John v The Commissioner of Taxation of The Commonwealth of Australia

[1988] HCATrans 111

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry

Sydney No S22 of 1988

B e t w e e n -

MARGARET RUTH JOHN

Appellant

and

THE COMMISSIONER OF TAXATION OF

THE COMMONWEALTH OF AUSTRALIA

Respondent

MASON CJ
WILSON J
BRENNAN J
DAWSON J
TOOHEY J

GAUDRON J

_John(2)

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON FRIDAY, 3 JUNE 1988, AT 10.33 AM

(Continued from 2/6/88)

Copyright in the High Court of Australia

ClTl/1/SDL 129 3/6/88

MASON CJ:	Mr Shaw, before you proceed I wish to make this
statement: the material handed up in the course
of argument yesterday contained some information about the identity of some persons with an interest
in the outcome of these proceedings. That information,
which was not previously available to the members
of the Court, has led Justice Deane to conclude
that, notwithstanding that the parties have indicated
they have no objection to His Honour continuing to sit, it would be inappropriate for him to
do so.  The case will therefore continue before
the Court as at present constituted.

MR GLEESON: If the Court pleases.

MR SHAW: If the Court pleases, may I pass to the consideration

of the questions of law which arise. Yesterday,

in answer to a question put by Your Honour

Mr Justice Brennan, we made the submissions which

appear in the first paragraph of our summary
of argument. That way of putting the question

is the way in which. it has been put in both the courts

below - by reference to section 51, I mean.

The way in which the question is to be solved

is dealt with in paragraph 2 of the summary

and there is there reference to the question

being a question about the essential character

of the supposed loss or outgoing and there

is a reference in that paragraph to LUNNEY's

case from which the expression, "essential character"
derives and that expression has been used, of

course, many times since. One of the places

is in FORSYTH's case and, in particular, in the

judgment of Your Honour Mr Justice Wilson in

that case.

RONPIBON TIN is a very well known case constantly

cited from and there were large extracts from

it and from NALL in the judgment of Your Honour

Mr Justice Brennan in MAGNA ALLOYS to which

reference was made yesterday. We would not

propose to go to the reports of any of those
cases but would remind the Court of the factual

circumstances which gave rise to those four cases

since remembering what they were is, in our

submission, of assistance in considering this

case.

(Continued on page 131)

ClTl/2/SDL	130	3/6/88
John(2)

MR SHAW (continuing): LUNNEY' s case was a case in which the

question arose 1;-Jhether fares to and frorh ·won< were deductible
or not under section 51, and the answer was tney were

not, because the mere fact that it was necessary to

go to work in order to work to earn income did not

provide the necessary connection and just, of course,

as there may be things which arise prior to the

earning of income which do not fall within section 51,

so there may be things which arise after the earning

of income, such as income tax which also, in our

submission, is substantially outside the terms of the

section.

FORSYTH's case was a case about a barrister who

took a licence to occupy one room in the building,
the rest of which was his family home, and it was

held that the essential character of the licence fee did not satisfy the description given in section 51, despite the fact that the licence agreement provided that the room was to be used for barristerial purposes

and despite the fact that the room was used for those

purposes. RONPIBON TIN and NALL are each cases of

directors' fees paid by a company conducting a

business, and in each case the question was whether

the directors' fees satisfied the description in

section 51, and the answer was, "Well, it all depends

on the facts, and you might have to apportion."

In NALL's case an apportionment was made.

In RONPIBON TIN the case was sent back to the trial judge in order for a factual inquiry to be made of the extent to which the fees were outlaid in the carrying on of the business of the company for the

purpose of producing assessable income.

So that mere formal connection with business or with the earning of income is not enough. What one

has to ask oneself is a question about essential

character. If the submission in paragraphl is
correct, and we submit it is, then. in ot1r submission,

the submission in paragraph ·3 of the sulllli.1ary
follows. That is not to say, of course, that the

matters that are referred to in that paragraph are

irrelevant. All it means is that whatever conclusion

one comes to about them, has to be examined in the

light of the question which is posed by section 51.

(Continued on page 132)

ClT2/l/VH	131	3/6/88
John(2)

MR SHAW (continuing): Having made those introductory

submissions may we come to the submissions which

are in paragraph 4 of the summary.

BRENNAN J:  How does the question in paragraph 2 arise until

one answers the question which you say is not

directly in issue in paragraph 3, namely, should

the partnership be treated as having paid for the

bonus share

MR SHAW:  It may be, Your Honour, that for company law

purposes, for example, the partnership ought to

be treated as having paid for the bonus shares
but nevertheless there is not a loss or outgoing

that would satisfy as to the description.

BRENNAN J:  Not a loss or outgoing of the relevant

kind, do you mean?

MR SHAW:  Well, I mean (a) there might not be a loss or

outgoing or (b) it might not be of the necessary

kind.

BRENNAN J:	I do not understand any distinction between the question of whether they should be treated as having
paid for the bonus shares and whether there is any
loss or outgoing.  I understand those to be the
same question, is that not right?
MR SHAW:	In our submission, if it is a question simply about
income tax law no doubt it would be the same, Your Honour, but if one question is asked in terms
of company law and the other question asked of the income tax law, the answer is not necessarily the
same. In paragraph 4(a) we make a submission
which involves saying that the conclusion reached
in CURRAN was wrong. In our submission we do not
need leave to make that submission but if we do need leave we would wish to apply for it.
MASON CJ:	I think probably the best course to pursue is

to make your submissions, Mr Shaw.

MR SHAW:	If Your Honour pleases.
MASON CJ:	One of the difficulties with cases of this

kind is argument are put by way of distinction

and then, ultimately, there is an argument that

if the distinctions are not accepted the case

ought to be overruled. So it is better to hear

the totality of the argument, I think.

ClT3/l/MB	132	3/6/88
John(Z)

MR SHAW:	Your Honour, there will be submissions of both kinds and, as Your Honour indicates, it may be
difficult to keep them entirely separate in any case.
MASON CJ:	Yes.
DAWSON J:	Is paragraph4(a)saying something different from what Justice Stephen was saying in CURRAN?

MR SHAW:  No. That is not to say that we would accept

everything he says, but in general, no, it is not

different. Your Honour will see, when I come to

develop the argument, why it is not exactly the same

as what he says. In CURRAN, 131 CI.R,

in the passage which my learned friend referred to

yesterday at page 415, His Honour the Chief Justice

says that - and this is the first complete paragraph:

For the purposes of income tax under the Act,

the amount of distributable profits thus

credited to the shareholder constitutes income -

and it will be remembered that the distributable

profits there in question were distributable profits

which, when they were used to pay up bonus shares,

fell within the description in section 44(2)(b)(iii).

(Continued on page 134)

ClT4/l/HS	133	3/6/88
John(2)

MR SHAW (continuing): Then, His Honour goes on in the second

complete paragraph on that page:

Thus, where a company having

distributable profits impliedly effects

their distribution by the issue against

them of bonus shares fully or partly
paid up, the recipient of the shares,

having regard to the definition of

"dividend" in section 6 of the Act,

must treat himself as having received
income to the amount of the profits of
the company applied to pay for the

bonus shares and, in my opinion, will

be entitled to regard those shares as

having cost him that amount of money,

even though the resolutions of the

company do not provide for payment to

him of that sum of money.

Then he goes on to say that the question of whether

or not income tax is payable -

in respect of the amount credited to

him -

depends on the other provisions of the Act and

it is in His Honour's opinion as expressed in that

paragraph irre:il.evant. Now, the Court will recall

that what is there said is inconsistent with

what was said in the joint judgment of His Honour
and Mr Justice McTiernan and Mr Justice Taylor

in GIBB' s case. That, is at 118 CLR and the

relevant passage is at page 636. It is the passage

to which I referred yesterday and what the three

members of the Court there said was that the

fact that something fell within the description

of "dividend" in the Act, did not of itself make

it income.

(Continued on page 135)

ClTS/1/SR	134	3/6/88
John(2)

MR SHAW (continuing): That when one looked at section 44(1)

that did not render dividend~ declared out of

what I might call capital profits, assessable

income for the purposes of the Act because

subsection (1) was expressed to be subject to this

section and this section - that is section 44 -

included subsection (2) which excluded these

profits from income. And, what is more, such

dividends, declared as they were, out of capital
profits, were not income in the ordinary sense

of the words.

Now, first of all, we would submit that

His Honour's reasoning, together with the other members of the Court in GIBB's case is preferable to the reasoning in CURRAN's case and it

may be that it 1s explicable by the way in which

CURRAN's case arose and was decided. CURRAN's

case was decided on a case stated. There was

some debate about the precise way the case was

stated and should have been stated, but ultimately

that question evaporated.

There are two things to say about the case

stated. It is contained in the report that my

learned friend referred to yesterday. Those are

copies of the complete case. In fact, the

case. as there set out does not include the

annexures. But it will be seen, if one looks

at the case stated, in paragraph 11:

(Continued on page 136)

ClT6/l/JM	135	3/6/88
John(2)
MR SHAW (continuing):

The Appellant in his said return

claimed a loss of $188,217 in respect of

a sale of stocks and shares in Stewart Bacon

Holdings Pty Limited ..... The Commissioner

disallowed the claimed loss and assessed

the Appellant on the basis that he had,

in fact, made a profit of $2,782 in respect

of the transactions concerning shares in

Stewart Bacon into which the Appellant had

entered.

Then, going to paragraph 21 at the top of page 8:

The Appellant in his books, in

accordance with his normal accounting practice,

treated the sum of $191,000 -

that is the amount which was related to the bonus

shares -

as income. The sum was treated by the

Appellant in his said return as being not

liable to be included in his assessable

income for income tax purposes by reason

of the provisions of Section 44(2)(b)(iii)

of the INCOME TAX ASSESSMENT ACT, 1936-1969.

It is agreed that the said sum was properly

so treated.

It may be that the explanation of the way in which His Honour dealt with the matter that I

have just referred to lies in those paragraphs.

The other thing we would say while the case is open is that it is well established,

in our submission, that when an appeal is decided on a case stated that it is not open to the Court to draw inferences from the case. That is established

in, amongst other places, RIGBY, 100 CLR 146 (Continued on page 137)

and BRISBANE CITY COUNCIL, 140 CLR 41.

ClT7/l/SDL	136	3/6/88
John(2)

MR SHAW (continuing): The case, as stated, says, in our

submission, nothing about prearrangement and

nothing about any purpose of what was done being

to affect income tax. Now, not only is what

His Honour says in that paragraph, in our submission, inconsistent with what appears in

GIBB' s case, but in McRAE' s case, 121 CLR 266, a

question arose very closely parallel to that in

CURRAN's case, although in a different context

and with a different solution. That case concerned

a profit-making scheme and the question arose,

first of all whether there was a profit-making

scheme, and secondly, if there was, what was the

profit?

It is in relation to that second question that

the case is relevant here.	What happened was, as
is set out in the headnote:

The taxpayer's father owned a building of

residential flats in which each flat was

let at a rent which was controlled ..... The

father was advised that if the building were

to be owned by a home unit company and individual

flats were sold the amount realized would be

considerably greater than if the building were

sold to one purchaser. He did not himself wish

to go through the necessary stages to achieve

this - ·

and was anxious to avoid death duties

so he asked his accountants to go·ahead with a plan by which his children would carry out the scheme.

(Continued on page 138)

ClT8/l/VH	137	3/6/88
John(2)

MR SHAW (continuing):

A company was formed with the taxpayer

and her brother as corporators and shares

were issued to them and their four sisters. The building was sold to the company at its

value, as assessed by the Valuer-General,

as a building subject to controlled tenancies.

The purchase was financed by a loan from the

father to the children to enable them to take

up the shares in the company fully paid.

The building was then revalued in the books

of the company at approximately the total

amount it was expected to realize on the sale

of individual flats. The increase in value

was credited to an assets revaluation reserve
account and a bonus issue of shares of an

equivalent amount was made by declaring a dividend to be applied in satisfaction of

the issue of shares. New articles of

association were adopted of the type necessary

for a home unit company. The holding of

particular shares carried the right to occupy
specific parts of the building. Each of the

shareholders executed a deed of trust which

provided that the shareholder held his or

her shares in trust for all the shareholders

as tenants in corrnnon in equal shares. The

shares in the company (and, thus, the flats)

were sold individual purchasers and the

taxpayer was assessed for income tax on the
excess received by her over her proportion
of the amount originally subscribed for
shares.

So it was a question about profit and it was held that there was a profit-making scheme and in paragraph (2)

of the headnote:

That the income tax of the taxpayer should

be assessed on the basis that the profit

of the whole scheme was the difference between

the aggregate net proceeds of the sale of all

the shares in the company and the price paid

by the company for the building. The

taxpayer should be assessed for tax upon a

proportionate part of the profit.

