John v The Commissioner of Taxation of The Commonwealth of Australia

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

John(2)

BRENNAN J

DEANE J
DAWSON J

TOOHEY J

GAUDRON J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON THURSDAY, 2 JUNE 1988, AT 10.17 AM

ClT2/l/HS

2/6/88

MR A.M. GLEESON, QC: May it please the Court, I appear
with my learned friend, MR A.H. SLATER, for the

appellant. (instructed by R.I. Rosenblum. & Partners)

MR B.J. SHAW, QC: If the Court pleases, I appear with my
learned friends, MR N.R. BURNS, and MR A. PAGONE,
for th@- resoondent Cormnissioner. (instructed by
the A~stralian Governr:1ent Solicitor,

MASON CJ: Yes, Mr Gleeson.

MR GLEESON: Your Honour, I hand up the appellant's outline
of argument.

MASON CJ: Thank you. Yes, Mr Gleeson.

MR GLEESON: Your Honours, may I say that what appears in
paragraph 9 of this outline of argument may be less
than complete. The matters that are the subject of
the notice of contention have not been fully argued
in the courts below and are not the subject of any
reasoning by the Federal Court. So we would want
to, as it were, reserve our position, to see precisely
how they are put.

MASON CJ: Yes, I gathered that. It was rather anticipatory
on your part to include paragraph 9.

MR GLEESON: Yes, Your Honour. Your Honours, the logical
commencing point for the consideration of the matter
is CURRAN's case itself, and may I take the Court to

that case and some aspects of it. Before going to
the detail of the judgments in that case, could I
make the following general observations about it.
The first is that the transaction in which the
taxpayer in CURRAN engaged was a kind of dividend

stripping operation. I do not intend to use that
expression technically because, as a matter of fact,
the expressions "transactions in the nature of a
dividend stripping operation", or, "transactions
similar to a dividend stripping operation", now

appear in various parts of the INCOME TAX ASSESSMENT

ACT, for example, in Part IVA, and I am not intending
to pre-empt any view that might be taken of the
precise meaning of those expressions, but it was a
kind of dividend stripping transaction.
In Australian usage, which is a little different

from English usage in that regard, and which is
explained, for example, in the judgment of
Mr Justice Windeyer, at first instance, in the
INVESTMENT & MERCHANT FINANCE case, the substance of
a dividend stripping operation may be summarized as

follows:_ if you have a taxpayer who carries on the
business of dealing in shares, or for whom shares are
trading stock, you will find that the taxpayer 'bt.o/s shares for
X dollars, cum-dividend, procures the declaration of a dividend
of Y.cbllars and then sells the shares ex-dividend for X minus
Y dollars.

C2T2/2/HS 2 2/6/88
John(2)

MR GLEESON (continuing):Nobody doubts that he is entitled to

an allowable deduction as a loss on the sale of
the shares which are his trading stock, equal to
X minus Y dollars but, of course, he has received

the dividend of Y dollars. A transaction of that
kind would not be financial advantageous to somebody
who had to pay tax on the.dividend; he would end

up square. But if the taxpayer is tax exempt or has
carry forward losses or if dividends are rebatable
to the taxpayer under section 46 of the Act he will
not bear tax on the dividend, and that is why the
transaction is financially attractive and
business-like to him, because of its fiscal
consequences.
That kind of transaction, of course, is now the subject of specific provisions of the Act and is

inter alia dealt with in Part IVA. But a dividend
stripping operation is of itself a prime example
of a business operation, ~r what has been held by
this Court repeatedly to be a business operation which
is business-like only because of its fiscal consequences.
For Mr Curran,the key to the financial attraction of the Stewart Bacon transaction lay in the provisions
of section 44(2)(b)(iii) of the INCOME TAX ASSESSMENT ACT
as it then stood. It was just section 44(2) at the
time of the John transaction.
The genesis of what has been called the Curran Scheme

lay in the taxpayer's own observation of the manner
in which he had been assessed to tax for years by the
Conunissioner in respect of bonus shares that were

issued to him. I might add that that was the same
manner in which he was assessed to tax by the
Conunissioner in the year in question in relation to
numerous bonus issues other than the Stewart Bacon
bonus issue. In relation to all those bonus issues,
the way in which the Conunissioner used to assess
Mr Curran to tax was as follows:
(Continued on page 4)

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John(2)

MR GLEESON (continuing): It was accepted that shares

were trading stock for Mr Curran. If he
bought what I will call original shares for
a certain price and then received a bonus issue which was a declaration of a dividend satisfied by paying up the face value of the shares, so
that he ended up with no money as a result of
the dividend,and then sold the original shares and
the new shares, he was assessed by the Commissioner
on the basis that the difference between the cost
price of the original shares and the sale price of
the original shares ex-dividend was an allowable

deduction. He was also assessed on the basis
that the new shares cost him the amount of the
dividend applied in paying them up so that he
sold them for what they cost him.
Provided the dividend was not assessable

by reason of the provisions of secti1 1n 44(2)(b)(iii),
the result of all that was that a transaction which
might have made a small commercial profit or a
small commercial loss gave rise to a substantial
allowable deduction.
But, of course, it may happen that the

bonus shares would not qualify for non-assessability
under section 44(2)(b)(iii) and then the opposite
consequence would happen. As I will mention in a
moment, we have an example of that in the facts
of this case.
Because the dividend which was declared

and then applied in paying up the new shares,
the so-called bonus shares was not assessable,
the conditions of section 44(2)(b)(iii) being
satisfied, what wascommercially a fairly neutral
transaction was financially advantageous and
business-like to Mr Curran because it brought a
large tax benefit. If I could take the Court to
the decisions in that case, it is in 131 CLR at 409.

(Continued on page 5)

CIT4/l/JM 4 2/6/88
John(2)

MR GLEESON (continuing): If I could go first to the headnote:

A taxpayer, who carried on a business of trading in shares, bought 200 shares in

a private company for $186,046.48. The
company thereafter alloted to him 191,000
shares which were paid up by the company
through the declaration and application
in his favour of a dividend under such
circumstances that that dividend was
exempt under section 44(2)(b)(iii) ..... Later
on the same day he sold the 200 shares
originally held for $197.52 and the other

191,000 shares for $188,631.60. He
claimed that in computing his taxable
income a deduction should be made of
an amount of $191,000 being the amount
applied in his favour in paying up the
191,000 shares, so that the entire
transaction gave rise to a loss of $188,217.36.
The Commission of Taxation assessed him
on the basis that the cost to him of the
191,000 shares was nil.
And by a majority it was held that he was entitled
to a deduction upon the grounds there set out. There
is something that may not appear clearly from the
report of the case in the Commonwealth Law Reports
and it is for that reason that we have put on our
list of authorities a reference to the report of
the case in the Australian Tax Reports. It is
in volume 5 of the Australian Tax Reports, page 61.
I do not ask Your Honours to go to that at the moment, but there Your Honours will find set out in full the case stated and a full account of the

facts. And there Your Honours will find
detailed reference to something that might tend to
be obscured by a reading of the decision as
reported in the Commonwealth Law Reports. And that
is that the Stewart Bacon transaction was only

one of a substantial number of bonus issues of shares that were made by companies to Mr Curran during the tax year in question; the difference
in relation to the Stewart Bacon transaction being,
of course, that it was big and that he was in
control of it, but like a person who owns a lot of
shares in public listed companies he received quite
a number of bonus issues of shares during the
year in question.
(Continued on page 6)

ClTS/1/SR	5	2/6/88
John(2)

MR GLEESON (continuing):

The Commissioner never sought to

argue in relation to those other bonus issues of
shares that the result for which Mr Curran contended
in relation to the Stewart Bacon shares was not
the correct result, but he could never explain
why, there was a difference between the result
that ought to follow in relation to all the other
shares and the result that he denied followed in

relation to the Stewart Bacon shares. When the
legislature came to deal with this problem by
amendment - the legislation was amended in 1979
retrospectively but not far back enough to catch
the transaction with which we are presently concerned -
the Commissioner had to produce a legislative
formula that coped with the ordinary cases in
respect of which he did not desire to argue and
did not argue before the High Court that Mr Curran's
accounting was incorrect.
Now, the judgment of the then Chief Justice

begins relevantly at page 415 and 416 where
His Honour said in the middle of page 415:
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 s.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.
Whether or not the recipient of the bonus shares
must pay income tax in respect of the amount
credited to him by the company in connexion
with the issue of the bonus shares depends on

the provisions of the Act. But, in my opinion,
whether or not he pays income tax on the
amount so credited can have no relevance to
the question whether he is entitled to treat
himself as having paid the amount credited to
him by the company as the cost of the bonus
shares.
In the present case, s.44(2)(b)(iii) of the Act in the circumstances of the issue of
the bonus shares by Stewart Bacon exempts from
income tax the amount credited to the appellant
in respect of the issue of the shares. But
that does not mean, in my opinion, that the
appellant is not to be regarded as having paid
for those shares the amount of their paid-up
value. The appellant is bound to treat the

ClT6/l/MB	6	2/6/88
John(2)

amount of $191,000 credited by the company
as income received by him, though by reason of
s.44(2)(b)(iii) it is not assessable income.
In my opinion, he is also entitled to treat himself as having paid for the bonus shares the
amount credited to him by the company in
connexion with the issue of those shares.
He paid for them by means of the credit given him by the company of his aliquot share of the distributable profits of the company derived from the realization of assets not acquired
for resale at a profit.
To like effect was Mr Justice Menzies on pages 416 and 417.

(Continued on page 8)

ClT6/2/MB	7	2/6/88
John(2)

MR GLEESON (continuing): A somewhat different approach was
taken by Mr Justice Gibbs who approached the matter
by reference to the way in which people should
account for trading stock and, at page 421 -
perhaps I should start at the bottom of page 420 -
His Honour said:
In fact no dividend, as that word is ordinarily understood, was declared by

Stewart Bacon. The appellant was never
entitled to receive in cash his proportion

of the capitalized profits. Nevertheless,
the effect of the special resolution was
that capitalized profits to the extent of
$191,000 were credited to the appellant
and applied on his behalf in paying up the
shares ..... In a sense, therefore, it may
be said that the shares cost the appellant
$191,000 and that it was appropriate to
treat their acquisition as a purchase for
that amount. However, I do not need to
base my decision on that ground. In my
opinion it was not possible to arrive at
the appellant's true income without taking
the bonus shares into account as trading
stock acquired, whether or not those shares
could properly be regarded as having been

purchased. The appellant's trading account
would not reveal the real situation if it
brought in at no value shares wich were,
in fact, valuable because the amount it
would then show as income would include
the value which the shares possessed when

they were first brought into stock. The
case may be compared with that of a trader
who takes into his trading stock articles
which he received by way of gift or under

a bequest. Cases of that kind not falling

within s.36 of the Act may be rare, but
they can can be envisaged. In such a case an account will not reveal the true result
of the trading unless those articles are
brought in at an appropriate value, e.g.
market selling value. If the account showed
that the articles cost nothing the result
would be to increase the amount of the trader's
profit or decrease the amount of his loss
by the value of the gift or bequest and
in effect 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. To arrive at a
true estimate of the appellant's income

ClT7/l/SDL 2/6/88
John(2)
it seems to me necessary to bring the
shares into the trading account at an appropriate
value, which in the circumstances of the
case must be their par value.
Mr Justice Stephen dissented and before I come
to the reasoning of Mr Justice Stephen in dissent
could I take what might appear as a practical
approach to testing that reasoning by comparing
what Mr Justice Stephen said the result ought
to be with what the legislature ultimately legislated
for when it amended the legislation and by noticing
the differences between the result ultimately
produced by the amending legislation and the
approach taken by Mr Justice Stephen.
It is broadly correct to say that

Mr Justice Stephen said the proper way to account
for a transaction, or the Stewart Bacon transaction
in the CURRAN case, was to treat the bonus
issue as a kind of relocation of value of the
original shares.
(Continued on page 10)

ClT7/2/SDL	2/6/88
John(2)

MR GLEESON (continuing): So that the combined value of the
original shares and the new shares after the bonus
issue was the same as the former value of the
original shares and one would account for it by

diminishing the cost of the original shares. Now,
that gave rise to a difference in construction of
the relevant provisions of the Act between the
majority and Mr Justice Stephen, and I will not stay
on what I might call the technical details of that

difference of construction. But Mr Justice Stephen
had to answer the problem that was emphasized, of
course, in argument and in the judgments of the

majority, and the problem was this. What about the
case of a bonus issue that does not satisfy the
requirements of section 44(2)(b)(iii)?
Now, as I will show Your Honours in due course,
we have just such a bonus issue in the present case.
The taxpayer in one regard failed before
Mr Justice Yeldham and there was no appeal taken.
One of the companies that made a bonus issue of shares
in the present case was a company named
Compinge Pty Limited, and the amount of the dividend involved in the bonus issue was over $970,000.
But the reserves out of which that dividend was

declared included an amount of $5000 the proceeds
of an insurance policy on one of the former executives

of the company. By reason of that presence in the
amount of $970,000 of that amount of $5000, no part
of the $970,000 satisfied the requirements of
section 44(2), so that the facts of the present case
gave rise to exactly the sort of example that was
being considered in argument and in the judgmentsof
the majority in CURRAN.
How would Mr Curran have accounted for that?
Because there he would have had to pay tax on the
amount of $970,000, and a transaction which commercially
would have been fairly neutral would, as a matter of
tax accounting on that basis have yielded an enormous
taxable income. In other words, the anomaly which
the facts of the case disclosed in the legislation
was one that cut ooth ways.

in his judgment, described that argument as an appeal Now, Mr Justice Stephen,
to equity. It was, in fact, an argument put on the
basis of the construction of the Act and he dealt
with on the bottom of page 426 and the top of page 427.
The way in which His Honour in fact dealt with it
was, with respect, a way which the legislature ultimately
had to recognize did not answer the problem.
(Continued on page 11)

ClT8/l/VH 10 2/6/88
John(2)

MR GLEESON (continuing): His Honour said, "Mr Curran

would never have bought those Stewart Bacon shares
for the amount that he paid for them if he knew
that he was going to pay tax on the dividend
declared in the bonus issue transaction''. But,
of course, what that answer did not address and
what the Parliament had to deal with was the
ordinary case where Mr Curran was not in charge
of the situation. In the great majority of cases
a person who receives a bonus issue of shares
is not the person who makes the decision that

there will be a bonus issue. An ordinary holder
of shares in a public listed company normally
has little practical say in whether or not he
will get a bonus issue of shares and the problem
cannot be dealt with by saying, in the type of
case covered by Stewart Bacon, it would not

arise. The problem commonly does arise of a
bonus issue of shares which does not comply with
the requirements of section 44(2)(b)(iii) or
section 44(2). It in fact arose in JOHN's case.
Now, of course, the proposition that a bonus

issue of shares simply involves a relocation of the value of the shares is equally valid in the case of a bonus issue that satisfies 44(2)(b)(iii)
and in the case of a bonus issue that does not
satisfy 44(2)(b)(iii). But in the case of a
bonus issue that does not satisfy 44(2)(b)(iii)

there is assessable income which has to be taken
into account in some way and unless it is treated
as the cost of the bonus shares, then you get,
in a sense, an equal and opposite result in favour
of the Commissioner to that which operated in

favour of the taxpayer in CURRAN. The other
point that was not addressed by Mr Justice Stephen
but that had to be addressed by the legislature
was this: the typical case of a dividend stripper
is one where the dividend stripper is a corporation
in whose hands dividends are rebateable under

section 46. So that he does not mind that the

dividend satisfied by the issue of bonus shares
is assessable income - "he" I should say "it" - is

entitled to a rebate under section 46. So that
is a problem that also had to be dealt with by
the legislature and is not addressed by
Mr Justice Stephen. Perhaps I should take Your Honours
tothe legislation that dealt with the problem that
was exposed in CURRAN's case. It is in section 6BA.
CURRAN's case was decided in 1974 and the
legislation was amended in 1979 retrospective to

a time in 1978. The evident explanation of how
this case arises before Your Honours is that there
were numerous taxpayers who did not find it easy
to accept that the logic of CURRAN's case was that
the Tax Comnissioner or the TAX ACT contained a
special benefit that was only intended to operate in
favour of stockbrokers. But that is the way the

ClT9/l/SR	11	2/6/88
John(2)

law stood for some four years after the decision
in CURRAN's case and then it was amended and

section 6BA was introduced. And the scheme of
section 6BA, which is slightly complicated is as
follows. Section 6BA(2) provides that:
Subject to subsections (4), (5) and (6),
no part of the relevant amount -

which is defined in subsection (1):
an amount ..... payable to a taxpayer ..... in
respect of shares ..... in the company -

which is applied in payment up of bonus shares:

no part of the relevant amount that
is applied by the company in payment
or part payment of the moneys payable
by the taxpayer in respect of the
bonus shares or the liability of the
company to pay which is otherwise
satisfied by the issue of the bonus
shares shall be treated as being an
amount paid or payable by the taxpayer
in respect of the bonus shares or as .....
constituting any part of the cost to
the taxpayer of the bonus shares.
And then subsection (3) strengthens that by
empowering apportionment.
(Continued on page 13)

ClT9/2/SR 12 2/6/88
John(2)

MR GLEESON (continuing): But then the qualification to
that is in 6BA(4). The effect of (a), (b) and (c)
could broadly be described as being that they
refer to taxpayers other than companies which
are entitled to a section 46 rebate.
So that if you have a taxpayer which is

no t a c om pan y en t i t 1 e d to a s e c t i on 4 6 re b a t e , then
subsection (2) does not apply in relation to any
part of the relevant amount that is included in

the assessable income of the taxpayer. So that if
you have a bonus issue of shares where the dividend
applied in paying out the bonus shares forms part
of the assessable income of the taxpayer and the
taxpayer is not a company which is entitled to
a section 46 rebate, then you do treat that as

part of the cost of the shares. So that the
accounting method used in CURRAN's case either
applies, or does not apply, depending on whether
or not the bonus share issue gave rise to
assessable income. But then there was, of course,
need for a further qualification in the case of
a company entitled to a section 46 rebate and
that further qualification appears in 6BA(5).
Now, Your Honours, the primary facts that

gave rise to the liti7ation in the present case were that CURRAN s case was decided in 1974.
There was, for a period of years after that, no
legislation overcoming its effect, and a number
of taxpayers formed a partnership to engage in

the business of share dealing. The reason they
wanted to engage in the business of share dealing
was primarily so that they could obtain the
tax benefit to which Mr Curran had been entitled.
The partnership agreement - and by the way, there

was no finding, and for that matter, may I say, no suggestion that the partnership agreement or
arrangement was a sham.

The partnership agreement is at page 284 in

volume 2 of the appeal papers. The partnership
agremeent recites that the partners have agreed to enter
into partnership in the business of traders in
shares. Perhaps I should pause to emphasize that
in New South Wales, by definition, a partnership
is an association of people who carry on business

in common with a view to profit. They agreed to
enter into a partnership in the business of traders
in shares and in clause 1 of the partnership
agreement it was said that:
The business of the partnership shall be that
of traders in shares -

The partnership had no other business or purpose
than that described in clause 1. In clause 4
the·initial capital of the partnership was
$100,000, and that is the amount that they

CITl0/1/JM 13 2/6/88
John(2)
contributed to the capital. In clause 13 they

provided for a management committee. The evidence
was that that management committee met - I am not
sure whether it is twice a week, or once every two
weeks during the year of income and once a month
thereafter. In clause 18 there was an obligation
on the management committee to prepare accounts.

The evidence was that the partnership

engaged a Mr McNeil to advise and direct its
operations of buying and selling shares and that
he was paid a fixed amount of money and a
percentage of profits.

(Continued on page 15)

CITl0/2/Jm 14 2/6/88
John(2)

MR GLEESON (continuing): Mr Justice Yeldham found the
primary facts and made his conclusion of ultimate
fact at pages 584 to 586, and if I can take
Your Honours to that in volume III of the appeal book.
On page 584 at line 18 His Honour said:
However, I have come to the conclusion
that the appellant has established that
the partnership was, between mid-April 1977
and 30th June, 1977, engaged in the business
of share trading. The authorities which I
consider give most adequate guidance to the
test to be applied are those which I mentioned
in GRANT's case -

now, they are the ones that we refer to in paragraph 3
of our outline of argument.
It is, of course, crucial to bear in mind

that the expenditure incurred in purchasing
the relevant shares was not made individually
by the appellant but by the partnership of which she was a member. The share trading activities engaged in by such partnership
during the period in question were regular,
extensive and systematic. They were managed
by a sub-committee which appointed Mr McNeill
to advise and implement decisions made
concerning the purchase and sale of shares,
he and his company being renumerated as earlier

set out earlier. Such sub-committee met

regularly, and two firms of stockbrokers
acted on behalf of the partnership. The total
initial capital of the latter, contributed
by its members, was $100,000. During the
year ended 30th June, 1977 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 $74,699.00. In my opinion the proper
inference is that it was the intention of the

members of the partnership that the latter
should if possible make profits.

May I pause there to say that finding of fact was
accepted in the Full Court of the Federal Court~ The only "loss" which it set out to make was
a "tax loss" arising from its dealings in the
shares in the Compinge companies although,
in fact, it made a commercial profit from
these and in respect of that the Commissioner
made assessments under s.26AAA. There is no
doubt that the members of the partnership were
primarily motivated to enter into it by a
desire to take advantage of the decision in
CURRA.N's case which in turn involved engaging

ClTll/1/HS 15 2/6/88
John(2)
in transactions that created a "tax loss".
They entered into a written partnership agreement, which I am satisfied was not a sham and which described share trading
as the business of the partnership. It is,
in my view, irrelevant that the appellant
herself did not have any active personal
involvement in the share trading activities

of the partnership. She contributed capital
and is entitled to her share of any advantages.
The purchases and sales of shares were central
to the business activities of the partnership
and fell within the scope of its business as
defined in the relevant agreement. In my
opinion, for reasons set out in some of the
cases to which I referred in GRANT -

and there principally INVESTMENT & MERCHANT FINANCE
and PATCORP -

the fact that the partners were motivated
(as they undoubtedly were) to carry on the
business of buying and selling shares by a
desire to obtain a tax benefit or advantage

is of little or no relevance. The fact that
the appellant, and indeed the partners collectively,
sought a tax advantage does not preclude them
from relying upon s.51(1) to obtain an allowable

deduction. If authority is needed for this
proposition it may be derived from CURRAN's
case. I have no difficulty in concluding,
as I do, that at the relevant time the partnership
of which the appellant was a member was engaged
in the business of share trading.
Now, the only difference between Mr Justice Yeldham
and the Full Court was a difference relating to the
significance of the fact that Mr Justice Yeldham
regarded, on the basis of the decisions of the
the High Court, as of being of little or no relevance.
I will mention in passing, without going to the

detail of it, the following references; the share trading account for the year appears on
pages 10 to 11, there is some evidence at page 77
of Mr Mitchell, the accountant, and the taxpayer at
page 279, line 15, concerning the purpose of making

profits. That was obviously accepted by the Chief Judge
where, at page 616, in the Federal Court, His Honour
said as _follows, at the top of the page:
The share trading activities were managed by
the sub-committee of· the partnership and a
Mr Peter McNeill, an experienced share trading
manager, was engaged on a retainer and a
share of the profits to assist. The sub-committee
met, on an average, twice a week during the year

of income. Two firms of sharebrokers acted

ClTll/2/HS 16 2/6/88
John(2)
on behalf of the partnership. It is true
that one aim of the partnership was to engage
in sufficient activity to be classed as a share trading business and to attract the operation of s.44(2) of the Act and the
benefit of the CURRAN case but it was also an
objective, according to the evidence of the
witnesses, that it be conducted with a view

to connnercial profit. The trial Judge
accepted the evidence of the witnesses and it
was not directly put to any of these witnesses
that the apparent share trading was really
designed to produce an "illusion" and that
there was in fact no share trading business.
In the result, as I have said, his Honour

concluded there was a share trading business
and that the Compinge transactions formed
part of that business.
Now, the reason why the Chief Judge departed from the conclusion of the trial judge appears from the
conclusion in his judgment at pages 621 to 622.
Connnencing at page 621, line 20, His Honour said:

(Continued on page 19)

C2Tl2/l/HS 17/18 2/6/88
John(2)
MR GLEESON (continuing):
In my opinion, it is necessary to look
at the whole of the circumstances of the
case when determining whether the Compinge
transactions were carried out in the course

of a business of trading in shares. For
myself, looking at the whole of the circumstances
I am unable to conclude that the Compinge
transactions were part of a business of
trading in shares. Indeed, to so hold would,
to my mind, be contrary to ordinary concepts
of business. These transactions were not
something occurring in a long-standing business

of share dealing. The pre-arranged transaction -

I will come back to the meaning of that expression -
concerning the Compinge companies was promptly
carried out in April 1977 after the entry
into the partnership on the 14th April, 1977.
It constituted fons et origo of all that
occurred. In my opinion, the partnership
transactions relating to the Compinge companies
were not transactions in the course of a
business of dealing in shares.

