The Commissioner of Taxation of the Commonwealth of Australia v Westraders Prt Ltd

FEDERAL COMMISSIONER OF TAXATION v. WESTRADERS PTY. LTD. (1979) 38 FLR 306
Income Tax

COURT

FEDERAL COURT OF AUSTRALIA

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

CATCHWORDS

Income Tax - Allowable deductions - Losses - Transfer of shares to share-trading partnership - Trading stock - Section 36A election - Whether shares trading stock - Income Tax Assessment Act 1936 (Cth.), ss. 6, 36, 36A, 51.

HEADNOTE

Jensen Mining and Investments Ltd. ("Jensen") entered into a partnership on 28th May, 1975, with seventeen others one of whom was the taxpayer. On 27th June, 1975, Jensen transferred certain shares held by it to the partnership for a consideration of $111,284.20. On the same day the partnership transferred most of the shares thus acquired to four companies for a consideration of $125,199.60, thus generating surplus of $13,915.40. By s. 36A (prior to its amendment by Act No. 57 of 1977) it was provided that where, by reason, inter alia, of a formation of or 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 for the purposes of s. 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 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 (Rath J.) allowed the taxpayer's appeal.

It was contended by the commissioner that the shares did not constitute assets and trading stock of the business of Jensen, that they did not become assets of the business of the partnership and that the disposal by Jensen to the partnership was not a disposal "not in the ordinary course of business" as required by s. 36 (1).

Held, dismissing the appeal, per Deane and Toohey JJ., Brennan J. dissenting - the findings of the trial judge: (i) Jensen was a sharetrader; (ii) the shares were trading stock of Jensen being assets of the company in the business of share trading; (iii) the shares became assets of the business carried on by the partnership; (iv) s.36A was not restricted by the requirement of s. 36 that the disposal be not in the ordinary course of business, were correct.

HEARING

Melbourne, 1978, August 1-2.

Sydney, 1979, March 23. #DATE 23:3:1979

APPEAL

The appellant appealed against a decision of Rath J. of the Supreme Court of New South Wales which allowed the taxpayer a deduction in respect of certain share-trading losses. The facts appear from the judgments.

J.S. Lockhart Q.C. and A.J. Leslie, for the appellant.

R.J. Bainton Q.C. and M. Bloom, for the respondent. Cur. adv. vult.

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

Solicitors for the respondent: Simons & Baffsky. J.H. TELFER

JUDGE1

March 23.

The following written judgments were delivered.

BRENNAN J. This is an appeal from a judgment of the Supreme Court of New South Wales. Rath J., sitting in the Administrative Law Division of that court, allowed the respondent taxpayer's appeal against its assessment to tax for the year ended 30th June, 1975. The appellant had disallowed a deduction of $248,844 claimed by the respondent as "tax loss in share-trading partnership Jenspart Trading Co.". As his Honour found, the Jenspart Trading Co. ("Jenspart") was a share-trading partnership, the membership of which comprised the respondent, Jensen Mining and Investments Ltd. ("Jensen") and seventeen other persons, some corporate and some natural. The respondent had a 3.85 per cent interest in the partnership. The partnership was formed in May 1975. (at p307)