If one goes over to page 271, in a joint judgment

Their Honours Mr Justice Kitto, Mr Justice Menzies

and Mr Justice OWensaid this in the paragraph which
runs over the bottom of the page:

The appellant contends that the application of the dividend to make the bonus shares fully paid amounted to a payment by the shareholders -

ClT9/l/HS	138	3/6/88
John(2)

and there is a reference to SPARGO's case and

JOSEPH V CAMPBELL -

and that therefore the proceeds of sale

of the bonus shares cannot properly be

treated as part of the amount from which

cost is to be subtracted in order to ascertain

profit unless the cost to be subtracted

includes the amount of the dividend.	The
answer is obvious.	In the first place it

is beyond dispute that the proceeds of sale

of all the shares sold, both original and

bonus shares, must be brought to account in

order to find the gross amount which the

carrying out of the scheme produced. And

in the second place the notion that the

dividend formed a part of what the children

put into the scheme in order to get the gross

proceeds out of it overlooks the fact that the
declaration of the dividend had the effect of
subtracting an equal amount from the value of

the original shares, so that the entire

transaction consisting of the declaration of

dividend plus the crediting of the bonus shares

as fully paid had no other effect than that of

a transfer of part of the value of the

original shares to the bonus shares. The same
property which had been the asset backing for
35,000 shares became the asset backing for

60,000 shares. The appellant did not put a

penny more into the scheme than her original

contribution of one-sixth of 35,000 pound

plus 1 pound for her subscriber's share;

and therefore her profit when the scheme has

been carried to completion must necessarily
be the amount by which her proportion of the

gross proceeds has exceeded 5,834 pounds.

Now, as Your Honour Justice Dawson has observed,

that reasoning finds an echo in what was said by

Mr Justice Stephen in dissent in CURRAN's case, and

it is true that the question which arose in

McRAE's case was not a question under section 51 at

all, but a question under section 26A. But it was

a question about profit or loss, and it is

conceivable, I suppose, if figures had been different,

that a question might have arisen under section 52

about loss.

(Continued on page 140)

ClT9/2/HS	139	3/6/88
John(2)

MR SHAW (continuing): Loss, of course, is a word which appears

in section 51 and, in our submission, although it

is true, as I think Your Honour the Chief Justice

observed in WHITFORDS BEACH,that different end

results may follow from assessment under the

general provisions of the Act, including section 51,

and under section 26A, the difference, this

difference, if it exists, is very surprising indeed.

Now, we would submit that when one looks at

the question and asks in relation to companies of
the kind which existed here in which all the
shares were held by the two partnerships that the

position after the bonus shares were issued was

no different so far as the companies and the

partnership were concerned than it had been
before. The companies themselves may have been

in a different situation so far as their capital

was concerned because part of their reserves had

been converted to capital. But as between the

partnership and the companies all was precisely

the same. It was true that there wera more shares

but there would be more shares also if, for example,

shares had simply been subdivided. So the mere

fact that there are more shares is not in itself
conclusive and when one looks at the terms of

the resolution and finds that no liability is, in fact,
imposed on the shareholders in relation to the
issue of shares, when we find that nothing leaves
the partnership and goes out to the companies,

when we find the position as between companies and shareholders precisely the same, after and

before for all practical purposes then, in our

submission, it is right to say that there is no

loss or outgoing and the reasoning by which the

Chief Justice in CURRAN's case reached his

conclusion. is flawed because he overlooks -

perhaps for the reason I referred to - the decision

in GIBB and its effect.

Now, my learned friend said yesterday, "Well,

that is all very well", but what happens if bonus

shares are issued which do not fall within

43(2)(b)(iii), in other words, bonus shares are

issued out of revenue, if I can talk in those terms.

(Continued on page 141)

ClTl0/1/MB	140	3/6/88
John(2)

1:1R SHAW (continuing): If - this is my learned friend's submission - you

adopt the approach which I am now putting to the Court, you reach a conclusion as unacceptable as the conclusion in CURRAN's case; it is the obverse.

One way or another you have to have an anomaly, so

he says, and why not have the one we have already got instead of this new one that the Commissioner

wishes to foist on you. Now, in our submission, that

is not so. Some of it is not so anyway. We are

urging a new approach on the Court, but we submit

that the anomaly he points to does not exist.

And it does not exist for this reason;, section 44 ( 1)

renders, subject to the section, dividends, income,

whether they would have been income, according to

ordinary concepts or not.

Now in the case where you have a declaration

of dividend out of the revenue of a company and

bonus shares being used to satisfy that dividend in

the way which occurred here - imagine one had such

a resolution as existed here but the source of the

dividend was different, it was revenue profits -

apart from the definition of dividend and apart

from the effect of section 44(1), we would submit,

there would equally be no income and no loss or

outgoing. But the effect of section 44(1), in the

case of such dividends and shares, is to say,
despite the fact that there is not any actual income
the Act says there is.

Now, in our submission, it follows from that that if one must treat the dividends in those cases

as received by the shareholder it follows necessarily,

as a matter of logic, that the use of those

dividends to pay for the bonus shares involves an

outgoing.

(Continued on page 142)

ClTll/1/SR	141	3/6/88
John(2)

MR SHAW (continuing): In other words, if you have to pretend

there is income, you have to pretend there

is an outgoing.	So, you do not get a double
assessment.	What happens differs, of course,

depending on whether or not the shareholder is

a share trader or not. If he is a share trader,

then he is entitled to treat the cost of the shares,

assuming all other things to be equal, as if it

was the cost of trading stock. If he is not a

share trader, but a private citizen who simply

holds an investment for example, then the

expenditure is a capital expenditure.

DAWSON J:  How should the bonus shares be treated in the

books of the partnership here, do you say?

MR SHAW:	We would submit that the way in which they
should be treated is that they have no cost.
DAWSON J:	So at the end of the year you would have the

bonus shares there at their sale value?

MR SHAW:	No, at nil, depending on what one is adopting.
If you adopted cost price - let me start again.
Assuming that one is talking about trading stock,
and this argument is being put on the assumption
that there is a business and there is no reason
to regard these shsresasany different from any of the other shares, making all those assumptions,
you would have the original shares there at their
cost price.  You would have the bonus shares
there - - -
DAWSON J:	At no cost

MR SHAW: If that what one selected as the value. In trading

stock one is given three options:  one can choose

cost; one can choose market value; and one can

choose replacement value. So, it would depend.

But, if you chose cost, nil, yes.

DAWSON J:

But at the end of the year you would have to

value what you had there and you value them at

market value.

MR SHAW:  Not necessarily.

DAWSON J: Well, you would, because then the original shares,

of course, would have decreased in value. Thei~

market value, if they are still retained, would
have decreased, whereas the bonus shares would have

a market value which reflected that decrease.

MR SHAW:	One is entitled, Your Honour, pursuant to section
31:

(1) Subject to this section, the value of each article of

trading stock (not being live stock) to be taken into account

at the end of the year of incane shall be, at the option of the taxpayer, its cost price, or market selling value or the price at which it can be replaced.

CIT12/l/JM	142	3/6/88
John(2)

MR SHAW (continuing):  The taxpayer is given an option and,

what is more, that option may be exercised bit

by bit.

DAWSON J:  Yes, but eventually, of course, if you realized

the bonus shares you would get the market value

MR SHAW:	Yes, of course you would, yes.
DAWSON J:	But you would lose, of course on the others.
MR SHAW:	Yes.
DAWSON J:	What I had in mind was two different ways of

going about it as suggested by Justice Gibbs

and Justice Stephen but neither seems to be correct.

You really do not have to go through any of those formally. Do not let me take you out of context.

MR SHAW:	I wanted to come now to what Mr Justice Gibbs
said because his approach was quite different.

BRENNAN J: Before you do: if one takes the approach you

have just been submitting, what is the situation

if the taxpayer sells his original shares during

the income year?

MR SHAW:	It would depend, Your Honour, on whether he had
held them at the beginning of the year or bought
them during the year. If he had held them at
the beginning of the financial year then one would have to set against whatever price they were in the books at then against whatever was received on the sale price. If they were bought during the year, doubtless one would set the purchase price against the sale price.

BRENNAN J:  So there is a substantial loss?

MR SHAW:  On those, yes.

BRENNAN J:  And in relation to the others you have a nil

value?

MR SHAW: 

Yes ..

BRENNAN J: 

So the taxpayer makes an enormous loss during

the year despite the fact that you say there
is only a shift in value from the initial shares
to the totality of the shares after the issue
of the bonus shares?

ClT13/l/SDL	143	3/6/88
.	John( 2)

MR SHAW:	That is because, although there has been the
shift in value, the way in which the valuation
of trading stock provisions work enables different
pieces to be treated differently.  But the end
result of the sale of all of them is simply that there is a profit or loss compared with the original cost.

BRENNAN J: Can I take it that what your basic submission is

is that so far as a share is concerned, it is

to be regarded as an individual piece of property

and not to be regarded as one of a series of

entitlements, the aggregate of which represents

the totality of the cause of action as between

the shareholder and the company?

(Continued on page 145)

C1Tl3/2/SDL	144	3/6/88
John(2)

MR SHAW: Shares, of course, have got two aspects.

BRENNAN J:	Exactly.
MR SHAW:	They have both the aspects that Your Honour was

referring to.

BRENNAN J:  But for tax purposes, can they have both at the

same time?

MR SHAW:	Well, I think, Your.Honour, the answer depends on why one is asking the question. If one looks at McRAE's case, the answer is obviously they can be
regarded in the second of the ways Your Honour mentioned for that purpose. It really just
depends how the question arises.

BRENNAN J: Well, why should not the other way be approached

for the purposes of this case - individual pieces

of property?

MR SHAW:  Your Honour, the question that we are presently

concerned with is whether there is a loss or outgoing?

And, in our submission, the answer to that question -

the questions	- the alternatives which Your Honour
has raised are not relevant.	They do not help solve
the question.	What Mr Justice Gibbs said was this:

"Look, these are items of trading stock and it is

necessary to attribute a value to them in the books

of the company, and I therefore will." And what

he said appears at page 421 and really depends on

the analogy - this is a passage that my learned
friend referred to yesterday - on the analogy which

His Honour draws with the receipt of tradings of

articles which could be trading stock by way of gift

or under a bequest.

(Continued on page 146)

ClT14/l/VH 145 3/6/88

:t1R SHAW (continuing):  And he says- tlreargument is, well

if you receive a bequest from grand-dad of a number

of · shares in BHP and you are a share trader and

you have got some shares in BHP already and
you just put them in with the shares which you have

already got, if they are simply treated as trading

stock with no value, no cost, then you will end

up taxing the value of the bequest and that is

not fair. And he says, at page 421, after

saying the effect of doing what I have suggested

would be:

to make the trader pay income tax on

the gift or bequest. The only

practicable way of reaching a true

result in a case of that kind would

be to bring the articles into the

account at an appropriate value as

though they had been purchased, and

there is no provision in the Act that

would require any different approach.

Now in a sense that is right and in a sense, in our

submission, it is wrong. In our submission, the

question His Honour should have asked himself is,

was there a loss outgoing? And the Act does

require a different approach if there is not

a loss or outgoing, because it is only if there

is a loss or outgoing that you can have a deduction

under section 51. So there is not a provision in

the Act that says you cannot do what His Honour

says one ought to do, but on the other hand, there

is not a provision enabling that approach to be

made, because there cannot be a loss or outgoing

because it is the same chap - he has just transferred

his shares from grandpa out of bequest pocket

into trading pocket. And it is perfectly true

that if one were to treat those shares as trading

stock with no value one would end up taxing the

value of the bequest but, in our submission, that

does not demonstrate that there has been a loss or	outgoing. It demonstrates that if one does that	one produces a result which one innnediately sees
is unfair, but it does not demonstrate that there
is a loss or outgoing.

Well, what is the answer to that, which is

said to be the example which compels the treatment which His Honour says has to be made in this case. In our submission, the answer is that the shares
which are connnitted to the business in that way

do not truly become trading stock by their connnittal.

ClTlS/1/SR	146	3/6/88
John(2)

MR SHAW (continuing): What happens is one has got a gift

which is external to the business and it has been

committed to a profit-making undertaking or scheme

in the same way as if there were no business.

When that is done one knows that one has to,

when one is working out the end profit, take

into account the value of the initial article

or property, whatever it was, that is committed

to the scheme and not tax that.

Now, it is true that in ,the English cases

they do treat the transfer of property from private

to business or business to private as a change

from trading stock to not or not to trading stock.

That is true but that is because in England the

TAX ACT operates differently. There it is concerned

with not income in our sense but profits of trade

and so on. So that the different form of the Act

enables a different treatment but, in our submission,

if one deals with the matter in the way that we
have suggested you achieve precisely the fair

result and you do not have to say there is a loss

or outgoing when there plainly is not.

DAWSON J:  I am not sure, Mr Shaw, what you are saying.

Are you saying that if a man receives shares by way of gift he can retain them or he can, as it

were, transfer them to the business. If he

transfers them to the business and is not paid
by the business the cost of those shares and

a profit is made, ultimately, by the sale of

those shares, then that is a profit to the business

and that is it, there is no outgoing.

