Network Acceptance Pty Ltd v The Commissioner of Taxation

[1979] FCA 35

NETWORK ACCEPTANCE PTY. LTD. v. COMMISSIONER OF TAXATION (1979) 36 FLR 419
Income Tax

COURT

FEDERAL COURT OF AUSTRALIA

GENERAL DIVISION
Brennan (1), Deane(2), Fisher(3) JJ.

CATCHWORDS

Income Tax - Deductions - Past losses - Insolvent company - Scheme of arrangement - Acquisition of shares in taxpayer by another company after years of loss - Channelling of business to taxpayer - Continuity of beneficial ownership test - Statutory interpretation - Application of amending Act - Whether "person" includes "company" - Whether s. 80B(2) (repealed) applicable for purposes of s. 80DA(1)(d) during transitional year - Mischief rule - Purpose of acquisition of control - Income Tax Assessment Act 1936 (Cth.), ss. 80, A, B, D, E, 106B (3) - Income Tax Assessment Act 1973 (Cth.), ss. 8, 9(b), 23(3), 24(4)(a) - Acts Interpretation Act 1901 (Cth.), s. 22(a).

HEADNOTE

The taxpayer claimed in the tax year ended 30th June, 1973, a deduction for past losses. The commissioner refused the deduction, and this refusal was upheld by Sheppard J. of the Supreme Court of New South Wales. The taxpayer had incurred substantial losses in the two years after its incorporation. Within those two years, all the shares in it were acquired by Network Finance Ltd. and then further shares were allotted to that company. This meant that, under the then provisions of the Income Tax Assessment Act, the past losses would be deductible from profits because the then applicable continuity of beneficial ownership provisions were satisfied.

Profitable business was channelled into the taxpayer by Finance, and the commissioner allowed the deduction of losses against the profits. The relevant provisions of the Income Tax Assessment Act were subsequently amended, the amendments taking effect for the next year of income. In particular, a new section, 80DA, provided that if voting control had been acquired for the purpose, or for a purpose that included, taking advantage of the loss carry forward provisions, then that voting control would be disregarded for ascertaining whether the continuity of beneficial ownership provisions were satisfied. The commissioner then applied the new provision with respect to the first year of income after its enactment, and refused Network a deduction for its previous losses. Among other arguments advanced on the appeal, Network contended that it was not a "person" within the meaning of the relevant part of s. 80DA, because it was a company, and the new section therefore did not apply to it.

Held, that Network was a "person" because in s. 80DA the term "person" included companies. On the facts, the shares in Network had been acquired for the purpose of obtaining the advantage of the loss carry forward provisions. Network was therefore not entitled to deduct the losses.

HEARING

Sydney, 1978, October 19, 20; 1979, May 1. #DATE 1:5:1979

APPEAL.

The relevant facts appear from the judgment of Deane J.

L.J. Priestley Q.C. and D. Bloom, for the appellant.

R.A. Conti Q.C. and J.W. Gibb, for the respondent.

Cur. adv. vult.

Solicitors for the appellant: Arthur T. George & Co.

Solicitor for the respondent: Alan R. Neaves (Commonwealth Crown Solicitor).

J.H. TELFER

JUDGE1

May 1.

The following written judgments were delivered.

BRENNAN J. I have had the advantage of reading the judgment prepared by my brother Deane. I agree with the order which he proposes and the reasons for proposing it. (at p420)

JUDGE2

DEANE J. This appeal relates to the assessment of the appellant Network Acceptance Pty. Ltd. ("the taxpayer") to income tax in respect of the tax year ended 30th June, 1973, ("the tax year"). The issue between the taxpayer and the respondent Commissioner of Taxation ("the commissioner") concerns the entitlement of the taxpayer to be allowed a deduction of so much of the losses which it had incurred in the year ended 30th June, 1971, as has not already been allowed as a deduction from its income of the intervening year (i.e. the year ended 30th June, 1972). The taxpayer, in its income tax return for the tax year, claimed the benefit of such a deduction. The commissioner, in making the assessment, refused to allow the deduction and, subsequently, disallowed the taxpayer's objection to the assessment. The taxpayer appealed from the disallowance of the objection to the Supreme Court of New South Wales in its Administrative Law Division. The Supreme Court (Sheppard J.) dismissed the appeal and confirmed the assessment. The taxpayer appeals to this Court from that decision of the Supreme Court. The taxpayer claims to be entitled to the benefit of the deduction pursuant to the provisions of s. 80 of the Income Tax Assessment Act 1936-1973 ("the Act"). The commissioner contends that the taxpayer lost any entitlement to be allowed the claimed deduction as a result of amendments to the Income Tax Assessment Act 1936-1972 which were effected by Act No. 51 of 1973 ("the amending Act"). It is common ground that, if the taxpayer is entitled to the deduction, the amount of it is $365,037. (at p420)

