carrying on a
business and incurred an expenditure so as to give rise to an allowable deduction under section 51. Each of
the three judges, in differing ways, formulated that

SlT6/5/HS	16	19/2/88
John

as the primary issue of fact and each of them, in

our respectful submission, dealt with the matter,
having regard to the evidence adduced below on the

footing that the appellate court, the intermediate court here, was, as the Chief Judge said at page 22:

in as good a position as the learned

trial Judge to draw inferences and reach

a conclusion on this matter.

Now, that being so, we respectfully submit the finding

of fact was, indeed, open to the Full Court, as they

concluded, and that so viewed the case cannot, on any

aspect, be regarded as carrying with it a point of

general importance.

MASON CJ:  But none the less, the approach taken to the

resolution of the question of fact was quite

inconsistent, was not it, with the approach that has

been taken in a number of cases in this Court?

11R. GRIEVE:  We would have to concede that, unless those cases

can be distinguished, the answer to Your Honour's

question is yes, but we submit the Full Court amply

did distinguish them, having regard to the

circumstances in which the Compinge shares were

acquired, the point being taken, or rather the point

being highlighted by the Chief Judge, again at 22, and

mentioned by the other judges, that that transaction:

was arranged before the partnership was

formed.

That is at leave book, page 22, lines 12, 13 and 14.

That consideration, in our submission, was dominant

in Their Honours' view of the essential factual

question. In other words, the way in which Their Honours

fornrulated the issue was thus:  when the arrangements

were put in place, as a result of which the taxpayer

and her partners incurred the expenditure, were they

carrying on the business, and Their Honours answered	that question in the negative from the factual
viewpoint. That is the first matter that we would
raise in opposition to leave.

MASON CJ:	But this particular ground of distinction cannot be characteristic of all these cases that are in the
pipeline lying behind this one, surely?
MR GRIEVE:	I am afraid I am not in a position to answer that

in point of fact, but as each individual case will

turn on its own circumstances of course it may well

be that a large number of them are factually on all

fours in that the CURRAN arrangement, if I can so

characterize it, may well have been the subject of

some prior negotiation and arrangement before the

formation of the partnership.

SlT6/6/HS	17	19/2/88
John

MASON CJ:  It just seems to me to be somewhat unsatisfactory

to say, "Look, we will not grant special leave in

this case because there is a factual distinction here

from the cases that were before the High Court earlier.

Leave the Federal Court in a situation where other
cases have to be litigated through to the Full Court

of the Federal Court, further applications for special

leave to appeal to this Court on the £ooting that

they do not contain this particular factual

characteristic".

MR GRIEVE:  We suppose, with respect, it really comes down to

so far as this taxpayer is concerned.

the question of is that characteristic crucial. lethal

MASON CJ:	Do I understand you to be saying, when you say that, that you would concede in other transactions that if
there was not this particular feature the decision
would go the other way?

MR GRIEVE:  It may well, yes. It is difficult to make an

unqualified concession in that regard -

MASON CJ:  This may be good news for a number of taxpayers,

I should have thought.

MR GRIEVE:  It may be. Without wishing to fox with the Court,

it is difficult to make an unqualified concession

because each case necessarily will turn on its own

circumstances, but one can well imagine that if a

taxpayer could demonstrate as a matter of fact a track

record of share trading activity well prior to the

making of the particular CURRAN arrangement, then he
would be on far stronger ground than this taxpayer.

He would certainly be far closer to the cases to which

our learned friend has referred where there had been

a pattern of share trading activity, PATCORP, et cetera,

and during the course of and incidental to that

established pattern the taxpayer had elected to take

advantage of the current principle.

Here the cart and the horse are in reverse order.

One has the taxpayer, as it were, setting up the establish as a matter of.fact a business and then

harness that CURRAN arrangement into that business

as if it were part of the continuing whole, and we

submit that that was the crucial point of fact that
attracted the Full Court's ultimate conclusion, or

led to the Full Court's ultimate conclusion in the

matter. The second matter that we would raise

in resisting leave is that, of course, the CURRAN

principle, if we can characterize it as such, has

been the subject of legislative action as long ago as

1977 and thus the case really raises a question which

could never arise again in any existing circumstance.

S1T6/7/HS	18	19/2/88
John

MR GRIEVE·(continuing):  What we draw from that, with

respect, is that to the extent to which the ambit

of section 51 warrants consideration by this

Court - and we do not deny for one moment

the abstact question that our learned friends

pose _ is an important question - we respectfully

submit that this case is an inappropriate vehicle

for that question to be considered. This case

does not arise out of what could be characterized

as a conventional series of commercial dealings;

this case arises out of an artificial set of

circumstances which were created to take advantage
of a tax situation that obtained more than

ten years ago and certainly does not obtain today.

That being so, we would submit that this

case is just not the appropriate case for that

question to be considered.

MASON CJ:  I follow that but would it not be correct to

say - perhaps I am wrong in suggesting this -

that the judgments in the Federal Court proceed

on a basis that would have overtones in relation

to the deductibility under section 51 of outgoings

arising from transactions entered into by a taxpayer

for the purpose of fiscal advantage?