MR SHAW:	But, Your Honour, the business and him are one.
DAWSON J:	I know but for accounting purposes you can treat

them differently.

MR SHAW:  For tax purposes if one is asking is there a loss

or outgoing, a chap is a chap, you cannot outgo

to yourself and although it is convenient for

accounting purposes to make the distinction which

Your Honour has drawn,that does not make any

difference to the fact, just as the fact that

one speaks of a partnership as existing and

separate from the individual partners makes no

different to the fact that, in fact, it is just

them.

ClT16/l/MB	147	3/6/88
John(2)

MR SHAW (continuing):  Although for accounting purposes

it is convenient, the fact of the matter is it

is just one person doing something and what he

is doing in the example I have given is selling the

shares bequeathed to him through his business for

convenience, or if you have something that - -

DAWSON J:  So that he is entitled to take the value of this

news into account?

MR SHAW:	When he sells them?
DAWSON J:	Yes.

MR SHAW:  Yes. So that, in our submission, the reasoning

on which Mr Justice Gibbs proceeds is flawed, and

flawed really because he does not ask the question,

"Is there a loss or outgoing?", because if one really

asks that question the answer must be, "There isn't",

because it is just impossible. Now, in the case of

bonus shares, they are, of course, the fruit or

product of something which on the hypothesis I am
presently using, of something which is trading

stock and that because of its source is not to be

treated like a gift or a bequest_, it takes the same

nature as the shares which have produced it and it

becomes trading stock, on the assumptions we have

made, going straight into the business.

So that, in our submission, the approaches of

both Mr Justice Menzies and the Chief Justice on the

one hand and the approach of Mr Justice Gibbs on the

other hand is flawed. It is flawed basically by not

facing directly up to the question asked by section 51

and the difficulties which are placed in the way of

our approach are, in our submission, on close

examination, non-existent.

DAWSON J:  Then Justice Stephen has a different approach

again. He has a fractional approach, I suppose.

MR SHAW:  He does something which is a bit like McRAE, but

I said to Your Honour that what we were saying was not the same as what His Honour said, although in some respects it was, and Your Honour will see that

it is not the same. But in our submission, when one

looks at the matter in the way in which we submit

it to the Court, the decision in CURRAN about whether
or not there was a loss or outgoing is mistaken and,

in our submission, that case should now be overruled.

(Continued on page 149)

ClT17/l/HS	148	3/6/88
John(2)

MR SHAW (continuing):  I should mention to the Court that

the case itself has been subject to substantial

criticism and if we could refer to

Professor Parson's book on Income Taxation in

Australia at paragraphs 1659 and 1660 in particular,

and 724 and 1275.

MASON CJ:	For what view does Professor Parsons contend?
MR SHAW:	He takes the view that because the bonus shares
are the product of trading stock, it is
inappropriate to give them a value when they are brought into the books. He says it is a
fundamental mistake not to take account of
the fact they are babies.
MASON CJ:	Yes.

MR SHAW: And just like Dad - Mum, I suppose. There is

another reference to a writing that I wanted

to give; I will give that to the Court in a

moment.

WILSON J:  Are you suggesting there are no costs with

babies?

MR SHAW: Well, the cost comes afterwards

(Continued on page 150)

CIT18/l / JM	149	2/6/88
John(2)

MR SHAW (continuing):  Then if I might go from there to

paragraph (b) of our submissions. That submission

really looks to the other part of section 51. By

the other part, I mean the description of the kind

of loss and outgoing it has to be. The other

reference I wanted to give the Court was Slater on
Law and Taxation of Companies Distributions in

Australia, published by CCR. The paragraphs on

CURRAN's case begin at 1148 and the paragraph which

is particularly relevant is 1149.

MASON CJ: Are these references on your list of authorities'

that you handed in?

MR SHAW:	The writings, Your Honour?
MASON CJ:	Yes.
MR SHAW:	No, Your Honour. I did not intend to read them

to the Court.

MASON CJ: 

No, but I rather thought that the list was divided

into two categories: those that counsel intend to
read to the Court; those to which reference will be

made but not read.

MR SHAW: Well, I am sorry, Your Honour. We should have had

it there. I will not make it any worse by trying to

read it, Your Honour.

MASON CJ:	No, no, do not make it any worse.
MR SHAW:	If the Court pleases, I might now go to paragraph 4(b).
As I was putting, that really turns on the description
of the kind of outgoing or loss which it is necessary to have in order to fall within the provision of section 51 and the words are well enough known, but the losses or outgoings are allowable only to the extent that they are incurred in gaining or producing the assessable income or are necessarily incurred in carrying on a business for the purpose of gaining
or producing such income.

Now, it is in relation to this part of the

argument that my learned friend says the case is

determined against us by, in particular, I.M.C.F.,

PATCORP and WESTRADERS.

(Continued on page 151)

C1Tl9/l/VH	150	3/6/88
John(2)

MR SHAW (continuing):  We will endeavour to show the Court

that is not so but if we might approach the matter

acknowledging the existence of those cases and

postponing their consideration until later.

For present purposes I suppose it is probably

sufficient to look at the second branch and ask

whether the cost of the shares was necessarily

incurred in carrying on a business for the purpose

of gaining or producing such income - that

being assessable income.

In order to do this one has to, of course,

assume that there is loss or outgoing and, making

that assumption, one has to ask a question about the essential character of the loss or outgoing. My learned friend, as we understand him, would

seek to approach that question by, first of all,

asking a question about trading stock and that

question, of course, has to be considered but,

in our submission, it is useful to, first of

all, approach the matter without jumping that

hurdle; like walking around it and saying,

"After all, the question is:  does the loss or

outgoing meet this description or not?" One

knows that if one is carrying on a business not

everything one does in the business may be directed

individually to the production of income. One

might do all sorts of things which themselves

do not produce any income and, nevertheless,

the expenditure meets the description.	An obvious
example, I suppose, is MAGNA ALLOYS.

But what one has to have is a business of the description and the expense has to be necessarily

incurred in carrying on that business.

(Continued on page 151A)

ClT2O/l/SDL 151 3/6/88

John(2)	(Continued on page 151A)
MR SHAW (continuing):	Now, in our submission, in order for

that to occur, since we know that expenses incurred

by businesses - if I can use that description, which I suppose I should not in view of what I

said to Your Honour Mr Justice Dawson - not all expenses

incurred by businesses are expenses of carrying

on a business which is being conducted for the

purpose of gaining or producing assessable income.

An obvious example if RONPIBON's case and NALL's

case, the director's fees cases.

Now, one looks at what happened here

and one sees that - and I take Mrs John as an

example of all the partners, for the reasons I gave

yesterday - the partnership entered into the

Compinge transaction in order to benefit her and

the other members of the partnership. One sees
that benefit which she was going to get from the

transaction was a share of the partnership loss

and sees that from her point of view that she

should have that share had nothing to do with the
partnership. Of course, she could not get it if
the partnership did not exist and had not suffered
the loss, but for her the objective significance
of the loss lay in, if she could have it, its
availability to set against her income from

non-partnership sources, in her case the income

which she expected to derive and did derive from

a family trust.

So here one has a transaction entered into

by a partnership,which we will assume for the
moment has a business, the object and purpose of

which has nothing to do with that business. What

it has to do with is the availability to each of
the individuals of the loss set against their

non-partnership income.

(Continued on page 152)

ClT21/l/MB	151A	3/6/88
John(2)

BRENNAN J:  Were the partners assessed to tax in respect of

their proportionate share of a small conm1ercial profit that was made in this dealing in shares?

MR SHAW:  Your Honour, I do not really know what the

answer to that question is, in the sense that -

BRENNAN J: Putting it another way, was that taken into

account in calculating the loss for the year?

MR SHAW:  Yes.

BRENNAN J: If that be so then the small conm1ercial profit

was treated as assessable income?

MR SHAW:  In fact, Your Honour, I think it may have been

treated as assessable income under section 26AAA,

I am not quite sure whether that is right but

I think it is.

BRENNAN J:	Then if that be so, and assuming that there was a payment or a loss, why is it not a loss which was
incurred in gaining or producing that income?
MR SHAW:	Your Honour, we would submit for this reason, that

if one applies the RONPIBON and NALL approach - - -

BRENNAN J:	But that is the second limb?
MR SHAW:	That is the second limb, Your Honour, yes.
BRENNAN J:	My question is directed to the first limb?
MR SHAW:	Your Honour, if one looks at the first limb then,

in our submission, the essential character of

the expenditure is determined by the purpose for

which the transaction is entered into - - -

BRENNAN J: That was to acquire the bonus shares?

MR SHAW:  Inm1ediately yes, Your Honour, but one, in our

submission, is not forced to close one's eyes to

all the circumstances, that is certainly a

circumstance.

(Continued on page 153)

ClT22/l/SR	152	3/6/88
John(2)

BRENNAN J:  But absent the payment of the cost of the bonus

shares, they would not have been acquired.

Youcould not find anything more closely associated

with the acquisition of that which was turned to

account to make the assessable income.

MR SHAW:  Your Honour, it is true that if they had not

bought the original shares they would not have got

the bonus shares, and if the bonus shares had not

been issued they would not have been able to sell

the bonus shares and receive the proceeds in the way
that they did and, if you like, make the small

profit which was made on the transaction. But it

is certainly true that unless the bonus shares had been acquired they could not have been sold and it is true too that the bonus shares could not be acquired

without acceptance of them pursuant to the resolution
which was passed. All that is true, and that does

have an immediate connection with the production of

assessable income, that is true.

DAWSON J:  Why is that, because if your original analysis

was right and the value of the original shares is

merely transferred to the bonus shares then it is

not necessary to produce the income because if the

original shares were retained and sold the same

profit would have been made.

MR SHAW:  Your Honour, that was what I was going to say, but

what I was saying to His Honour Justice Brennan was

this:	looking at the matter in a formal way,
what was bought was - I do not know.	I will make

it up - 100 shares, what was sold was 200 shares. Now, you could not sell 200 shares when you only had 100 without, somehow or other, getting an

extra 100.

(Continued on page 154)

ClT23/l/HS	153	3/6/88
John(2)

MR SHAW (continuing):  So that in a strictly formal sense

the sale price of the 200, whatever it was, is

produced by the original purchase and the

transactions which led to the acceptance of the

bonus shares.

DAWSON J:  But the answer is, according to your reasoning,

well, that was all unnecessary; you would achieve

the same profit without doing that.

MR SHAW:	And even if you would not achieve exactly the same profit, when one looks at the transaction
overall and the various advantages which arose
by reason of the transaction, the essential character of the outgoing arises out of the
supposed income tax consequences, the aequisition
of a loss.  The other matters are, in our
submissions, in these circumstances, simply
incidental.

BRENNAN J: Perhaps the difficulty lies in my assuming

something which is not really inherent in your

submission. I had assumed that the loss or

outgoing which you were assuming, and to which

your submissions were directed, was the purchase

price of the bonus shares, not the original

payment.

MR SHAW:	I was, Your Honour. I was directing it to that
matter, Your Honour, yes.
BRENNAN J:	To the purchase price of the bonus shares?
MR SHAW:	Yes, I was, Your Honour.

BRENNAN J: Well, now, if that be so, let us assume that

there was no dividend. Let us assume that there

was a taking of money from the pocket to buy

the bonus shares and the bonus shares were

subsequently sold at a profit.	Why would it not
be that that taking from the pocket,_ and the

purchase of the bonus shares, would not fall squarely

within the first limb of 51(1)?

(Continued on page 155)

CIT24/l/JM	154	3/6/88
John(2)

MR SHAW Well, leaving out the fact that one

would not really call them bonus shares in those

circumstances, they would: it would.

BRENNAN J:  No i of course not. Then what is the distinction?

I am not saying that the assumption that underlies

this question is accurate. I am just saying that

if you make that assumption, how do you avoid the

first limb?

MR SHAW:  What we do, Your Honour, is say it depends on

essential character; it depends on looking at all the

objective circumstances which surround the matter

and in these particular circumstances - differently

from the ones that Your Honour has just hypothesized

one comes to a different conclusion about the

essential character than one does in that case,

simply because of the circumstances. What we would

submit is that the Court ought to look - when it

is deciding on essential character - at all the

circumstances, in order to make that decision.

The point we simply make is that the transaction

was pre~rranged; it was, so far as the partnership

was concerned, a partnership with a capital of

$100,000, $5000 each. This transaction was a

transaction O'ifr nearly $3m purchase price. There

was a resale at a very small profit in two or three days. The significance of the transaction lies, we
would submit, in the tax consequences of it, not in

anything else. Acknowledging the matter that

Your Honour has put to me, but saying that is simply

a matter of form, and when one looks at essential

character as one is directed to do, the determinative

character which would otherwise arise from the form

is dissipated. Now, can we make a point about CURRAN

in relation to this analysis?