1. The taxpayer was incorporated on 30th September, 1969, under the name Digital Technology Pty. Ltd. For a time it carried on a business of providing computer services to others. Its operations were financially unrewarding. Its total issued capital consisted of 34,088 ordinary shares of $1 each which were held by a total of six shareholders in varying holdings. It incurred losses, for taxation purposes, of $257,047 for the tax year ended 30th June, 1970, and $482,059 for the year ended 30th June, 1971. It was insolvent. A scheme of arrangement between itself and its creditors was proposed. (at p421)

2. By deed dated 2nd September, 1971, between the prospective scheme trustee under the proposed scheme of arrangement, the taxpayer and Network Finance Ltd. ("Finance"), provision was made for the acquisition by Finance of all the issued shares in the taxpayer for a nominal amount ($6). The deed provided that, within fourteen days of the approval by the Supreme Court of the proposed scheme of arrangement between the taxpayer and its creditors, Finance would subscribe, at par, for 148,970 shares of $1 each in the capital of the taxpayer. The moneys to be paid by Finance for the purchase and allotment of shares were to be paid to the scheme trustee and applied, subject to one-half being retained in an investment account pending certification of the taxpayer's past losses by the Deputy Commissioner of Taxation, in payment of the costs and expenses of the scheme and for the benefit of the creditors. The proposed scheme of arrangement between the taxpayer and its creditors was, apparently, accepted by the creditors and approved by the Supreme Court. The 148,970 new shares in the capital of the taxpayer were, in pursuance of the provisions of the deed, allotted to Finance on 21st October, 1971. On 29th October, 1971, the taxpayer's name was changed to Network Acceptance Pty. Ltd. (at p421)

3. The superficial result of the above-mentioned steps was that Finance acquired, for an outlay of $148,976, the corporate shell of a failed company (the taxpayer) which possessed no tangible assets. In truth, of course, none but the uninitiated would see Finance as guilty of such philanthropy. In circles where it is considered "fiscal waste" to see corporate tax losses as other than items of commerce, the taxpayer's weathered corporate shell would have been seen to contain a pearl of unusual value. Under the Act in its then form (i.e. prior to the commencement of the amending Act) the tax losses of a company which had failed within two years of its incorporation could be utilized by the purchaser of its shares without the inconvenience of continued ownership of shares by some former shareholders to procure satisfaction of the requirements of s. 80 of the Act as to the continuity of beneficial ownership of shares carrying between them certain minimum rights. This advantageous position was the result of the provisions of s. 80B(2) of the Act which, at that time and for present purposes, provided that where shares in a company were allotted after the commencement of the year in which a loss for tax purposes was incurred and the allotment took place in the year of income in which the company was incorporated or within a period of two years after that year of income, the shares were to be deemed to have been allotted at the commencement of the year in which the loss was incurred and to have been beneficially owned, at all times from the commencement of that year until the time when the shares were in fact allotted, by the persons who beneficially owned the shares immediately after that time. The effect of s. 80B(2) was that, for the purposes of continuity of beneficial ownership, Finance was deemed to have beneficially owned the 148,970 shares in the capital of the taxpayer since the commencement of the tax year during which the losses being claimed as a deduction were incurred. (at p422)

4. In December 1971 and August 1972, Finance subscribed for further parcels of 2,800,000 shares and 5,000,000 shares respectively in the capital of the taxpayer. (at p422)

5. The primary business of Finance was that of lending money on the security of real estate. On 21st December, 1971, the taxpayer became the holder of a licence under the provisions of the Moneylender's and Infants Loans Act, 1941 (N.S.W.). Mr. Fisher, a director of both Finance and (after it became a subsidiary of Finance) the taxpayer, gave evidence as to the steps taken to take advantage of the taxpayer's accumulated tax losses: (at p422)