The manner and circumstances of Jenspart's formation owe much to the provisions of ss. 36 and 36A of the Income Tax Assessment Act 1936, and to the perception of their operation which the chairman of Jensen, 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, for the purposes of the Income Tax Assessment Act 1936, to bring them to account at the end of its tax year at market value or at cost (s. 31(1)). 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 ss.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, and some of Jensen's shares were transferred to Jenspart in circumstances presently to be mentioned. In fulfilment of the conditions specified in the paragraphs of s. 36A (2), Jensen held an interest of twenty-five per cent in Jenspart (par.(b)), the transferred shares became an asset in Jenspart's business of share trading (par. (a)) and a notice signed by Jensen and the members of the Jenspart partnership was given to the commissioner notifying him that they had agreed that s. 36A (2) should apply to the transferred shares (par. (c)). Jensen so exercised its s. 31(1) option that if s. 36A (2) were applied, the value to be attributed to the transferred shares for the purposes of s. 36 would be the cost of those shares to Jensen, not the market value of those shares nor the actual amount which Jenspart paid for them. It was then thought, and the respondent now submits, that the transfer of the shares from Jensen to Jenspart fell within s. 36A (1), that the application of s. 36 was thus attracted, and that Jenspart is to be deemed to have purchased the shares at a price equal to their cost to Jensen. If that submission be right, the subsequent sale of the shares (or most of them) by Jenspart for their market value - an amount much less than their cost to Jensen - was expected to give rise to a tax loss in the partnership. That tax loss was expected to benefit the partners by diminishing their respective assessable incomes. By contract with those who entered into partnership with Jensen, Jensen obtained fees and commissions in consideration of its signing the elections required for the purposes of s. 36A (2). Its entitlement to retain those fees and commissions was not to be affected by the success or failure of the scheme in conferring the intended tax benefits upon the participants. (at p308)
The Supreme Court upheld the respondent's claim to be allowed a deduction being its proportionate share of the claimed "tax loss in share-trading partnership", finding the scheme to be effective to confer a tax benefit upon the Jenspart partners. The appellant, though challenging that conclusion, does not seek to upset it by challenging the learned trial judge's findings of facts, and a brief reference to the relevant facts is required. (at p308)
Jenspart acquired the relevant shares from Jensen when the partnership commenced, pursuant to cl. 4 of the partnership deed, which provided: "4 CAPITAL. The initial capital of the partnership shall consist of: (1) The shares specified in the second schedule hereto which immediately prior to the commencement of this partnership were beneficially owned by Jensen. Jensen will from the commencement of this partnership hold the said shares upon trust for the partnership until such time as the same are transferred to and registered in the name of the partners, or are disposed of by the partnership in the course of its business. Jensen warrants that at the commencement of this partnership the said shares are unencumbered and that it is subject to the trust hereby constituted the beneficial owner of each of them. The capital account of Jensen in the books of the partnership shall be credited with the sum of $115,000 which the partners agree to be the market value of the said parcel of shares at the commencement of this partnership. (2) The sum of $345,000 in cash which shall be contributed by the partners other than Jensen in the amounts set out in the third schedule hereto." The partners contributed capital in accordance with this clause and Jensen executed transfers to Jenspart of the shares specified in the second schedule on 27th June, 1975. Jenspart sold the majority of those shares on the same day. Shares which the partnership had acquired for $111,284.20 were sold for $125,199.60. Jenspart's share trading and profit and loss account for the period ending on 30th June, 1975, showed purchases $152,347, sales $138,590 and closing stock $27,072. Jenspart's tax return for the year ended 30th June, 1975, revealed a "book profit" of $9,072, an amount which was the difference between the sum of the proceeds of sale of shares and the value of shares on hand at 30th June, 1975, and the amounts actually outlaid in purchasing those shares and paying audit fees. The respondent's share of the book profit was $349. (at p309)
Although Jenspart's trading activities resulted in a book profit, those activities were said to result in a "partnership loss" within the meaning of that term in s. 90 of the Income Tax Assessment Act 1936 in the amount of $6,463,484. Accordingly the respondent claimed a deduction of $248,844 representing its individual interest in that loss (s. 92(1)). Jenspart arrived at the partnership loss of $6,463,484 by treating the shares acquired from Jensen (which his Honour found to be part of the trading stock of the partnership) as having been acquired at a "deemed cost in accordance with s. 36A(2) election" of $6,584,513. This was the cost of the shares when Jensen purchased them. The question in issue is whether the "deemed cost" of $6,584,513 is an allowable deduction, for it is only if an affirmative answer be given that the partnership loss could be said to arise (s. 90)). (at p309)
The deduction claimed is not, of course, a claim in respect of expenditure actually incurred. The incurred cost of trading stock is deductible under s. 51(1) but that provision standing alone does not create an allowable deduction of a cost which has not in fact been incurred. However, that provision may confer deductibility upon a cost which s. 36(1) deems to be the purchase price of property where that property is trading stock. The terms of s. 51(2) make it clear that s. 51(1) may so apply. Section 51(2) applies both to expenditure actually incurred and to expenditure deemed to have been incurred in the purchase of the taxpayer's trading stock: "Expenditure incurred or deemed to have been incurred in the purchase of stock used by the taxpayer as trading stock shall be deemed not to be an outgoing of capital or of a capital nature." Section 51(2) qualifies the exclusion from deductibility expressed in the latter part of sub-s. (1) of s. 51 (per Dixon C.J. in John Fairfax & Sons Pty. Ltd. v. Federal Commissioner of Taxation (1959) 10 CLR 30, at p 35 ) and that qualification is required in respect of expenditure deemed to have been incurred as well as in respect of expenditure actually incurred. The provision which deems expenditure to have been incurred in the purchase of an asset is s. 36(1), the concluding words of which require an amount to be deemed to be the purchase price of an asset whether or not the asset in question is purchased and whether or not the deemed amount is the same as the consideration (if any) which passes from the disponee to the disponor on the disposition of the asset to which s. 36(1) relates. Section 36(1) reads:

"36(1) Subject to this section, where -

(a) a taxpayer disposes by sale, gift, or otherwise of property being trading stock, standing or growing crops, crop-stools, or trees which have been planted and tended for the purpose of sale;

(b) that property constitutes or constituted the whole or part of the assets of a business which is or was carried on by the taxpayer; and