.(Continued on page 156)

ClT25/l/VH	155	3/6/88
John(2)

MR SHAW (continuing):  It is really the point at the end of

our paragraph 4 and it is a point that I made

in passing when I was looking at the stated case,

namely,that CURRAN was decided on a stated case

and this question simply did not arise there.

So that, in our submission, CURRAN has no relevance

to this question at all.

The next thing we would say is this: in

our submission, it has to be remembered what
is the character of income tax. In our submission,

it is rightly regarded as not an expense which

is incurred in gaining or producing the assessable

income or necessarily incurred in carrying on

a business for the purpose of gaining and producing

assessable income. It is an expense which arises

because income has been earned and that is established

by SMITHS POTATO CRISPS in the House of Lords

and it is, perhaps, convenient to refer to that

case in CLIFFS INTERNATIONAL, (1985) 80 FLR 12 -

if I could hand up some copies of that case.

That case concerned a number of matters.

One of the matters was the deductibility of professional advice and legal expenses incurred in disputing assessments, preparation of income tax returns

and advice on tax. That matter is dealt with

beginning at page 38.

(Continued on page 157)

ClT26/l/SDL	156	3/6/88
John(2)

MR SHAW (continuing): His Honour Mr Justice Kennedy of

the Supreme Court of Western Australia refers to

a number of authorities, including SMITHS POTATO

CRISPS and some Canadian authority. I use this

simply as a convenient way to refer to SMITHS POTATO

CRISPS at page 40, he refers to what was said by

Lord Simmons, the second quotation on the page:

But it is significant that counsel

were not able to call to the attention

of the House any case in which the

appellant's present contention has been

put forward. For a long period of
years large sums of money have been
devoted to the litigation of income tax

claims: the most acute minds of the

legal and accountancy professions have
been at the service of the taxpayer:

yet the claim that such money was

expended wholly or exclusively for the

purpose of the trade appears never to

have reached a court of law. The reason

is not far to seek: it is that neither

the cost of ascertaining taxable profit

nor the cost of disputing it with the

Revenue authorities is money spent to

enable the trader to earn a profit in

his trade. What profit he has earned,

he has earned before ever the voice of

the tax gatherer is heard. He would have

earned no more and no less if there was

no such thing as income tax. His profit

is no more affected by the exigibility

of tax than is a man's temperature

altered by the purchase of a thermometer,

even though he starts by haggling about

the price of it.

Bearing that authority in mind, bearing in mind the

use one may make of purpose in deciding essential

character and the use one may make of the evidence

of motive as was pointed out by Your Honour

Mr Justice Brennan in the MAGNA ALLOYS case in

deciding what purpose is, in our submission, the

essential character of this cost is not a business

character at all. The next thing - - -

BRENNAN J: That is an astonishing proposition though that

proposition when applied to our section 51(1),is

it not? The proposition that if money is not

wholly or exclusively laid out for the purposes

of trade,that it is non-deductable under section 51(1),

will come as a surprise to many people?

MR SHAW:  Of course, Your Honour, yes. But the point I was

makingwas simply that what His Lordship was saying,

ClT27/l/SR	157	3/6/88
John(2)

in our submission correctly, is that you do not
incur income tax in 8aining or producing the

assessable inco~e, Gne incurs income tax by

having earned a taxable income. The next

thing we would say is this: in any case there is,

in our submission, no business for the necessary

purpose. It is true that the partnership both
before and after the Compinee transactions
entered into a number of transactions which involved

the sale and purchase of shares and it is true

that there were a number of those transactions and

that they were entered into on a systematic basis,

so long as hysterical is not a better description

of them. But, in our submission, when one looks

at those transactions and looks at the Compinge

transactions, one sees that those transactions,

while intended to produce a profit if it were possible,

were indeed entered into, as was avowed, the order

to place, so it was hoped, necessary complexion

on the Compinge transactions, in other words, in order

to enable a loss to be claimed as a result of what

happened in relation to those shares.

(Continued on page 159)

ClT27/2/SR	158	3/6/88
John(2)

l'1R SHAW (continuing):  Now, in our submission, even

although on~ may say that those transactions

were designed to produce a profit, if that were

possible, one cannot describe a business which

consists of those transactions and the Compinge

transactions, when those transactions are simply

appendant to and incidental to the Compinge
transactions, as a business for the purpose of gaining

or producing assessable income.

Then, if I might go to PATCORP, WESTRADERS and

IMFC, my learned friend says that these cases

determine the matter against the Commissioner.

In our submission, that is surprising because it

was said by Mr Justice Menzies in IMFC in 125 CLR 262,

in the second paragraph, the third line:

Of course a dealer may enter into a

transaction that does fall outside his

income producing business -

and then he gives an example of a land dealer buying
a building for an office, and Mr Justice Walsh at

page 270 says, eight lines from the bottom:

(Continued on page 160)

ClT28/l/HS 159 3/6/88

John(2)

MR SHAW (continuing):

I do not assert, of course, that shares

are always trading stock in the hands of their

owner; and even where the owner is a dealer in

shares the circumstances may show that

particular shares are not trading stock.

So one has to look at all the relevant circumstances

in order to see what the answer is and if one

thing is clear it is, in our submission, that
the facts here are not the same as in any of the

cases that my learned friend referred to. By that

I mean PATCORP, WESTRADERS and IMFC. In our submission ROWDELL, 111 CLR, which is the other

case he referred to in this connection, is just

a case about section 260 and it has got no bearing

on the question which arises here.

Now, if we might then place to one side

WESTRADERS, 144 CLR, because there, in our submission, the position was wholly different as was stated

in a paragraph which, in fact, my learned friend

Your Honour the Chief Justice. It is the last	read out yesterday, on page 71, in the judgment of
complete paragraph from the bottom in which
Your Honour says that Jensen was engaged in
trading in shares for division 7 schemes and 36A partnerships and trading in shares for that
purpose was, in Your Honour's view, trading in
shares, as of course it is. But it is trading in shares for a particular purpose, promoting tax schemes through the purpose of shares. It
is a very particular kind of share trading and
that certainly is not present here. This partnership
is not a promoter.

In our submission, that fact is, as Your Honour

says, determinative of that case and it has

accordingly, in our submission, no relevance here

because once one decided that then the rest followed

from an application of section 36A and a transfer

of the price of the purchase in accordance with

that section.

(Continued on page 161)

ClT29/l/MB	160	3/6/88
John(2)

MR SHAW (continuing):  Then one comes to PATCORP and IM:FC

and if one looks at PATCORP in 140 CLR 290, in

the judgment of His Honour Mr Justice Gibbs, in a

passage that my learned friend referred to yesterdav

His Honour states the Connnissioner's contention

that - this is six lines from the top:

the transactions presented such
extraordinary features that they should
properly be regarded as isolated dealings

not forming part of the ordinary ebb and

flow of the business of share trading

carried on by the appellant companies.

The so-called extraordinary features of

these go only transactions go only to

show that the motive that inspired the

appellant companies to enter into the

transactions, and the effect which they

were intended to achieve, was to improve

their taxation position by taking

advantage of the provisions of section 46.

Knowing that a share trader may acquire shares which do not form part of his trading stock, and assuming for the moment that there is a business

of the relevant kind here- then, in our submission,

what one needs to know is whether or not there is

anything to isolate the Compinge transactions from

the ordinary ebb and flow of the business of share

trading which is being carried on, and if one looks

at page 645 of the appeal book in volume III, one

sees a schedule of share trading of the partnership

for the year ended 30 June 1977.

(Continued on page 162)

ClT30/l/HS	161	3/6/88
John(2)

MR SHAW (continuing): And one remembers that the partnership was a partnership which had

a capital of $100,000 and one sees, when

one looks at that page and the next page,

that there were indeed a number of transactions

besides the Compinge transactions. But when one

simply looks at the amounts of money involved

in those transactions, and sees what the other

transactions are, it is, in our submission, as

plain as it could be that there is something

special about those transactions. They do not,

in our submission, form part of the ordinary

ebb and flow of the business of the partnership.

This point can be made in another way by looking

at page 585 in the judgment of His Honour

Mr Justice Yeldham at line 6:

The total initial capital of the latter -

that is the partnership -

contributed by its members, was $100,000.

During the year ended 30th Jun~ 1977

(i.e. a period of about ten weeks) total

purchases of shares in public listed

companies amounted to $143,953 and total

sales amounted to $67,584.00. As at

30th June, 1977 there was stock on hand

of $74,669.

That, in itself, in our submission, is enough to demonstrate that these transactions do not indeed form an indistinguishable part of the

general transactions of the partnership but

as one would expect in the circumstances were,

were pre-arranged, took place within a few

obviously,the whole point of what occurred.

days, related to shares which had been purchased

in early April for 2.125 million and now half

of them were being purchased for 2.89 million. (Continued on page 163)

CIT31/l/JM	162	3/6/88
John(2)

MR SHAW (continuing):  When one remembers that the transactions

on the stock exchange were conducted under the aegis

of Mr NcNeil and that these transactions were
transactions he had nothing to do with, and when one
sees the significance of the transactions for

non-partnership purposes, in our submission, it

becomes plain that these transactions do not form

part of the ordinary ebb and flow of the business of

the partnership but are isolated and cannot be

regarded as part of the ordinary trading stock of

the partnership, if it has any. In our subrri.ssion,

the cases which have been referred to, PATCORP and IMFC, , do not compel or indeed even suggest any

conclusion contrary to that.

.What they_ say is that there you had an established trader in shares entering into, in the ordinary course,

a number of transactions. The only difference which

these transactions - the transactions there in

question - demonstrated from the ordinary ebb and

flow, was their concern with the obtaining of a tax

benefit to set against the other business income

earned by the share trader without all the surrounding

circumstances and, in our submission, it is to

isolate what those cases - does not compel to be
isolated - to suggest that they in any way compel

the conclusion which my learned friend seeks to

draw from them.

Those really are the matters which are dealt with

in paragraph 6 of our written submissions. Might I

now turn from that to the submission which appears

in paragraph 7? That submission does not, when one

starts to read it - at least, I hope it does not,

when one starts to read it, look as it is a submission

about what has been called the doctrine of fiscal

nullity, but it is. We will be seeing that, at

the end of the paragraph, there is reference to

RAMSAY's case, BURMAH OIL and FURNISS V DAWSON,

which are the foundation of the doctrine in the

United Kingdom.

Before going to those cases, we would submit that

it is a mistake to think that the ideas - if that is

the right word - that lie behind the words which

appear in the opinions of Their Lordships in these

cases is foreign to our Act.

(Continued on page 164)

ClT32/l/VH	163	3/6/88
John(2)

MR SHAW (continuing): If I might go back to McRAE's case.

The Court will remember what McRAE was about, that

is in 121 CLR. I read the headnote before. That

was about the father who had the building of

residential flats that was rent controlled and

a profit-making scheme was entered into by his

children. The question arose about how one

calculated the profit and in the passage that

I read on page 271, the last paragraph, talking

about the calculation of profit, says that when

you are working out what the profit is for the

purposes of section 26A you look at the whole

scheme and see what the overall profit is without

going step by step through everything which happened.

The next thing we would say is this; the question

here is not whether the doctrine has application
to the Act in those general terms, the question

is what is its relevance,if any, to section 51?

Section 51 is about losses and outgoings. RAMSAY's

case, BURMAH OIL and FURNISS V DAWSON were about

capital gains tax in England and the questions

which arose were whether in those cases allowable

losses had arisen under the Act. So that the question which arises under section 51 is, of

course, a different question to i· .. the question which

arises under the capital gains tax legislation

in England but it has very close similarities.

(Continued on page 164)

ClT33/l/MB	164	3/6/88
John(2)

MR SHAW (continuing):  He refers to some authority and then

he goes on:

For the commissioners considering a

particular case it is wrong and an unnecessary

self limitation, to regard themselves as

precluded by their own finding that documents • fl h II f

or transactions are not s ams , rom

considering what, as evidenced by the documents

themselves or by· the manifested intentions

of the parties, the relevant transaction

is. They are not, under the WESTMINSTER

doctrine or any other authority, bound to
consider individually each separate step

in a composite transaction intended to be

carried through as a whole. This is particularly

the case where (as in RAWLING) it is proved

that there was an accepted obligation once

a scheme is set in motion, to carry it through

its successive steps. It may be so where

(as in RAMSAY or in BLACK NOMINEES LTD V

NICOL ..... ) there is an expectation that

it will be so carried through, and no likelihood

in practice that it will not. In such cases

(which may vary in emphasis) the commissioners
should find the facts and then decide as

a matter (reviewable) of law whether what

is in issue is a composite transaction,

or a number of independent transactions.

Then, over at page 326, His Lordship says, beside

the letter B, his approach is not to introduce

a new principle and, beside the letter C:

To force the courts to adopt, in relation to closely integrated situations, a step

by step, dissecting, approach which the

parties themselves may have negated, would

be a denial rather than an affirmation of

the true judicial process. In each case
the facts must be established, and a legal

analysis made: legislation cannot be required

or even be desirable to enable the courts

to arrive at a conclusion which corresponds

with the parties' own intentions.