6. "Q. Was not Network Finance also utilizing the tax losses indirectly? - A. Indirectly, Network Finance was channelling business to these companies. In respect of Network Finance's business, it would write the business to Network Acceptance, so to do that . . . "Q. But Network Finance was to get the benefit of that by the holding of the share in Network Acceptance? - A. They in turn would make a dividend to Network Finance. "Q. By channelling the business and by obtaining the profits of the business, because they held all the shares, Network Finance was able to utilize the pre-acquisition tax losses? (Objected to - the question allowed) - A. Yes, they were. "Q. And that was contemplated by Network Finance at the time that they acquired the issued capital of Digital? - A. That would be a management plan to do it that way. "Q. That was the management plan? - A. Yes, it was." (at p422)

7. The results of the "business" which Finance "channelled" to the taxpayer was that, if the benefit of past tax losses is ignored, the taxpayer derived a taxable profit, after writing back non-deductible provisions, of $374,069 during the tax year ended 30th June, 1972, and of $828,774 during the tax year ended 30th June, 1973. This income was derived without the taxpayer employing any staff or having any premises of its own. Mr. Fisher gave evidence to the effect that the staff of Finance "acted when necessary to carry on such business as" the taxpayer carried on. Again to quote from his evidence: (at p422)
   

8. "Q. And, in fact, what happened was that Network Finance simply channelled into Network Acceptance portion of the business which it would otherwise have done itself, or channelled it to other subsidiaries? - A. Yes. "Q. And that method of procedure was contemplated by the management of Network Finance at the time of the acquisition? - A. Yes, it was." (at p423)

9. The taxpayer's income tax return in respect of the tax year ended 30th June, 1972, showed a taxable income of nil. This was the result of deducting from the adjusted profit of $374,069 from its lending activities the whole of the loss of $257,047 incurred in the 1970 tax year and $117,022 of the loss of $482,059 incurred in the 1971 tax year. In its income tax return in respect of the tax year ended 30th June, 1973, the taxpayer purported to deduct the remaining $365,037 of its past losses from the adjusted profits of its lending activities resulting in a taxable income of $463,737. The commissioner, as has been said, disallowed the deduction. He assessed the taxpayer on a taxable income of the full $828,774. (at p423)

10. The commissioner was clearly correct in allowing the deduction in respect of the year ended 30th June, 1972. The effect of s. 80B(2) was that the shares allotted to Finance in October and December 1971 were deemed to have been allotted at the commencement of the tax year ended 30th June, 1970, in so far as the losses of that year were concerned and at the commencement of the tax year ended 30th June, 1971, in so far as the losses of that year were concerned and to have been beneficially owned by Finance at all times since such deemed allotment. In the result, for the purposes of the continuity of beneficial ownership requirements of s. 80A of the Act in its then form, Finance was, at all times during the year of the loss, deemed to have beneficially owned 2,948,970 of a total of 2,983,058 issued shares in the capital of the taxpayer. (at p423)

11. The amending Act effected, inter alia, extensive alterations to the provisions governing a company's entitlement to a deduction on account of losses of prior years. It also contained, in respect of the tax year, transitional provisions to which some reference will subsequently be made. It omitted the provisions of s. 80B(2) but only as regards assessments in respect of income of the year subsequent to the tax year. For the purposes of this appeal, the most important alteration of substance effected by the amending Act was the insertion of a new section, s. 80DA. The commissioner, in refusing to allow the deduction relied upon the provisions of par. (d) of sub-s. (1) of that section. Those provisions were, for present purposes, as follows:
    
    

"80DA(1) Notwithstanding sections 80 and 80AA but subject to

section 80E, a loss, or a part of a loss, incurred by a company in a year (in this section referred to as 'the year of loss'), before the year of income shall not be taken into account for the purposes of

section 80 or section 80AA if - . . .

(d) during the whole or any part of the year of income the

voting power in the company was, either directly or through one

or more interposed companies, trustees or partnerships,

controlled by a person who did not, either directly or through one

or more interposed companies, trustees or partnerships, control

the voting power in the company during the whole of the year of

loss or, in a case to which sub-section (5) of section 80A applies, during the part of the year of loss referred to in that sub-section, and that person acquired the control of that voting power for the

purpose, or for purposes that included the purpose, of receiving

any benefit or obtaining any advantage in relation to the

application of this Act or securing that another person would

receive such a benefit or obtain such an advantage." (at p424)

1. The amending Act provided (s. 23(3)) that the amendment constituted by the insertion of s. 80DA applied to assessments in respect of income of the tax year and all subsequent years of income. (at p424)