MR GRIEVE:  With respect, overtones of a similar kind 1n

the same court have sounded, if we may use that

expression, in such cases as ILBERY, URE, GWYNVILL

PROPERTIES and so forth. Those cases, as it

were, establish a bank of authority which is

there and we would respectfully submit that this

case forms a respectable member of the same bank

without necessarily enlarging its implications.

MASON CJ:  I suppose the question is as to the solvency

of the bank.

MR GRIEVE:  For the very same reason that this Court saw

fit, as we understand it, to decline leave in

a number of those cases - - -

MASON CJ:  ILBERY is one that I recall - and I cannot quite

recall the precise ground on which the Court

refused leave in ILBERY but I do recall that

it was refused.

MR GRIEVE:  Leave was refused in ILBERY and in GWYNVILL;

it apparently was not sought in URE and MAGNA -

which went against the Commissioner but is still

a part of that group - - -

MASON CJ:	Yes, because of the principles enunciated.
John

SIT7/l/SDL 19 19/2/88

MR GRIEVE:  Yes. It was a case in which the Commissioner

himself did not seek leave.

MASON CJ: Justice Toohey suggests the Court did grant

leave in ILBERY and then dismissed the appeal.

My recollection is the other way, that the Court

refused leave.

MR GRIEVE:  I was not in the matter but I am told by my

client that Your Honour the Chief Justice's

understanding is correct, that special leave

was refused.

MASON CJ: It does not mean much that you were in it - I

gather at the bar table that other people know

more about these cases even.

MR GRIEVE:	We would submit that in light of that pattern that has developed over some years now, the bank,
as I have characterized it, is quite solvent
and that this case does not add a gloss to
section 51 that would have any implications over
and above or beyond the factual circumstance where one is asked to consider the tax implications
arising out of an artificially constructed scheme.

In short, we respectfully submit that what

Their Honours, in the Court below, said can be

regarded as confined to the particular facts of the case does not involve any enunciation
of a principle which in some way has a bearing

on the proper construction of section 51 in general

terms and by way of general application and would

be regarded as applicable to those types of
circumstances - put shortly, scheme cases.

For those reasons, Your Honours, we respectfully submit that leave ought to be refused.

MASON CJ:  Thank you, Mr Grieve. Yes, Mr Gleeson?

MR GLEESON:  Could I deal first of all with the matter

of fact suggested to be an important matter of

distinction from other cases?

MASON CJ:	Yes.
MR GLEESON:	The fact stated by my learned friend, with

respect, is not accurate. It depends what you

mean by the expression "put in place" or

''pre-arranged". If you look at page 79 of the

application book, at lines 4 to 10, where

Mr Justice Yeldham describes the relevant facts,

he says that:

SIT7/2/SDL	20	19/2/88
John

During the first three months

following the formation of the partnership, the sub-committee would meet on an average of twice per week.~.

to consider -

decisions made in relation to the sale

and purchase of shares ..... the first meeting
took place on 19th April.

The C.Ompinge transactions took place on about 27 or 28 April in relation to the declaration

of the relevant dividends. There is no doubt

that they were pre-arranged in the sense that

before the partnership was formed and commenced

buying shares the people who brought the members

of the partnership together knew where they could

find a company that had available dividends that

satisfied, or they hoped would satisfy, the

requirements of section 44 and had taken steps

to put the ~ltimate transaction in place. But

it is just not right to say that the Compinge

transactions occurred before the formation of
the partnership or before the partnership began
to buy and sell shares. As I say, a lot depends

on what content you give to the expression

"pre-ar-ranged".

Of course, in many if not most cases of

CURRAN' s schemes, before the partnership comes

together the members of the partnership know

where they can get access to distributable profits

of the kind here involved.

It was, with respect, relevant for my learned

friend to refer to cases like ILPE'RY and MAGNA

ALLOYS because the result that was achieved in this case comes from a combination of two

processes of reasoning. First of all, you distinguish
cases like IMF and PATCORP and	WESTRADERS on

the basis that they are cases confined to the

special circumstance where there is what Mr Grieve

calls "a track record" of share trading. Then,

once you have those confined in that fashion
one then takes the idea developing in the Federal

Court in the cases to which reference has been

made, that you import into other provisions of

the Act, and in particular into section 51 of
the Act, some concept of the necessity for the

presence of bona fides before you characterize

a transaction as a business transaction. You

then have the result that the actual decision

in CURRAN's case can be said to turn upon the

fact that you had a track record of share trading

by Mr Curran and that the particular transaction

was entered into by a person who had such a track

SIT7/3/SDL	21	19/2/88
John

record. That, of course, leaves the decision

operating in relation to cases where Mr Justice Fox

certainly, and Mr Justice Beaumont probably,

would deny the deduction to the taxpayer.

In our respectful submission, the matter

does raise important questions.

MASON CJ:  Thank you, Mr Gleeson. The Court will grant

special leave to appeal.

AT 11.09 AM THE MATTER WAS ADJOURNED SINE DIE

SIT7/4/SDL	22	19/2/88
John