(Continued on page 168)

ClT36/2/SDL	167	3/6/88
John(2)
MR SHAW (continuing):

The capital gains tax was created to

operate in the real world, not that of

make-belief. As I said in ABERDEEN

CONSTRUCTION GROUP LTD V AND REVENUE

COMMISSIONERS, it is a tax on gains (or I

might have added gains less losses), it is

not a tax on arithmetical differences. To

say that a loss (or gain) which appears to

arise at one stage in an indivisible process,

and which is intended to be and is cancelled

out by a later stage, so that at the end of

what was bought as, and planned as a single

continuous operation, there is not such

a loss (or gain) as the legislation is dealing

with, is in my opinion well and indeed

essentially within the judicial function.

What His Lordship says there is developed in the

later cases, BURMAH OIL CO. LTD. and

FURNISS V DAWSON, leading to what might be

regarded, perhaps, as rather technicolor descriptions
of the doctrine in that last case. But, in our

submission, when one sees what is being said there,

while there might be revolutionary words in the

last of the cases, in the description of the

foundation of the doctrine given by Lord Wilberforce

in that passage, there is nothing at all surprising,

foreign to section 51, or, in our submission, new. Now, when I say "not new", in our submission,

that sort of approach is precisely what the

Court has adopted in McRAE's case. That is not,
of course, the purpose of section 51. It is

for the purpose of working out what a profit is.

And if one works out a profit in that way, why
not a loss.

So, in our submission, the approach by the English courts is simply of an example of an

approach already adopted in Australia in relation

to the same kind of problem.

(Continued on page 169)

CIT37/l/JM	168	3/6/88
John(2)

MR SHAW (continuing): It follows, in our submission, that when

one is looking at what is here, clearly a series of

transactions intended to produce a particular result,
that, as in McRAE, it is perfectly legitimate to say,

well, what happened in the middle is irrelevant.

What matters is the end. That reinforces, in our

submission, and indeed supports, the kind of approach

which is exemplified in, if your like, RONPIBON,

and NALL, and in ILBERY and MAGNA ALLOYS. In our

submission, when one sees that the question is a

question about section 51 and one-seesthat in England

they were concerned simply to give effect to the

party's intention, the doctrine finds a comfortable
place, a place indeed supported by authority in this

Court, and not, in our submission, excluded by the

presence in the Act of section 260 for present

purposes, or Part IVA - I meant for present purposes,

regarding ourselves in the past for the purposes

of this case - and again, for present purposes, I mean

as the Act now stands.

WILSON J:  Does the submission, in the way you have put it,

conflict with OAKEY ABATTOIR?

MR SHAW:	Yes, but I am going to say that is not right.
WILSON J:	Yes.
MR SHAW:	I think the answer is yes, but can I say this about
it, too? OAKEY ABATTOIR. is just wrong, at least in
one respect, because there are three reasons given
there for excluding the doctrine.  The reasons are -
and they appear, Your Honour at - it is 55 ALR - - -

(Continued on page 170)

ClT38/l/VH	169	3/6/88
John(2)

WILSON J: Let me say, why I intervened to ask you, was because on one view one could perhaps describe

Lord Wilberforce's approach, although he uses the

words "fiscal nullity", in reality he is simply

arguing for a realistic view of the totality of

the transaction?

MR SHAW:  Yes, that is all.

WILSON J: And I just wondered, therefore, whether we were

really being asked by you to apply the doctrine

of fiscal nullity as it may have come to be seen in a more romantic sense of striking things out

from the transaction as distinct from simply viewing

a transaction as a whole?

MR SHAW:  Your Honour will have noticed that although I

have referred to FURNISS V DAWSON, I have not read

anything out of it, and I submitted that when - the

first bit of the outline of submission which

deals with this does not look as if it is about

fiscal nullity at all, and what I was concerned to

do was to say, well leaving out what to some minds

might seem rather electric expressions in

FURNISS V DAWSON, then one sees what it springs from in what Lord Wilberforce was saying, he is

just saying, "Well, if you have a whole series of

transactions, it is unreal to pretend it is not a

series with the end result intended" and where one
is talking about, "Have you really made a gain or

a loss", it is sensible in the real world to say,

"Look at them all, why look at the bits".	And
what he was saying was to do that is not new.	The
courts have done that often.

Why I said that OAKEY ABATTOIR was wrong in

one respect, is this - it appears at page 299 of

55 ALR.	Th~ee reasons are given, beginning at the
bottom of the page before, about why the doctrines
do not apply.	Now the last of the reasons is

on page 299 at line 22 and Their Honours there say:

(Continued on page 171)

ClT39/l/SR	170	3/6/88
John(2)

MR SHAW (continuing):

the RAMSAY and FURNISS principles should

be perceived as no more than rules

governing the statutory interpretation

of the United Kingdom legislation for the

taxation of capital gains.

Now, simply technically that is not right because

in INGRAM's case, a stamp duty case, (1986) 2 WLR 598,

it was applied in the stamp duty context, and in

another case in England it was applied, sort of

by-the-way, in an income tax context. It is

CAIRNS V McDIARMID, (1983) STC 178. What is more, as Your Honour Justice Wilson just pointed out,

Lord Wilberforce's statement of the grounds of the

principle do not make the principle a principle of tax

law, in particular, at all. By that I do not mean it is not a principle of tax law, but he states it as a general principle applicable in other contexts

as well, if the approach is called for.

The next thing is this:  the second reason is

given in the paragraph immediately before on the same

page in OAKEY ABATTOIR, and that relies on the presence

of section 260 in the Act.

(Continued on page 172)

ClT40/l/HS	171	3/6/88
John(2)

MR SHAW (continuing): The mistake in that paragraph is to

regard the principle as an anti-avoidance principle,

in our submission. We would say that to analyse

section 51 in the way we did earlier in our

submissions, to say that one is directed by the

section to look at the essential character of a

particular loss or outgoing which is relied on

and to ask to what extent are those losses or

outgoings incurred in gaining or producing the

assessable income and to what extent not.	To
ask that question is not to import an anti-

avoidance rtEchanism into section 51, it is simply to seek,

to find whether or not the loss or outgoing

satisfies the description there given because it

is only such losses and outgoings which qualify.

In our submission, the fiscal nullity - if

that is the right description of it - doctrine is

simply directed to discovering whether or not there

is a loss or outgoing and if it is how one should

regard it. So it is a mistake, in our submission,

to say that because taking a particular approach

to a section leads to the consequence that some

things which might have been thought to have been

deductible are not, because they do not satisfy
the description, is not to import or invent an

anti-avoidance provision which is otherwise provided

in the Act. For example, in FORSYTH's case the

question was did Forsyth's licence fee to occupy the room in his house satisfy the description in

section 51 or not. The answer was, when one looked

at its essential character, no, it did not. The

reason it did not was not because the court read into that section some anti-avoidance provision,

it is because the court looked at the section

and said, "Look, it does not say all losses and

outgoings are deductible, it says only some of them

are and one has to be satisfied they are losses

and outgoings of the description." So that in
our submission the reason given in that second

paragraph is mistaken because it regards the

approach,which we are urging on the Court,
as doing something which it does not.	It is not

seeking to invent an anti-avoidance provision,

it is simply saying that in the process of

deciding whether there is a loss or outgoing and

if there is whether it satisfies this description,

it is appropriate where one has a serious of

planned transactions intended to have an end

result, to bear in mind that that is the result

intended, and that only.

ClT41/l/MB	172	3/6/88
John(2)

MR SHAW (continuing):  Of course, the Act may, in particular

circumstances, direct one not to the end result

but to some intermediate step because it may say: "If you do X or if you do Y then you can

have a deduction or something comes in" - or,

it might say all sorts of things. If the Act

does that then, of course, one does look at one

of the intermediate steps. But, where one is
concerned with something like a loss or outgoing

then, in our submis~ion, one is concerned with

reality and the end ~esult.

The other reason which is given, which is

the first reason on pages 298 to 299, is that -

what I was doing was looking to see whether this case

was concerned with a secton 51 deduction and

I do not think it was. But, if one applies that

reason to a section 51 situation, in our submission,

it has no relevance.	MULLEN's case was a question
to wliich reference is made;	it is a case in which

His Honour the Chief Justice said that you did

not tax an issue of shares as if it was a loan.

Obviously not, especially when a deduction was

provided in relation to payment of money on the
shares.

But, here one is concerned with losses or outgoings and, in our submission, at least

in relation to losses, one must be concerned

with whether there is an economic loss - at least

in part. So that it is the section itself which

directs one to ask this question. It is true

that in MULLEN's His Honour refers to the ROPER

cases. The Court will recall those cases which

were New Zealand appeals in the Privy Council.

There was there under consideration in at least

one of the cases a section of the New Zealand

Act which had a distinct similarity with the

provisions of section 51.and the same statement

was made by the Privy Council.

But, in our submission, that statement 1n no way detracts from the force of the requirement

that in respect of everything which is said
to qualify under section 51 for deduction, one

is concerned to discover its essential character.

(Continued on page 174)

ClT42/l/SDL	173	3/6/88
John(2)

MR SHAW (continuing):  So that we would say,

Your Honour Mr Justice Wilson, what is said in

OAKEY is in part wrong and in part not directed

to the question which arises here, arising as

it does in relation to section 51.

MASON CJ: Mr Shaw, might I ask you how long the balance

of your argument will take?

MR SHAW:	Your Honour, that is a question which 1s not
easy to answer.
MASON CJ:	I am concerned about whether we can finish

this afternoon.

MR SHAW:  I understand that, Your Honour. I would have

thought, Your Honour, it is likely to take

three-quarters of an hour, an hour, something

like that.

MASON CJ:  Yes. Mr Gleeson, how long do you think you

would take in reply?

MR GLEESON: I should think about an hour, Your Honour.

MASON CJ: If it is convenient to you, Mr Shaw, we will

continue on now until 1 o'clock and resume at 2,

in the hope that with a little extra time we

may be able to finish this afternoon, but if

we cannot, well, that cannot be helped.

MR SHAW:	On the assumption that Your Honour means
if it is not too inconvenient to me, go on,
I shall go on.
MASON CJ:	Yes, if it is not too inconvenient.
MR SHAW:	I had finished, Your Honour, what I had wanted
to say about - - -
MASON CJ: Fiscal nullity, or
MR SHAW:	I do not like to say that, Your Honour.

MASON CJ: - - - economic equivalent.

MR SHAW:	If I could now turn to section 260. I suppose
the starting point for consideration of the
question which arises here is what was said
by the members of the Full Court in CECIL BROS LTD,
where in substance the majority of the Court said that they found it difficult to understand how
a loss or outgoing truly allowable under section 51
could be struck down by section 260. I might perhaps
first go to ILBERY.  That is in 58 FLR at 191.

CIT43/l/JM	174	3/6/88
John(2)

:MR. SHAW (continuing): At page 204, Your Honour Mr Justice Toohey

says - this is the last paragraph on the page:

As to the operation of section 260 .... .

I would just say this. In CECIL BROS .... .

members of the court expressed their

difficulty in seeing how section 260 could

apply to defeat or reduce any deduction
otherwise truly allowable under section 51.

In a number of ~decisions the High Court has pointed to "the very restricted

operation conceded to section 260 by the

course of judicial decision" ..... On the

assumption that the prepayment of interest

was an outgoing incurred in the course of

gaining or producing the assessable income,

it was a transaction the taxpayer was

entitled to enter into, a particular course

of conduct he was entitled to adopt. There

was no purpose or effect such as is described

in section 260.

Now there are two things we would say about that.

The first of them is that section 260 has been

said by the Court to operate within the limits

imposed by the choice principle. And what the

choice principle was was	considered by the
Court in GULLAND's case.	And the general effect

of what the members of the Court said in relation

to this was, in Your Honour Mr Justice Brennan's

words, that the section did not apply to defeat

the operation of a specific and particular provision

of the Act. Now, in our submission, section 51

does not meet that description. It is a general

provision providing generally for deductions for

losses and outgoings incurred in gaining or producing

and so an in very general terms, and it is the
rough equivalent, I suppose, of section 25, which

provides in general terms for the inclusion of

gross income in the taxpayers assessable income.

(Continued on page 176)

ClT44/l/SR	175	3/6/88
John(2)

MR SHAW (continuing):  In our submission, if one is

concerned with that principle, it is not a

principle of any relevance to section 51, for the·

reason I have given. Then one comes to say

and perhaps I should add this, if that is not so

then it would seem that section 51 must have no

application in relation to deductions at all and

one knows that is not so.	JAQUES case, for example,
is an instance of that.	So that, in our submission,

so far as the choice principle is concerned, there

must be room for the application of section 260.
That does not mean that it does apply, of course, but

it means it is not excluded by the choice principle.