2. In the proceedings before Sheppard J., the commissioner also relied upon the provisions of s. 80DA(1)(a) (in addition to the provisions of s. 80DA(1)(d)) to maintain the assessment. Sheppard J. held that the provisions of s. 80DA(1)(d) were, and the provisions of s. 80DA(1)(a) were not, applicable to disallow the deduction. The commissioner, on the appeal, accepted Sheppard J.'s decision that the provisions of s. 80DA(1)(a) were not applicable. The issue in the appeal before us is whether the provisions of s. 80DA(1)(d) were properly applicable to disallow the deduction. In my view and for substantially the reasons which Sheppard J. gave in his carefully reasoned judgment, they were. (at p424)

3. The taxpayer did not dispute that Finance controlled the voting power in the taxpayer during the whole of the year of income and that, ignoring the effect of any "deeming" provisions, Finance did not control the voting power in the taxpayer during the whole or any part of the year of loss. The prima facie position would therefore appear to be that the provisions of s. 80DA(1)(d) are applicable to disallow the deduction if, and only if, Finance acquired control of the voting power in the taxpayer for the purpose specified in the paragraph or for purposes that include that purpose. For the taxpayer it was submitted that there was no basis for a finding that that specified purpose existed. Three independent preliminary arguments were also advanced on behalf of the taxpayer to support a contention that the provisions of s. 80DA(1)(d) were inapplicable even if the specified purpose were found to exist. Those three arguments were: (i) The word "person" where first occurring in the paragraph refers to a natural person only with the result that control of the taxpayer's voting power by Finance was irrelevant; (ii) The combined effect of s. 80B(2) and the transitional provisions of the amending Act was that Finance was, for the purposes of s. 80DA(1)(d), to be deemed to have held the shares issued to it in October and December 1971 at all times during the year in which the loss was incurred; and (iii) The circumstances of the present matter were not within the mischief at which s. 80DA(1)(d) was aimed. I shall examine these three preliminary arguments in the above order before coming to what I see as the main question in the appeal, namely, whether Finance's acquisition of control of the voting power in the taxpayer was for the purpose specified in s. 80DA (1)(d) or for purposes that included that purpose.
   
   (i) Meaning of "person" (at p425)
   
   

4. Section 22(a) of the Acts Interpretation Act 1901 provides that, unless a contrary intention appears, the word "person" in any Commonwealth Act shall include "a body politic or corporate as well as an individual". Section 6 of the Act provides, in simpler language, that, unless the contrary intention appears, the word "person" when used in the Act "includes a company". The question arises whether there is to be found in the context of s. 80DA(1)(d), the contrary intention necessary to rebut these statutory presumptions. (at p425)

5. For the taxpayer, it was argued that the language of the section, in particular the reference to "interposed companies, trustees or partnerships", indicates that what is being referred to is the personal control of a natural person rather than control by a company which is a figment of the law itself controlled by its shareholders. I do not find any such indication in either the language or the subject matter of the section. There is nothing in the concept of control of the voting power in a company by a single entity which, in itself, indicates that the relevant entity must be a natural person and not a company. Nor does the reference to "interposed companies, trustees or partnerships" convey any such indication. The need for that reference arises from the fact that the control to which the paragraph is referring is either direct or indirect control by a single entity. (at p425)

6. Careful examination of the words of s. 80DA(1)(d) and of their context in the Act supports, rather than negatives, the statutory presumption that the word "person" where first occurring in the paragraph includes a company. The word is twice used in the paragraph. It would seem plain that its second use is intended to refer to a company as well as a natural person. To exclude a company from the purview of the word when first used would involve giving the same word two different meanings in the one paragraph in a context where its second use is linked with the first use by the qualifying word "another". Perhaps more important, one finds that, in a number of other provisions of the Act where reference is being made to control of a taxpayer, a company is clearly included in the "person" or "persons" possessing control. When, in such other provisions, it is desired to restrict a reference to a controlling "person" to a natural person, the legislature has said so in clear terms: (see, for example ss. 80A(1), 80A(3), 106B(3)(a), (b) and (c) which were all, like s. 80DA, inserted in the Act by the amending Act). (at p426)

1. It follows that the word "person" should be given its extended statutory meaning on the two occasions on which it is used in s. 80DA(1)(d). It includes a company.
   