When His Honour refers, on page 621 line 20,
to "the whole of the circumstances", he is not
referring to anything additional to the circumstances

referred to by Mr Justice Yeldham. What he is
doing is treating as the determinative circumstance
the circumstance relating to the motive of the
Compinge transaction.

It is not clear, with respect, from

His Honour's reasons whether he was holding
that the Malindi Trading Company did not carry
on a business of dealing in shares or whether
His Honour held that it did carry on a business

of dealing in shares but the Compinge transaction
was not part of a business of dealing in shares.

BRENNAN J: Why do you say that he regarded motive as the
sole determinative factor?

MR GLEESON: Because that is the only difference. There
is no difference between the circumstances that
Mr Justice Yeldham looked at and the circumstances
that the Chief Judge looked at. He did not find
some additional fact that had not been mentioned
or referred to by Mr Justice Yeldham. He was
prepared to take alf the primary facts as found
by Mr Justice Yeld:ham ·but then· he emphasized
one of them.

ClT13/l/SDL 19 2/6/88
John(2)
BRENNAN J: That does not mean that that is the only factor
that is relevant, does it?

MR GLEESON: No, I am sorry. I had not intended to create

that impression. I mean he regarded it as determinative,
critical. Mr Justice Yeldham said that is of
little or no relevance and the Federal Court
said that is critical, that is determinative.
I do not mean by that to say they shut their
eyes to the other facts but the point I am concerned
to make is that it is not that they discovered
some fact or referred to some fact that
Mr Justice Yeldham was not looking at himself.
If the Chief Judge was holding that the

Malindi Trading Company did carry on a business of dealing in shares but simply the Compinge
transaction was not part of that business, that
does not seem easy to reconcile with the proposition
that the Compinge transaction was fons et origo
of all the share-trading activities, or share-
dealing acitivies.
It is fairly clear that Mr Justice Fox took the narrower of those two possible approaches.
His Honour's reasons begin on page 623 and, at
page 626, he stated the two questions, at line 17.
(Continued on page 21)

C1Tl3/2/SDL 20 2/6/88
John(2)
MR GLEESON (continuing):
The question raised seems to me to be one of
fact: was the partnership of which Mrs John
was a member engaged in the business of share
dealing at the relevant time, or, was.the particular transaction part of a business of dealing in shares. The question can be
stated in a number of slightly different ways,
but in the end must satisfy the tests in s.51.
It is submitted on behalf of the Commissioner
that the loss was incurred in a distinct and
separate loss-producing operation.-
Now, just pausing there, that seems to be an argument
that it stood outside a business of share trading.
Of course, it was not a loss producing operation
commercially, it was an operation that produced

a small commercial profit. So the reference there
to "loss" or "loss-producing" must be to a tax loss - which went to reduce the taxable income received
from a different source, or sources. In
CURRAN, these questions did not arise for
decision. It is difficult to see any answer
to the Commissioner's submission -

and that must be the one that His Honour is referring

to on line 24. He says:
A painless taxation loss, not profit, was the
motive.

He says that at line 10 of page 627. At line 14
he says:
it was a unique activity distinctly outside
the mainstream of the alleged business.

He says:

the purpose of the transaction -

that must be the Compinge transaction -

was to obtain an income tax advantage,
and apart from any tax advantage, there
was a loss.

Now, that is not actually correct. Apart from the
tax advantage there was a profit but it was not

a big profit. So that it seems fairly clear that
the reasoning of Mr Justice Fox was that the
Compinge transaction was not part of what he might
otherwise have been prepared to accept as a business
of dealing in shares and the reason why it was not
part of such a business was because of the motive
with·which it was undertaken, which was to obtain
an income tax advantage.

ClT14/l/MB 21 2/6/88
John(2)

BRENNAN J:	Mr Gleeson, is the ultimate question which you have to address this: whether the money that was
applied to the paying up of the bonus shares was an expenditure necessarily incurred in carrying on a business for the purpose of gain?
MR GLEESON:	Yes, that is one way of formulating the question, yes, Your Honour.

BRENNAN J: Is that the only way?

MR GLEESON:

Another way of formulating the question is

whether or not the Compinge shares were trading
stock.

BRENNAN J: That is the receipt of the Compinge shares themselves?

MR GLEESON:

Yes.

That is the way Mr Justice Gibbs would

formulate the question, I suspect, Your Honour.

BRENNAN J:

Yes.

So then one does not look at the receipt

of the dividend it supplied to the payment up of
the shares, one looks simply at the shares themselves
as the income?

MR GLEESON:

Yes.

BRENNAN J: And do you have a preference for one view or

the other?

MR GLEESON:

Well, no, Your Honour.

The point at which we

come to address our argument at the moment is that
we seek to attack the reason which the Federal Court gave and the only reason that the Federal Court gave for displacing the finding of fact made by the
trial judge and we seek to argue that whichever
way precisely it is expressed the only reason that
the Federal Court gave for displacing the finding
of fact made by the trial judge is one that is
inconsistent with the authority of this Court, and

is wrong. (Continued on page 23)

ClT14/2/MB	22	2/6/88
John( 2)

MR GLEESON (continuing): Mr Justice Beaumont, with respect,
like the Chief Judge, did not make it as clear as
Mr Justice Fox did, which of those two alternative

decisions he was making. At pages 651 to 652, however,
His Honour states the issue, as he saw it, with
respect, with crystal clarity. At line 24 of page 651,
he said:
If it were possible to isolate the stock
exchange purchases and sales by divorcing
them from their context as part of a Curran scheme, an inference that the partnership was carrying on the business
of share traders may well have been open. exercise was the decsion in CURRAN, is

that conclusion open here? That is the
principal question.

At pages 659 to 656, at line 24 on 659, His Honour
said:
Gibbs J. was, of course, speaking of income and not of a deduction. But His Honour's
reasoning is relevant here because of his
conclusion
he referred to the Federal Court cases that I will
come to a little later; it really begins at 35 -
This is not to say that the partnership agreement or the Compinge transactions

were shams. The Curran scheme which was
adopted was real and took effect, but, in
my opinion, Mrs John has not established
that the Compinge transactions were embarked
upon as an adventure in the nature of trade. It
would be nrire accurate, in my view, to describe
them as an adventure in the nature of tax
minimization.

Well, I will take Your Honours shortly to some
adventures in the nature of tax minimization that
have come up for decision by this Court. Before I
go to the decisions of the High Court that are
referred to in paragraph 3 of the outline or argument,
I should indicate the course of authority in the
House of Lords in England because it was the subject
of a good deal of discussion in some of the decisions
of this Court.
Before I go to the English cases, however, could
I just stay to mention the issue of principle that
seems to underline a lot of the authorities to which
reference is about to be made, and it relates to this
question of the motive with which people engage in

transactions. The issue has arisen most sharply, as
a matter of history, in the case of dividend stripping
operations which, as I said, are perhaps the best

ClT15/l/VH 23 2/6/88
John(2)
example one can think of, of a transaction which is
engaged in for the purpose of obtaining a fiscal
benefit. But, of course, the issue and the significance
of the issue is by no means limited to that, and that,
of course, is dealt with by amend~ent to the

INCOME TAX ASSESSMENT ACT now. The question is,
what is the relevance to the question whether
particular activities constitute a business of the
motive with which those activities are conducted
and in particular, the fact that the rrotive is a tax benefit.
(Continued on page 25)

ClTlS/2/VH	24	2/6/88
John(2)

MR GLEESON (continuing): There are many businesses of

farming being carried on throughout Australia by people as to whom it could be said that if their motive was to make a profit they would be
displaying extraordinary persistence. A man might be motivated to carry on a business of
farming to please his wife or because he enjoys
working in the open air or because he is not
qualified to do anything else. And there are
some people in Sydney whom we call "Pitt Street
farmers" who are motivated to carry on the
business of farming primarily or soley because
of the tax advantages that it carries with it.
If I could remind the Court of a case of

some primary producers, the university students
in CRIDLAND's case, who paid a few dollars and
became primary producers entitled to average
their income. It does not seem ever to have been
suggested by anybody that they would not be
entitled to deductions under section 51 of the
INCOME TAX ASSESSMENT ACT in respect of the
outgoings of their pastoral activities, because
their motive in becoming primary producers was
to obtain the benefit of the averaging provisions
under the INCOME TAX ASSESSMENT ACT.

DAWSON J: That is a little different, is not it? I mean,

the analogy here would be, if the share trading
operations were carried on to make a loss, but
what is being said here is, "No, no, you can isolate
the particular transaction in question and all
the rest was merely window dressing"?

MR GLEESON: That was not the finding of fact, Your Honour.

It could have been the finding of fact. It could
have been alleged, and found as a fact, that the
rest was an illusion or sham, but that is the
one thing that was not claimed.

DAWSON J: No, window dressing is not a sham, it is real.

But you can take the nature of the business by
saying that that is what it was?

MR GLEESON:

Yes.

Real and being carried on with a view

to profit. Could I take a particular example
where questions of motive and the operation of
section 51A come into sharp relief. There is
in the INCOME TAX ASSESSMENT ACT a division lOBA

relating to investment in Australian films. So
business-like does the legislature regard investment
in Australian films that it gives people a
deduction of 150 per cent of the amount they
invest. Now it is down to 120 per cent. An
interesting reflection of how financially
advantageous it is thought that activity would be
if it were not for the tax benefit that

accompanies it. Suppose a person regularly and

C1Tl6/l/SR	25	2/6/88
John(2)

systematically invested in Australian films, in
a situation where it was obvious that he was
motivated by a desire to obtain the benefit of
the concessional deduction allowed by section lOBA
and suppose that person borrowed from his bank
money to make that investment and paid interest

to the bank. Would he be entitled to a deduction
for the interest under section 51(1)?

We would respectfully submit the answer

to that question is, yes. And the answer to the
question would be yes whether his motive for
investing in Australian films was to get the tax
benefit, conferred by division lOBA, or because
he was a patron of the arts. It would not make

any difference. And that issue of the relevance
of motive is one that has arisen for determination
by the House of Lords and for determination by
this Court on many occasions and has been
consistently, as we respectfully submit in this
Court, determined in the manner for which we
contend.

(Continued on page 27)

ClT16/2/SR	26	2/6/88
John(2)

MR GLEESON (continuing): It arose first in England in
the context of dividend stripping in the case
of GRIFFITHS VJ P HARRISON (WATFORD) LTD in
(1963) AC 1. If I could take Your Honours first
to the headnote:
In 1952-53 the respondent company

sustained in carrying out its mercantile
business a loss which was available to be
carried forward under section 341 of the
INCOME TAX ACT, 1952. In 1953 it added to
its objects that of dealing in shares, and
then bought for £16,900 all the issued
shares in C. Ltd., which had ceased trading
but had .funds available for distribution as dividends. In January, 1954, C. Ltd.
declared a net dividend of £15,901 19s. 3d.
which the respondent company received. The
respondent company then sold the shares in C. Ltd. for their nominal value of £1,000,
that being the sole share-dealing transaction
carried out by it in 1953-54.

And, I might say, the first.
It claimed to be entitled to set the loss of £15,900 against the net dividend of
£15,901 19s. 3. and to rebate to tax on
the dividend: -
Held (Lord Reid and Lord Denning

dissenting), that this was a trading transaction
carried out by the respondent company in
the course of carrying on its trade and that,
so long as it ws not a sham, it was immaterial
what might be its fiscal result or ulterior
fiscal object.
This is a strong case, because the issue

that arose before the House of Lords was whether

it was possible for the special commissioners to
find as a fact that this was not a trading action
and they held it was not possible.
Now, the majority view is expressed, first

1n the judgment of Viscount Simonds at page 10.
In the first paragraph, His Lordship says:
My Lords, upon an appeal by the company

against the rejection by the inspector of
taxes of its application for relief ..... the
Commissioners for the Special Purposes of the
Income Tax Acts found that a certain transaction
was not entered into by the it as part of any
trade of dealing in shares and was not an
adventure in the nature of trade. . .... the
question of law for the opinion of the court

CIT17/l/JM 27 2/6/88
John(2)
was whether there was evidence on which
they could arrive at their finding.
Then, on the following page, it is said, after the

facts had been summarized:
This, my Lords, is the sum of the evidence
upon which the commissioners determined that
part of any trade of dealing in share or
the company's purchase and sale of the as

an adventure in the nature of trade. As the
commissioners made no other finding than that
which I have mentioned, it must be assumed that
their determination can only have been based
on the facts (1) that the Claiborne transaction
was an isolated one in the year of assessment,
and (2) that the shares were purchased with
a view to obtaining a dividend against which
it could claim to set off its losses.
The first of these reasons, if not formally

abandoned, was not seriously maintained before
your Lordships and appears to me to be quite
unsustainable.
It was the second reason that was urged as justifying the commissioners' determination.
I hope that I do no injustice to the argument
for the Crown if I say that it rested entirely
on the proposition that the essence of a
trading transaction is that its object is to

make a profit and that the found object of
this transaction was the ulterior one of obtaining

a dividend against which it could claim to set
off its losses. This proposition was supported
by the fact that the shares were bought for
£15,900 and sold for £1,000, a transaction which,
thus baldly stated, could not be regarded as

a favourable or even a normal one from the point

of view of a dealer in shares. But, my Lords, attractive as this proposition
is, and attractively as it was advanced by the
then Solicitor-General, it does not convince me.

Here was a canpany whose object it was to
deal in shares. It entered into a commercial
transaction which, though it might be given

an invidious name, contained no element of

impropriety, much less of illegality. I can find

nothing that enables me to say that it is not a
trading transaction and echo the question asked
by the majority in the Court of Appeal: "If

"it is not trade, what is it?" No doubt, many
observations that have been made alio intuitu will
be found to the effect that trade is carried on

with a view to a profit.

CIT17/2/JM	28	2/6/88
John(2)

MR GLEESON (continuing):
But this proposition is not universally
true, nor can it be tested merely by ascertaining
the difference between the purchase price
(or, it may be, the manufacturing cost)
of an article and the selling price of that
article. For a dealer may seek his profit,
if a profit is essential, otherwise than
by an enhanced price upon a resale, as by
a declaration of dividend, a repayment upon
a reduction of capital or upon a liquidation
of the company whose shares he has bought.
It appears to me -
and we underline this sentence -
to be wholly immaterial, so long as the
transaction is not a sham ..... what may be
the fiscal result or the ulterior fiscal
object of the transaction, and since this
can be the only ground upon which the
commissioners could have reached their
determination, I must conclude that it cannot
be upheld.

Lord Morris - - -

BRENNAN J: Is there any justification for that view in authority? Why is it not one of the material facts?

MR GLEESON: I think it is more clearly expressed in
the other members of the majority to whom I come
where I think they say the question is what you

are doing not why you are doing it. They explicitly
reject motive and, of course, they would no doubt
have in mind that there are many forms of business
activity which are carried on for many motives.
I forget what book or film it was in that there

was a medical student who was at the university for a long time because he was a beneficiary
under some will. That did not produce the result
that he was not a university student. His grandmother's
annuity would peter out if he ceased to be an
university student.
I think it is really in Lord Guest that the

point is dealt with most sharply but in, Lord Morris'
reasoning, His Lordship says on page 23 - that
EDWARDS V BAIRSTOW is a case just about the proper
appr?ac~ to findings of fact by the special
comm1ss1oners:

C1Tl8/l/SDL 29 2/6/88
John(2)
It has not been and could not be
suggested that the transaction of the company

in the shares was a sham transaction. The
company bought the shares, received a dividend
and then sold the shares. These facts seem
to me to point firmly to the conclusion
that the transaction was entered into as
part of a trade of dealing in shares or
was an adventure in the nature of trade.

May I pause there to say the fact that the dividend
was tax-exempt was one of the things that made it good business to do it. That is why it was
a smart financial thing to do.
The inherent nature of the transaction suggests
a trading operation. It is said, however,
that the inherent nature of the transaction
becomes altered by virtue of the objective
of the transaction. It is said that the
company embarked upon a dividend-stripping
operation and that accordingly the transaction
should not be regarded as a trading transaction
but as a fiscal transaction.

Now, that is the critical question: is there
a dichotomy? Is there an opposition or a tension
between the idea of a trading transaction and
the idea of a fiscal transaction?

DAWSON J: That does not seem to me to be the question,
really, in this particular case. Here you might
have an established set of trading operations
but here the question seems to be whether the
transaction in question was part of the trading
operations, which were admittedly carried on,
or whether the opposite was the case: whether the trading operations were merely part of this
transaction?

MR GLEESON:

Yes.

Of course, in GRIFFITH's case, which

is much stronger for the Commissioner than our
case, not only had there never been any previous
dealing in shares, there had not even been power
in the company's objects to deal in shares.
(Continued on page 31)

ClT18/2/SDL	30	2/6/88
John(2)

MR GLEESON (continuing): They changed their objects to
give them power to deal in shares and then they
entered into one dividend stripping transaction
and that was it. The question was
whether that isolated first transaction of buying
and selling shares for the purpose of dividend
stripping was a trading transaction.

DAWSON J: Well, I am merely suggesting they may have been
asking the wrong question by concentrating on
motive.

MR GLEESON: Yes. Lord Morris goes on:
My Lords, it seems to me that a trading transaction does not cease to be such
merely because it is entered into in the
confident hope that, under an existing state of
the law, some fiscal advantage will result.
In judging as to the essential nature of
a transaction it will often be relevant and
of assistance to consider the objects and
intentions which are the inspiration of the transaction. In the present case, however,
I cannot think that there is room for doubt
as to the essential nature of the transaction:
it was a transaction which was demonstrably
of a trading nature.
Presumably that was said because it involved the
purchase and sale of shares, it did not involve
anything else. It was:
demonstrably of a trading nature and it was.not
divested of that nature merely because it was
entered into with the expectation that as a
result (but not as part of the trading
activity of the company as such) some tax
recovery might be claimed.

It is doubtless true to say that in general of making a profit: but it cannot be said that

a trader embarks upon trade with the intention

if this intention is lacking there is no

on with the knowledge that losses will result.

carrying on of a trade. A trade may be carried examination of them certain transactions must
be regarded as trading transactions or
adventures in the nature of trade they do
not cease to be such because those conducting
them have embarked upon them with a view to
obtaining some fiscal benefit. It was urged
in the present case that the transaction in the
shares of Claiborne Ltd ought to fail to be
regarded as a trading transaction because
in its real nature it was a fiscal transaction.
My Lords, I cannot regard these as alternative
descriptions. There may be trading transactions

C1Tl9/l/MB 31 2/6/88
John(2)
which can be the prelude, if the state of the
law so allows, to tax-recovery activities. If
tax recovery is possible it is as taxpayers
and not as traders that the recovery is obtained.
The possibility of tax recovery may be a result made possible by the trading activity but I am
unable to accept that if a transaction fairly
judged has in reality and not fictitiously the
features of an adventure in the nature of trade
it must be denied any such description if those
taking part in it had their eyes fixed upon
some fiscal advantage.

Of course, we rely upon the bare facts of that case
which were relied upon as making it demonstrably

an adventure in the nature of trade. Then Lord Guest,
the other member of the majority, at page 25, said
in the middle of the page:
The finding of the commissioners cannot be
disturbed unless it was arrived at upon a view of
the facts which could not reasonably be
entertained.

And then there is reference to EDWARDS V BAIRSTOW.

I therefore proceed to examine the grounds
put forward by the Crown for supporting the

decision of the commissioners. At one stage it was
suggested that because this was an isolated
transaction, the company could m.o.t be said to

be trading. The Solicitor-General, however, did
not suggest that this by itself was a ground
upon which trading in this case could be

negatived. No doubt if the respondent had
been a private individual this might have
been a cogent reason, although there are many
cases where an isolated transaction has been

held to amount to trading. But where the company

has power under its memorandum of association
to indulge in a particular activity, and the
transaction contains otherwise all the indicia
of trading in that line of business, the fact
that it was an isolated transaction is, in my
opinion, nihil ad rem. In any event, regard
must be had to the subsequent dealings in shares
by this company, and so viewed, this was
not an isolated transaction, but one of many.

(Continued on page 33)

ClT19/2/MB	32	2/6/88
John(2)

MR GLEESON (continuing):
It was argued for the Crown that as the
objective of trading was in general the
making of a profit a transaction which was
aimed at making a loss with a view to a
fiscal advantage could not in any circumstances

amount to trading. The fallacy underlying
the Crown's argument is, in my view, the confusion of the trading activities of a concern with the result of these activities.
An individual or a company can conduct
their business in the most extravagant way,
they can conduct it with the certainty of

making a loss. But the Revenue is not
concerned with the particular method of
trading: they are only concerned with the
results of the business. If there are profits
or gains and the business is a trade then
income tax is payable. If there are losses
relief is available under section 341. It was also

argued for the Crown that recovery of tax
was not part of the trading activities of a
company and that, therefore, tax repaid was
not part of the profits of a trade. I agree. Neither payment of tax nor recovery of tax is part of the trading activities of a company, they
are the results which the law imposes on the

trade. A number of citations from cases were
quoted in order to show that to ascertain whether
there was trading it was relevant to look at the
object, result or intention of the activity: .....
No doubt if it is established that a transaction
is entered into with the evident intention of
making a profit, that may be a strong indication
that the company was trading. But the corollary
by no means follows that the absence of an
intention to make a profit or the intention to
make a profit or the intention to make a loss
negatives trading. The test is an objective

one. The question to be asked is not quo animo
was the transaction entered into but what was in fact

done by the company ..... I therefore conclude
that neither the fact that the company intended
to make a loss nor the fact that the company
intended to make a fiscal advantage out of the
transaction negatives trading.
In my opinion one has to look at the

transaction by itself irrespective of the object,
irrespective of the fiscal consequences,
and ask the question in Lord President Clyde's
words in LIVINGSTON; "whether the operations
involved in it are of the same kind, and
carried on in the same way, as those which are
characteristic of ordinary trading in the line
of business in which the venture was made."

ClT20/l/VH 33 2/6/88
John(2)
The company had power to deal in shares, they bought shares, they received a dividend on
these shares, they sold the shares. This
was just the ordinary conunercial transaction

of a dealer in shares. I ask myself the question
put by Lord Radcliffe in EDWARDS V BAIRSTOW;
"What detail does it lack that prevents it
being an adventure in the nature of trade, or
what element is present in it that makes it
capable of being aptly described as anything else?"
What it is if it is not trade? In my view
the transaction in question was an adventure in the nature of trade and the conunissioners
had no grounds upon which they could hold
that it was not.

WILSON J:

Mr Gleeson, I must have misunderstood an earlier

remark of yours: I tmught you said Griffiths
was stronger for the Conunissioner in the present
case, because it was a one-off transaction.