(c) the disposal was not in the ordinary course of carrying on that business,

the value of that property shall be included in the assessable income of the taxpayer, and the person acquiring that property shall be deemed to have purchased it at a price equal to that value." (at p310)

The value which s. 36(1) takes as the deemed purchase price of the relevant property is its market value (s. 36(8)), but the amount of the deemed purchase price in cases falling under s. 36A (1949) 78 CLR 504, at p 513 ) is the value which would have been taken into account at the end of the year of income if no disposal had taken place and if the year of income had ended on the date when the change in the ownership of or interests in the property occurred. The value which could thus be deemed to be the purchase price of the shares transferred by Jensen to Jenspart was the cost of the property to Jensen. But before an outgoing deemed to have been incurred in the purchase of trading stock can be deducted, the statutory conditions for deeming Jenspart to have paid more than it actually outlaid must be fulfilled. As s. 36A(1) operates by applying s. 36 in a modified manner, it is convenient first to consider the operation of s. 36. (at p310)
The property to which s. 36(1) relates is the property of which "a taxpayer disposes". The subject matter of the disposition is not the several and severable proprietary rights of the disponor in the articles of his trading stock, but the articles themselves. The complex of provisions relating to trading stock of which s. 36(1) forms a part are concerned with "articles" of trading stock (Farnsworth v. Federal Commissioner of Taxation (2)) which may properly be described as being "on hand" at relevant dates (Modern Permanent Building & Investment Society (In Liquidation) v. Federal Commissioner of Taxation (1958) 98 CLR 187, at p 190 ; Investment and Merchant Finance Corporation Ltd. v. Federal Commissioner of Taxation (1971) 125 CLR 249, at p 270 ). Section 36(1) relates to the disposition of the ownership of the articles of trading stock, not to the disposition of fractional interests in those articles, as the judgment of the High Court in Rose v. Commissioner of Taxation (1951) 84 CLR 118 explained. In their joint judgment, Dixon, Fullagar and Kitto J J. said: "Section 36 is concerned with the disposal of the whole or part of the assets of a business when trading stock is included in the disposition. Now it seems quite clear that, unless the partnership can for the purposes of s. 36 be considered as a distinct entity to which the assets were transferred, the disposition by the taxpayer consisted in imparting to his two sons equal undivided shares in the assets as co-owners with himself. Further, the admission of the sons into partnership with him may be regarded as an entire transaction of which the alientation to each of them of an equal undivided third share in the assets of the business was only a legal consequence or incident. When s. 36 speaks of disposing of the assets of a business it is speaking of a transfer of the proprietor's ownership of the assets, including the immediate right to their possession, subject of course to any encumbrance, whether existing or newly created. But it is not speaking of the transfer of an undivided fractional interest in the assets. It is not speaking of the vesting in another or others of an undivided share or shares in the business including the assets. Plainly it is directed at the disposal of the entirety of ownership in the assets and not the conversion of single ownership into collective ownership" (1951) 84 CLR, at pp 123-124 . (at p311)
It follows that s. 36(1) does not apply to the acquisition of shares by Jenspart from Jensen, for cl. 4 of the partnership deed did not work a disposal of the entirety of Jensen's ownership in the shares. From the commencement of the partnership Jensen held an interest in the shares as a co-owner with the other partners. Section 36 does not apply to the change which the partnership deed effected in the ownership of the shares, and it does not, in combination with s. 51, create an entitlement to an allowable deduction of the kind claimed by Jenspart. (at p311)
Section 36A, enacted subsequent to and seemingly consequent upon the judgment in Rose's case gives an extended application to s. 36. Section 36A(1) provides:

"36A(1) Where, for any reason, including -

(a) the formation or dissolution of a partnership; or

(b) a variation in the constitution of a partnership, or in the interests of the partners,

a change has occurred in the ownership of, or in the interests of persons in property constituting the whole or part of the assets of a business and being trading stock, standing or growing crops, crop-stools, or trees which have been planted and tended for the purpose of sale, and the person, or one or more of the persons, who owned the property before the change has or have an interest in the property after the change, section 36 applies as if the person or persons who owned the property before the change had, on the day on which the change occurred, disposed of the whole of the property to the person, or all the persons, by whom the property is owned after the change." (at p312)