   (ii) Section 80B(2) (at p426)
   
   

2. As has already been mentioned, the amending Act (s. 9(b)) amended the Income Tax Assessment Act 1936-1972 by omitting s. 80B(2). That amendment did not, however, apply to assessments in respect of income of the tax year. It applied to assessments in respect of income of years subsequent to the tax year (s. 23(3)). Notwithstanding the provisions of the amending Act, s. 80B(2) remained, within its statutory limits, operative in respect of the tax year. It was argued on behalf of the taxpayer that the provisions of s. 80B(2) were applicable, as regards the tax year, for the purposes of s. 80DA(1)(d) of the Act. If this were the case, Finance would, for the purposes of s. 80DA(1)(d), be deemed to have controlled the voting power in the taxpayer during the whole of the year of loss as well as during the year of income with the result that the condition precedent to the operation of the paragraph was not satisfied. (at p426)

3. The area of operation of sub-s. (2) of s. 80B of the Act was expressly defined, by sub-s. (1) of that section, as being for the purposes of the application of s. 80A in determining whether a loss or a part of a loss incurred by a company in a year before the year of income is to be taken into account. The provisions of s. 80B(2) were epexigetical of the provisions of s. 80A. Their operation was within the confines of the operation of that lastmentioned section. For their part, the provisions of s. 80A, as amended by the amending Act, are expressly stated to be subject to the provisions of s. 80DA. The operation of s. 80DA(1)(d), unlike that of s. 80B(2), is not confined by the operation of s. 80A. It has an independent operation of its own to deprive a taxpayer of the benefit of a deduction in respect of a loss, or part of a loss, of a previous year if the circumstances which it describes exist. There is nothing in the provisions of s. 80DA(1)(d) that indicates that those provisions were, in respect of the tax year, to be read as subject to the provisions of s. 80B(2). On the contrary, s. 80B(1), as has been mentioned, expressly defined and confined the operation of s. 80B(2) as being for the purposes of the application of a section (s. 80A) other than s. 80DA. (at p426)

4. Senior counsel for the taxpayer carefully analysed the provisions of s. 80DA, the provisions of s. 80, s. 80B(2) and s. 80D in the form they took prior to the amending Act, and the effect of the relevant operative and transitional provisions of the amending Act. He submitted that that analysis demonstrated a need to treat the provisions of s. 80B(2) as being applicable, as regards the tax year, not only for the purposes of the application of s. 80A but also for the purposes of the application of s. 80DA (1)(d) of the Act. In essence, the argument was to the effect that overall consistency would be better served if s. 80B(2) were, in respect of the tax year, made applicable for the purposes of the new s. 80DA as well as for the purposes of the old s. 80A. The argument to that effect is, in my view, fundamentally unsound. The desirability of underlying consistency of legislative policy does not warrant overriding the plain effect of the words the Parliament has seen fit to use. In any event, the claimed inconsistency is, upon examination, ephemeral. The question whether, as a matter of legislative policy, the emeliorating provisions of s. 80B(2) should remain operative, in respect of the tax year, for the purposes of s. 80A which is not, in essence, a tax avoidance section is quite different to the question whether those provisions should, as a matter of legislative policy, be made operative, in respect of the tax year, for the purposes of the new s. 80DA which is, in essence, a tax avoidance section. For the Parliament to give different answers to those questions does not, in my view, indicate any necessary inconsistency of legislative policy underlying the relevant provisions. (at p427)

5. It was also argued on behalf of the taxpayer, that a conclusion that s. 80B(2) did not, in respect of the tax year, apply for the purposes of the provisions of s. 80DA(1)(d) would lead to an anomalous situation existing in circumstances where the provisions of s. 80B(2) operated to take a case out of s. 80A(2) into s. 80A(1). If, for example, shares in a taxpayer carrying the relevant rights and beneficially owned during the year of income had been acquired by the beneficial owner during the year of loss in circumstances which attracted the operation of s. 80DA(1)(d), the provisions of that paragraph would not operate to deprive the taxpayer of the benefit of a deduction in respect to so much of the losses as were incurred in that part of the year of loss which followed the acquisition of the shares. This result follows from the express restriction in the paragraph of its operation, in a case to which sub-s. (5) of s. 80A (which, in respect of the 1973 year, is to be read as a reference to s. 80A(2): amending Act, s. 24(4)(a)) applies, to so much of the loss as was incurred during the part of the year of loss referred to in that subsection. If, on the other hand, sufficient shares had been, in such a case, allotted within the period of two years of the year of incorporation, to bring about the result (pursuant to s. 80B(2)) that the necessary continuity of beneficial ownership was deemed to exist for the purposes of s. 80A(1) during the whole of the year of loss, s. 80DA(1) (d) would operate to deprive the taxpayer of the benefit of the whole of the loss. The Act should be construed, so the argument went, in a way which would avoid this anomaly. The suggested construction was to treat s. 80B(2) as applicable for the purposes of s. 80DA(1) (d). (at p428)