MR GLEESON:

Yes.

As a dividend stripping transaction it was.

WILSON J:	Yes -
MR GLEESON:	There were no other dividend stripping transactions.

WILSON J: Lord Guest refers to it - it was not an isolated

transaction but one of many.

MR GLEESON:

Yes.

It was an isolated transaction in the

year of income, Your. Honour, and in subsequent
years of income the company bought and sold shares.
There was not any suggestion that there were other
dividend stripping transactions.

WILSON J:	Yes.
MASON CJ:	Before you leave it, the minority took the view

that it was a question of fact and degree, and that

in determining it, it was relevant to have regard to
motive or objective.

MR GLEESON:

Yes, and additionally, Your Honour, that there

was an opposition between a fiscal motive and a
business motive.
(Continued on page 35)

ClT20/2/VH	34	2/6/88
John(2)

MASON CJ: Yes.
MR GLEESON: Now, the minority view was the view that was
repeatedly urged upon this Court in some of the
cases to which I am about to come, but if I could
mention the history of the minority view before
coming to the way the English cases were dealt

with by this Court. The minority view was that of

Lord Reid and Lord Denning. The actual decision,
or GRIFFITHS V HARRISON, was applied in the case of
JOHNS V WIRSAL SECURITIES LTD, to which I will not take Your Honours, (1966) 1 WLR 462. The minority
view in HARRISON ultimately prevailed in England
and was established in two decisions of the
House of Lords, LUPTON VF.A. & A.B. LTD, (1972)
AC 634, and THOMPSON V GURNEVILLE SECURITIES LTD,
(1972) AC 661. May I take Your Honours to those
cases because one interesting aspect of them is the
way in which GRIFFITHS V HARRISON was dealt with by
those members of the House of Lords in the later
two cases who formed part of the majority in
GRIFFITHS V HARRISON.
Without going to the detail of the reasoning

in these cases, because what may be at least as
important as what the High Court has said about them -
it is fair to say that Lord Morris and Lord Guest
in LUPTON, and in THOMPSON V GURNEVILLE, distinguished
GRIFFITHS V HARRISON, and the other members of the
House of Lords appear to have thought that the
approach taken by the majority in GRIFFITHS V

HARRISON was wrong. The ground upon which Lord Morris
and Lord Guest distinguished GRIFFITHS V HARRISON
is interesting because of the overtones that it has,
or the familiar ring that it has to ears accustomed
to hear argument about section 260.
In order to explain the ground I should mention

an ~spect of dividend stripping transactions in
England which differ from dividend stripping

transactions in Australia. The objective of a
dividend stripping transaction in England is actually

to get money back from the revenue. The system in
England is that the company which declares dividends
pays to the revenue an amount of tax referable to
those dividends - I am not sure of the detail of
this, but it sounds a little like the system of
dividend imputation, or franking that we now, in
recent times, have in Australia - and the objective
of a dividend stripping transaction in England was
for the dividend stripper to become entitled to claim
on the revenue the repayment of the amount that had
been paid in respect of the dividend, because the
dividend stripper would incur a loss on his dealing
in the shares, the amount for which he would sell
them ex-dividend being less than what he paid for
them cum-dividend.

ClT21/l/HS 35 2/6/88
John(2)
The basis upon which Lord Morris and Lord Guest
in LUPTON and THOMPSON distinguished GRIFFITHS V
HARRISON was that, on the face of the contract of
purchase of shares, there was an arrangement for
sharing between the vendor and the purchaser of
the money recovered from the revenue.

(Continued on page 37)

ClT21/2/HS 36 2/6/88
John(2)

MR GLEESON (continuing):

They then said, "This is

different from GRIFFITHS VJ P HARRISON, because
here on the face of the transaction itself, the
transaction was a joint venture between the
vendor and the purchaser to obtain money to
actually make a claim for money from the
revenue." It sounds very much like cases that
say, 'You must take an objective approach to
the transaction, do not worry about the motives
of individuals, but if ex facie you can see on
the transaction the revenue consequence or
activity involved,that produces the result that
section 260 applies". So the way in which
Their Lordships reconciled their view that the motive of the taxpayer was irrelevant in
GRIFFITHS VJ P HARRISON, with their view that
the revenue should succeed in LUPTON and in
THOMSON V GURNEVILLE, sounds very much like the
distinction that has been drawn in this country
in relation to the difference between the objective
purpose of an arrangement and the subjective

motive of the taxpayer. But what may be more
important about those cases is what was said and
done in relation to them in this Court. If
I could go first to the decision of ROWDELL,
101 CLR 106. If I could go to the headnote first.
This was the obverse of HANCOCK's case. This was
the company which had been the dividend stripper in HANCOCK's case, to which section 260 had been held to apply being sought to be made liable to
tax in relation to the dividend stripping operation.
The headnote says:
The appellant, a resident company

dealing in shares, purchased the shares
of certain other companies having
accumulated profits which, if distributed
by way of dividend amongst their
shareholders, would, subject to the
INCOME TAX ASSESSMENT ACT 1936-1949 and
sections 44(2)(b)(ii), 46 ..... attract

tax in their hands. It acquired the
shares at a price approximating the value of the companies' assets less ten per cent.

:MASON CJ:	I think you have given us the wrong volume?
MR GLEESON:	I am sorry, 111 CLR 106, Your Honour.
WILSON J:	We had a 101.

MR GLEESON:

I am sorry.

The dividend stripping company

could get the benefit of sections 44(2)(b)(iii)
and 46:
It acquired the shares at a price
approximating the value of the companies'

ClT22/l/SR	37	2/6/88
John(2)

assets less ten per cent. The companies
were then stripped of the whole or a
great part of their accumulated profits
by means of declarations of dividends
or distributions in liquidation or both,
and the shares were resold if the company
was not in liquidation or, if it was,
the appellant participated in a
liquidator's distribution of capital.
The arrangements for the purchase of
the shares was rendered void as against
the Corrnnissioner ..... by section 260 ..... so
far as the vendor shareholders were
concerned, in that they had the purpose
or effect of avoiding the liability to
tax which the vendor shareholders would
have incurred had they received, whilst
holding the shares, the profits which
in the event were distributed to the
appellant. Relying upon the effect of
the operation of section 260 upon the
vendor shareholders' liability to tax,
the Corrnnissioner, in assessing the
appellant, sought to apply section 260
so as to treat the appellant as having
obtained not dividends subject to
exemption from or rebate of tax, but
other income of a taxable character by
virute of the acquisition of the shares.
Held that section 260 did not apply because the
arrangements did not have, or did not purport
to have the purpose or effect of avoiding the
appellant's liability to tax. In argument
GRIFFITHS V HARRISON was referred to at page 113,
Mr Burt who was appearing for the taxpayer,
a little over half-way down page 113, said:
It makes not one iota of difference from the taxing point of view whether

the transactions were entered into
with the expectation of making a

loss in one sense, but with an eye to - and this must be a misprint, fiscal -
~dvantage in another, or not.

He referred to GRIFFITHS V HARRISON.

(Continued on page 39)

ClT22/2/SR	38	2/6/88
John(2)

MR GLEESON (continuing): At pages 114 to 115, in the
argument of Mr Seaton for the Commissioner -
at the bottom of page 114 it is submitted:
The basic conception in the 1951 assessments is that this was not a case for mere share purchase. It is not a case of a share dealer

going along and buying shares on which
a dividend is accruing, or profits are accruing
which subsequuently result in a dividend
being declared. This was a case where the
share dealer entered into a contract to
purchase the shares, the terms of the arrangement
being that the figures having been examined
and investigated, certain dividends were
to be declared, and the purchase price was
ascertained according to the result of the
examination of the accounts, the taxpayer
seeking only a commission or profit of
approximatley ten per cent. The effect
of the arrangement, in fact the purpose
of it, was not only to relieve a person
from liability to tax, it also altered the
incident of tax. There being admittedly
an arrangement which came within the purview
of s.26O and Rowdell being a party to it
in the full sense qua Rowdell the Commissioner
is entitled to treat that arrangement ..... as
being void against him. The whole intention
and result of the arrangement was that certain
moneys should pass through Rowdell's hands
and they should be dispersed in a certain
way leaving a certain sum in Rowdell's hands
as a profit. As a profit it is income;
in other words from Rowdell's point of view

it is a profit-making proposition. They
are using their established position as
a share dealer to cover the transaction
so as to allow it to appear that this was
an ordinary case of buying and selling shares

by a share dealer. Consequently insofar
as it was concerned it would coincidentally
get the benefit of any exemptions or rebates
attaching to any of the moneys it received.
But in fact the substance of the transaction
as between the parties was that certain
moneys should pass through Rowdell's hands
in a certain way and should be disbursed
in a certain way leaving Rowdell ultimately
with its profit. These transactions were
not in the ordinary course of dealing of

a share dealer. The ordinary business of
a share dealer is to buy shares with a view
to reselling them at a profit. Here there
was no such intention so far as the shares
themselves were concerned.

ClT23/l/SDL 39 2/6/88
John(2)
Contrary to some observations made in the Federal
Court, we seek to emphasize that this was an
issue that was squarely raised, time and again,

in this line of cases in the High Court. The
Chief Justice, at page 117, first of all,
said why section 260 did not apply and that is
perhaps not particularly relevant in our submissions

in-chief. At page 118 to page 119, His Honour
said:
The true point of the present case
1s whether a deduction to which the appellant
is entitled should be thrown against these

dividends. As has been stated already,
the appellant company carried on the business
of dealing in stocks and shares and securities.
When the appellant company bought the shares
in a company from its shareholders what
it paid to the shareholders, although calculated
at, e.g. assets value less ten per cent
(that is without regard to or apart from
any possible operation of s.260), came to
the shareholders as capital and was therefore

free of tax. But the taxpayer company paid
for the shares a sum of money which would
form an outgoing under s.51 in its business
of trafficking in stocks and shares.

I pause there to say, provided you reject Mr Seaton's
argument.
If it received a dividend prima facie
taxable and did so subsequent to the operation
of s.44(2)(b)(ii), s.46 or s.107 as the
case may be, any balance forming a taxable
income would prima facie be subject to rebates
or exemption. It must be remembered that
in speaking of dividends there must be included
for the purpose of this case distributions
to shareholders of a company by a liquidator

in the course of -

I pass over that.
Now in making these purchases, whether of shares in liquidation or of shares in a
company not yet the subject of a winding
up order or resolution, the appellant company
may be taken to have contemplated incurring
a loss consisting of the excess of the amount
paid to the shareholders of the· companies
over the amount eventually received as capital
for the shares, but by reason of its purchases
the appellant would also receive dividends
which it was expected would not be taxable
at all in the case falling under s.44(2)(b)(ii)

ClT23/2/SDL 40 2/6/88

John(2) (Continued on page 40A)
and would be subject to rebates in the
other cases ..... When one speaks of the appellant
company contemplating the incurring of a
loss no more can be meant than that the
outlay for the purposes of s.51 was for
the purpose of obtaining assets to yield
dividends, together with further sums
representing the capital of the shares,

and it was known that these further sums
would be insufficient to recoup the outgoing;
but it was still an outgoing.

(Continued on page 41)

ClT23/3/SDL 40A 2/6/88
John(2)

MR GLEESON (continuing):

I pause there to say for that to

be relevant it must mean an outgoing in the carrying
on of a business.

BRENNAN J:

But the business is then assumed to be, in which

it is an outgoing, it is assumed to be a business for
the purpose of gaining or producing such income.
That is a proposition which seems to me to be, perhaps, at the heart of these problems.

MR GLEESON:

It is also, of course, Your Honour, obviously,

a business that includes the particular transaction
in question.

BRENNAN J:

Yes. Therefore, if you describe the business by

reference to its purpose and you find a transaction
which lacks that purpose, then the question arises
whether it is a transaction in that business.

MR GLEESON:

Of course, the point is that a transaction does

not lack that purpose simply because, or is not in
any way deprived of that purpose, simply because
the motive of the taxpayer in entering into it - - -

BRENNAN J:	No, not simply because of it, no.
MR GLEESON:	Well, or at all, because the motive of the taxpayer

in entering into it is to get a fiscal benefit.
The motive of the taxpayer in ROWDELL was to get a fiscal benefit, as in GRIFFITHS V HARRISON.
It therefore seems correct to regard each
payment of the purchase price of shares as an
outgoing within s.51 and as a debit in a company
trading in shares etc., appropriate to be taken
into what may be called the profit and loss
account. Dividends would be credits resulting
wherever there is an assessment for tax in a
rebate under ss. 46 or 107, and of course an

exemption from tax in the case under s.44(2)(b)(ii).
The Commissioner, however, if he had his way,
would reduce the appellant's exempt and rebateable
dividends by apportioning the one outgoing, viz.
the cost of the shares or the loss, pro rata against
the dividends. For this there is no justification.

And at page 125 in the middle of the page
Mr Justice Kitto, in one paragraph, says:
Anticipating this conclusion, counsel for the
Commissioner submitted that the section -

that is 260 -
applies to each of the relevant transactions
not only as being a means for avoiding a tax
.liability on the part of the vendor-shareholders
but also as being a means for avoiding a tax

C2T24/l/MB	41	2/6/88
John(2)

liability on the part of ROWDELL. As to this,
no more need be said than that tax-avoidance
on the part of ROWDELL was clearly not within
either the purpose or effect of the transactions.
No doubt among the considerations which led
ROWDELL to enter into the transactions was the considerations that its tax liability
resulting from the transactions would be
reduced by the application of ss.44(2), 46
and 107 ..... but it is impossible to point to any
tax liability which ROWDELL would have incurred
if the arrangement had never been made and for
the avoidance of which the arrangement was a
concerted means.
And at page 131 Mr Justice Menzies, a little over
half-way down page 131 said:
These amendments were supported by reliance upon s.260 and no case was made by the
Commissioner that, independently of this section,
the taxpayer's purchases of shares ripe to
yield dividends were otherwise than genuine
transactions for all purposes. In very general
terms, what the taxpayer did during all the
years in question was to seek out companies with
substantial profits available for immediate
distribution and whether or not in the course of
liquidation ani offer to purchase shares at a

price somwhat below asset value from holders who
would be taxable upon distributions as

dividends. Such purchases themselves would afford
the taxpayer the virtual certainty of profit
because before it purchased it could calculate
that it would receive by way of capital returns
either on liquidation of the company or upon a
resale of the shares and by the receipt of non-
taxable or rebateable devidends the equivalent
of the asset value of the shares without tax

deduction - that is, it would receive free of
tax more than it paid.
(Continued on page 43)

C2T24/2/MB 42 2/6/88
John( 2)
MR GLEESON (continuing):
There was for the further advantage that,
being a share dealer, any loss made upon
the realization of the shares would be taken
into account in the calculation of its

taxable income. For the prospective
vendors the inducement was that instead of
receiving taxable dividends, they would
receive in the character of purchase money
a capital sum enhanced -
That account by Mr Justice Menzies of the business
purpose of the transaction seems to include the
tax benefit as part of the business purpose.
Now, in the case of INVESTMENT & MERCHANT FINANCE
CORPORATION V THE COMMISSIONER OF TAXATION, 125 CLR 249,
the High Court was invited to adopt the approach of
the House of Lords in LUPTON, that is to say
the High Court was adopted to prefer the minority
view in GRIFFITHS V HARRISON, and indeed,
Mr Justice McTiernan, in dissent in this case, and again in PATCORP, specifically based his decision
upon the minority approach in GRIFFITHS V HARRISON
which had, by that time, commanded a majority in the

House of Lords. The headnote in this case,
125 CLR 249, reads:
In October 1963 the taxpayer company, a
dealer in shares, bought certain shares for
86,503.17.0 pounds with the intention of
causing a dividend to be declared and of then

selling them. In November 1963 it received
a dividend of 81,900 pounds and in December
1964 the shares were sold for 21 pounds.
In relation to the year of income ..... the
taxpayer claimed a rebate of tax in respect
of the dividend under s.46 ..... and was allowed

the rebate it claimed; but in relation to the
next year of income its claim under the

INCOME TAX ASSESSMENT ACT to be entitled to
a deduction of 86,483 pounds -

the difference between what it paid for the shares
and what it sold them for -
was disallowed -

and the taxpayer allowed a deduction of only a much
lesser sum, and there was an appeal from that, and

held: the majority, with Mr Justice McTiernan in dissent,
That the shares were trading stock ..... even
though the taxpayer had not so treated them
in its return, and even though they had been

C1T25/1/HS 43 2/6/88
John(2)
acquired for the purposes of a dividend-

stripping operation. Their value at cost
should have been taken into account as at
the commencement of the year of income
ended 30th June 1965, and their sale price
should have been taken into account on their
subsequent sale, with the consequence that
the taxpayer was in effect entitled to a
deduction equal to the difference between these
amounts. It was irrelevant for these purposes
that a dividend had been received in the
immediately preceding year of income or that
a rebate of tax had been allowed in respect
of that dividend.
In argument the Solicitor-General, Mr Ellicott,

at page 253, raised the issue squarely. About a
third of the way down page 253 he submitted:
The purchase and sale of the material shares
was not part of an activity of trading in
shares; indeed, there was no intention to

make a profit from, the sale. There was
merely an intention of obtaining a dividend
and then of disposing of the worthless shell
of the company.

(Continued on page 45)

ClT25/2/HS 44 2/6/88
John(2)

MR GLEESON (continuing):

I cannot help mentioning that one

of the members of the House of Lords who ultimately
came into a majority expressed that point very colourfully by saying that 1f a person buys a
crate of beer and then drinks all the beer, and
throws away all the empty bottles, he is not a
dealer in bottles.
Thus if s.52 does not apply the Commissioner
has been over-generous

And then he referred to LUPTON VF.A. & A.B. LTD:
Further, it must be borne in mind that the
shares which were in question here should not be

regarded as trading stock. The deinfition -

Well, that is a different point. Then, further
down:
Even if shares are sometimes trading stock
they are not trading stock in the circumstances
of this case.
Now, Chief Justice Barwick at pages 254 to 255

said, in the middle of page 254:
If as I think the purchase of the shares

was part of the appellant's business as a
dealer in shares neither the purchase nor the
subsequent sale of the shares was part of a

capital transaction. The cost of the shares
was an outgoing of the appellant's business
properly deductible under s.51 of the INCOME
TAX ASSESSMENT ACT 1936-1969. Notwithstanding
some expressions of judicial opinion in earlier
cases, the shares purchased by the appellant,
in my opinion, formed for the purposes of the
Act part of the stock in trade of the appellant
in its business of share dealing. Accordingly

it was entitled for the purposes of the
assessment of income tax to bring the shares to
account at the close of the first of the two
relevant tax years at their cost price. The
dividend received by the appellant constituted
assessable income by virtue of s.44: but it was

rebatable by virtue of s.46. When the shares
were sold in the second of the tax years, there
ws a loss. As I have indicated it was not a

capital loss. I can see no answer to the
proposition that that loss was properly regarded
as a loss incurred in carrying on the business of
share dealing and therefore deductible under s.51.
The Commissioner sought to avoid this

consequence by asserting that the purchase
and sale of these shares was outside the
scope of the appellant's share trading business

CIT26/l/JM	45	2/6/88
John(2)

and ought to be regarded as an isolated

transaction. I am unable to agree with this
proposition. It is based apparently upon the
supposition that because the appellant saw
fiscal advantages in buying the shares
cum-dividend and disposing of them ex-dividend
at a diminished price the transaction could not
be regarded as a transaction of share dealing
in the course of its business as a dealer in
shares -
Now, that is the critical question. That is the
one that was agitated in GRIFFITHS V HARRISON -
but quite clearly neither the attainment of
profit nor the expectation of it is essential
for a particular commercial transaction to
form part of the business of dealing in the

commodity purchased. As I have already
indicated, the share transaction was effected
in the course of and as part of the appellant's
business as a share dealer.
This conclusion in reality determines the fate of the appeal.
Now, I will read the dissenting judgment of

Mr Justice McTiernan, if I may, because it states
very clearly the opposing point of view. His Honour
said, at page 258, a little over half-way down:
In my opinoin, whatever may be the general

position with regard to shares held by a company
trading in shares, these particular shares
could not be regarded as trading stock. This
transaction was certainly not part of the
taxpayer's normal trading business. In fact
it was the only dealing of this type engaged
in by the taxpayer during the period 1961-1968.
I think it appropriate to quote the words of

Lord Morris in FINSBUR½ where a dividend-stripping
operation, similar in nature, if not in detail,
to that in this case, had occurred.
His Lordship said:

(Continued on page 47)

CIT26/2/JM 46 2/6/88
John(2)

MR GLEESON (continuing):

"A consideration of the transactions now under
review leads me to the opinion that they were
in no way characteristic of, nor did they
possess, the ordinary features of the trade of

share dealing. The various shares which were
acquired ought not tobe regarded as having become

part of the stock-in-trade of the company. They
were not acquired for the purpose of dealing
with them. In no ordinary sense were they
current assets."
And later:
"It was a wholly artificial device remote
from trade to secure a tax advantage."

And then Mr Justice McTiernan points out that the

shares were not even treated as stock in trade.
Mr Justice Menzies, who is in the majority, at
page 262, about a third of the way down the page,
said:
The learned Solicitor-General did not deny
that the taxpayer was a share dealer; his
contention was rather that this particular
transaction was outside its business as a

share dealer and was of a capital nature. significance of what Mr Justice McTiernan says

DEANE J:

Mr Gleeson, going back to page 259, what is the

in the next paragraph which you did not read?
I was just wondering about the reference to the
outgoing~ for the purposes of this case.

MR GLEESON:	In the computation of the loss?
DEANE J:	Well, not the loss, the outgoing.

MR GLEESON:

Yes.

Could I come back after lunch to deal with

that point, Your Honour? Mr Justice Menzies,
at pages 262 to 263, says the Solicitor-General's:
contention was rather that this particular
transaction was outside its business as a -
share dealer and was of a capital nature.
Of course, a dealer may enter into a transaction
that does fall outside his income-producing

business. Thus a company, which buys and sells
land, might buy a building to occupy as its
principal office so that the purchase price
paid for it would be an outgoing of a capital
nature. I have, however, found no basis here
for excluding this transaction from the
taxpayer's share dealing transactions. The
learned trial judge clearly regarded it as
falling within that business. In doing so he

C1T27 /1/VH	47	2/6/88
John(2)

was, I think, correct. The taxpayer bought
the shares intending to take the dividend and
to sell the shares at their then market price.
It was undoubtedly true that the attraction
of the transaction lay in the concurrence of
three features, namely, that the purchase price
would be deductible from assessable income; that
the dividend to be received would be rebatable
and that the sale of the shares would result
in a loss which would, it was expected, be
deductible from other income of the year in
which the loss was made. It seems to me,
however, that this transaction was a transaction

of a trading character. The decision of the
House of Lords in GRIFFITHS (INSPECTOR OF TAXES)
V J.P. HARRISON (WATFORD) LTD supports this
conclusion.