Then one asks this: why is it that

Mr Justice Dixon said what he did in relation to section 260 and what is the force of "truly allowable"

in what he said.	Mr Justice Kitto and Mr Justice Taylor,
I think, said "properly allowable".	In our submission,

although, perhaps, the remark is not wholly correct

in any case, it becomes more understandable and its
significance clearer if one views section 51 in
the way in which we have suggested to the Court
section 51 should be viewed because, to take this
case, if it be true that the cost of the Compinge
shares is not an allowable deduction in this case

to Mrs John, because that cost was a cost incurred

by the partnership otherwise than in carrying on a

business for the purpose of producing assessable

income_ for the reason that it was directed to give

her a private income tax advantage, the very

description of the available loss or outgoing excludes

sect·ion 260, in this case, at any rate, because its

description means that once one has said, "Yes, it
is incurred", and so on, one has indeed said what

Your Honour Justice Toohey said in ILBERY's case

that, "there was no purpose or effect such as

described in section 260".

(Continued on page 177)

ClT45/l/HS	176	3/6/88
John(2)

MR SHAW (continuing): In fact it was not relied on.

2. In those circumstances where s.137 does

not apply, the older rule of strict construction

of a taxation statute, as modified by the

courts in recent years, prevails but will

not assist -

in the two circumstances which were set out.

Then His Honour goes on:

3. Moreover, the formal validity of the

transaction may also be insufficient where:

(a) the setting in the Act of the allowance,

deduction or benefit sought to be gained

clearly indicates a legislative intent

to restrict such benefits to rights accrued

prior to the establishment of the arrangement

adopted by a taxpayer purely for tax purposes;

(b) the provisions of the Act necessarily

relate to an identified business function.

This idea has been expressed in articles on the subject in the United States:

The business purpose doctrine is an

appropriate tool for testing the tax effectiveness

of a transaction, where the language, nature

and purposes of the provision of the tax

law under construction indicate a function,

pattern and design characteristic solely

of business transactions .....

(c) "the object and spirit" of the allowance

or benefit provision is defeated by the

procedures blatantly adopted by the taxpayer

to synthesize a loss, delay or other tax

saving device, although these actions maft

not attain the heights of "artificiality'

in s.137.

And then so on. So that, in fact, what the

Supreme Court of Canada did was say that despite

the presence of something like section 260, in their

Act, there was room for something like the quieter
version of the doctrine of fiscal nullity as

I put to the Court this morning.

(Continued on page 180)

ClT48/l/SDL	179	3/6/88
John(2)
MR SHAW (continuing): In	REG V GEORGE GOLDEN in

86 DTC, the Supreme Court of Canada said, at

page 6140, first column, second last paragraph:

In STUBART INVESTMENTS LIMITED the

Court recognized that in the construction of

taxation statutes the law is not confined to

a literal and virtually meaningless

interpretation of the Act where the words will

support on a broader construction a conclusion

which is workable and in harmony with the

evident purposes of the Act in question.

Strict construction in the historic sense no longer finds a place in the canons of

interpretation applicable to taxation statutes in an era such as the present, where taxation

serves many purposes in addition to the old

and traditional object of raising the cost

of government from a somewhat unenthusiastic

public.

So that the Canadian cases, in our submission,

support the submission which we put and the presence

of section 260 does not, on the reasoning in those

cases, deny it.

The next thing we would say is this - and I

have now gone back to where I left off immediately

before lunch - anot~er supposed limitation of the

doctrine relating to section 260 as enunciated by

this Court is the supposed requirement of an

antecedent transaction. That matter was the

subject of extensive examination in ,GULLAND's

case in 160 CLR at 55 and, in my submission,

what Chief Justice Gibbs says at page 73

accurately summarizes the situation. After

quoting from Chief Justice Barwick, His Honour

says:

(Continued on page 181)

CIT49/l/JM	180	3/6/88
John(2)

MR SHAW (continuing):

This latter passage shows in my opinion

that in the earlier passage the learned

Chief Justice was using "antecedent

transaction" to refer to an antecedent

situation as well as to an antecedent

transaction. In any case, however,
there is nothing in section 260 that

supports the view that that section

can apply only when there has been an

antecedent transaction between parties.

An arrangement will, for example, be

within the section if it alters the
incidence of income tax in a case in

which the only relevant antecedent

circumstance is that the taxpayer is

in receipt of income.

Now that describ@s this case precisely. In
New Zealand the equivalent section to section 260 has

been held to apply to deductions. Two ot tne

cases are referred to in our outline of argument,

the others are referred to in our list of cases,

perhaps I should give the Court them all. The

two cases on the list are CHALLENGE CORPORATION

and ELMLGER.	There is also WISHEART, MACNAB
& KIDD, (1972) NZLR 319.	The idea that

section 260 does not apply to section 51 has

not been met with universal agreement and if we

might refer to what was said by Mr Justice Menzies

in FRANKLIN'S SELF SERVE, (1970) 125 CLR 52 at

page 74. His Honour there says:

(Continued on page 182)

ClT50/l/SR	181	3/6/88
John(2)

MR SHAW (continuing):  His Honour there says:

I should, perhaps, say that I do not

regard CECIL BROS as deciding that the
operation of s.260 cannot destroy, as

against the Commissioner, the basis upon

which a taxpayer claims a deduction -

and he refers to ELMIGER, WI8HEART and HOOKER-REX.
HOOKER-REX is a decision of His Honour

Mr Justice McTiernan, 123 CLR, and at page 86

His Honour seems to take the same view.	When one
looks at section 260 it says:

Every contract, agreement, or arrangment

made or entered into ..... shall so far as it

has or purports to have the purpose or

effect of in any way, directly or indirectly -

(a) altering the incidence of any income tax;

(b) relieving any person from liability to pay

any income tax .....

be absolutely void, as against the Commissioner.

In our submission, the arrangement which was entered
into here does have that effect and, accordingly,

it is absolutely void as against the Commissioner

on the basis that their other arguments are wrong,

in so far as it relates to the liability for and

payment of the value or cost of the bonus shares.

(Continued on page 183)

ClTSl/1/HS	182	3/6/88
John(2)

MR SHAW (continuing): That is what, in our submission, is

annihilated. When one looks at section 51 in the

light of the submissions which we have made, one

possibility should perhaps be mentioned. Section 51

refers to:

Losses and outgoings to the extent to which

they are incurred in ..... carrying on a business for the purpose of gaining or

producing -

assessable income. Now, under that limb, it may

possibly be conceivable that in carrying on a
business for the purpose of gaining or producing

assessable income, an outgoing might be incurred

solely for income tax reasons, for example, to

obtain a deduction. If that be possible, then

in that respect there is room for the application

of section 260 to that case. In our submission,

when one looks at JACQUES case,34 CLR 328,one finds

there the application of section 260 to a deduction

claimed under what was then section 18(l)(i) of

the INCOME TAX ASSESSMENT ACT.

(Continued on page 184)

ClT52/l/VH	183	3/6/88
John(2)

MR SHAW (continuing): That was not the equivalent to section

260. That case has been explained by some as depending on the existence in the case of an

arrangement for doing what was done, or affecting

what was done, of a different kind to the one

which was ultimately entered into and that latter

one was the one which was said to give rise to the

deduction. In our submission that is not the way

in which the matter is approached either by

Mr Justice Rich, at first instance, or by

Justices Isaacs and Starke and it turns rather,

as Your Honour Mr Justice Dawson said in GULLAND's
cas~ on the artificiality of the arrangement which

was there entered into.

In our submission, when one regards all the

facts here, if there is otherwise an available
deduction the whole construction here, the entry

into of the partnership by these people who did not

know one another, what was done in relation to the

Compinge shares before they reached the partnership, the transactions which took place in relation to

them while in the partnership's hands and the

subsequent sale is quite as artificial as that

in JAQUES case, and bearing as it does, we would

submit, on the face of it, the object and purpose

of altering the incidence of taxation, it should

fail to the extent we have indicated in the same

way as the arrangement failed in JAQUES case.

If the Court pleases, for those reasons, we submit

that Their Honour's order was correct and that this

appeal should be dismissed. If the Court pleases.

MASON CJ:  Thank you, Mr Shaw. Yes, Mr Gleeson.

MR GLEESON:  Your Honours, may I deal first with the

submissions that have been made as to the correctness

of the decision in CURRAN and on the question of

whether the correctness of the decision in CURRAN

should be review.

(Continued on page 185)

ClT53/l/MB	184	3/6/88
John(2)

MASON CJ:	Yes.
MR GLEESON:	I notice that my learned friend says that

there are circumstances, of which this is an

example, when the legislature has to move quickly,

to remedy a situation or a defect in the law.

My learned friend must take a geological view

of time.

CURRAN's case was decided in 1974 and the

law was amended in 1979 after what could obviously

only be described as "mature consideration".

The way in which the law was amended in 1979,

retrospectively to 1978, as we put in our submission

in-chief, gives a clue to the difficulties that

attend upon some of the problems that have been

addressed by my learned friend's submissions.

Your Honours, it is difficult enough for

counsel to have to contend with and address

respectful arguments concerning the judgments

of judges and I absolutely refuse to undertake

the task of making comments on writings of my

learned junior, but Professor Parsons has been

relied upon and could I simply seek to illustrate

the difficulties by reading to Your Honours

two short passages from Professor Parsons' work

that have been mentioned by my learned friend

and I ask Your Honours to compare these passages.

MASON CJ: Is this on IMF, is it?

MR GLEESON:  No, this is his gentler commentary on CURRAN.

I simply read, for the purpose of comparison,

first of all what Professor Parsons said in

paragraph 7.24 of his work,on page 436 of my

print.

(Continued on page 186)

ClT54/l/SDL	185	3/6/88
John(2)

MASON CJ:  You might read it out while we listen,

Mr Gleeson.

MR GLEESON:  Yes:

In CURRAN, on the previous authority of

GIBB, the bonus issue was neither an item

of exempt income nor of assessable income.

An allowance of a deduction or subtraction

was inappropriate. It would have been

appropriate had the item been a bonus issue

from a revenue profit, in which case there

would have been an assessable dividend, and

to the extent of the amount of the income
assessed a deduction should be allowed as the

cost of trading stock. A contrary view

who dissented in CURRAN, is, with respect,	expressed in the judgment of Stephen J.,
unacceptable.

In paragraph 12.76 the learned author said this:

The judgment of Stephen J. in dissent

in CURRAN rejected the principle adopted

by Barwick CJ. Stephen J. was conscious

of a consequence of the rejection: if the

bonus issue is made from a revenue profit

there will be two taxes on the same gain - the

one on the value of the bonus shares and the

other on that value reflected in the proceeds

of sale of the bonus shares. That such a

consequence will follow from the rejection

is a demonstration of the correctness of

the principle adopted by Barwick CJ.

With respect, the error in the judgment of

Barwick CJ. is in the reversion to an

interpretation of s. 44(2) that had been

rejected by the High Court in GIBB by A reading of the latter paragraph would seem to

over-ruling its own previous decision.

suggest that he thought that Chief Justice Barwick's

it was the inconsistency with the earlier decision of	conclusion was correct, and the only difficulty with
his own in GIBB. Could I then raise a problem
about what Professor Parsons had to say. I have
often wondered when I would be able to make practical
use of a proposition that was stressed to me years
ago, that the opposite of a cow is not a horse or a person, it is a non-cow, it is everything in the
world that is not a cow.

The opposite of a bonus lssue of a kind

described in section 44(2)(b)(iii) is not a bonus

issue out of revenue profits, as the facts of Compinge

Pty Limited in the present case demonstrate.

I remind Your Honours that in the case of Compinge Pty

ClTSS/1/HS	186	3/6/88
John(2)

Limited there were capital profits amounting to about $970,000 and of proceeds of a sale of

an insurance policy amounting to $5000. The

existence of the $5000 produced the consequence
that the whole of the bonus issue made by Compinge

Pty Limited was outside section 44(2) and was, therefore, an assessable dividend, and my client

has been assessed in relation to it, in the result

produced by the Federal Court.

Now, Professor Parsons uses the expression

"revenue profits" to refer to profits which are not

of the kind described in section 44(2), but

section 44(2) refers, not to capital profits. It

refers to a situation where the dividends are paid

wholly and exclusively out of profits arising

from the sale on revaluation of assets not
acquired for the purpose of resale at a profit.

Now, as the facts of the Compinge Pty Limited bonus issue in the present case demonstrate, you can

have a bonus issue that does not fall within
section 44(2) and gives rise to assessable income,

even though it would not be income according to

ordinary concepts, on the principle which

Professor Parsons uses as the starting point of

his process of reasoning, and that was the

conundrum that concerned the majority in this Court in CURRAN's case, and for which, with respect, as

everybody seems to agree, Mr Justice Stephen had no

satisfactory answer.

But there is an even more acute conundrum that

is not addressed at all by what my learned friend had

to say and what Professor Parsons had to say, and

that is the one I mentioned in-chief, the case of

a bonus issue to a person who is entitled to treat

the dividend as rebateable.