6. There is, in my view, a number of answers to this argument. First, the existence of an anomaly in the event that a particular construction is given to particular provisions of the Act may be of less than ordinary significance in determining legislative intent in the case of provisions, such as those of s. 80DA(1)(d), which operate only in circumstances involving intended tax avoidance. Second, if the existence of the perceived anomaly is to be avoided by a forced construction of provisions of the Act, it would appear more appropriate to adopt a construction which limited the application of s. 80B(2) to the case where the relevant disqualification from the right to a deduction in respect of past losses was that contained in s. 80A and construed the provisions of s. 80B(2) as being inapplicable in determining the factual context for the purposes of the operation of s. 80DA(1)(d). Third and most important, the existence of such an anomaly would not, in any event, justify giving to s. 80B(2) of the Act an operation beyond the confines to which the plain words of the Act restrict it. (at p428)

7. In the result, I am unable to construe the provisions of s. 80B(2) as being applicable for the purposes of s. 80DA(1)(d) or to read the provisions of s. 80DA(1)(d) as being affected by the provisions of s. 80B(2). The express restriction of the operation of s. 80B(2) resulting from the provisions of s. 80B(1) and the unqualified form (apart from the reference to s. 80D) of the provisions of s. 80DA(1)(d) combine, in my view, to compel the conclusion that s. 80B(2) did not, in respect of the tax year, apply for the purposes of the provisions of s. 80DA(1)(d).
   
   (iii) The mischief at which s. 80DA(1)(d) was aimed (at p428)
   
   

8. Section 8 of the amending Act repealed s. 80A of the Income Tax Assessment Act 1936-1972 and substituted a new s. 80A for the repealed section. This amendment made by s. 8 applied to assessments in respect of income of year subsequent to the tax year (s. 23(3)). The continuity of ownership requirements of the new s. 80A(1) included ownership at all times during the year of income of shares carrying between them the right to exercise more than one-half of the voting power in the company by persons who at all times during the year of loss beneficially owned shares carrying between them that right. It was argued, on behalf of the taxpayer, that, in that context, it was plain that the mischief at which s. 80DA(1)(d) was aimed was the case where it was necessary to point to a group of shareholdings (in contrast to a single shareholding) to satisfy the continuity of ownership provisions and variations had occurred in the shareholdings of, or rights attached to the shares held by, the individual shareholders whose shareholdings comprised the group. When, as in the present case, the continuity of ownership requirements of s. 80(1) were satisfied by the continuous shareholding of a single shareholder there could be no need for the provisions of s. 80DA(1)(d) to apply for the reason that, in the absence of s. 80B(2) (i.e. as regards assessments in respect of years of income after the tax year), the satisfaction of s. 80A(1) would ordinarily preclude fulfilment of the conditions of operation of s. 80DA(1)(d). It followed, so the argument proceeded, that a case where the continuity of ownership requirements of s. 80A(1) were satisfied by reference to the shareholding of one shareholder was not within the mischief at which s. 80DA(1)(d) was aimed and s. 80DA(1)(d) should be construed as not applying to such a case. (at p429)

9. A number of considerations leads me to reject this argument advanced on behalf of the taxpayer. They are as follows. In the first place, it was not argued on behalf of the taxpayer that the provisions of s. 80DA(1)(a), (b) and (c) can have no effective operation in a case where the continuity of beneficial ownership requirements of s. 80A(1) are satisfied by reference to a single shareholding. It would seem plain that each of these paragraphs could operate in the particular circumstances of such a case. There is considerable difficulty in construing s. 80DA(1) in a manner that permits the application of pars. (a), (b) and (c) to such a case but excludes the application of par. (d) when it is the introductory words of the subsection which give operative effect to each paragraph. (at p429)