And then he referred to FINSBURY. Now, of course, by
the time, as the judgment of Mr Justice - sorry, I
was going to say something that would have been
incorrect - I was going to say that by this time LUPTON

had been decided: it had not been. But the earlier
case leading up to LUPTON, FlliSBURY, had been decided.
His Honour quotea.Viscount Simonds in HARRISON's
case, with approval, on page 263, and bases his decision
upon the same approach as was adopted by the majority
of the House of Lords in GRIFFITHS V HARRISON.
(Continued on page 49)

ClT27/2/VH 48 2/6/88
John(2)

MR GLEESON (continuing):

Mr Justice Walsh was to like

effect. He dealt more specifically with trading

stock at the bottom of page 269. Now that was
a case in which there was squarely raised for
the decision by the High Court the opposing
points of view that had split the House of Lords

in GRIFFITHS V HARRISON. One member of the
High Court in dissent came down in favour of
the dissenting approach in GRIFFITHS V HARRISON
and the majority of the High Court came down
in favour of the majority approach in
GRIFFITHS V HARRISON.
The High Court was again pressed with the minority approach in GRIFFITHS V HARRISON which
had by that time become a majority in the
House of Lords, in PATCORP INVESTMENTS PTY LTD V
FEDERAL COMMISSIONER OF TAXATION, where this
Court was invited to overrule its decision
in INVESTMENT AND MERCHANT FINANCE. That is
PATCORP INVESTMENTS PTY LTD V FEDERAL COMMISSIONER
OF TAXATION, (1976) 140 CLR 247. If I could go to the headnote and then the judgment of
Your Honour the Chief Justice at first instance.
The headnote reads:

Related companies entered into

a series of transactions in which one
company bought shares in private
companies which had ceased to trade
but which had undistributed profits
and realizable assets; dividends
were declared out of the profits,
and the -shares were then sold to the
related company at a price much less
than the seller had paid for them.
In some cases, the dividends were declared and paid before transfers of the shares to the first company were
registered though after the directors

of the private companies had approved transfers executed in its favour. In
each of those cases the share register
showed that the company became a
shareholder on the day the transfer was
approved.
That is another point in the case that I will not
stay on:
The purchasers were paid for with

funds lent by the stripped companies

and cheques were exchanged. The
stripping company carried on share trading
business in each of the years in which
it was engaged in share-stripping
transactions.

ClT28/l/SR	49	2/6/88
John(2)

I will come to the detail of that later too:
In its income tax return it deducted the losses incurred on the sale of the shares in the stripped companies
and treated the dividends as income
but claimed to be entitled to a rebate under section 46 ..... The
Commissioner refused to allow any
rebate and assessed the company on
the footing that it had made a
profit on each transaction calculated
by deducting the cost price from the
sum of the sale price and the
dividends received.

Held, with Mr Justice McTiernan dissenting: that the transactions were part of
the company's business of share

trading. Hence it was entitled to
deduct the price paid for the
shares under section 51, and the loss
on resale, under section 52.

INVESTMENT & MERCHANT FINANCE

CORPORATION ..... applied.
LUPTON AND THOMSON V GURNEVILLE .....
distinguished.
Now, Your Honour, at page 254, said:
In INVESTMENT AND MERCHANT FINANCE
CORPORATION LTD V FEDERAL COMMISSIONER
OF TAXATION, this Court held that
shares acquired by a taxpayer company,
a dealer in shares, in another company
for the purpose of a dividend-stripping

operation, with the intention of
causing a dividend to be declared and
of then selling them, formed part of
the trading stock of the taxpayer
although it had not so treated them in
its return of income. It was considered
that the taxpayer was entitled to a
deduction equal to the difference between
the purchase price and the sale price of the shares, notwithstanding that a dividend had been received in the
previous year of income and that a
rebate of tax had been allowed in respect
of that dividend.

ClT28/2/SR	50	2/6/88
John(2)
MR GLEESON (continuing):

Counsel for the Connnissioner sought to
distinguish this decision on the facts. It was
said that in the present case the circumstances
surrounding the entry by the appellants
into the transactions now under consideration
were altogether different from the circumstances
as Windeyer J found them to be in the
I.M.F. case, so different indeed that it is
proper to conclude that the shares when purchased
did not form part of the trading stock of the
appellants. In this respect counsel relied
on the recent decisions of the House of Lords

in LUPTON and THOMSON V GURNEVILLE. One matter
which calls for consideration is the .extent
to which, if at all, these decisions should be
regarded as enunciating a proposition of law
different from the principle expounded by this
Court in the I.M.F. case. The consideration
of this question must await an examination of the
particular transactions.

Then I pass over the examination of the particular
transactions to pages 273 to 274. At page 273 it
was said:
The next, and perhaps the most important,
question is whether in relation to the dividends
declai,.ed and paid by companies other than Austin
Sales the amounts received by the appellants

were rebatable under s.46. I am bound by the
decision of this Court in the I.M.F. case and it follows from this decision that the payments are

rebatable. I am unable to discern any basis on
which this case can be distinguished.

And then at the bottom of 273 it said:
When the Full Court decided the I.M.F. case it had

before it two decisions of the House of Lords,
GRIFFITHS V HARRISON and BISHOP V FINSBURY which supported the conclusion reached by the
majority of this Court. Since then the House of
Lords in LUPTON and THOMSON V GURNEVILLE has
held that where a taxpayer enters into a
transaction for the purpose of a dividend-
stripping operation with the manifest object
of securing a tax advantage the transaction
does not constitute a dealing in stocks and
shares and therefore forms no part of the
trading activities of a dealer in stocks and
shares. The Connnissioner relied on this decision
but in my view, having regard to this Court's
decision in the I.M.F. case, I should not
follow it.

ClT29/l/MB	51	2/6/88
John(2)

I will refer briefly to what was said about section 260:
There remains the question whether the appellants'
claim that dividend payments are rebatable is

defeated by s.260. The right to a rebate is
specifically conferred by the ~atute in the
circumstances to which it refers and which
in my view obtain in this case. I am unable to see how s.260 can defeat the operation of s.46. This conclusion is, I think, supported
by the decision in ROWDELL.

That decision was upheld. At page 278 in the argument
of counsel for the Commissioner, in the middle of
page 278,an attempt is made to distinguish ROWDELL
and then the first judgment was given by

Mr Justice McTiernan, who was in dissent. On page 283
His Honour dealt with the matter of section 51. Mason J felt he was bound by the decision of
this Court in INVESTMENT & MERCHANT FINANCE
and concluded that the amount of the losses
sustained by the taxpayers in the dividend-
stripping transactions were deductible.
(Continued on page 53)

ClT29/2/MB	52	2/6/88
John(2)
MR GLEESON (continuing):

Two decisions of the House of Lords .....
were referred to by Menzies J. in the IMF
case to support the conclusion of the majority.
Since then, however, the House of Lords
has decided F.A. & A.B. LTD V LUPTON (Inspector
of Taxes) and THOMSON (Inspector of Taxes)

V GURNEVILLE SECURITIES LTD. In the F.A. &
A.B. LTD case it was held by Lord Morris of
Borth-y-Gest and Lord Guest that where a
taxpayer buys shares to conduct a dividend-
stripping operation the share dealing
transaction does not come within the area
of trade of a dealer in shares.
Viscount Dilhorne and Lord Donovan held
that if a transaction viewed as a whole
(including the manner of its implementation)

was entered into with the purpose of securing
a tax advantage then the transaction cannot
be viewed as forming part of the trading
activities of a dealer in stocks and shares.
Lord Simon of Glaisdale expressed a similar
opinion. In the GURNEVILLE SECURITIES LTD
case Lord Morris of Borth-y-Gest, Lord Guest,
Viscount Dilhorne, Lord Donovan and Lord Simon
of Glaisdale reiterated the opinions they
had expressed in the F.A. & A.B. LTD case.
In my opinion the views expressed by their
Lordships in these two cases are to be preferred
and should be followed here with the result
that the outgoings on the purchase of the
shares in the companies the taxpayers were
endeavouring to dividend strip are not within
s. 51.

DEANE J: That seems to be contrary to what His Honour
said in the earlier case.

MR GLEESON: I have not sufficiently appreciated that

point and I will come back to it if I may,
Your Honour.

DEANE J: I do not think it is critical. I was just
wondering about it in the earlier case.

MR GLEESON: One of the points that we seek to make, of

course, is that this view is in dissent. This

is the opposing view to that that has prevailed
in this Court.
They were not designed to achieve anyting
for those businesses except save the profits
of the businesses from tax. In the circumstances
the outgoings do not come within the second
limb of s.51.

ClT3O/l/SDL	53	2/6/88
John(2)

Mr Justice Gibbs, at the bottom of page 289, begins

his discussion of this point. His Honour says:
It was not challenged that each appellant

company was a dealer in shares. It was
clearly established that in the case of
each transaction the appellant company bought
the shares with the intention of taking
the dividend and then reselling the shares
within a short time. If the purchase and
sale of the shares formed part of the appellant's
business of share trading there can be no
doubt that the proceeds of the sale of the
shares would be assessable income, or that
the expenditure incurred in the purchase
of the shares would be deductible under
s.51. Such expenditure would not be of
a capital nature, because in the circumstances
mentioned the shares would be trading stock

within s.51(2). So much was established
by INVESTMENT & MERCHANT FINANCE CORPORATION
LTD V FEDERAL COMMISSIONER OF TAXATION.
However, the Commissioner contended that
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 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 s.46 of the ACt.

Your Honours, nobody ever doubted that.

In addition it might be said, in relation to the shares in Austin and possibly also
in relation to those in Yarra, that it was
not intended to make a commercial gain,
i.e. that the only object of those transactions
was to derive a fiscal benefit. However,
the fact that a dividend-stripping operation
is carried out for the purpose of obtaining
taxation advantages and not to make a profit,
does not mean that it must be regarded as
outside the scope of the taxpayer's share
trading business, or that the shares cannot
be treated as trading stock.

ClT3O/2/SDL 54 2/6/88
John(2)
MR GLEESON (continuing):
The Commissioner's submissions are
contrary to what was decided in
INVESTMENT & MERCHANT FINANCE CORPORATION

LTD V FEDERAL COMMISSIONER OF TAXATION. And then His Honour goes to that case.

And then
on page 291:
In the argument of the Commissioner

reliance was placed upon two decisions of
the House of Lords by which it was held
that the dividend-stripping transactions
there in question, which had been carried out
for the purpose of establishing claims against
the revenue, should not be regarded as being
trading transactions in the course of the

taxpayers' trade of dealers in shares. The
question which the House of Lords had to decide
in those cases arose under s.341 of the INCOME

TAX ACT 1952 (U.K.), which applied where II • 1 • d II
any person sustains a oss 1n any tra e ....
It is unnecessary for present purposes to discuss
in detail the reasoning by which their Lordships
reached their conclusion, but a few short
passages will illustrate the nature of their
approach. In LUPTON's case, Lord Morris

of Borth-y-Gest said: "some transactions
may be affected or inspired by fiscal
considerations that the shape and character
of the transaction ii no longer that of a
trading transaction", and Lord Simon of

Glaisdale said: "what is in reality merely
a device to secure a fiscal advantage will
not become part of the trade in dealing in
shares just because it is given the trappings
normally associated with a share-dealing
wtihin the trade of dealing in shares". In

THOMSON's case, Lord Donovan said: "when

shares are bought for the sole or main
purpose of dividend-stripping, the transaction

is not a trading transaction; and a loss
shown by the writing down of the value of the
shares consequent upon the dividend-stripping
is not a loss sustained in trade".

It cannot be denied that the point was fairly and squarely before the High Court.
This reasoning cannot, I think, be reconciled
with that accepted in INVESTMENT & MERCHANT
FINANCE CORPORATION LTD. V FEDERAL COMMISSIONER
OF TAXATION, and if the two sets of statutory
provisions were the same in relevant respects
it might be necesary to reconsider what was
said in the latter case in the light of these

deicsions of the House of Lords. However, the
scheme of the English legislation is very

CIT31/l/JM 55 2/6/88
John(2)
different from that of the Australian Act.
In particular the English legislation does
not contain a provision like s.260 of the Act
which is aimed generally at tax avoidance.
I pause there to say the point His Honour is making
is that if you have a specific anti-avoidance
provision in one part of the Act, you cannot imply
a different anti-avoidance provision in another
part of the Act.
The presence of section 260 makes it impossible
to place upon other provisions of the Act a
qualification which they do not express, for
the purpose of inhibiting tax avoidance. In
other words, it is not permissible to make
an implication which does what s.260 fails to
do in preventing the avoidance of tax. If it
is suggested that a taxpayer Aas engaged in
a device to secure a fiscal advantage, and
the relevant provisions of the Act do not
expressly deal with the matter, the case
depends entirely on s.260. These considerations
are sufficient to distinguish the two decisions
of their Lordships. Moreover, the Parliament, by
enacting s.46A of the Act (which was not
in force at the time material to this case), has
legislated in an attempt to overcome what it
regarded as the undesirable effects of the
deicsion in INVESTMENT & MERCHANT FINANCE
CORPORATION LTD. V FEDERAL COMMISSIONER OF
TAXATION, and that is a further reason why
we should not reconsider the authority of
that case.

(Continued on page 57)

CIT 31/2/JM 56 2/6/88
John(2)

MR GLEESON (continuing): That, of course, is a consideration

precisely in point in the present case. Then on
page 298 to page 300 His Honour considered
section 260, and it is perhaps inappropriate that
I should read that in my submissions in-chief, but
I just point out that section 260 was a live issue

in PATCORP. At pages 307 to 308 Mr Justice Jacobs,
dealing with the question of the approach that
this Court should take to a reconsideration of its
former decisions, in the middle of page 307 said:
It is correct to state that it was not argued
in FEDERAL CO:MMISSIONER OF TAXATION V ANGUS
on behalf of the Commissioner that the taxpayer
was a shareholder and that the moneys received

by her were dividends. Therefore the Court
did not determine this question after a
disputed hearing between the parties. However,
the passages which I have quoted show that
there was no hesitation in the acceptance by
the Court of the view that a beneficiary in
these circumstances was not a shareholder and
this view was an essential step in the ultimate
conclusion which was reached by the Court.
It is probably correct that this Court would
in such circumstances, more readily than it
ordinary would, reconsider a view so adopted;
but, on the other hand, the construction and
effect of the provision of the INCOME TAX
ASSESSMENT ACT which has been adopted by the
Court in one case as a basis for decision should
not without very good reason be varied or discarded in a later case simply upon the
ground that the particular point of construction
or effect of the legislation had not been
argued or fully argued in the earlier case.
In the application of a fiscal Act of this
kind, there must be consistency and as much
certainty as its complexity will allow.

I pause to say that CURRAN's case was decided between
the judgment at first instance and the judgment on
appeal in PATCORP. Your Honours will not find it
being argued on behalf of the Commissioner of
Taxation in CURRAN's case that the particular
transaction involving the Stewart Bacon shares fell outside the ordinary course of Mr Curran's business

of dealing in shares. No doubt the reason why that
was not argued by the Commissioner was the line of
authority as it existed prior to CURRAN, and as
subsequently strengthened following CURRAN by the
decision of the Full Court in PATCORP.
At pages 310 to 313 Mr Justice Jacobs said

as follows:

ClT32/1/HS 57 2/6/88
John(2)
Each of these dealings and transactions has been described in detail by Mason J.
There can be no doubt that all were
conceived and carried out as what are conunonly
called dividend stripping operations.
The motive of the taxpayer was to reduce
its liability to income tax on profits which,
apart from these operations, had otherwise
accrued during the fiscal years in which
the operations were conceived and carried

into effect. In order to reduce its liability
to tax in respect of its other profitable
activities in the manner adopted certain
circumstances needed to exist.

(Continued on page 59)

ClT32/2/HS 58 2/6/88
John(2)

MR GLEESON ( continu:ing) :

First, the taxpayer had to be a trader in shares so that a loss on the subject
transactions could be set off against profits

and other transactions. I do not think that it
matters for present purposes whether a
purchase of shares and a subsequent sale at a
lower price is regarded as a loss under s.52
or whether the purchase price is regarded as an
outgoing under s.51 and the sale price as
income under s.25, because the purchase and sale
were in each case completed during the same
year of income. There was no dispute that the
taxpayer was a trader in shares. Therefore this
condition was fulfilled.
Secondly, the shares must have been purchased

in the course of the taxpayer's trading in shares, that is to say, in the course of that business the profit of which (if any) was assessable income.
I shall return to this question presently.
Then he goes into other questions including a mention of
section 260.
At the top of page 311 His Honour says:
Thus it receives a very substantial fiscal

advantage but it is entitled to have the
transactions regarded as part of its business
of share trading and to the fiscal advantage
unaffected by the operation of s. 260 unless
the facts are relevantly distinguishable from
those in INVESTMENT & MERCHANT FINANCE
CORPORATION LTD V FEDERAL COMMISSIONER OF
TAXATION. That, it seems to me, is the essential question to be determined on these
appeals -

and then he goes to the facts and says: The question, then, is whether this decision
is distinguishable. It has primarily been
submitted that the applicability of s. 260
was not argued in the I. M. F. Case -

Nor was it argued in CURRAN's case.
But if the relevant facts are not distinguishable
I do not think that this is a valid reason
for not following the earlier decision it being
one on the appli.cability of a fiscal Act. What
such a case actually decides is that in certain
circumstances there is a certain liability, or
freedom from liability, to assessment of income

ClT33/l/PLC	59	2/6/88
John(2)

tax, whatever be the expressed reasons for that decision. If in another case the circumstances
cannot be relevantly distinguished then the same
result should follow if a necessary and most
desirable uniformity in the principles of
assessment of tax is to be achieved and preserved.
The question is not so much whether the
applicability of s. 260 was argued but whether it
was overlooked and the decision given per incuriam.
That is not suggested. It is true that the
applicability of s. 260 involves a degree of
factual inquiry and inference and therefore to a
considerable extent its applicability is often a
question of fact. But if the facts in one case are
not relevantly distinguishable from those in
another the same conclusion should follow partly
because the ultimate conclusion is, or
largely depends on, a question of law as to the
true construction and legal effect of s. 260 and
partly for the reason to which I have earlier
adverted, the need for uniformity in application of

a taxing Act. It seems to me that this need is
particularly strong in the case of a statutory
provision as notoriously difficult to interpret and
apply ass. 260. If the court has held that a
particular course of operations has a particular
fiscal effect and if it has thereby expressly or
even impliedly found that it is not a contract, agreement or arrangement falling withs. 260 it
is for the legislature to make whatever special
provision it thinks is necessary to displace
the effect of the decision. There is now a special
provision in the Act respecting rebate on dividends
paid as part of a dividend-stripping operation.
See s. 46A .....
One difference between the present cases and

the I.M.F. Case is that in the latter the rebate
had been allowed under s. 46 in the year prior to
the year of sale of the shares. The question whether

the dividend was rebatable therefore did not
arise. But there could be no question that once
the taxpayer was found to be a "shareholder"
the conditions of s. 46 were satisfied both in the
I.M.F. Case and the instant cases.
Then His Honour goes on to say that he does not find any
relevant difference. And at the bottom of page 312
His Honour says:
(Continued on page 61)

ClT33/2/PLC	60	2/6/88
John(2)
MR GLEESON (continuing):

For the Commissioner it has been submitted
that points of distinction are that the
company whose shares were acquired in the
I.M.F. case had assets which had not been
converted into cash, that the taxpayer did
not buy the entire capital but only
seven-tenths thereof that the taxpayer
continued to hold the shares for at least
fourteen months -
and so forth, and says -
none of these matters was of special
significance.

One of the matters that is not of special significance
is the reference to there being in an earlier case
no evidence or suggestion that the shares were
acquired to shield from tax particular income which
had already been derived. Then, on page 313,
His Honour says:
The I.M.F. case was decided before LUPTON
and THOMSON (INSPECTOR OF TAXES) V GURNEVILLE
SECURITIES LTD. It may well be that the
approach in those cases is not consistent
with the reasoning in the I.M.F. case which
led to the conc-lusion that the purchase and
sale of the shares by the taxpayer was part
of the business of trading in shares but
that is no sufficient reason for overruling
the I.M.F. case however cogent the reasoning in the English cases may appear to be. I do not find it necessary to express an opinion on

this question. The reversal or alteration of
the fiscal effect of the I.M.F. case was a
matter for the legislature.

Now, the next case that I wish to go to is the case

of WESTRADERS. Before going to the decision of the
High Court in WESTRADERS, since all the members of the Federal C.ourt who decided that case are present,
can I go to the decision of the Federal Court in
FEDERAL COMMISSIONER OF TAXATION V WESTRADERS PTY LTD,

38 FLR 306. The point of difference between the
majority and the minority, as I will seek to explain,
is not one that is relevant to the present issue.
I will come to that in a moment. If I could read
the headnote first:
Jensen Mining and Investments Ltd., entered
into a partnership on 28 May 1978 with
seventeen others one of whom was the taxpayer.
On 27 June 1975, Jensen transferred certain
shares held by it to the partnership for a
consideration of $11,284.20. On the same day
the parnership transferred most of the shares

ClT34/l/VH	61	5/2/88
John(2)

thus acquired to four companies for a
consideration of $125,199.60, thus generating

a surplus of $13,915.40. By section 36A -
as it stood prior to amendment -
it was that where, by reason, inter alia, of a
formation of or a change in a partnership, a change had occurred in the ownership of property being an asset of the business and
trading stock, and the persons who previously
owned the property held, after the change,
an interest to the extent of twenty-five
per cent of the value of the property, the
former owners and new owners might elect by
notice to the commissioner that the value
far the purposes of section 36 should be the
value that would have been taken into account
at the end of the year of income if there had
been no change (namely, the value of the
trading stock in the books of the vendor).
The partners and Jensen made such an

election, which had the effect that the deemed
cost to the partners was the the original cost
of the shares to Jensen, namely, $6,584,513.
(Most of the shares had been subjected to a
dividend stripping operation before transfer to
the partnership.) The partnership claimed a
loss on disposal of $6,463,484 of which the

taxpayer's share was $248,844. The commissioner
disallowed the taxpayer's claim to this loss.
The Supreme Court of New South Wales allowed
the taxpayer's appeal -
as did the Federal Court and the High Court in due
course.
(Continued on page 63)

ClT34/2/VH 62 2/6/88
John(2)

MR GLEESON (continuing): Now, Your Honour Mr Justice Brennan

referred, at page 307 in the first paragraph, to
the fact that Mr Justice Rath had found that
the partnership was a share-trading partnership, the membership of which comprised the respondent
and 17 other persons. I might add, the actual
circumstances relating to the formation of the
partnership, we would submit, were not relevantly
distinguishable from those of the present case:

The manner and circumstances of

Jenspart's formation owe much to the
provisions of section 36 and 36A of

the INCOME TAX ASSESSMENT ACT 1936,
and to the perception of their operation
which ..... Mr P.R. Fox then entertained.
Jensen was, at the material time, a
public listed company. It had been a
share trader. It had bought shares in
companies which had then been procured
to distribute large dividends, leaving
the shares worth much less than their
cost. As these shares were the stock
of Jensen's trade, it had the option .....
to bring them to account at the end of
its tax year at market value or at
cost. In early May 1975 (at a time
which was not long before the
formation of the Jenspart partnership) Mr Fox conceived the notion of forming
partnerships to which Jensen might
transfer the shares it had on hand and,
by attracting the operation of
sections 31(1), 36 and 36A, confer upon
the partnerships the ability to obtain
the benefit of tax losses on resale of
the shares. Jenspart was one of the
partnerships so formed -
there was not any doubt about the motive for the

formation of these so-called "share trading
partnerships" -
and some of Jensen's shares were
transferred to Jenspart in circumstances
presently to be mentioned ..... Jensen
held an interest of twenty-five per cent
in Jenspart, the transferred shares
became an asset in Jenspart's -

that is the partnerships -
business of share trading and a notice
signed by Jensen and the members of
the Jenspart partnership was given to
the corrrrnissioner.