(Continued on page 188)

C1T55/2/HS	187	3/6/88
John(2)

MR GLEESON (continuing):  A bonus issue made either out

of revenue profits or out of profits which
simply are not wholly or exclusively capital

profits of a kind referred to in section 44(2)

will be a bonus issue that is tax free, or

tax neutral, in the hands of the recipient if

the recipient is a company of the kind referred

to in section 6BA(5). So, nobody has had the

answer to that particular conundrum and the

solution now propounded by my learned friend - or

the arguments put by my learned friend, demonstrate,

and demonstrate to the hilt, that this was a

problem appropriate to be dealt with by legislative

amendment. That is the way in which the problem

was dealt with, by legislative amendment. Even

the submission that the Commissioner urges upon

Your Honours at the moment - that is to say,

in fairness, if the bonus issue is to be treated

as assessable income, then treat it as a cost, but if the bonus issue is not to be treated as

assessable income, do not treat it as a cost -

even that solution does not answer the problem of

the situation where the bonus issue is to a company for

whom the dividend is assessable income, but which

is entitled to a rebate.

So what the Commissioner is seeking to have

Your Honours do in the light of the existence in

the statute of section 6BA is to propound as a

matter of construction of the other provisions of

the Act, apart from section 6BA, a solution to
the conundrum, or problem, with which the Court

had to wrestle in CURRAN, which is itself only

a partial and inadequate solution to the problem.

That, in our respectful submission, adds extra
significance to the circumstance that the

leg is la ture has acted maturely by ·amendment to

deal with this problem. The fact that it has

acted to deal with the problem in a way that

is different from the result for which the

Commissioner now contends is itself an important

consideration.

Further, we would submit. that in the

circumstances of the present case, having regard
to the legislative amendment, the only point of
re-considering CURRAN's case is to catch people

who have relied upon CURRAN's case.

(Continued on page 189)

CIT56/l/JM	188	3/6/88
John(2)

MR GLEESON (continuing):That, in our respectful submission,

would not be a proper consequence for the Court

to entertain. Further, it is to be noted that one

of the explanations offered by the Commissioner as

to where the Court went wrong in CURRAN lies in an
agreement to which the Commissioner was a party.

My learned friend has submitted that the explanation of the Court's inattention to GIBB' s case - and, of

course, GIBBS and McRAE were referred to in argument

in CURRAN' s -the explanation of the Court's

inattention to GIBB's case in CURRAN lay in the fact

that, as is recorded in, I think,it is paragraph 16

of the case stated, it was agreed between the

parties that it was proper for the taxpayer to give

a certain accounting treatment to certain matters.

Finally, my learned friend submits that the true

answer to the problem that arose in CURRAN's case and

that arose in the present case might be found in the

adoption of an approach that was taken in McRAE.	Now,
as it happens, we are here squarely within the

argument that was, in fact, addressed to the Court in

CURRAN by counsel for the Commissioner. If Your Honours

look at the report of CURRAN's case in the Commonwealth

Law Reports Your Honours will see that the substance

of the argument that was addressed by counsel for the
Commissioner in CURRAN was based upon McRAE, and

Your Honour will find counsel for the taxpayer dealing with McRAE in reply. In fact, unless I am mistaken,

counsel who argued CURRAN's case for the Commissioner

in CURRAN was also the barrister who argued for the

Commissioner in McRAE.

At all events, the answer that was given in argument

in CURRAN's case and, with respect, the correct answer,

is this: whatever the attractiveness of the argument,

McRAE's case is the decision that was relied upon by
Mr Justice Windeyer at first instance in INVESTMENT &
MERCHANT FINANCE CORPORATION and was rejected by the

Full High Court in that case. At first instance in the IMFC case, Your Honours will remembe½ there was a

dividend stripper_.who bought shares in a company,

procured the declaration of a dividend and then sold the

shares ex dividend and kept the money.

(Continued on page 190)

ClT57/l/VH	189	3/6/88
John(2)

MR GLEESON (continuing):  Mr Justice Windeyer, at first

instance in McRAE, said the proper approach to

an analysis of the fiscal consequences of that

transaction is via section 26A. This was a profit-

making undertaking or scheme and the taxpayer

made a profit of $50 or whatever it was in McRAE's

case. And similarly, it was argued in CURRAN's

case that one should regard Mr CURRAN's dealings
in Stewart Bacon as a profit-making undertaking

or scheme and apply section 26A, in effect, or

apply McRAE's case and produce the result that

he made a modest conunercial profit as did the

partners in the present case.

Now, it then has to be acknowledged,and with

respect my learned friend did not acknowledge,
that what the Court is being invited to do is not

only to overrule CURRAN, but also to overrule the

INVESTMENT AND MERCHANT FINANCE CORPORATION and

PATCORP. The difference, of course, between McRAE's

case and for that matter GIBB's case on the facts

ana IMFC and PATCORP and CURRAN, was that the

taxpayer in McRAE was not a dealer - there was no

business of dealing, there was no trading activity

going on. And what the Full Court said in IMFC

was, if you have a business going on, it is not

appropriate to seek the tax consequences of the
activities of that business by taking individual
transactions and isolating them from the business

and applying the provisions of section 26A to the

results of those individual or isolated transactions.

Now, we respectfully submit that approach

is right. But right or wrong the fact is that

the approach that we contend for is the approach

that was adopted by the High Court in the INVESTMENT

AND MERCHANT FINANCE case. And all that the Court

was doing in CURRAN, in rejecting an argument based

on McRAE, was following the authority of IMFC. And

that is why you will find in none of the judgments,

in either the na.jority or the minority in CURRAN's

case, an approach being adopted along the line of

McRAE's case.

(Continued on page 191)

ClT58/l/SR	190	3/6/88
John(Z)

MR GLEESON (continuing):  The Commissioner now says

what the Court should have done in CURRAN's case
was to say the process of reasoning adopted

by Mr Justice Menzies is correct, except in a

case where the bonus issue falls within

section 44(2)(b)(iii). In the case of all bonus

issues that do not fall within section 44(2)(b)(iii)

you adopt the approach taken by Mr Justice Menzies

and you treat the shares as having cost the taxpayer

the amount of the dividend applied in paying them

up and in respect of bonus issues which do fall

within section 44(2)(b)(iii), you reject the

approach taken by Mr Justice Menzies. Of course,

to the question, "What does the Commissioner say

about the case of a bonus issue to a taxpayer

for whom dividends are rebateable?.",the Commissioner

maintains a discreet silence.

BRENNAN J:  Mr Gleeson, if one has regard to 44

in its application to what might be called revenue

bonus shares, the taxpayer does not receive two

incomes, does he? He does not receive the dividend

in cash· and then, when that is applied to the

bonus shares, the shares themselves?

MR GLEESON:  No, Your Honour.

BRENNAN J: Well, is 44 posited on the proposition that

one takes into account that which is received

in fact?

MR GLEESON: Section 44(1), in both paragraphs (a) and (b)

talks about dividends paid to him by the

company and then 44(2) deals with the special

case, which is not the case about which Your Honour

asks me. So, you have to apply the words "paid to him by the company" to the case of something

that section 6 defines as a dividend.

(Continued on page 194)

CIT6 l / 1 / JM	193	3/6/88
John(2)

MR GLEESON (continuing):  And, if you look at the definition of

"dividend" in section 6, the relevant part of it

appears to be paragraph (c), that is:

the paid-up value of shares issued by a company.

So you have something of a verbal hiatus there between
the language of paragraph (c) of the definition of
"dividend," and the language of section 44(1). It
must be the case that there is only one dividend, but

whether one applies the definition in 44(1) by saying

it is the money that you are talking about or it is the

actual shares, is not made clear.

BRENNAN J: Well, if it be the shares only, then is the structure

of 44 this: that one does not take into account the

process by which the shares are paid up?

MR GLEESON:  Mr Slater tells me that there is a provision in

section 6, but I cannot just put my eyes on at the

moment, that says that "paid" includes "credited."

BRENNAN J:  It would be a curious thing, even assuming that to be

as we believe it to be, that the money which is

credited, in terms of a revenue allocation, is not

taken into account as income, but the bonus shares

are, and yet when it gets to the non-revenue
allocation, one takes the money into account and

then regards the bonus shares as having been purchased

with that money.

MR GLEESON:  The consistency would lie - if it were the case,

that whether you are dealing with revenue or
non-revenue bonus shares, you treat as

the dividend an amount of money which is credited to the account of the taxpayer by the company and

then apply it on his behalf in payment up of the

bonus shares and you will do it in both cases.

(Continued on page 195)

ClT62/l/VH	194	3/6/88
John(2)

MR GLEESON (continuing):  That seems to be the approach

that all the members of the court took in CURRAN's

case.

BRENNAN J:  Yes, it does. But what work does that leave

paragraph (c) of the definition of "dividend" to

do?

MR GLEESON: Well, a value is an amount of money, I suppose,

Your Honour.

BRENNAN J: 

But it is unnecessary, is it not?

MR GLEESON: 

It does have a long history. There have been problems about how bonus shares are to be dealt

with, going back, I think, to the 1920s, and a

long history of this in this dividend, this definition

of dividend, Your Honours.  But there is that lack

of a perfect match between the scheme of section 44

and the actual language of the definition of
dividend,that is clear.

Your Honours, could I then come to the issue

of trading stock and paragraph 6 of my learned friend's
outline of argument, on the top of page 4, where

it is said:

Even if the partnership had a business, none

of the Compinge shares were trading stock

of the partnership.

Could I draw Your Honour's attention to two things.

First of all the definition of "trading stock" in the Act itself which is defined to:

includes anything ...... acquired ...... for

purposes of sale.

In the INVESTMENT AND MERCHANT FINANCE CORPORATION

case, Mr Justice Walsh dealt with this matter in

125 CLR 269 in a passage that I do not think I

read in-chief.

(Continued on page 196)

ClT63/l/MB	195	3/6/88
John(2)

MR GLEESON (continuing): At page 269 a little over half-way

down the page, Mr Justice Walsh said:

In the case of a company the

business of which includes dealing in

shares, it could scarcely be doubted

that shares which it buys and which it

intends to resell would generally be

regarded as part of its trading stock

according to the meaning in which,

apart from any statutory definition, that expression would be understood.

This was taken for granted in all the Courts, including the House of Lords,

that considered the case of CRADDOCK .....

I cannot think that it ought to be

denied that this is so in relation to

particular shares, merely for the

reason that the company expects or

intends that the resale of those shares

will be at a lower price than the cost

price. In section 6 of the Act it is

provided that "trading stock" includes

"anything -

I have read that definition -

I need not decide whether in this

provision the word "includes" should
be read as "means :1 · If it should not,

it seems clear to me that the

Macgrenor shares were trading stock

of the appellant.

Then there is a passage that my learned friend

read as to part on the bottom of page 270 and

the top of 271 and I would seek to read the

rest. On the bottom of page 270, my learned

friend read the following statement:

I do not assert_ of course, that shares

are always trading stock in the hands

of their owner; and even where the

owner is a dealer in shares the circumstances

may show that particular shares are not

trading stock.

That is where my learned friend stopped. His Honour

went on to say:

But when shares are bought by a dealer in

shares and it is intended that they are
to be resold and this will probably
occur in the not distant future, I do not
think they are to be denied the

description of trading stock, either

ClT64/l/SR 196 3/6/88

John(2) (Continued on page 196A

because the trader expects or intends

that they will be sold at less than

their cost price or because he seeks
to obtain a connnercial advantage from
the transaction otherwise than from

a profit on the resale, that is, an

advantage from an expected dividend

and from an expected taxation benefit.

(Continued on page 197)

ClT64/2/SR	196A	3/6/88
John(2)

MR GLEESON (continuing):  My learned friend put an argument

on section 51 and its relationship to section 260

that was, in a sense, a separate argument from

his section 260 argument although he developed

it in the course of putting his argument about

section 260. My learned friend said that assistance

as to the application of section 51 in a case

such as the present can be derived from considering

the expression, "truly allowable" used by

Sir Owen Dixon in CECIL BROS and he said if

one reflects upon the significance of that word,

"truly" it may have some consequences for a

case such as the present.

Your Honours, we do not need to puzzle

about what Sir Owen Dixon meant by the word

"truly", we only have to look at the loss or outgoing

that in CECIL BROS he held was an allowable

deduction under section 51. Perhaps I should

remind Your Honours of the facts of CECIL BROS,

111 CLR 430. CECIL BROS was a case where a taxpayer

company purchased some of its stock in trade

from a family company at an inflated price for

the motive of allowing the related family company
to make a profit and to be financially better

off.

This has a significance for my learned

friend's argument about the purpose of the partnership,

the Malindi Trading partnership in the present

case. He says it was a collateral purpose,

or a non-partnership motive, to obtain a tax

benefit for the partners. It is interesting

to reflect upon the "truly allowable" deduction

that the taxpayer obtained in CECIL BROS in

that connection.