10. Second, I am unconvinced of the alleged general inutility of s. 80DA(1)(d) in any case where the requirements of s. 80A(1) are satisfied by reference to a single shareholding. Section 80DA(1)(d) plainly has operative effect in a case such as the present when, in respect of the transitional tax year ending 30th June, 1973, the provisions of s. 80A(1) are satisfied by reference to a single shareholding as a result of the operation of the deeming provisions of s. 80B(2) of the Act. Quite apart from such transitional cases, the taxpayer's argument ignored the fact that s. 80A(1) operates at the first level of shareholding while s. 80DA (1)(d) is intended to operate (by reason of the reference to "through one or more interposed companies, trustees or partnerships") both at that and at remoter levels. Thus, for example, s. 80DA(1)(d) may well operate to preclude a deduction in a case where control of the voting power in the taxpayer has been acquired with the relevant purpose by means of the acquisition of shares in a holding company of the taxpayer and where the provisions of s. 80A(1) are satisfied by reference to the shares in the taxpayer held by the holding company. (at p429)

11. Third, I agree with the conclusion reached by Sheppard J. at first instance that, as a matter of construction, the provisions of s. 80A neither shed light on, nor cut down the operation of, the provisions of s. 80DA(1)(d). The fact that the most obvious cases for the operation of s. 80DA(1)(d) may be those in which the provisions of s. 80A(1) have been satisfied by reference to a number of shareholdings does not mean that the provisions of s. 80DA(1)(d) should be read down as applying only to cases within that category.
    
    The purpose of the acquisition of control (at p430)
    
    

12. My conclusion that each of the three independent arguments advanced by the taxpayer and considered in what has been written above, should be rejected makes it necessary to consider the question whether the control of the voting power in the taxpayer was acquired by Finance for the purpose specified in s. 80DA(1)(d) of the Act or for purposes that included that purpose. If it was, the taxpayer was not entitled to be allowed the deduction. If it was not, the taxpayer was so entitled. I turn to the consideration of that question. (at p430)

13. During the whole of the year of income, Finance beneficially held all of the issued shares in the taxpayer. It clearly controlled the voting power in the taxpayer. It acquired that control when, upon "execution" of the deed dated 2nd September, 1971, (see cl. 1 thereof), it purchased the whole of the issued capital in the taxpayer for $6 on the basis that it would, in pursuance of the deed, subsequently provide, through subscription moneys for the shares which were issued in September 1971, $148,970 to be applied to defraying the costs and expenses of the scheme of arrangement and towards payment of creditors. If the advantages of the taxpayer's past tax losses are ignored, the $148,976 paid by Finance was, as has been mentioned, to purchase the corporate shell of a failed company with no tangible assets. In fact, as has likewise been mentioned, the explanation of the purchase lay in the taxpayer's accumulated tax losses. (at p430)

14. The purpose to which s. 80DA(1)(d) refers is the purpose of the person who acquires control. It is the actual - and not an imputed - purpose or purposes for which control was acquired that is relevant. In some cases it may be difficult to determine the relevant corporate purpose or purposes because of divergence of purposes in the minds of those through whom the company acted. This is not such a case. The purpose for which Finance acquired the control of the taxpayer is apparent from the objective facts. It was put into express words in the extracts from the evidence of Mr. Fisher which have already been set out. (at p430)

15. The business of Finance consisted, as has been said, primarily of lending money on the security of real estate. That business was, apparently, a profitable one. To the extent that it carried on that business and derived the profits of it itself, Finance would, in the ordinary course, be liable to pay income tax upon such profits. To the extent that it caused subsidiaries to be incorporated in the ordinary way and, to use the words used in Mr. Fisher's evidence, "channelled" some of the "business" through them, Finance would not, as a public company, be required to pay tax on the dividends it received from its subsidiaries. The subsidiaries would themselves, however, be required to pay income tax on the profits and the amount available to be distributed to Finance by way of dividend would be correspondingly reduced. In so far as the application of the provisions of the Act were concerned, Finance's ultimate position would be no better if "business" were "channelled" through subsidiaries incorporated in the ordinary manner than it would be if it carried on the business and derived the profits itself. (at p431)