ClT35/l/SR	63	2/6/88
John(2)

Then the way in which the fiscal consequences

flowed for that is described. Now the point on
which Your Honour Mr Justice Brennan dissented was
a point relating to the construction of
sections 36 and 36A and turned upon, not any denial
that the partnerships were carrying on a
share trading business, but upon the circumstance
that when Jensen made a decision to get rid of its
shares and sell them to the partnership, at that
point they ceased to be the assets of a
share-trading business of the Jensen company and
therefore the provisions of section 36A did not apply and
could not be invoked. That was, I think I can fairly state,

the basis of Your Honour's conclusion. And
Your Honour expressed that at page 314 and 315,
it all really turning upon the character of the business of the company and its relationship to the shares at the time it decided to sell the
shares to the partnership.
In relation to the finding that Jensen had been a share trader and that Jenspart was a
share-trading partnership, in the middle of page 315,
Your Honour said:
These findings, construed as findings

of fact, were neither challenged nor
reasonably open to challenge. But the
finding by his Honour that the promotion
of partnerships was "another business

activity" raises the question whether
the share trading business of Jensen -
that is the company -
was discontinued, or more relevantly,
whether the shares which had "been
acquired for the purpose of sale in Jensen's business as a sharetrader"
remained assets in a business of

trading in those shares innnediately
prior to Jensen's entering into the
deed of partnership.
(Continued on page 65)

ClT35/2/SR	64	2/6/88
John(2)
MR GLEESON (continuing):

The commercial activity of Jensen at the time of
its entry into the partnership deed no longer
involved the sale of shares. The business of
trading in those shares, a business which
involves the selling no less than the buying of

shares, had ceased. Once Jensen resolved to
engage in the promotion of the partnership to
take advantage of the conceived tax advantages,
it would be inaccurate to describe its -
that is, the Jensen company's -

business as share trading. To sell the
shares at that time would have been incompatible
with the promotion of the partnerships from
which Jensen intended to derive some profit.
The business of Jensen which had been found
to be, and to be accurately described as, "the business of share trading" could not
endure past the point where Jensen resolved
not to sell the shares which hitherto were its

stock in trade. From that point onwards the
only relevant commercial activity in which
Jensen engaged was an activity in which the
fractional interests in the shares, not the
shares themselves, were to be disposed of to
Jenspart or to the other partnerships.

Your Honour Mr Justice Deane at page 316 referred to the judgment of Your Honour Mr Justice Toohey and expressed agreement:
I would add some comments for myself on the
question whether the shares owned by Jensen
Mining and Investment Ltd which became the
property of Jenspart Trading Company, were,
at the time of that change of ownership,

property being trading stock of a business. With the possible exception of a small
holding of shares in Beneficial Finance
Corporation Ltd., none of the relevant shares
had been acquired by Jensen in the course of the
ordinary buying and selling operations of an
unsophisticated trader in shares.

I pause there to say, Jensen had never carried on what might be called by some people, a bona fide
business of share trading. Jensen's share trading
history was that of a dividend ~tripper.
r.r
They were required as part of what have, for
convenience, been referred to as "dividend
stripping" operations. The profit which was

-the object of their acquisition was to be

ClT36/l/MB	65	2/6/88
John( 2)

derived more from the dividends which were
ripe for the picking (either in the form of
cash or, in two cases, in the form of land)

than from the proceeds of the ultimate sale of
the shares themselves. This circumstance did
not, however, preclude the shares so acquired
from constituting part of the trading stock
of the business of dealing in shares which Jensen,
at the time of the acquisition, carried
on (see INVESTMENT AND MERCHANT FINANCE, CURRAN

and PATCORP. The finding of the learned judge
at first instance that the shares, when
acquired, were trading stock of that business
was, in the light of those authorities and for
the reasons which he gave, plainly correct.
Then on pages 318 to 319 Your Honour said:
The learned judge at first instance referred to
Jensen's activity of promoting partnerships,
of which it was a member and to which it

transferred shares as a "new business". He
did not, however, as I read his judgment, mean,
by the use of that phrase, to indicate a
view that this "new business" represented a
complete break with or cessation of, Jensen's
old business as a share trade. It may not, in
one sense, be correct to refer to the conversion
of single ownership into collective ownership
which results from the transfer of shares to a
partnership of which the transferor is a member as
a disposal of the shares as distinct from a
disposal of an interest in the shares.

That is a technical matter that I will pass over.

The transfer of the relevant shares by Jensen
to Jenspart was itself effective to extinguish
any separate interest which Jensen had in them as

distinct from the undivided beneficial interest
which it had in the totality of partnership
assets.
(Continued on page 67)

ClT36/2/MB	66	2/6/88
John(2)

MR GLEESON (continuing):
The combined effect of the transfer of
the relevant shares by Jensen to Jenspart
and the subsequent sale of them by Jenspart
was that, on any approach, Jensen had disposed of
all itsinterest in the shares. That disposition
was plainly the result of a new course of
business activity which involved the formation
of five such partnerships with the consequent transfer of shares to them. That new business activity provided a more favourable environment
for Jensen to dispose of the trading stock
of its share trading business in that it
involved the formation of partnerships which
would pay or credit the equivalent of market
value for shares -
and that the more favourable environment is the
fiscal environment.
The adoption of that new business activity
did not, however, mean that Jensen's business
as a share trader no longer existed. It
continued while Jensen actively sought to
dispose of the shares which it held as trading
stock of that business. Nor does the fact
that the new activity involved the seeking
of advantages which were different - and
indeed additional to those which would ordinarily
be enjoyed by a share trader produce the
consequence that the shares which were to
be disposed of by the share trader in the
course of that new activity ceased, before
the change in their ownership, to be trading
stock of the share-trading business -

and reference is made to IMFC and PATCORP.

the sophisticated tax avoidance procedures - In the result, I am of the view that

there was never any doubt that they were anything
else -
which were adopted by the taxpayer have been successful in converting what was,
by ordinary commercial standards, a profit
for the tax year of more than $238,000
into a loss, for income tax purposes, of
$3,593. That result may seem both contrary
to the general policy of the Act (if it
be possible to discern any general policy
other than that people pay income tax) and
unfair to the ordinary taxpayer who willingly
or reluctantly contributes, without resort
to tax avoidance, the share of his net income

ClT37/l/SDL 67 2/6/88
John(2)
which the Parliament has determined is
required by the nation for the cormnon good.
If there be, in truth, such contrariety
or unfairness, the fault lies with
the form of the legislation at the relevant
time and not with the courts whose duty
it is to apply the words which the Parliament
has enacted. For a court to arrogate to
itself, without legislative warrant, the
function of overriding the plain words of
the Act in any case where it considers that
overall considerations of fairness or some
general policy of the Act would be best
s2rved by a decision against the taxpayer
would be to substitute arbitrary taxation
for taxation under the rule of law and,
indeed, to subvert the rule of law itself.
That passage was quoted with approval by the
Full Court of the High Court on appeal.
Your Honour Mr Justice Toohey, at page 323,

in the second complete paragraph on that page,
said:
Jensen had by its activities in 1971,

1972 and 1973 established itself as a share
trader or share dealer in the orthodox sense

of those expressions. Any suggestion that
to buy shares cum-dividend and to sell them
ex-dividend at a reduced price was not
a transaction of share trading in the course of a business as a share trader was rejected
in INVESTMENT AND MERCHANT FINANCE CORPORATION
LTD V FEDERAL COMMISSIONER OF TAXATION.

That is then quoted. Then, on the bottom of
page 323, Your Honour there goes on to say:

However, that does not dispose of the commissioner's first ground of appeal.
He argues that even if Jensen was engaged
in the business of share trading, the shares
transferred to Jenspart were not trading
stock.

(Continued on page 69)

ClT37/2/SDL 68 2/6/88
John(2)
MR GLEESON (continuing):
Since the INVESTMENT AND MERCHANT FINANCE
CORPORATION LTD case there is no doubt that
shares may be trading stock in the hands of
a share trader.

I will pass over that point. And at page 325,
in the middle of the page, having referred to the
facts, Your Honour says:
In summary then, the shares transferred

by Jensen to Jenspart were part of the assets
of the business of share trader engaged in
by Jensen and were trading stock in the sense
that they constituted assets of that company
in the business of trading in shares.

And then there is a reference - perhaps, because
it was the ground of Your Honour Mr Justice Wilson's
dissent in the Full Court, I should mention the
point that Mr Justice Toohey goes on to deal with
on page 326 in the middle of the page, just to
draw attention to what the point was, which is
called the "third and final ground of appeal".
It is not relevant to the present case.

MASON CJ: This is all designed to make sure we do not forget
anything we ever said in WESTRADERS.

MR GLEESON: I have to deal with the matter collectively
as well as individually, Your Honour. In the
Full Court, on appeal, the report is at 144 CLR 55.
Having regard to the comment of Mr Justice Beaumont
in the Federal Court that WESTRADERS was the case
of an admitted share dealer, could I draw
Your Honours' attention to the argument of
Mr Priestley at page 57 and going on to page 58.
He submitted, at the bottom of page 57:

What occurred here was part of the ordinary
course of an unusual business of promoting
partnerships. Alternatively, as soon as
Jensen resolved to use some of its stock of
shares to promote the partnership operation
those shares ceased to be trading stock.
The shares were not bought as part of a
share trading business but as part of a business

which dividends were to be obtained in - I think that must mean "in which dividends were
to be" -
obtained in excess of the purchase price of
the shares. It is incorrect to define
trading stock simply as an article purchased
for sale.

ClT38/l/ND 69 2/6/88
John(2)

MR GLEESON (continuing): Then Chief Justice Barwick
at pages 59 to 61 supported the view taken by the

majority in the court below. Your Honour the
present Chief Justice dealt with the point relevant
to the present case at pages 70 to 71, and this
passage - perhaps I should point out that
Mr Justice Aickin, at page 80, agreed with the
judgment of Your Honour the present Chief Justice
and Mr Justice Wilson at page 80 agreed with
Your Honour the present Chief Justice, save for what
I have called the presently irrelevant point that

I flagged earlier. On these pages Your Honour said:
The Corm:nissioner then advances a number

of reasons with a view to supporting
the conclusion that JENSEN,in acquiring shares
after the 1972 year, was not motivated by a
desire to make a profit on the resale of shares
and that it was "on the take-over trail",
bent on acquiring cheaply the assets of other
companies .....
However, neither the circumstance that

Jensen was "on the take-over trail", whatever
that colourful expression may mean, nor the
fact that it derived special advantages from
its acquisitions, not being the making of a
profit on resale, nor the fact that the
acquisitions took place in the course of
carrying out "Division 7 schemes", is enough
to justify the conclusion that Jensen was not,
or had ceased to be, a share trader in the
1975 year.
The point is that Jensen engaged in

diverse share trading activities and that the character of those activities changed over the years. The cases of INVESTMENT AND
MERCHANT FINANCE CORPORATION LTD V FEDERAL~:.:-
COMMISSIONER OF TAXATION and FEDERAL COMMISSIONER
OF TAXATION V PATCORP INVESTMENTS LTD, clearly

establish that the purchase of shares in
companies having large amounts of undistributed
profits, the payment by way of dividends from
those profits and then the sale of the shares at
a reduced price are transactions of a trading
nature and may therefore form part of the
activities of a share trader.

Now, pausing there, that is the Stewart Bacon
transaction and that is the Compinge transaction.
Prima facie, they are transactions of a trading nature.
The two cases also establish that shares so
acquired may be considered trading stock.

ClT39/l/PLC 70 2/6/88
John(2)
And then reference is made to Mr Justice Walsh and PATCORP.
I acknowledge that in the .. present case Jensen was not in 1975 buying and selling
shares through brokers as an orthodox share
trader would. Indeed, Jensen's transactions
in the later years were limited to Div. 7
schemes and the promotion of s. 36A
partnerships.

(Continued on page 71)

ClT39/2/PLC 71 2/6/88
John(2)
MR GLEESON (continuing):
Nonetheless I regard its activities 1n
buying and selling shares connected
though they were with the carrying out of
division 7 schemes as constituting the
business of share trading. Jensen's
earlier activities as an orthodox
share trader assist in arriving at this
conclusion -
and we underline the following sentence -
But I do not regard them as essential.

The whole point of the reasoning of the Chief Judge
in the Federal Court below was that the fact of
JOHN's case that distinguished it from CURRAN's
case was that Curran had a pre-established business
of being a share trader and no mention was made of
that passage in this judgment which was agreed in
by a majority of the Court. Then:
The Commissioner's third submission is that even if Jensen was considered a share trader
in the relevant period and the shares were considere::i
part of Jensen's trading

perhaps it is not important that I should read that.
Now, we would respectfully submit that some of those
passages did appear to have been forgotten when the in the present case and we have, in our outline
of argument in paragraph 6, summarized what we submit
are some propositions for which those cases are
authority.
The first of them is that we submit that those cases establish that there is no dichotomy between
the idea of carrying on a business and the idea of

engaging in an activity which is financially advantageous
solely or primarily because it brings a tax benefit.
That, of course, is a proposition which has a significance
that runs throughout this entire Act. It is not

limited to CURRAN schemes or to dividend stripping
operations and I have given, earlier this morning,
a couple of instances of the practical significance
of that proposition.
But the notion that there was such a dichotomy

or tension or opposition is what underlay the decision
of the minority in GRIFFITHS V HARRISON and the
subsequent decisions of the House of Lords in LUPTON
GURNEVILLE which were explained by this Court
as being an attempt to introduce into the general
provisions of the English Act a notion of anti-
tax avoidance implication.

ClT4O/l/JM 72 2/6/88
John(2)
In that regard, and to support that justification
of the rejection or distinguishing by this Court
of the decisions of the House of Lords, could I
take Your Honours to a decision of the Supreme Court
of Canada in STUBART INVESTMENTS V REG, (1984)
10 DLR (4th) 1.

(Continued on page 74)

ClT40/2/RB 73 2/6/88
John(2)

MR GLEESON (continuing):

Apart from a typographical error,

we would respectfully submit that the reasoning of
Mr Justice Estey in this case is compelling.

MASON CJ: This is the case in which I was mistaken for a

French Canadian lawyer.

MR GLEESON:

Yes. Well, the facts are so simple I will not read the headnotes.

When I say, "simple", to an

Australian, extremely familiar.
There was a company in a group of companies that

had carry-forward losses. There was another company in
the group of companies that was carrying on profitable
trading activities. The company that was carrying on
the profitable trading activities -if I can use this
expression - channelled the business through the
company that had the benefit of the carry-forward losses
to take advantage of those losses and the question was
whether that was fiscally effective.
Now, the leading judgment was written by

Mr Justice Estey. At page 3 His Honour said:

The issue in this case is whether a

corporate taxpayer, with the avowed purpose
of reducing its taxes, can establish an
arrangement whereby future profits are
routed through a sister subsidiary in order to avail itself of the latter corporation's loss carry-forward.
And then His Honour says, at the bottom of page 5:
No section of the Act was isolated by the

Attorney-General of Canada as clearly authorizing
the assessments ..... Assuming for the moment
there is no sham, the respondent asks the court
to find, without express statutory basis,
that no transaction is valid in the income

tax computation process that has not been
entered into by the taxpayer for a valid
business purpose.
(Continued on page 7 5)

ClT41/l/PLC	74	2/6/88
John(2)

MR GLEESON (continuing):

I used the word "bona fide" a

little time ago. Here the word "valid" is used.

It is the same kind of idea. The notion that a
business is only fair dinkum if it is being
carried on for a purpose other than a principal

purpose of getting a tax benefit. The respondent
asserts that by definition an independent business
purpose does not include tax reduction for its

own sake. Then on page 7 and following,
His Honour refers to "sham transactions" and I

will pass over that. The point on which the
Court of Appeal in Canada had decided the case,
which is of no present significance, related to
the incompleteness of the transaction and that
is dealt with by Mr Justice Estey from page 8

and I will pass over that. Then I will come
on page 12 to what His Honour called the "business
purpose test":

What then is the law in Canada as

regards the right of a taxpayer to
order his affairs so as to reduce his
tax liability without breaching any
express term in the statute?
Historically, the judicial response is
found in MAYOR OF BOROUGH OF BRADFORD
V PICKLES ..... Lord Halsbury .....

If it was a lawful act, however

ill the motive might be, he had a
right to do it. If it was an unlawful
act, however good his motive might
be, he would have had no right to do it.
And then reference is made to the Duke of Westminister:
In the courts of the United States

a different philosophy was developed -

and reference to the United States cases is then

made. And on page 14, His Honour says: The situation in Australia sheds
further light on the problem of
applying the proper interpretative
approach to a taxing statute. The
Australian tax statute contains a
more rigorous anti-tax avoidance
provision than our section 137.

Then CRIDLAND is cited in Your Honours passage in
CRIDLAND.

ClT42/l/SR

2/6/88

John(2)

MR GLEESON (continuing): GULLAND AND WATSON had not arrived
in the mail by the time this case was decided.
Then there is reference to the English cases on
fiscal nullity and I will pass over those for the

moment. At the bottom of page 21, he said:
The scene in Canada is less clear and
has not, until this appeal, reached this

court. The first reference to a "a business
purpose" concept -
and then a history of Canadian cases is set out.
I have passed over the most important part of the judgment, I am sorry, on page 18. It is the
explanation that was given of the ratio of the
English fiscal nullity cases:
There are features about that case and
its disposition that must be noted when
considering its application in our law.
The transaction created an accounting result
which was then applied to reduce taxes

otherwise exigible. The taxpayer did
more than rearrange its affairs to avail
itself of a statutory tax allowance. It
was not, in my view, the non-arm's length ideas
radiating out from a central control of the
corporate group that was fatal. It was the
synthetic nature of the gain and the loss
which rendered it unrecognizable in the eyes of
the taxation program adopted by the Legislature.
Secondly, and more importantly, the

doctrines developing in RAMSAY and BURMAH,
supra, refle~t the role of the court in a

regime where the Legislature has enunciated
taxing edits in a detailed manner but has not
superimposed thereon a general guideline for
the elimination of mechanisms designed and

established only to deflect the plain the purpose
of the taxing provision.
(Continued on page 77)

ClT43/l/VH 76 2/6/88
John(2)
MR GLEESON (continuing):
The role that the judiciary must play in
such a regime to control tax avoidance was
recognised by Lord Reid, who, in GREENBERG
VINLAND REVENUE COM'RS -
who -
stated:
"We seem to have travelled a long way from
the general and salutary rule that the subject
is not to be taxed except by plain words.
But I must recognise that plain words are seldom adequate to anticipate and forestall
the multiplicity of ingenious schemes which
are constantly being devised to evade taxation.
Parliament is very properly determined to prevent this kind of tax evasion, and if the courts find it impossible to give very wide
meanings to general phrases, the only alternative
may be for Parliament to do as some other
countries have done, and introduce l~gislation
of a more sweeping character which will put
the ordinary well-intentioned person at much
greater risk than is created by a wide
interpretation of such provisions as those
which we are now considering."
Here the appellant has bound itself

contractually to pay over -

That is the same explanation as Mr Justice Gibbs

gave in PATCORP of the English cases. And as I
said, coming back to page 21 and 22, there is
reference to the scene in Canada and I will not
go through the full Canadian history, although
two pages over on page 25 His Honour criticized
what he suggested was a muddling of notions of

business purpose" and the bringing forward of a sham with notions of what he called "bona fide
hybrid rule.

MASON CJ: Mr Gleeson, would it be convenient to adjourn
at this stage.

MR GLEESON: Yes, Your Honour.
AT 12.49 PM LUNCHEON ADJOURNMENT

ClT44/l/ND 77 2/6/88
John(s)
UPON RESUMING AT 2.18 PM:

MASON CJ: Yes, Mr Gleeson.

MR GLEESON: Your Honours, before I come back to STUBART
could I mention two matters arising out of what

was said this morning. First of all, in relation
to what Mr Justice McTiernan said in INVESTMENT
& MERCHANT FINANCE CORPORATION, 125 CLR 259, in a
passage to which Your Honour Justice Deane referred -
I had not thought about that passage previously and
I did not pick up the point when Your Honour mentioned
it to me - but it would be our submission that there
is an inconsistency between Mr Justice McTiernan's
statement on page 259 that ROWDELL was authority for
the proposition that the purchase price of the shares
boueht by the dividend stripper would, to use his
language, "of c-ourse have been an outgoing" within the
m:aning of section 51(1) in the year in which the shares
were purchased and his preference expressed for the
English authorities, explicitly in the later case
of PATCORP. If the English authorities are correct
it would not have been an outgoing within section 51(1).
The second thing is I think I made an assertion

this morning that in relation to WESTRADERS there
was no relevant difference between the history
and activities of the sharetrading partnerships
of which Jenspart was an example and Malindi

Trading Company. To support that, without inviting
Your Honours to go to it, could I give Your Honours
a reference to the decision at first instance in
WESTRADERS of Mr Justice Rath, 8 ATR 40,
where at pages 61 and 62 His Honour expressly finds
that Jenspart carried on a business of dealing in
shares.

(Continued on page 79)

ClT45/l/HS 78 2/6/88
John(2)

MR GLEESON (continuing):

The evidence in that case made

it perfectly plain that Mr Fox's motives in calling
the partnerships together were to take advantage of

the provisions of section 36A to the extent to
which it is correct to say in the present case that tax minimization was the raison d'etre of
the Malindi Trading Company;exactly the same was

true of the Jenspart Trading Company. At page 61,
referring to the general stock exchange transactions
of Jenspart and then these particular transactions,
Mr Justice Rath, in a finding which was supported
by the members of the Full Federal Court and the
High Court, said:
In my opinion, therefore, all the shares
transferred by Jensen to Jenspart were
assets of a business, and were trading stock
within the meaning of s.36A(l) ..... It appears
from the records of the brokers, Constable and
Bain, that Jenspart was ,in business as a
sharetrader from the day after its formation.
The shares transferred to it from Jensen
were sold as part of its sharetrading activities,
and were an asset of the business carried
on by it within the meaning of s.36A(2)(a).
There were special circumstances relating to the
acquisition and disposal of those shares,
but those special features are irrelevant to the question whether the shares were assets in the sharetrading business of Jenspart.

So he took the same approach as Mr Justice Yeldham. Now, at the adjournment I was reading from STUBART,

10 DLR. At page 28 -at the bottom of page 28,
Mr Justice Estey says:
Returning then to the issue of interpretation
now before this court, there are certain
broad characteristics of tax statute
construction which can be discerned in the

authorities here and in similar jurisdictions

abroad. The most obvious is the fact that
in some jurisdictions, such as Canada and
Australia, the Legislature has responded to the need for overall regulation to forestall blatant
practices designed to defeat the revenue.

(Continued on page 80)

ClT46/l/MB	79	2/6/88
John(2)
MR GLEESON (continuing):

These anti-tax avoidance provisions may
reflect the rising importance and cost
of government in the community, the
concomitant higher rates of taxation in
modern times, and hence the greater stake
in the avoidance contests between the

taxpayer and the State. The arrival of
these provisions in the statute may also
have heralded the extension of the
INCOME TAX ACT from a mere tool for the
carving of the cost of government out of the community, to an instrument of
economic and fiscal policy for the
regulation of commerce and industry of
the country through fiscal intervention
by government. Whatever the source or
explanation, measures such as section 137
are instructions from Parliament to
the community on the individual member's
liability for taxes, expressed in
general terms. This instruction is,
like the balance of the Act, introduced
as well for the guidance of the courts
in applying the scheme of the Act

throughout the country. The courts may,
of course, develop, in their interpretation
of section 137 -
that is like section 260 -
doctrines such as the bona fide business
purpose test; or a step-by-step
transaction rule for the classification
of taxpayer's activities which fall
within the ban of such a general tax
avoidance provision.

In jurisdictions such as the

United States and the United Kingdom,

such doctrines have developed in the
courts, usually in the guise of canons
of construction of the tax statutes.
These have included the business purpose
test, step-by-step transactions analysis,
substance over form, and expanded sham
rules. Whether the development be by
legislative measure or judicial action,
the result is a process of balancing
the taxpayer's freedom to carry on
his commercial and social affairs however
he may choose, and the State interest in
revenue, equity in the raising of the
revenue, and economic planning. In Canada
the sham concept is at least a judicial

ClT47/1/SR

2/6/88

John(2)

(Continued on page 80A)

measure for the control of tax abuse
without specific legislative direction.
The judicial classification of an
ineffective transaction is another. In
the United States, these doctrines have
expanded to include the business purpose

test. The United States tax code is,
as we have seen, replete with benefits
in the form of special relief from
general tax measures, but the problem is
whether the bona fide business purpose
test will, in a given circumstance,
descend upon the taxpayer ex post facto.
And I pass over the quotation.