(Continued on page 198)

ClT65/1/SDL	197	3/6/88
John(2)

MR GLEESON (contiuing):  The taxpayer in CECIL BROS LTD

was in exactly the same position as would obtain

if you had a man who was carrying on the business

of selling ladies wear and his wife was a fashion

designer, or manufacturer of lanies fashions and

he bought his trading stock from his wife at an

inflated price in order that his wife would be

financially better off, or just in order to please

her. Those are the facts in CECIL BROS LTD and

it is interesting that that was a deduction that

was regarded as truly allowable under section 51.

At first instance in CECIL BROS LTD

Mr Justice Owen, who applied section 260, at

page 434 re~orded the taxpayer's section 51(1)
submission.

The first submission made in support of the Commissioner's assessment was based

upon s.51(1) of the INCOME TAX AND SOCIAL

SERVICES CONTRIBUTION ASSESSMENT ACT. It

was contended that, of the total payments of

£230,000 made by the taxpayer to Breckler

Pty Ltd, the amount of £19,777 should not be regarded as an outgoing incurred in gaining or producing the taxpayer's assessable

income. That amount was paid, so it was

argued, not as part of the purchase price of

goods supplied but to provide Breckler Pty Ltd with income. I do not agree with this

submission. The fact that the taxpayer paid

more for its purchases than it would have paid

had it dealt direct with the manufacturers or

wholesalers in order that Breckler Pty Ltd might

make a profit out of the transaction does

not, in my opinion prevent the amount which it
in fact paid from being regarded, for the

purposes of s.51(1), as an outgoing incurred

in gaining its assessable income. ··

And the way in which that issue was dealt with

on appeal, and the point was rejected fairly

summarily on appeal, is reflected in the argument

of Mr Bowen on behalf of the taxpayer, on page 438,

an argument which we would seek to adopt in the

present case:

(Continued on page 199)

CIT66/l/JM	198	3/6/88
John(2)

MR GLEESON (continuing):

The motives with which a person incurs an

expense in gaining or producing an assessable

income are irrelevant to the application of

section 51.

Andthat is the point that was accepted. Then, when

it was a question of the application of section 260,

the Court, for reasons that I will not go through at
the moment, my learned friend has discussed them to

some extent, held that section 260 could not apply.

But that is the deduction that Sir Owen Dixon was

speaking about when he was talking about deductions

that are truly allowable under section 51 and he

was obviously, in that statement, rejecting any
suggestion that a deduction might cease to be truly

allowable under section 51 because the loss or

outgoing was incurred with a collateral motive, as

it was plainly was in the case of CECIL BROTHERS,

and a collateral motive not of benefitting the
taxpayer but of benefitting a relative or an associate

of the taxpayer.

There is, in our respectful submission, no

element of difference between a motive in a taxpayer

of conferring a collateral benefit upon an associate
of the taxpayer by increasing the wealth of the
taxpayer, on the one hand, or by conferring or doing
something that will confer a taxation benefit on the

relative or associate of the taxpayer, on the other

hand. So, it must be implicit in my learned friend's

submissions that he wants the Court, in construing

section 51, to depart from the construction of

section 51 that was put upon it in CECIL BROTHERS,

too.

Now, on the matter of fiscal nullity, the

Commissioner's submissions apparently disown the

more recent developments in this field, as exemplified

in FURNISS V DAWSON. It is not clear whether the

Commissioner's submissions amount to the proposition

that the development in the law that has occurred

in the United Kingdom ought to be followed here, or

that there is no need to follow the development of the

law that has occurred in the United Kingdom because

there is sufficient in that in the law of Australia

and always has been.

(Continued on page 200)

ClT67/l/VH	199	3/6/88
John(2)

MR GLEESON (continuing):  The first thing to be said,

that there has been a development in the law

in the United Kingdom, cannot be overlooked.

I will read a short passage, without asking

Your Honours to go to the case, from the speech

of Lord Diplock in the BURMAH OIL case in

(1982) STC 30.	At page 32 His Lordship said
this:

It would be disingenuous to suggest,

and dangerous on the part of those who

advise on elaborate tax-avoidance schemes

to assume, that RAMSAY's case did not mark
a significant change in the approach adopted

by this House in its judicial role to a

pre-ordained series of transactions (whether

or not they include the achievement of

a legitimate commercial end) into which

there are inserted steps that have no commercial

purpose apart from the avoidance of a liability

to tax which in the absence of those particular
steps would have been payable.

If the House of Lords is prepared to acknowledge that the decisions of the House of Lords mark

a change of the law in England then it seems

futile for the Commissioner to argue to this

Court that the decisions of the House of Lords

do not mark a change in judicial approach.

That is not to say that it is not open to the

Commissioner to make an argument, for example,

of the kind that I mentioned based on McRAE's
case. That is precisely the argument that was
put by the Commissioner in CURRAN's case. It
was not given the label of "fiscal nullity"

in those days but that was the substance of

it. It was that when you look at what was

done in relation to this Compinge transaction

or in CURRAN's case the Stewart Bacon's

transaction, you find some shares being bought

and some shares being sold at a modest commercial

profit and McRAE tells you that you bring to

tax the modest commercial profit and you ignore

as frills all the intermediate steps of transactions.

That, as I said, is the argument that

was accepted by Mr Justice Windeyer at first

instance in IMFC and rejected on appeal.

(Continued on page 201)

ClT68/2/SDL	200	3/6/88
John(2)

MR GLEESON (continuing):  Now, in relation to his submissions

concerning IMFC, PATCORP and WESTRADERS, my learned

friend, dealing with WESTRADERS, distinguished the

position of the partnership, Malindi Trading Company

in the present case, from that of the Jensen Company

or the Jensen Corporation. But unless I missed it

he did not make any attempt to distinguish the

position of the Jenspart Trading Company, the Jenspart

share trading partnership and, of course, it was

fundamental to the decision in WESTRADERS that the
Jenspart partnership should be characterized as

a dealer in shares and that the shares in question

should be characterized as trading stock.

Mr Justice Rath at first instance, and all the

members of the Federal Court and the members of

the High Court, on appeal, were prepared to accept

that in a situation where the Jenspart trading

partnership was something that was promoted by

Mr Fox for the purpose of taking the benefit of section 36A deductions or allowances or him being

involved in section 36A schemes, and it also bought

and sold shares on the stock exchange in precisely

the same way as the Malindi Trading Company and

its motive in buying and selling shares on the stock

exchange would have been plainly identical with

the motive of the Malindi Trading Company.

Now, as to section 260 I have already commented on those parts of my learned friend's submissions

that seek to distinguish the observations in

CECIL BROS and in their context to section 260,

we would submit that there is nothing materially

different about the present taxpayer's attempt

to rely upon section 51 and the attempt of the

taxpayer in CECIL BROS's case to rely upon section 51.

We have referred in our written outline of argument,

in an anticipatory way, to some of the submissions

that we make and I will not repeat what is there

said or the authorities to which we there refer,

but I should point out to Your Honours that it is nov.here

suggested in GULLAND AND WATSON that the decisions

in the cases on section 260, that is, the previous

decisions of the High Court on section 260 that

we mention , were erroneous. GULLAND AND WATSON

does not say - indeed the Court in GULLAND AND WATSON

seems to have gone out of it ways to avoid saying

that decisions in CRIDLAND and MULLENS and ROWDELL

were incorrect or that the rejection of section 260

in PATCORP was incorrect.

(Continued on page 202)

ClT69/l/MB	201	3/6/88
John(2)

MR GLEESON (continuing):  Now, once again, it is to be borne

in mind that it is now about 7 years since

section 260 was repealed. And whilst one hears of

sportsman being on the comeback trail, for
section 260, 7 years after it has been repeale~

to be applied to produce a consequence inconsistent

with and involving overruling of decisions like

that would, in our respectful submission, be a

fairly extreme result. It is to be borne in mind

that in GULLAND AND WATSON the case that the

Cormnissioner made out and made out successfully

was a case for the application of PEATE's case.

And what the Cormnissioner was here arguing in

GULLAND AND WATSON was that PEA.TE' s case has never

been overruled and the decision in GULLAND AND

WATSON on the facts was consistent with the

earlier decisions in PF.ATE' s case. And, in our

respectful submission, it would be a misuse of

authority of GULLAND AND WATSON to rely on that

case as authority for overruling and overriding

a succession of decisions of this Court concerning

section 260 which were not said to be wrong or

disapproved of in GULLAND AND WATSON.

But if one has to, as it were, come to the matter as res integra, then the first thing that

has to be done is to take a step in the argument as

to which the Cormnissioner's argument, with respect

is not entirely clear. The first thing that always

has to be done is to identify the arrangement which

is alleged to be void against the Cormnissioner.	Now
I pointed out to Your Honours in-chief, that the
actual assessment which the Cormnissioner seeks to
defend in the present case is inconsistent with

the notion that the partnership is void, because
Mrs John, according to the result that obtained
in the Federal Court is being assessed to tax on her

share of the bonus issue from Compinge Pty Ltd.

(Continued on page 203)

ClT70/l/SR	202	3/6/88
John(2)

MR GLEESON (continuing):  My learned friend did not

submit that the Court should annihilate the

partnership. Indeed, as I noted his argument,

he said, "What you annihilate is the payment

for and the cost of the bonus shares.". He

said that is what is annihilated. That, of course,

is always the first problem that the Commissioner
has to face up to in an argument about section 260:

identify the arrangement alleged to be void and show how the annihilation of that which is void leaves assessable income in the hands of the taxpayer.

So, it is first of all not clear exactly what it is

that the Commissioner says is the arrangement that

falls within section 260, or how it is to be

annihilated. The submissions that my learned friend

made concentrating upon distinguishing, or if

necessary, having treated as incorrect, the

observations in CECIL BROS LTD are of course
consistent with the approach that, as my learned

friend said, what is sought to be annihilated

is the payment for and the cost of the bonus

shares. But that is, with respect, a difficult

concept also. Is there to be annihilated the

issue of the bonus shares? How can you fail

to annihilate the issue of the bonus shares but
annihilate the payment for or cost of them?
Because the issue of the bonus shares was simply
the fulfilment of the transaction in company law
involving the declaration of the dividend, crediting
it to an account of the taxpayer in the books of the

company, and then applying it to payment up of the

bonus shares.

Further, when the Commissioner puts an argument

under section 260 he not only has to identify the

transaction or arrangement said to be void and

show how the annihilation of it produces a~sessable

income in the hands of the taxpayer, but he also

has, according to authority, to confine himself

to the overt acts to the face of the arrangement

know whether the arrangement that is sought to be	itself. As I say, this may make it important to
avoided is, or includes the formation of the partnership, or is limited to the actual bonus issue of shares.

(Continued on page 204)

CIT71/l/JM	203	3/6/88
John(2)

MR GLEESON (continuing):  The authorities make it clear

that the subjective motive of the taxpayer in

either case is a fact irrelevant to the characterization

of the arrangement as one for the avoidance

of tax or the alteration of the incidence of

tax. If it is the share trading partnership
that is supposed to be void as against the

Commissioner, the objective facts are that you have a group of people buying and selling shares

in a regular systemmatic way with an experienced
person advising them as to what to do. If the
arrangement that is sought to be avoided is

just the bonus issue of shares in Compinge,

then the objective fact is that you have a company

which has reserves available for distribution
amongst its shareholders by way of dividend

which are mistakenly in one case, that is the case of Compinge, believed to be available for

tax-free distribution by way of bonus issues.

They have a bonus issue and then the recipient

sells the shares. Those are the objective facts.

If you, consistently with authority, leave out of account the motives of the participants

in these transactions then, in our respectful

submission, there is nothing on the face of

them to attract the operation of section 260.

Then - and this perhaps is where CECIL BROS becomes relevant again - one has to describe

the purpose of the arrangement as being the
avoidance of tax or the alteration of the incidence
of tax and this is what has led the courts to have,

at the very least, grave reservations about the

application of section 260 to a deduction that

is otherwise allowable under section 51(1).

If the deduction is otherwise allowable under

section 51(1) then what is there in that that

involves the avoidance of tax or the alteration

of the incidence of tax?

In our respectful submission, the Commissioner has made out no convincing case for the application

of section 260 and in relation to all those

arguments of the Commissioner based on fiscal

nullity, or perhaps only McRAE, section 260

and the construction of section 51 and, for

that matter, as to the argument that the Compinge

transaction was a transaction that stood outside

the ordinary course of the share trading business

of the Malindi Trading Company, all of those

arguments were arguments that could have been

put in CURRAN's case and would have been equally

applicable in CURRAN's case.

ClT72/l/SDL	204	3/6/88
John(2)

MR GLEESON (continuing):  As Mr Justice Jacobs said in

PATCORP, it is not good enough for the Commissioner

to say you should depart from a previous

decision,a fortiori a decision the effect of

which has been dealt with by legislative amendment

on the basis that here are a series of arguments that were available to me to put to the Court on

that case. and which I, presumably deliberately,

chose not to put. Those are our submissions,

Your Honour.

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

consider its decision in this matter.

AT 3.13 PM THE MATTER WAS ADJOURNED SINE DIE

ClT73/l/HS	205	3/6/88
John(2)