16. If, on the other hand, Finance could acquire all the issued shares in the capital of a company which had accumulated tax losses and matters could be so arranged that, notwithstanding the change of shareholders in the new subsidiary, the benefit of a deduction under s. 80 of the Act remained available against future income, the disadvantage which the application of the Act otherwise involved could be avoided. By "channelling" part of its profitable "business" through the newly acquired subsidiary, Finance would not be required to pay the tax which it would, as a result of the application of the Act be required to pay if it transacted the relevant business and directly received the relevant profits itself. To the extent that the losses were deductible, the amount of the subsidiary's profits available to be distributed to Finance would, by reason of the different result of the application of the Act, not be diminished by the income tax which a subsidiary incorporated in the ordinary way would be liable to pay on the profits of the business channelled through it. In the result, the profit derived from the relevant business would be available to Finance by way of dividend from the loss company which it controlled without the disadvantage of any reduction resulting from liability of either itself or its subsidiary to pay income tax. This advantage to Finance flowed from the different result of the application of the Act to the different circumstances. It was to obtain this advantage that Finance paid the $148,976 which it paid to acquire the corporate shell of the taxpayer. (at p431)

17. The primary argument advanced on behalf of the taxpayer was that Finance acquired the control of the voting power in the taxpayer when it acquired, for $6, the shares which had already been issued. That acquisition, in itself, did not lend to Finance obtaining any benefit in relation to the application of the Act for the reason that the immediate effect of that acquisition was that the taxpayer, by reason of s. 80A of the Act in its then form, lost any right to a deduction in respect of past losses pursuant to s. 80 of the Act. The right to such a deduction was, so the argument went, only restored to the taxpayer by reason of the operation of s. 80B(2) when, in September 1971 after control of the voting power in the taxpayer had already been acquired, the new shares were allotted to Finance. It followed, it was argued, that it could not properly be said that Finance acquired the control of the voting power in the taxpayer for the purposes of obtaining an advantage in relation to the application of the Act. This argument is, in my view, unacceptable. (at p432)

18. In the circumstances of the present matter, it is quite unreal to isolate the acquisition by Finance of the existing shares for a nominal amount from the subsequent allotment of 148,970 shares in Finance. Both acquisition and subsequent allotment were in pursuance of the deed of 2nd September, 1971. Without the scheme of arrangement, the shares in the taxpayer were of no value to Finance. The taxpayer was hopelessly insolvent. The profits of any business channelled through it would have been required, in the first instance, to pay existing creditors and would not have been available to be distributed to Finance by way of dividend. What Finance sought to acquire was the shares in the taxpayer having the accumulated losses but freed from liability to its creditors. This it did under the terms of the deed of 2nd September, 1971. The consideration which it paid was a composite one consisting of the nominal amount paid for the acquisition of the shares and the substantial amount of the subscription moneys. True it is, the nominal amount which Finance paid for the acquisition of the shares can properly be seen as the price of the shares and the substantial amount paid by way of subscription for the new shares can be seen as the price of freeing the taxpayer from its liability to creditors. The purpose of the acquisition of the shares and the purpose of the subscription for the new shares was, however, one and the same. It was to enable Finance to obtain the advantage in relation to the application of the Act which has already been described and which was, in part, obtained when the deduction pursuant to s. 80 was allowed in the assessment of the taxpayer's taxable income for the year ended 30th June, 1972. (at p432)

19. It was also argued on behalf of the taxpayer that a finding that Finance acquired the control of the voting power in the taxpayer for the purposes of obtaining an advantage in relation to the application of the Act would involve ignoring the fact that Finance and the taxpayer were, for taxation purposes, separate entities. In my view, this is simply not so. True it is that the immediate benefit or advantage resulting from a deduction pursuant to s. 80 was enjoyed by the taxpayer. The advantage which Finance sought and to no small extent obtained was the advantage of having available to it, by way of dividends, the profits from the business channelled through a subsidiary with neither liability to pay income tax itself nor reduction in the amount available to be distributed to Finance as a result of the liability of the subsidiary to pay income tax. As a matter of ordinary language, that advantage was an advantage to Finance which flowed from the more favourable application of the Act to the circumstances designed and structured to achieve that very result. (at p433)

1. In my view the purpose for which Finance acquired the control of the voting power in the taxpayer was, within the meaning of the words used in s. 80DA(1)(d), the purpose of obtaining an advantage in relation to the application of the Act. (at p433)

2. In the result, the taxpayer was not entitled to the benefits of the deduction in question. The appeal should be dismissed with costs. (at p433)

JUDGE3

FISHER J. I have had the benefit of reading the judgment of Deane J. I agree with the order which he proposes and with his reasons. (at p433)

ORDER

Appeal dismissed.