(Continued onpage 81)

ClT47/2/SR	80A	2/6/88
John(2)

MR GLEESON (continuing):
Perhaps the high-water mark in the opposition to the introduction of a business purpose test
is found in the reasoning of the learned
authors, Ward and Cullity ..... in answer to
the question: can it be a legitimate business
purpose of a transaction to minimize or postpone
taxes?:
"If taxes are minimized or postponed, more capital
will be available to run the business and more
profit will result. Surely, in the penultimate
decade of the twentieth century it would be
naive suggest that business can, or should,
conduct and manage their business affairs
without regard to the incidence of taxation
or that they are not, or should not, be attracted
to transactions or investments or forms of
doing forms business that provide reduced
burdens of taxation."
I would therefore reject the proposition that a
transaction may be disregarded for tax purposes
solely on the basis that it was entered into by
a taxpayer without an independent or bona fide

business purpose. A strict business purpose

the apparent legislative intent which, in the
modern tax statutes, may have a dual aspect.

test in certain circumstances would run counter to in our country, is no longer a simple device to raise revenue to meet the cost of governing the

community. Income taxation is also employed
by government to attain selected economic policy
objectives. Thus, the statute is a mix of fiscal

and economic policy. The economic policy
element of the Act sometimes takes the form of an
inducement to the taxpayer to undertake or redirect
a specific activity. Without the inducement

undertaken by the taxpayer for whom the induced offered by the statute, the activity may not be
action would otherwise have no bona fide
business purpose. Thus, by imposing a positive
requirement that there be a such a bona fide
business purpose, a taxpayer might be barred from
undertaking the very activity Parliament wishes
to encourage. At minimum, a business purpose
requirement might inhibit the the taxpayer from
undertaking the specified activity which Parliament
has invited in order to attain economic and perhaps

social policy goals. Examples of such incentives
I have already enumerated.

ClT48/l/VH	81	2//6/88
John(2)

MR GLEESON (continuing): I mentioned one this morning
in relation to investment in Australian films.
And then His Honour finally suggested some
guidelines on page 33:
1. Where the facts reveal no bona fide

business purpose for the transaction,
s.137 may be found to be applicable
depending upon all the circumstances
of the case.
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 the taxpayer
where:

(a)

the transaction is legally ineffective or incomplete; or,
(b) the transaction is a sham within the

classical definition.

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 may not attain the heights of
"artificiality" in s.137. This may
be illustrated where the taxpayer, in

order to qualify for an "allowance"
or a "benefit", takes steps which the

CIT49/l/JM 82 2/6/88

John(2) (Continued on page 82A)
the terms of the allowance provisions of the Act may, when taken in isolation and read narrowly, be stretched to support.
However, when the allowance provision is
read in the context of the whole statute,
and with the "object and spirit" and
purpose of the allowance provisions in
mind, the accounting result produced by
the taxpayer's actions would not, by
itself, avail him of the benefit of the
allowance.
(Continued on page 83)

CIT49/2/JM 82A 2/6/88
John(2)

MR GLEESON (continuing): Your Honours, I went off on to
STUBART in the context of paragraph 6(a) of our
outline of argument. There are, of course, in practice
many forms of business or business organizations
which are motivated by fiscal considerations. Trading
corporations, for example, might establish separate
finance company subsidiaries to carry on financing
activities in order that the loss and gains of the
subsidiaries on foreign currency loans should be
deductible. Trading corporations might establish leasing associates to carry on leasing businesses
so that they can claim the special benefit of investment
allowance deductions. Insurance companies may,
in their corporate organization, establish special
investment subsidiaries because of the taxation
consequences of that.
Of course, a purpose of gaining or producing assessable income is not the same thing as a purpose
of gaining or producing taxable income. Further,
what is relevant for section 51 is the purpose of
the business, not the subjective motive of the taxpayer
who, as I mentioned earlier, might be motivated
to carry on a business for a variety of reasons,
well removed from profit or financial gain, of which
obtaining a fiscal advantage is only one. It is
difficult to see what logical difference there is
between a motive of obtaining a fiscal advantage
and some of the other personal motives of a kind
that I mentioned this morning.
The second proposition that we say is inherent

1n the authorities to which reference has been
made is in paragraph 6(b). We submit that bearing
in mind the presence of section 260 in the Act,
section 51 is not to be construed so as to contain
an implied and different anti-avoidance provision.
That is really a summary of something that, I think,
Mr Justice Gibbs said in terms in one of the cases to which I have referred already.

The third is that the questions whether

buying and selling shares is a business or part
of a business, or whether the shares are trading
stock, are not to be decided by reference to the
presence or absence of a motive of obtaining a tax

benefit. If it were otherwise the decision in those
cases would have gone the other way.
Finally, transactions by way of or similar

to dividend stripping entered into for fiscal motives
are not inherently different from and prima facie
outside a business of dealing in shares but, as
all the cases to which reference has been made
demonstrate, may constitute part of such a business
and may in particular years of income constitute
the whole of such a business.

ClT50/l/SDL	83	2/6/88
John(2)

It is our submission that it is impossible
to reconcile the reasons which the Federal Court
gave for overturning the finding of ultimate fact
made by Mr Justice Yeldham with all or any of
the propositions referred to in paragraph 6.

Your Honours, could I then come to more

particular submissions as to the reasoning of the

Federal Court. I have already foreshadowed and
will not repeat the submission made on the top of
page 5 of our outline of argument concerning the
ground upon which the Chief Judge distinguished

CURRAN. The reference to the Compinge transaction
being pre-arranged may or may not be correct depending
on what is the precise content of the term "arranged".
Undoubtedly the transaction was in view when the
partnership was organized just as when the Jenspart
trading company partnership was organized the 36A
transactions were in view and it was under the control
or power or capacity of the organizer of the partnership,
Mr Fox, to bring those transactions into being.

(Continued on page 85)

ClTS0/2/SDL 84 2/6/88
John(2)

MR GLEESON (continuing): There is nothing in the least

bit unusual that a partnership would be formed

with such a transaction in view. And I have
already made the final point or the point referred to

on the bottom of page 5 and the top of page 6. The
significance of the criticism that we respectfully
make as the fourth particular criticism of the
Chief Judge is not, I hope, a mere debating point or made merely for the purpose of demonstrating
an error of fact. His Honour does seem to have
thought that the consequence of the presence in the Compinge Pty Ltd reserves of the $5000-odd,
the proceeds of the insurance policy, were simply
that $5000-odd did not qualify under section 44(2),
but, of course, the consequence of it was that
the whole of the $936,000 did not qualify.
That, as the Corrnnissioner, ultimately assessed the taxpayers, had a very significant consequence
and one that may be of significance in case it
were argued that section 260 applied to the

present case. The taxpayers were assessed to tax,
and I think the best place to pick this up is
in the appeal book at page 62, on bases that varied
from time to time. The Corrnnissioner had about
two or three different goes at assessing these
taxpayers and they were materially different in
each case. Finally, as appears from page 62, the
taxpayers were assessed to tax upon the basis
that the dividends declared and applied in paying
up the Compinge Pty Ltd bonus issue, which
amounted to more than $900,000, constituted
assessable income since, becat.i.se of the presence of that
amount of $5000, they did not qualify under the
provisions of section 44(2). And the effect of the decision of the Federal Court upholding the
Corrnnissioner's assessment is to produce the result
that Mrs John has a taxable income of 120th of
$900,000, whatever exactly that might be - approximately.

Of course, the question then arises, if

section 260 applies, what is the arrangement which
is annihilated as against the Corrnnissioner. If the
partnership is the arrangement that is annihilated
or the Compinge transaction is the arrangement that
is annihilated, it does not seem easy to reconcile
that with the consequence that Mrs John has
derived assessable income equal to 120th of the

total amount of $900, 000- odd. So I draw attention
to that aspect of the facts simply to illustrate
that if one comes to the question of section 260,
considerable importance may attach to the precise
way in which it is said to operate.

DEANE J:

What was the outcome of that?

I mean, that is

$45,000. Was that cancelled by the losses on
share trading?

ClT51/l/SR	85	2/6/88
John(2)

MR GLEESON:

No, they made a small profit on the Compinge

transaction. The partnership made a loss on
share trading of about, I think, $17,000 during
the first year, it made a profit in the third
year of about $20,000 or $30,000, I forget
exactly what it was now, but - - -
(Continued on page 87)

ClTSl/2/SR	86	2/6/88
John(2)

DEANE J: I have been obscure. If you be correct on
other aspects of the case, would that $45,000
be cancelled out?

MR GLEESON: No. If we are correct on other aspects
of the case - if Mr Justice Yeldham was right in
his judgment, the result is to reduce the amount of
the deduction that she got by way of her partnership
loss by that amount.

DEANE J: Which means that particular transaction would not
have succeeded in the tax sense because what was
saved in one way was lost when the dividend was taxed.

MR GLEESON: No. Indeed, that particular transaction is the
one that I referred to earlier when I said that the
point that the majority were making in CURRAN and
that Mr Justice Stephen was endeavouring to answer
is a point that precisely arises on the facts of

the present case. There you had an example of
a bonus issue that gave rise to assessable income.
Now, so far as Mr Justice Fox is concerned, he did
not mention any of the authorities upon which the
taxpayer relies, with the exception of CURRAN itself.
Perhaps I should deal together with the basis of the
reasoning of Mr Justice Fox and the matter referred to
at the conclusion of the reasoning of Mr Justice Beaumont.
Mr Justice Fox relied upon two cases which were

amongst a number of Federal Court decisions referred
to by Mr Justice Beaumont at the conclusion of his

judgment for his conclusion. The two cases are
referred to on page 627 and they are the cases of

URE and ILBERY. Mr Justice Beaumont, on page 659,
referred to those two cases, and additionally
MAGNA ALLOYS and GURNEVILLE PROPERTIES in support for
his approach, and it may then be convenient at this
stage to turn to that line of authority in the
Federal Court to consider the extent to which it
might be said to cut down the High Court decisions

to which reference has been made. I will take these cases sequentially.

The first
in the line of authority was MAGNA ALLOYS, 49 FLR 183.
If I could read the headnote first - that was a
decision in favour of the taxpayer:
Various criminal proceedings were brought
against three of the taxpayer's directors,
four of its agents, one of its associate
companies and, for a time, the taxpayer
itself. The charges related to the
payment of secret commissions in the
course of the taxpayer's business.
The taxpayer expended some $280,000 in
defending all the defendants -

ClT52/l/HS 87 2/6/88
John(2)
and sought a deduction to 51(1) and it was
held by the Federal Court that that deduction
was allowable -
the taxpayer's motive in incurring
the expenditure was not the critical
criterion for deductibility under

s.51(1). The test in the present case
was whether the expenditure was apt
to serve the business purposes of the
taxpayer.

(Continued on page 89)

ClT52/2/HS 88 2/6/88
John(2)

MR GLEESON (continuing):

Your Honour Mr Justice Brennan, at

page 185 and 186 said:
It will nevertheless aid an examination of
principle if a meaning be given to these
terms in the context of - ·

that is like motive and object and purpose -
in the context of a discussion of section 51,
not in definition of statutory terms but in
identification of concepts to which reference
has frequently been made in applying the

section. Motive means ..... the reason why a
taxpayer decides to incur the expenditure.
Purpose may be either a subjective purpose -
the taxpayer's purpose - where it means the
object which the taxpayer intends to achieve
by incurring the expenditure; or it may be
an objective purpose, meaning the object
which the incurring of the expenditure is

apt to achieve. Both motive and subjective
purpose are states of mind and they are to
be distinguished from objective purpose, which

is an attribute of a transaction. An objective

purpose is attributed to a transaction by
reference to all the known circumstances;
whereas subjective purpose and motive, being
states of mind, are susceptible of proof not
by inference alone but also by direct evidence .....
Though references to motive and purpose are
to be found in cases arising under section 51,
neither motive nor either kind of purpose is a
criterion of deductibility. The statutory
criteria are expressed in the two limbs of
section 51, "incurred in gaining or producing
the assessable income" and :'necessarily
incurred in carrying on a business for the purpose
of gaining or producing such income." The purpose
mentioned in the second limb is not a purpose
imported by the phrase "incurred in carrying on",

but the purpose of the business in the carrying
on of which the deductible expenditure is
incurred.

We seek to place reliance upon that distinction. On
page 187 is said:
The requirement in the second limb that
expenditure be incurred in carrying on a business
parallels the requirement in the first limb that
the expenditure be incurred in gaining or
producing the assessable income. In A.G.C.
A.G.C.(ADVANCES) LTD V FEDERAL COMMISSIONER OF

TAXATION Mason J said: "Thus in the RONPIBON
case the Court stated that 'to come within the
initial part of the subsection it is both
sufficient and necessary that the occasion of the

ClT53/l/VH	89	2/6/88
John(2)

loss or outgoing should be found in whatever
is productive of the assessable income'. So
also it may be said that it is enough to
satisfy the second part of the subsection
that the occasion of the loss or outgoing is
to be found in the carrying on of a business
for the production of assessable income".
Whether the assessable income against

which expenditure is sought to be deducted is
produced in the carrying on of a business or
in some undertaking which does not constitute
the carrying on of a business, the same kinds
of factors are material to deductibility.
Then, on page 189, about the middle of the page,
Your Honour said:
Though purpose is not the test of deductibility
nor even a conception relevant to a loss
involuntarily incurred, in cases where a
connexion between an outgoing and the taxpayer's
undertaking or business is effected by the
voluntary act of the taxpayer, the purpose of
incurring that expenditure may constitute an
element of its essential character, stamping
it as an expenditure of a business or income
earning kind.
And that was held to be the case here with the
company's expenditure on money defending its directors.
On page 193, Your Honour said:
(Continued on page 91)

C1T53/l/VH 90 2/6/88
John(2)
MR GLEESON (continuing):
Once the ''controlling factors" are ascertained, the business purposes for
which an outgoing is incurred may be
determined. In that step towards
characterization, the taxpayer's state of
mind has no part to play. His purpose or
motive is not a controlling factor of the purpose to be attributed to the incurring

of the expenditure. But in ascertaining
the controlling factors, the taxpayer's
state of mind may have a significant evidentiary
role to play, and by leading to the ascertainment
of the controlling factors, it may even be the
determinative element in characterizing
expenditure in a particular case. Nevertheless,
the taxpayer's state of mind - whether intention,
or purpose, or motive - is evidentiary only.
What the taxpayer has in mind may bear

upon "the character of the business or
undertaking" in showing the scope of his

business or undertaking. The taxpayer is at
liberty to determine for himself what the
scope and nature of his business or
undertaking shall be and how it shall be
conducted, the Act having no effect upon
those matters but taking "the result of the
taxpayer's activities as it finds them".
On page 196, in the middle of the page, Your Honour
said:
Given a sufficient identification of

what the expenditure is for and the character
and scope of the taxpayer's income-earning
undertaking or business, the question whether
expenditure is incurred for the purpose of
carrying on a business or for the purpose

of gaining or producing assessable income does
not depend upon the taxpayer's state of mind.
The relationship between what the expenditure is
for and the taxpayer's undertaking or business
determines objectively the purpose of the
expenditure. In cases to which a reference
to purpose is required or appropriate, objective
purpose will be found to be an element in
determining whether expenditure is incurred in
gaining or producing assessable income or in
carrying on business. If the purpose of
incurring expenditure is not the gaining or
producing of assessable income or the carrying
on of a business, the expenditure cannot be
said to be "incidental and relevant" to gaining
or producing assessable income or carrying on

business; or to be incurred "in the course of gaining or producing" assessable income or of carrying on a business; nor can the undertaking

ClT54/l/JM 91 2/6/88
John(2)
or business be seen to be "the occasion of"
the expenditure.
In the present case, the character and scope of the taxpayer's business is known
without reference to its state of mind. Equally,
it is objectively certain that the relevant
expenditure was incurred to defray the legal
costs of the directors and agents in the

criminal proceedings brought against them. The
connexion between the legal services thus
acquired and the taxpayer's business neither
requires nor permits reference to the taxpayer's
state of mind. The nature of that connexion is
to be found in the objective facts found by his
Honour or not in dispute between the parties.
In the joint judgment of Your Honour Mr Just ice Deane
and Mr Justice Fisher, at page 208, in the middle
of the page, the following passage appears:
The controlling factor is that, viewed
objectively, the outgoing must, in the
circumstances, be reasonably capable of
being seen as desirable or appropriate
from the point of view of the pursuit of
the business ends of the business being
carried on for the purpose of earning assessable
income. Provided it comes within that wide
ambit, it will, for the purposes of s.51(1), be
necessarily incurred in carrying on that
business if those responsible for carrying on
the business so saw it.

Now, Mr Justice Beaumont did not explain precisely
what use he made of that decision in his process
of reasoning, but he referred to it in support of
his conclusion and we submit it does not support
his conclusion and does not cut down the effect
of the High Court authorities to which we have

referred. (Continued on page 93)

CIT54/2/JM 92 2/6/88
John(2)

MR GLEESON (continuing): Now the next case was URE V

FEDERAL COMMISSIONER OF TAXATION,(1981) 50 FLR 219.
That was a case concerning the first limb of
section 51 and it was an apportionment case or
treated as an apportionment case:

The taxpayer borrowed money at

commercial rates (up to 12.5 per cent
per annum) paid interest of some
$8,736 in the year of income and lent
the moneys at one per cent per annum
to his wife and to a family company.
The taxpayer paid guarantee fees of two per cent per annum to family
companies which provided guarantees
and securities for two of the loans.
The taxpayer also incurred legal and
valuation fees in relation to

obtaining the loans. The taxpayer
claimed deductions for the interest
and the other payments, and the
Commissioner substantially disallowed
the claims.
And it was held that the expenditure should be
apportioned. It was said it:
was not primarily incurred to produce
assessable income, but was private
or domestic.

At page 223, Your Honour Mr Justice Brennan said:

In the present case a question

arises as to whether it can truly be
said that the incurring of interest
charges at rates of 7.5 per cent ..... is
incidental to the gaining of income
by way of interest at the rate of

one per cent per annum. The answer to
that question does not turn directly

upon the disparity in interest rates,
but upon an examination of the
purposes for which the money was laid
out. The disparity in interest rates
is itself eloquent to suggest the
existence of purposes ulterior to the
earning of interest at the rate of
one per cent per annum, and the
evidence confirms the existence of
further purposes. The loans of the
borrowed moneys made by Mr Ure were
calculated to achieve the further
purposes of providing some income to Mrs Ure, of enhancing the p~ofits of Listohan, of providing Mr Ure and his
family with the Epping residence at a
nominal rental, and of enabling the

ClT55/l/SR	93	2/6/88
John(2)

Joan Honeybourne Trust to take the
benefit of any increment in the capital
value of the Epping property and to enjoy the rents and profits of that property when it became available for
letting at a connnercial rental.
So what happend was that Your Honour said, looking
objectively at the transaction, there are a
variety of purposes and I will apportion the
outgoing between that part of it incurred in
gaining or producing assessable income and that
part of it which was a private or domestic
nature.
Now, the sting in the present case, which

Mr Justice Fox and Mr Justice Beaumont may have
had in mind, is the concluding words of a sentence
in the joint judgment of Your Honour Mr Justice Deane
and Mr Justice Sheppard on page 233. There
Your Honours said:
In the present case, it would be a

misleading half-truth to say that the object which the taxpayer had in mind
or the advantage which he sought in
incurring the liability to pay interest
at rates of 7.5 per cent or more was
the derivation by him of interest at
the rate of one per cent per annum by
re-lending the money which he borrowed.
(Continued on page 95)

ClT55/2/SR	94	2/6/88
John(2)

MR GLEESON (continuing):
That was, no doubt, an object which the taxpayer had in mind. It was an advantage which he sought. In the circumstances, however, characterization of the outgoing
cannot properly be effected by reference
to that object or advantage alone. The
incurring of the outgoing can only be explained
by reference also to less direct objects
and advantages which the taxpayer sought
to achieve and which plainly were of paramount
importance. These indirect objects or advantage
were, in so far as the taxpayer was concerned,
not of an income-earning character in that
they involved the provision of accommodation
for the taxpayer and his family, the financial
benefit of the taxpayer's wife and a family
trust -
and so far that is what Mr Justice Brennan said,
too -
and a reduction in the taxpayer's personal

liability to pay income tax.

That is the point that has been taken up in subsequent cases in the Federal Court and was apparently
taken up in this case.
In the result, the outlays of interest

can be seen as servicing a number of objects

indifferently. The predominant, though
indirect, objects were not concerned with
earninP, assessable income for the taxpayer
but were, for the purposes of s.51(1), of
a private and domestic nature -

and, thus, apportionment. Of course, no question,
no issue in that case, of whether anybody was
carrying on a business. It was a case about

the first limb of section 51(1).
The next case was the case of the Perth

solicitor, Mr Ilbury, in 58 FLR 191. This is
a case that is much called in aid, these days,
in the Federal Court by the Commissioner. It
is a case in which this Court refused special
leave to appeal, as I understand it, on the ground
that a concession was made that the case was -
and it is recorded, actually, in the judgment -
simply an application of MAGNA ALLOYS to the
facts and circumstances of the particular case.
If I could read the headnote:

ClT56/l/SDL 95 2/6/88
John(2)
The taxpayer borrowed $20,000
from an independent finance company at
fourteen per cent per annum. He exercised his option under the loan agreement to pay five years' interest, namely $14,000, in
advance. Pursuant to the agreement, the
interest on the loan thereafter became four

per cent per annum. The taxpayer borrowed
the necessary $14,000 from a bank. After
the prepayment of interest the finance company
assigned its interest in the $20,000 loan
for $6,140 to a company associated with

the taxpayer and his wife. The taxpayer
subsequently -

and I underline that word -
used the borrowed $20,000 to pay for most of

a house he intended to rent out. The taxpayer's
purpose in making the $14,000 prepayment
was to obtain a tax deduction for that sum.

That is the way the headnote records it. It
was, of course, a prepayment of interest -
interest on money which the taxpayer borrowed
and he used the borrowed money to buy income-
producing property.
The taxpayer claimed the $14,000 as a
deduction under s.51(1) of the INCOME TAX
ASSESSMENT ACT 1936 .....
Held: Appeal allowed - (1) The taxpayer's purpose in paying the $14,000 was not to
acquire property from which to derive income;
it was to derive a tax advantage .....
(2) If s.51(1) were applicable, then s.26O
could not be employed to defeat the
transaction.

(Continued on page 97)

C1TS6/2/SDL 96 2/6/88
John(2)

MR GLEESON (continuing): Both aspects of that are potentially

relevant to the present case. I do not use this following expression disrespectfully, I think it
may have been used in another case. But this is
the case in which two members of the Federal Court
engaged in what has been called a flirtation with the
fiscal nullity doctrine but it was later rejected
by the Federal Court in the next case I am going

to refer to of OAKEY ABATTOIRS. Mr Justice Northrop
and Mr Justice Shepherd agreed with Mr Justice Toohey
and Mr Justice Toohey's judgment was the leading
judgment.
They added to their agreement approval, or

tentative approval of considerations of fiscal
nullity. It may be convenient at this stage
to mention that subsequently,in a judgment of
Mr Justice Fox, Mr Justice Fisher and
Mr Justice Beaumont in the Federal Court in
OAKEY ABATTOIRS PTY LTD V FEDERAL COMMISSIONER OF
TAXATION, 55 ALR 291, the Federal Court held
that the doctrine of fiscal nullity did not apply
in Australia and in subsequent cases, like this
case, the Commissioner has from time to time mentioned
it formally for the purpose of keeping it open for

possible argument in this Court. But OAKEY ABATTOIRS
was the end of fiscal nullity in the Federal Court.
I will go directly to the judgment of Your Honour
Mr Justice Toohey.
The facts appear at page 195. The detail

of the facts is of some importance. The sequence
of events was that the taxpayer borrowed the amount
of $20,000 under a contract which contained a
provision for the prepayment of interest and prepaid
the interest, then the loan was assigned. Two
days later he bought the house that he rented.
The interesting question, of course, is what the
decision in the case would have been if the facts

had been ever so slightly different. Let it be
supposed - to use the conveyancing steps that are
familiar in New South Wales - the taxpayer had
contracted to buy the property which he intended
to let out, to produce rental income, and then on
completion of the contract a financier turned up
on completion and provided the purchase money under
the terms of the loan applicable in the present
case. That money was used to complete the purchase
and then the rest of the transaction proceeded as
in this case, that is, there was a prepayment of
interest and an assignment of the loan.
The detailed steps appear at page 195. At page 198 Your Honour rejected an attempt by counsel for
the taxpayer to rely on what I will call a second
limb of section 51 on the basis that it was raised
too late. Then Your Honour went on to deal with the
first limb.

ClT57/l/MB	97	2/6/88
John(2)

MR GLEESON (continuing): On page 200 Your Honour referred
to the case of URE that I just read, and the

judgment of Mr Justice Deane and Mr Justice Sheppard, from which I have just read, and said:
In the present appeal counsel for the
taxpayer stressed that there was a
business reason for paying the interest
early viz. "it cuts down the rate of interest
by $2,000 a year for twenty-five years.
The payment of that $14,000 not only achieved
the discharge of liabilities to $14,000 over
the first five years but paid when it was
reduced the future interest bill by $50,000".
That may well have been a consequence of the prepayment of interest but it was not
suggested by the taxpayer as his reason for
doing so nor as the purpose sought to be
achieved; nor in my view does it say
anything about the character of the payment.
The taxpayer never tried to conceal that his
object in paying five years' interest in one
year was to obtain the tax advantages

thought to flow from that course. To the
extent then that purpose is relevant to throw
light upon the character of the payment, no
purpose can be discerned here other than
that of gaining a tax advantage.

Then on page 203 the following appears:
At the time of the prepayment of interest the taxpayer had not acquired any property
from which he hoped to derive income.
There was no relevant income-earning
undertaking or business in existence. That
is not necessarily fatal to an argument that
an outgoing incurred is "incidental and
relevant" to gaining or producing the

assessable income. But what is under consideration here is a prepayment of
interest made at a time when no relevant
income-producing activity had begun and
not made for any purpose connected with

such an activity. The money was not outlaid
to gain income; it was not incidental or
relevant to the gaining of income.

It is because of that that I gave the example of

slightly altered facts of the case. Now, Your Honour
then dealt with section 260 on the bottom of
page 204 and page 205 by saying:

ClT58/l/HS 98 2/6/88
John(2)
As to the operation of s.260 of the
INCO1:1E TAX ASSESS1:1ENT ACT, I would just say
this. In CECIL BROS members of the court
expressed their difficulty in seeing how
s.260 could apply to defeat or reduce any
deduction otherwise truly allowable under
s.51. In a number of decisions the
High Court has pointed to "the very restricted
operation conceded to s.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 couse of conduct he was entitled
to adopt. There was no purpose or effect
such as is described in s.260.

(Continued on page 100)

ClT58/2/HS 99 2/6/88
John(2)
MR GLEESON (continuing): There is a series of cases now in
the Federal court in which they have said that you
cannot apply section 260 to a section 51 deduction.
Now, that is the case, or it is fair to sav that is
a tax benefit will defeat the application
the case that is relied upon often in the Federal securing
of section 51. I have referred to OAKEY ABATTOIRS

and I will not go back to that. The final case
referred to - it was URE and ILBERY that

Mr Justice Fox relied upon. The extra case that was
referred to by Mr Justice Beaumont is GWYNVILL
GWYNVILL. PROPERTIES - COMMISSIONER OF TAXATION V
GWYNVILL PROPERTIES, 13 FCR 138.
I am sorry, I have given Your Honours some
misinformation. It was in this case that special
leave to appeal was refused on the ground that a
concession had been made that MAGNA ALLOYS, that it was
just a question of the application of MAGNA ALLOYS
to the facts, and that concession is recorded in
the judgment of Mr Justice Fisher at the bottom of
page 141.

MASON CJ: Special leave was refused in ILBERY, but not on

that ground.

MR GLEESON:	Yes, I believe it was.
MASON CJ:	Was an application for special leave made in

OAKEY ABATTOIRS?

MR GLEESON:

We do not seem to know.

There are conflicting

recollections at the bar table. I have no knowledge

of it at all. Mr Shaw and Mr Burns think it was,
but they are not sure,and we can all check it up.
In GWYNVILL PROPERTIES there was a division in the court between Mr Justice Fisher on the one hand and
Mr Justice Neaves and Mr Justice Jackson on the other.
If I could read the headnote:

The respondent taxpayer was one of a group

of companies. The taxpayer had not previously

borrowed money from outside the group. On
3 February 1~78, the taxpayer borrowed the sum of
$2,400,000 from an independent finance company.
It paid the first quarter's interest of $69,271

on that date. It was a term of the loan that
the finance company could require five years'

interest to be paid in advance. As the taxpayer
had expected, the finance company did so require,
and the taxpayer paid it $1.5m interest on
6 February 1978. It was also a term of the
loan that the finance company might assign its

interest in the loan. As the taxpayer had
expected, the finance company did assign its
interest under the agreement at the discounted
figure of $916,729 to another company in the
taxpayer's group .... LThe taxpayer claimed a
deduction for interest of $69,271 and $1.5m.

ClT59/l/VH	100	2/6/88
John(2)

By a majority it was held that the deduction was
not allowable:
The transaction as a whole was not explicable
as achieving the business end of borrowing
outside the group. There was no discernible
relationship between the expenditure incurred
and carrying on the business in question.

Again, in our respectful submission, that is fairly
well removed from the problem that arose in JOHN's
case·, in our case.
(Continued on page 102)

ClT59/2/VH	101	2/6/88
John(2)

MR GLEESON (continuing): In dissent, Mr Justice Fisher
said at the bottom of page 142:
The fact that it was also a major concern of
the taxpayer that it achieve a deduction of the
amount of interest paid and that it sought
thereby a tax benefit or advantage does not
deny the taxpayer a deduction under s51(1).
As Brennan J said in MAGNA ALLOYS, after
noting that the trial judge had held that it was
the personal interests of the directors
which provided the principal motive or reason
for MAGNA ALLOYS incurring the expenditure.
"The character of the expenditure is not lost
because the expenditure was apt to serve both
the business purpose and the purpose of
defending the directors, nor is that character
lost because the principal or dominant reason
for incurring the expenditure was to defend
the directors."
The following passage appears in the joint
judgement:
"In our view however, the identification of the
dominant motive of the directors in deciding to
incur the expenditure was not the essential
question which arose for determination. There
is no necessary dichotomy between what can
properly be regarded as incidental and relevant
to the business ends of a business and that which
advances the personal interests of those persons
who are employed or otherwise involved in that
business."
I have emphasised the word "motive" because in
my opinion in this matter also it is not the
essential question for determination.

I adopt this as the proper approach to a
claim for deduction under s 51 even if the obtaining of a tax advantage, contrary, in
this instance, to the trial judge's finding
of fact, was the principal or dominant reason
for incurring the expenditure.

Then His Honour referred back to PATCORP and quoted
from the judgments in that case.
The trial judge referred to a number of additional
authorities for this proposition which I need not
repeat because, with the exception of two
herafter mentioned, they are all to the same
effect. Furthermore counsel for the Connnissioner
did not on the appeal support his contrary

contention with any authority. The two cases

ClT60/l/MB 102 2/6/88
John( 2)
which on the face of them might appear to
support a contrary conclusion are ILBERY and

DEANE. In my view each case was convincingly
distinguished by the trial judge, particularly
on their respective facts, and I need no more
than adopt his reasoning.
Counsel for the the Commissioner also

contended that even if the payments of
interest were allowable deductions under
s 51(1), the application of the principle
known as the "doctrine of fiscal nullity"

denied entitlement to a deduction. He also
submitted that the trial judge should have
held that the arrangements between the taxpayer
and Herunda were void against the Commissioner
by virtue of s 260. In each instance he
acknowledged that he had to contend with
contrary decisions of the Full Court of this
Court and he said little more on the substance
of the two points than to make formal submissions
to preserve his position on any further appeal.
This was certainly the case in relation to
fiscal nullity, see OAKEY ABATTOIR.
Counsel for the Commissioner said little in

relation to s 260 in his initial submissions.
He was however subsequently granted leave to
make further submissions after taking instructions.
He contended that notwithstanding a number of decisions of the Full Court of this Court
and the decision of the High Court in CECIL BROS,
s 260 could be used to deny a deduction
otherwise allowable under s 51(1). It is my opinion
that we should consider ourselves bound by
these decisions to hold to the contrary,
notwithstanding the recent decisions of the
High Court on s 260 in GULLAND; WATSON and

PINCUS. These decisions may require reconsideration
of the general statements which have been made,

frequently obiter, indicating difficulties
in applying s 260 "to extinguish a deduction
otherwise properly allowable under s 51.
In FEDERAL COMMISSIONER OF TAXATION V LAU
the Full Court of this Court refused to apply
s 260 to deny as 51(1) deduction.
(Continued on page 104)

C1T60/2/MB	103	2/6/88
John( 2)

:MR GLEESON (continuing):
Finally, the Commissioner invokes
section 260. There are obvious difficulties
in seeking to apply section 260 to deny
a deduction to a payment
which qualifies as an allowable deduction.
The question was considered by a Full
High Court in CECIL BROS ..... Although,
in strictness, their Honours did not
need to decide that section 260 could
not apply to defeat or reduce any
deduction otherwise truly allowable under
section 51, their expressions of opinion
the point should be treated as authoritative
for present purposes.

BRENNAN J: How does one marry that with the proposition
that one cannot construe section 51 as having
any tax minimization provisions built into it, since
section 260 is to be found in the Act?

:MR GLEESON:

I think the answer to Your Honours question,

if there is one, must lie in the reason why
section 260 does not apply in a case that is
bound to fall within section 51. And as I
would understand what was behind the thinking
of the High Court in CECIL BROS, it was something
to this effect: our Act proceeds upon the basis
of bringing to tax taxable income which is
assessable income less allowable deductions. If,
by hypothesis, something is an allowable
deduction, then the steps by which that result is
achieved cannot constitute an alteration of the

incidence of tax or an avoidance of tax. The
Act operates, as it were - you are just applying
the Act and that which the taxpayer is procurring
or achieving by whatever he has done to produce
the result that section 51 applies has the result
that the Act works according to its terms. It
is involved in the problem that underlay section 260

and that was sought to be avoided in relation
to part 4A, inherent in the meaning of the words
"avoidance of tax" or alteration of the incidence

of tax. The expression that is used in part 4A
is "tax benefit" and one defined form of tax benefit
is obtaining an allowable deduction. Another
defined form of tax benefit is procuring the result
that a certain item of income is not part of
assessable income.

But one of the difficulties that the

courts over the years experienced in relation to
section 260 was the meaning of those concepts -
avoidance of tax, because, of course, time after
time, transactions that might be called colloquially
"tax dodging" were transactions that produced the

ClT61/l/SR 104 2/6/88
John(2)
result that a specific provision of the Act
operated according to its terms, of which CRIDLAND

must be the best example. Now, in our respectful
submission, if that is why section 260 would not
defeat a deduction that was otherwise allowable
under section 51, it is not inconsistent with that
to say that you do not treat section 51 as
containing its own implicit anti-avoidance implication
or notion or idea.

Mr Justice Neaves was in the majority in

GWYNVILL PROPERTIES and his reasoning on the

point really begins at pages 150 to 151. And he

founded his decision on MAGNA ALLOYS. He quoted
from MAGNA ALLOYS in the middle of page 150 and
then said:
The taxpayer's case concentrates upon

the terms of the loan agreement. It
submits that the payments were made to
satisfy its legal obligation under that
agreement to pay interest to Herunda
upon the loan,.that it obtained the loan
in the course -0f the business it was
carrying on for the purpose of gaining
or producing assessable income and that
the amounts expended are properly to be
regarded as "incidental or relevant" to
the derivation of such income.
(Continued on page 106)

ClT61/2/SR	105	2/6/88
John(2)

MR GLEESON (continuing):
If there were no more in the case than that,
the taxpayer would be entitled to the deductions
claimed, subject only to the question whether
the whole of the sum of $1.5 million is
properly allowable as a deduction in the

year of income ended 31 July 1978 ..... But
to approach the matter in this way is, in
my opinion, to have regard to part only
of the relevant transaction and to treat as of no consequence the other events to
which reference has been made.
The primary judge was satisfied that

the transaction in question was different
to any which the taxpayer had previously

undertaken. The most important departure .....
was that the taxpayer had not previously
borrowed from outside the Franklin's Group.
Then he referred to the evidence given as to
the need for the loan.
In the light of the findings of the primary judge it must be accepted that in
late 1977 when the taxpayer began negotiations
with certain financial institutions, including
Herunda, the taxpayer perceived that the
funds necessary to support its property
investment activities to the close of the
financial year and beyond might not be
available to it from its traditional sources,
.namely its trading profits, the sale of
assets and moneys available to it from within
the Franklin's Group. In such circumstances
it could well be seen to be desirable that
the funds available to the taxpayer from
those sources should be supplemented by

borrowing outside the Group. The question

arises, however, whether what was done
thereafter, when viewed objectively, is
explicable in those terms.

So, His Honour's process of reasoning was to take the proffered commercial explanation of the transaction and then see whether it stood

up and he said it did not. He said:
In considering the "essential character"

of the payments in question attention must
be given to the following significant features
of the transaction. In the first place,
there is the finding that what the taxpayer
was seeking was an arrangement whereby,
in addition to a requirement that a substantial
amount of interest be prepaid, the loan

ClT62/l/SDL 106 2/6/88
John(2)
itself would be sold at a discount price.
That this was part of the taxpayer's concern
is shown by -
a certain document.
One may ask why, if the taxpayer's sole
interest was to obtain funds from outside
the Franklin's Group, it was of any concern
to it that the loan itself, after the
prepayment of interest, the loan would be

sold at a discount. The only possible
explanation is, that it was concerned to
arrange, if possible, that, after the
prepayment of interest, the loan would be
sold at a discount to another member of
the Franklin's Group.

And then he refers to other aspects of the facts
and, on page 152, in the middle of the page,
says:
Taking these matters into consideration,

I am unable to conclude that the transaction
as a whole is explicable as being appropriate
to achieve the espoused business end of
supplementing from an outside source the
funds available to the taxpayer from its
own resources. Whatever else the transaction
may have achieved, it did not achieve that
result and was not capable of doing so.
If the purpose of the taxpayer was to obtain
such funds, the transaction was not apt
to achieve that purpose.
In the result, I am not satisfied that

the taxpayer has established that the interest
payments were "necessarily incurred in carrying
on a business".

So, the process of reasoning was: ~The taxpayer
has failed to persuade me that the reason he
has advanced, or the business end that was claimed
to be served, was achieved."

(Continued on page 108)

ClT62/2/SDL 107 2/6/88
John(2)

MR GLEESON (continuing): Therefore section 51 does not
apply, but although it is not explicitly adverted
ta and there does not seem to be an assignment
of it as the reason for the decision, the flavour
of tax avoidance may have been significant in

His Honour's process of reasoning; but how
significant, or why, it does not actually emerge. Mr Justice Jackson came to the same conclusion on
pages 154 and 155 referring inter alia to URE,
ILBERY and MAGNA ALLOYS, and he specifically founded his decision upon ILBERY on page 157 where His Honour
said:
In these circumstances I am of the view that the whole of the payments did not satisfy the requirements of the second
limb of s.51(1). Nor in my view could they
be regarded as being in toto "losses and
outgoings ... incurred in gaining or
producing the assessable income" in terms of
the first limb of s.51(1). The outgoings in toto were simply incurred in seeking to gain an allowable deduction: cf ILBERY.

So, there is presumably a step right into motive,
the taxpayer's motive.

WILSON J: Did you say it was not a permissible finding of
fact in the circumstances of this case?

MR GLEESON: That that was the taxpayer's motive?

WILSON J: No, that that was the finding of fact in the
circumstances of the case.

MR GLEESON: No, Your Honour. The problem with the case - and
as I understand it, it was a problem in relation to
special leave to appeal -appears on the bottom of
page 141:

be applied ..... is MAGNA ALLOYS -
Both parties accepted that the test to

and it was a question of applying the test to the
facts of the particular case and both
Mr Justice Neaves and Mr Justice Jackson -

WILSON J: Yes, I understand your point of criticism. I had
not appreciated that premise.

MASON CJ: By the way, Mr Gleeson, special leave to appeal

was refused in OAKEY ABATTOIR, 155 CLR 696.

MR GLEESON: Thank you, Your Honour. I suppose the
applicant for special leave to appeal in OAKEY
ABATTOIR would have been the taxpayer, because the
Federal Court in OAKEY ABATTOIR applied section 260

ClT63/l/HS 108 2/6/88
John(2)
and the facts and circumstances of that case are not

particularly relevant to the present. Mr Shaw
tells me that the High Court said that special leave
to appeal was refused, but the refusal was not to
be taken to imply anything about the correctness
of what the Federal Court said about section 260.
I may be able to take comfort from the silence on
the subject of the correctness of what the
Federal Court said about fiscal nullity, but that
might be taking it too far.
Now, Your Honours, the other points in our

outline of argument are of relatively minor
importance and I will not go through them in
detail.

(Continued on page 110)

ClT63/2/HS 109 2) 6/ 88
John(2)
BRENNAN J: Before you get to them, Mr Gleeson, may I
ask how then does one approach the characterization
of the allocation of the dividends to the payment
for the shares, having regard to the authorities
that you have just been speaking of?

MR GLEESON: You begin with the circumstance, in our
respectful submission, that the objective
transaction that occurred in relation to
the Compinge companies, like the objective
transaction that occurred in relation to
Stewart Bacon was on theface of it, an ordinary
transaction. There was a purchase of shares in a
company that had accumulated profits. There was
then not a declaration and payment of a cash dividend, but a declaration of a dividend to
be satisified by being applied to payment up of
bonus shares. And then there was a sale of the
shares originally bought and of the bonus shares.
It was in its objective features not dissimilar
to a dividend stripping operation.

BRENNAN J: Is ·this ~ig~t, because in a dividend stripping
operation, the only outlay that is made is the
acquisition cost?

MR GLEESON: Yes. The only difference between this and
a dividend stripping operation is that in a dividend
stripping operation the dividend stripper ends up with cash,
-whereas in this operation he ends up with shares available
for sale.
Now, the purpose of the payment of the

dividend is to satisfy the obligations which
have resulted from the resolution of the company
resolving to make the bonus issue, and they are
to satisfy the taxpayer's obligations to pay those

shares. The resolution of the board of directors
of the company has been that a dividend will be
declared, that new shares will be allotted in

the capital of the company and that the dividend
will be applied in payment up of those shares.

BRENNAN J: How does the taxpayer acquire an obligation?
MR GLEESON: Well, the articles of association of the
company bind the taxpayer and the resolution of
the company is that the dividend will be declared
and allotted to the taxpayer. I am not sure that
I have ever come across a consideration of the question of what would happen if a shareholder in a company
that resolved to make a bonus issue of shares did

not accept the shares. The dividend is a conditional
dividend; it is a dividend with strings attached.
The company is not prepared to part with the money,
but what the company is prepared to do is issue
shares which will be saleable by the shareholder

CIT 64/ 1 / JM 110 2/6/88
John(2)

in the company and to apply the dividend to
pay up those shares. At all material times
the company has got a million dollars, or
whatever the case may be, in the bank.

(Continued on page 112)

CIT64/2/JM 111 2/6/88
John(2)
MR GLEESON (continuing): Now, as I recollect it, there was some discussion in CURRAN's case in the judgment
of the circumstance that the resolution declaring
the dividends was elliptical in that regard; that
the Court construed the resolution to give it the

effect that I have just described. So the purpose
of the transaction from the company's point of view
is to increase its capital - its paid-up capital, -
to declare a dividend but not to part with the cash
representing the amount that it has available, but
to keep that as part of its paid-up capital. The
purpose of the transaction, from the point of view
of the shareholder, is to receive shares which he
has available for sale, and which he proceeds to sell.

BRENNAN J: In CURRA.N's case the Chief Justice, at page 415,
dealing as it seans to me with the relevant provisions
of section 51(1),says that:
In my opinion -
the taxpayer -
will be entitled to regard those shares as
having cost him that amount of money.

MR GLEESON: Yes, Your Honour.

BRENNAN J: Now, I do not, as at presently advised, see the
link between the words of 51(1) and being entitled to treat himself as that amount having been an expenditure
incurred by him, costing him that amount.

MR GLEESON:

There is, of course, no suggestion that the

taxpayer has some kind of choice or discretion as to whether he will take it in money or take it in shares.

BRENNAN J: No.

MR GLEESON:

But the consequence of what has happened,

particularly when you relate it, as His Honour did,
to the operation of the INCOME TAX ASSESSMENT ACT,
is that the taxpayer is taken to have received
assessable income for what woul4, but for 44(2)(b)(iii),
be assessable income, in the form of a dividend, but
he has not had it paid to him, he has not been

entitled to receive it in cash. As a result of
the operation of the company's articles of association
the contract- between him and the company works in
such a way that the company is to be treated as
entitled to apply that sum of money in payment up of
the shares. That must be what His Honour had in mind
when he says he is entitled to treat those shares

as having cost him that amount of money. It is because
of the contract between the taxpayer and the company,
constituted by the company's articles of association, that
the company is entitled to do this and, at least to

ClT65/l/VH 112 2/6/88
John(2)
the extent to which he is getting it in the form of
shares, not of cash, the taxpayer is obliged to

accept it or suffer it. Then the INCOME TAX ASSESSMENT

ACT tells him that, subject to 44(2)(b)(iii), he has
derived assessable income, but he has not got any
money in his pocket. What he has got is shares.
His Honour's p~ocess of reasoning is then: those
shares must be taken to have cost him something and
that cost must be treated as an outgoing incurred
in carrying on a business for gaining or producing assessable income, a business which he pursues, in

due course, by selling the shares.
Mr Justice Gibbs did not see it that way, or did not find it necessary to decide whether that was the
right way to look at it.

BRENNAN J: Well, His Honour's analysis avoids that step, does

it not?

MR GLEESON:

Yes. I have to draw Your Honour's attention to

the fact, although it does not emerge clearly or perhaps,
at all, from the decision in CURRAN, that there is an
important difference in practical consequences between
the approach of Chief Justice Barwick and
Mr Justice Menzies on the one hand, and Mr Justice Gibbs on the other.

(Continued on page 114)

ClT65/2/VH	113	2/6/88
John(2)

MR GLEESON (continuing): It was unimportant in CURRAN and it

would be unimportant in the present case, but it
would be important in a case like the case of the
ordinary bonus issue by public companies where the
bonus issue did not use up all the available reserves.
You would then have an apparent difference, or might
have an apparent difference between Chief Justice Barwick
and Mr Justice Menzies on the one hand and
Mr Justice Gibbs on the other as to what you would

take as the value of the bonus shares. You certainly
could not necessarily treat,on Mr Justice Gibb's
approach,as the value of the bonus shares,the
totality of the funds of the company to which
ownership of all the shares in the assets of the
company entitled you. That, in the end, never
had to be worked out because of the legislative
amendment to section 6BA, but that would have been
the next problem down the road if there had been no
amendment. For those reasons,we submit, the appeal
should be allowed, Your Honours.

MASON CJ:

Thank you, Mr Gleeson.

Yes, Mr Shaw.

MR SHAW:

In our submission, the beginning of a consideration

of this case is most satisfactorily to be found
in seeing what the facts are and, in our submission,
when one sees what the facts are, that is also

the end of the appeal.

In saying that we would

observe in relation to my learned friend's submission

that his constant reference to motive did not

demonstrate that the motive was not the purpose.

Something that is the motive may not be the purpose,
but it may, it is all a question,one has to look.
In considering what the purpose of the transaction

is, what the motive is ~aybe, as Your Honour

Mr Justice Brennan said, an important evidentiary

fact.

So that we would submit that it is not

enough for my learned friend to say whatever he

says it was was the motive, what he must say is

it was not the purpose.

Now, the facts are conveniently summarized by
His Honour Mr Justice Beaumont at pages 635 to 648
of the appeal book.

(Continued on page 115)

C1T66/1/MB 114 2/6/88
John(2)

MR SHAW (continuing): It is perhaps convenient to approach

the facts through that summary, going from time
to time, to what was said by His Honour

Mr Justice Yeldham. At line 30, on page 635,
His Honour speaks of the history of the matter
commencing with the conversation between Mrs John
and Mr John, in which Mr John said there was
going to be:

an horrendous tax problem this year -

and here was a way to fix it up. Then he goes on
to recount more of what passed and then at
page 636 refers to Mrs John tax return and what
that showed. The tax return, in fact, does not

appear in the appeal books. We have it available
if the Court desires it. It does indeed show
what is said there. It shows a taxable income

of $25,159 and the only other income beside that
disclosed is $8480 from something called 11 Peal Valley Machinery Service 11 , That is

available if it is thought to be useful. When one
looks at page 548 of the appeal book, one sees,
going from the bottom of page 548 over to the
top of page 549, that in the year of income:
Malindi -

that is the partnership -
claimed in its return of income an
"adjusted net loss" of $2,577,286 -

of which the almost the whole is the sum which

relates to these transactions. Now, it ~ppears
from that, in our submission, that for the
members of the partnership, the significance of
the loss which was said to arise out of these
transactions lay in matters entirely outside
partnership affairs. For Mrs John it was the income
from the trust. For the other partners there is
no evidence about them, but the circumstances in

which the loss arose demonstrate that for them too,
the loss being created, so it was said, in these
transactions,had no significance for the
partnership business, its significance lay in what might be called private matters - matters external to the partnership and it could not be said therefore
in relation to this lot what was said in the
quotation which my learned friend read out in
STUBART's case. It is in Dominion Law Reports,
One of the passages he read was on page 30.

ClT67/l/SR	115
John(2)

MR SHAW (continuing): His Honour Mr Justice Estey refers
to something written by Ward and Cullity:

who stated, in answer to the question: can
it be a legitimate business purpose of a
transaction to minimize or postpone taxes?:
"If taxes are minimized or postponed,
more capital will be available to run the
business and more profit will result."

All we are submitting is that that reasoning is

unavailable here. The objective facts demonstrate
that the significance of the loss had nothing to
do with the partnership business.
Mr Justice Beaumont goes on to refer to the

execution of the partnership agreement. This is
at page 637 in volume III. The express reliance
on CURRAN's case is referred to at the bottom of
that page.

DEANE J: Is not what you say there really by the way?
I mean, there was no loss.

MR SHAW: No.

DEANE J: There was a profit.
MR SHAW: Well, that is true.

DEANE J: So, what we are concerned with is the application
of the INCOME TAX ASSESSMENT ACT to a business

which earned a profit. I do not follow the
significance of your saying that the loss was
not for the purposes of the partnership business,
or that the tax saving was not.
MR SHAW: In fact the partnership did not make a profit

overall; it made a loss.

DEANE J: I am sorry, I thought it had made a profit.

MR SHAW: It made a small commercial profit on the Compinge
transactions, but overall it made a loss.

DEANE J: That partly answers my query.

MR SHAW: The tax loss was slightly larger than the tax
loss deriving from these transactions. That
appears, Your Honour, at the top of the page

I was referring to before, 548, going over the top of page 549.

BRENNAN J: On the Compinge transactions, as a commercial
activity, that was a profitable one.

MR SHAW: It produced - I am just going to come to that,
what happened.

CIT68/l/JM 116 2/6/88
John(2)

BRENNAN J: What loss are you speaking about?

MR SHAW:

What I am speaking about is the loss or outgoin8

said to the be made available because the "cost of the - cost in inverted commas - bonus shares
ought to be taken into account.

BRENNAN J: You are speaking about the cost of the bonus
shares, are you?

MR SHAW: Yes. Now, on page 638 and going over to 639 there
appears a proposal which is put forward to finance
the Compinge transaction, which demonstrates -
although the precise details of that were not
exactly followed, that the whole natter "Was pre-arranged
Then, at the bottom of that page, there 1s a

reference to a second partnership. I do not know
in fact whether the name of that partnership is
correctly stated there; it is called something else

somewhere else. But there is, in any case, a
second partnership which begins with "P".

What happened was that each of the

partnerships bought 50 per cent of the shares 1n
the companies. The reason it is important to
remember is that when one is considering what
was paid and what was received by Malindi
is tha~ it relates only to half of the relevant
companies.

(Continued on page 118)

CIT68/2/JM 117 2/6/88
John(2)

MR SHAW (continuing): Then at page 641 the entering into
the partnership is referred to and at page 642
the fact that Mrs John, in fact, was unacquainted

with most of the members. Then the purchase of
half the capital on 27 April 1977 is referred to
at line 19, the issue of the bonus shares on
the 28th and the sale of the shares on the 29th
at the top of page 643, and a summary of the
various transactions appear in the following
pages with a number of accounts.
Now, if one goes to page 555 a more detailed

account is given in the court below by
His Honour Mr Justice Yeldham and at page 556,
the place of Mr McNeill the person who managed the
stock exchange transactions is referred to.
He managed the stock exchange transactions, but,
as it is stated at lines 23 and 24, he had no part

in the Compinge dealings. The location of the
relevant companies by Mr Rosenblum is referred to
at page 558 at line 23, and at page 559 the
judgment goes into some extensive references to the
affidavit material that was before the Court.
Finally at page 571, at line 35, there is a reference
to the fact that the Dickens and Carey group,
which is the same group as the Compinge group under
another name, originally contained 18 companies;
the company structure is set out on the next page,
and at the next page at line 3 it said that:
Only six of the companies were the
subject of acquisition by the Malindi
partnership -

and which they are is then set out, and then in the table which follows the net assets of the group are
tabulated in the table which ends by showing net
assets of $2,149,850.00 at line 6 in the last
colunm on page 574. Then at page 575 at line 9
His Honour says:

I am satisfied that as at the commencement
of April 1977 the Compinge companies, and
in particular the six with which the
present appeal is principally concerned,
were dormant, their combined net tangible
assets amounted in all to $2,149,850, and
the shares in the holding company were
owned by Daross and Valpam which were in
turn controlled by Messrs LeMarchant and
Creary.
(Continued on 119)

ClT69/l/HS 118 2/6/88
John(2)
MR SHAW (continuing): Then he goes on to refer to
R.M. Services and, at line 19, says:
On 15th April, 1977 R.M. Services Pty
Limited purchased for $2,125,442 from Daross
Investments Pty Limited and Valpam Investments
Pty. Limited the whole of the issued shares
in the capital of Compinge (Holdings) Pty
Limited.

So there are net assets of - although His Honour
described it as "net tanRible assets" the proper
description seems to be net assets" - of $2,149,000
and they were bought for $2,125,000 - just slightly
less than the net assets of the group.
Then further transactions are described

on the rest of that page and the top of the next
one and, at line 13 on page 576, His Honour says:
Between 15th and 27th April, 1977 the shares
in the remaining 12 Compinge companies
were sold to a third party -

and then says what the consequence of that is

so far as the group was concerned. At line 24:
On 26th April Malindi Trading Co. instructed a firm of stockbrokers to offer to purchase
half of the issued shares in the capital
half of the issued shares in the
of each of the six Compinge companies. purchase
capital of each of the six Compinge Companies
for a total price of $2,894,150.96.

So that, a purchase having been made of the whole on 15 April, for $2,125,000, on 27 April
an half is purchased for a sum - $700,000 or something -
in excess of that amount. So that the value of the e:roup
had somehow, between 15 April and 27 April, been

increased. (Continued on page 120)

ClT70/l/SDL 119 2/6/88
John(2)

MR SHAW (continuing): The precise way in which that was
done does not perhaps matter. If I could give
an indication of how it was done; all of the evidence
was not before the court in relation to all of the

companies but some of the evidence was. I could
give references to evidence which was, in fact,
in the appeal books before the Federal Court but
has not been reproduced here, if it was thought
to be useful. But the kind of process involves
this. If you have company B, a wholly owned
subsidiary of company A and company A has net
assets, leaving out the value of its subsidiary
of $100, and so does company B, if company A
then sells its shares in company B to X, it can
sell them for, say, the value of the net assets,
$100, and X will owe to A $100 which will then
have assets of the original assets it had~ $100,
and the debt which is owing to it, $100. That
is $200. Then the owner of the shares in A can
then sell to X the shares in A for $200. So X
has bought the shares in A and the shares in B
for $300 despite the fact the net assets of each

of them is only $100, something like that. The
precise mechanism does not matter.
But something happened of the general nature of which I have just described which had the result
that when the shares in the six companies were
purchased on 27 April a half was worth 2.9 million
whereas on 15 April a half was bought for 2.125 million
and the net assets of the group were only faintly
in excess of that.
(Continued on page 121)

ClT71/l/MB 120 2/6/88
John(2)

MR SHAW (continuing):

Then, what happened after that is set

out on the balance of that page 577, at line 5
it says:
Since 15 April 1977 the directors of each
of the six Compinge companies had been -

the promoters, or some of them -
Messrs Mitchell, Powell and Rosenblum.

Then there was an alteration of the article to enable bonus
issues; then there were the bonus issues which were
made. These are copies of the resolutions and
articles which are, in fact, not reproduced in the
appeal books here; they come from the exhibits.
They do not contain any surprises.

WILSON J:

What do you suggest we do with them, Mr Shaw?

MR SHAW: Well, Your Honour, we will see in a moment.

WILSON J:

Thank you.

I shall possess myself in patience.

MR SHAW:

What I was suggesting is that while it might be

necessary to attend to them, they are less than
fascinating.

WILSON J:	I can confirm that at a glance.
MR SHAW:	On the second page of the top document, there is

a resolution at the bottom of the page. The first
part of the document is the amendment to the articles:
Resolved that -

a particular sum -
forming part of the undivided profits of the Company representing profits arising from the sale of assets not acquired for

the purpose of re-sale at a profit and
standing to the credit of the capital
profits reserve account -

and so on -
be capitalized and that the same be
distributed amongst the members who -

at a particular time -
were the holders of the ordinary $2,00 shares
in the capital of the Company on the footing
that they become entitled thereto as capital
in pursuance of Article 13 of the Articles of
Association of the Company and in proportion to the
number of o~dinary shares then held by them respectively and

ClT72/l/VH	121	2/6/88
John ( 2)

that the said capitalized sums ..... be applied
in paying up in full -
so many -
of the unissued ordinary shares of $2.00
each in the capital of the Company and that
the same be distributed amongst the members
aforesaid as fully paid ordinary shares of
$2.00 each in satisfaction of the said
capital sums and in proportion to the number
of shares then held by them respectively.

(Continued on page 123)

ClT72/2/VH 122 2/6/88
John(2)

MR SHAW (continuing):

The point of all that is that it

demonstrates what, I suppose, is the assumption
made throughout, that the resolution gives no
right to the dividend. All it gives - - -

MASON CJ:

I thought that was collIIIlon ground?

MR SHAW:

I think that is right.

Then if I can go to the

bottom of page 577 - it is collIIIlon ground,
Your Honour, but it has a relevance to the question
asked by Your Honour Mr Justice Brennan about
the relationship of what was said by His Honour
the Chief Justice in CURRAN's case to the question
raised by section 51.

MASON CJ:	Yes, how the shareholder was under a liability?
MR SHAW:	That is the point of referring to that resolution.

DEANE J: Mr Shaw, I am a little bit lost. What is the

end point, what we are currently engaged on, is
it to demonstrate,.what, about the facts?

MR SHAW:

Your Honour, going through the facts it has got a

number of relevances. The reason I have been
talking about the prices at which various things
happened is because it is relevant, we will submit,
to a consideration of the overall transaction and
to the purpose one should objectively attribute
to the transaction and to the way in which one
should see the transaction in the context of the other transactions of the partnership,that there
should have been this purchase of the whole at
the $2 million-odd and then the sale of the half

at nearly $3 million-odd. The relevance of what
I have just been saying about the terms of the
resolution goes to the question of whether or not
there was a loss or outgoing incurred.
Then at the bottom of the page at line 26:

On 29th April the Malinda Trading Co
sold to Jenmin ..... for an aggregate
purchase price of $2,895,650.65 all the
shares owned by the Malinda Trading Co -

in each of the companies. And if one compares the
figure which appears in the first line on that page
with the figure which appears on the last line one
sees that the figure which appears in the last line
is approximately $1500 larger than the figure
which appears in the first line.

ClT73/l/SR	123	2/6/88
John(2)

BRENNAN J: Do the bonus shares here answer the description of

dividends in the INCOME TAX ASSESSMENT ACT?

MR SHAW:

Yes.

The divide~o referred to does.

The

definition - - -

BRENNAN J: The monetary dividend does?

MR SHAW:

The definition of dividend is:

any distribution includes -
I am referring to section 6 -
(a) any distribution made by a company to
any of its shareholders, whether in money
or other property;
(b) any amount credited by a company to any
of its shareholders as shareholders; and
(c) the paid-up value of shares issued by a

company to any of its shareholders to the
extent to which the paid-up value represents

a capitalization of profits.
I think the answer to Your Honour's question, the answer I should have given was no, not yes, but their paid-up

value does fit that description.

BRENNAN J:

And did the shareholders receive two dividends

or one?

MR SHAW: Well, our submission will be that the Act, when

it describes dividends and deals with dividends,
has the effect which is stated in section 44,
namely, that:
The assessable income of a shareholder ..... .
shall, subject to this section ..... include
dividends.

(Continued on page 125)

ClT74/l/MB	124	2/6/88
John(2)

MR SHAW (continuing): The section includes subsection (2),
which says that:
the assessable income of a shareholder
shall not include dividends paid by a company
wholly and exclusively out of profits.

It was decided in a case called GIBB -

BRENNAN J: Could I just ask you this que.stion: if
the shares are the relevant dividend and not
the cash which was applied to pay them off then
does the problem in this case arise at all?
In other words, is there any loss or outgoing?

MR SHAW: Our submission is there is not any loss or outgoing
although not quite for that reason.

BRENNAN J: The real question is: why is it that the dividend
that was received was not the shares themselves
or the value of the shares?

MR SHAW: I think the only answer is that it is the value
of the shares - not the shares. That is the
answer I would give because of the terms of the
definition of "dividend". In GIBB.' s case,
118 CLR 628, the Court reconsidered what was
decided in FULLER's case and the headnote reads:
A company revalued at a value above
their book value certain of its assets which
had not been acquired for the purpose of
resale at a profit, credited the consequent
profit to its shareholders and then applied
it to paying up bonus shares issued to them.
Held, that the shares so issued did not constitute income in the ordinary or comercial sense and ..... that they did not
have the character of income attributed
to them by the operation of the INCOME TAX

AND SOCIAL SERVICES CONTRIBUTION ASSESSMENT
ACT ..... ss.6, "dividend", 44,and so the
proceeds of sale of such shares received
by another company did not "represent income"
derived by that other company within the
meaning of those words in s.47.

(Continued on page 126)

ClT75/l/SDL 125 2/6/88
John(2)

MR SHAW (continuing): At page 635, at the very bottom of
the page, Chief Justice Barwick, Mr Justice McTiernan
and Mr Justice Taylor say:
The substantive provisions of the Act dealing with what dividends shall be
included in a taxpayer's assessable
income of dividends is to be found in

s.44. Sub-section (1) of that section
provides that the assessable income of
a resident shareholder shall, subject
to this section, include "dividends paid
to him by the company out of profits
derived by it from any source" and
sub-s.(2)(b)(iii) provides that his
assessable income shall not include
dividends of the nature in question in
this case -

that is because they had been declared out of assets
not acquired for resale, or to profit -
Can it properly be said that s.44(1)
"clearly treats the amount represented b7i
the face value of bonus shares as income'
and that "s.44(2) takes out of the category
of assessable income the amount represented
by the face value of specified classes of
bonus shares" or that the effect of s.44(2)
"is to take out of the category of
'assessable income' dividends which are
'income' ... by virtue of sub-s.(1)" -

they are quotations from the earlier decision,
and Their Honours say:

In our view it cannot. Of course, if
the definition of "dividend" operated to
attribute the character of income to an
allotment of bonus shares no further

inquiry would be necessary. The same

result would follow if the definition of
"income from personal exertion" and
"income from property" had a like effect.

(Continued on page 127)

ClT76/l/HS 126 2/6/88
John(2)

MR SH.AW (continuing):

But when the question is whether, in substance,
s. 44(1) produces the result contended for by
the respondent it is important to observe that,
in terms, sub-s.(l) does not purport to deal with
all dividends as defined; it deals, subject to this
section, with all such dividends and we find that
sub-s.(2) declares that the assessable income
shall not include dividends of the description
here in question. Consequently it is, we
think, erroneous to say that dividends of that
character are, first of all, comprehended by
sub-s.(l) and then excluded by sub-s.(2).
On the contrary at no time do dividends of the
kind referred to in sub-s.(2), by force of
sub-s.(l), achieve the character of assessable
income. It is, of course, clear that
some classes of dividends which by force of
sub-s.(2) are not assessable income would,
apart from that sub-section, be income of the
taxpayer. But this is because they would be
income according to ordinary concepts, not
because the provisions of sub-s.(l) make them
assessable income. This, however, is not so
in the case of dividends falling within
sub-s.(2)(b)(iii).
His Honour Mr Justice Windeyer, at page 638,
in the first complete paragraph, says this:
It was said for the Con:nnissioner, first,
that the receipt of the bonus shares by
Gibbsons had involved a receipt by it of
income according to ordinary concepts of the
distinction between receipts of capital and of
income. The transaction by which the bonus
shares were issued was analysed to support
this contention. But I think that we should

accept as now settled law that the receipt
by Gibbsons of the bonus shares did not, nor did
any incident of the transaction by which they
were issued to it, amount to a receipt by it
of income in the ordinary economic sense of

that term. The moneys which Gibbsons received
when it sold the shares were therefore the
by the company" in any ordinary sense of
proceeds of the sale of a capital asset.
that phrase.
(Continued on page 128)

ClT77/l/MB	127	2/6/88
John(2)

BRENNAN J: That would apply if, in the hands of the
recipient shares, they were a capital asset.
How does this operate if, in the hands
of the recipient, they are trading stock?

MR SHAW: What we would submit, Your Honour, is this:
that if one has, as one has here, a question
which concerns one year of income and does
not involve stock on hand at the beginning of
the year and stock on hand at the end of the
year, the question which arises is the question
which Your Honour asked my learned friend,Mr Gleeson,
this morning: whether it was the only question
which arose. In our submission, it is the only
question which arises and one has to ask oneself
in relation to the resolution whether any part
of it gives rise to a loss or outgoing which
falls within either of the two limbs in
section 51(1) and, in our submission, the answer
to that is no.
BRENNAN J: Mr Shaw, we might resume at 10.15 tomorrow.
MR SHAW: If Your Honour pleases.
AT 4.20 PM THE MATTER WAS ADJOURNED
UNTIL FRIDAY, 3 JUNE 1988

CIT78/l/JM 128 2/6/88
John(2)

[1988] HCATrans 109

Key Legal Topics

Areas of Law

Tax Law

Statutory Interpretation

Commercial Law

Legal Concepts

Appeal

Statutory Construction

MASON CJ:	Thank you. Yes, Mr Gleeson.
MR GLEESON:	Your Honours, may I say that what appears in

appear in various parts of the INCOME TAX ASSESSMENT
ACT, for example, in Part IVA,	and I am not intending

one of a substantial number of bonus issues of shares that were made by companies to Mr Curran	during the tax year in question; the difference
in relation to the Stewart Bacon transaction being,
of course, that it was big and that he was in control of it, but like a person who owns a lot of shares in public listed companies he received quite a number of bonus issues of shares during the year in question.

section 46.	So that he does not mind that the
dividend satisfied by the issue of bonus shares

set out earlier.	Such sub-committee met
regularly,	and two firms of stockbrokers

was a medical student who was at the university	for a long time because he was a beneficiary
under some will. That did not produce the result
that he was not a university student. His grandmother's
annuity would peter out if he ceased to be an
university student.

It is doubtless true to say that in general of making a profit: but it cannot be said that	a trader embarks upon trade with the intention	if this intention is lacking there is no
on with the knowledge that losses will result.
carrying on of a trade. A trade may be carried examination of them certain transactions must
be regarded as trading transactions or adventures in the nature of trade they do not cease to be such because those conducting
them have embarked upon them with a view to obtaining some fiscal benefit. It was urged
in the present case that the transaction in the
shares of Claiborne Ltd ought to fail to be regarded as a trading transaction because
in its real nature it was a fiscal transaction.
My Lords, I cannot regard these as alternative
descriptions. There may be trading transactions

with by this Court.	The minority view was that of
Lord Reid and Lord Denning.	The actual decision,

in this line of cases in the High Court.	The
Chief Justice, at page 117, first of all,

in-chief.	At page 118 to page 119, His Honour
said:
The true point of the present case

House of Lords.	The headnote in this case,
125 CLR 249, reads:

part of the stock-in-trade of the company.	They
were not acquired for the purpose of dealing
with them. In no ordinary sense were they
current assets."

effect.	He dealt more specifically with trading
stock at the bottom of page 269.	Now that was

of the private companies had approved	transfers executed in its favour. In
each of those cases the share register
showed that the company became a
shareholder on the day the transfer was
approved.

course, is that this	view is in dissent. This
is the opposing view	to that that has prevailed
in this Court.

In addition it might be said, in relation	to the shares in Austin and possibly also
in relation to those in Yarra, that it was not intended to make a commercial gain,
i.e. that the only object of those transactions
was to derive a fiscal benefit. However,
the fact that a dividend-stripping operation
is carried out for the purpose of obtaining
taxation advantages and not to make a profit,
does not mean that it must be regarded as
outside the scope of the taxpayer's share trading business, or that the shares cannot
be treated as trading stock.

LTD V FEDERAL COMMISSIONER OF TAXATION. And then His Honour goes to that case.	And then
on page 291:

THOMSON's case, Lord Donovan said:	"when
shares are bought for the sole or main

precisely in point in the present case.	Then on
page 298 to page 300 His Honour considered

Now, the next case that I wish to go to is the case
of WESTRADERS.	Before going to the decision of the

business purpose" and the bringing forward of a	sham with notions of what he called "bona fide
hybrid rule.

MASON CJ:	Yes, Mr Gleeson.
MR GLEESON:	Your Honours, before I come back to STUBART

authorities here and in similar jurisdictions
abroad.	The most obvious is the fact that

(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

is an attribute of a transaction.	An objective
purpose is	attributed to a transaction by

We seek to place reliance upon that distinction.	On
page 187 is said:

criminal proceedings brought against them.	The
connexion between the legal services thus acquired and the taxpayer's business neither

recollections at the bar table.	I have no knowledge
of it at all.	Mr Shaw and Mr Burns think it was,

The respondent taxpayer was one of a group
of companies.	The taxpayer had not previously
borrowed money from outside the group.	On

point really begins at pages 150 to 151.	And he
founded his decision on MAGNA ALLOYS.	He quoted