The partnership deed effected a change in the ownership of, or in the interests of Jensen in, the shares, and if the other conditions of operation expressed in s. 36A(1) are satisfied, s. 36 would apply as if Jensen had, at the commencement of the partnership, disposed of the whole of the shares to Jenspart. Section 36A(1) applies s. 36 in a fictional way: "as if" there had been a disposition of the entirety of the ownership of the relevant assets by the person or persons who held the entire interest to the person or persons who are to hold a like interest. It is implicit in s. 36A(1) that the notional disponors and disponees of the relevant property should be regarded for the purposes of s. 36(1) as including no common entity who retains a continuing interest in that property. Section 36A(1) would therefore regard Jensen, for s. 36(1) purposes, as the "taxpayer" and Jenspart as "the person acquiring" the relevant property. (at p312)
The appellant submitted that s. 36A(1) applied pars. (a)(b) and (c) of s. 36(1) to a notional disposition created by s. 36A (1), and that the notional disposition of shares by Jensen to Jenspart did not satisfy the condition expressed in s. 36(1)(c) which requires that "the disposal (is) not in the ordinary course of carrying on that business". If this construction of the two provisions were adopted, s. 36(1) would not produce any effect with respect to a notional disposition created by s. 36A(1) unless each of the conditions expressed in pars. (a)(b) and (c) of s. 36(1) are satisfied. In my view that is not a true construction of ss. 36 (1) and 36A(1). (at p312)
The similarity but lack of identity between pars. (a) and (b) of s. 36(1) and the terms of s. 36A(1) make it unlikely that these provisions impose separate cumulative sets of conditions; and the condition expressed in par. (c) is not susceptible of application to the fictional disposition created by s. 36A(1). One cannot predicate of a disposition of property that has not occurred either that it was, or that it was not, in the ordinary course of carrying on the business of the owner of the property. Section 36A is concerned with cases where the trading stock of a business - the articles on hand - are not disposed of, but are retained in the partial ownership of the former proprietor of that stock. Section 36A(1) works a notional disposition of the trading stock so that a purchase at a price may be deemed to have occurred pursuant to s. 36(1), and that operation is not dependent upon satisfying a set of conditions additional to those contained in s. 36A(1). It is not, therefore, relevant to inquire for the purposes of par. (c) of s. 36(1) whether Jensen's disposition of fractional interests in the shares to the members of the partnership was not in the ordinary course of its business, for the disposition of a fractional interest falls for consideration only under s. 36A. The operation of s. 36A on a change in proprietary interests may not be dissimilar from the operation of s. 36(1) on a disposition of trading stock, for it is difficult to envisage a case where the ordinary course of carrying on a business of trading in stock would embrace a change in the proprietary interests in that stock. (at p313)

The property to which s. 36A relates is described in terms similar to but not identical with the terms used in s. 36. Each section relates to property described as an asset of a business and (relevantly for present purposes) as trading stock. Before an asset can be described as trading stock the asset must be found to have that quality in a particular business. In Federal Commissioner of Taxation v. St. Hubert's Island Pty. Ltd. (In Liquidation) (1978) 138 CLR 210 Jacobs J. notes, in reference to the land which was the asset there under consideration, that he did "not find it possible to answer the question whether the land was trading stock except through an examination of the nature of the business of which the land may be the trading stock" (1978) 138 CLR, at p 234 . Later in his judgment, his Honour said: "For instance, a man may be a shopkeeper and out of the accumulated profits retained in the business he may purchase an area of land with the purpose of selling it at a profit at some time in the future. In one sense the land is an asset of the business, but not, I think, in the sense of s. 36(1). There must be a relationship between the property and the business whereby it can be said that the property bears the description of one or another of the kinds enumerated, not in a general sense, but in specific relation to the business which was or is carried on. Thus property, being trading stock, must be an asset of a business of trading in that stock" (1978) 138 CLR, at p 234 . (at p313)
Although both ss. 36(1) and 36A(1) relate to trading stock answering the description of an asset of a business of trading in that stock, there is a difference between the provisions which distinguishes the times when the trading stock must be found to answer that description. Section 36A(1) relates to property "constituting the whole or part of the assets of a business and being trading stock". The relevant qualities must be found to exist at the time when the change in proprietary interest occurs. The property must be trading stock of a business at the time when s. 36A operates. In this respect, the terms of s. 36A(1) are materially different from s. 36(1) which relates to the disposition of property which "constitutes or constituted the whole or part of the assets of a business". The difference in terms is accounted for by the difference between the subject matter of the respective provisions. When an asset is acquired as trading stock in a taxpayer's business, and its cost becomes an allowable deduction, provision is necessarily made for bringing to account the proceeds of its disposition even if the business is discontinued, and there is nothing to confer upon the asset a continuing character as trading stock. And so s. 36(1) looks backward to the character which the asset has borne at any time in the taxpayer's hands. But s. 36A is concerned with changes in proprietary interests in assets which are, at the time of disposition, assets in a business of trading in those assets. It is the contemporaneous character of the assets which gives point to s. 36A(1) and attracts its operation. An asset may acquire the character of trading stock at the moment of its acquisition (s. 6(1), and see per Stephen J. in the St. Hubert's Island case (1978) 138 CLR, at pp 222-223 ) but it is not an asset of a business of trading in that stock after the relevant business is discontinued. (at p314)
To determine whether the shares were assets in Jensen's business of share trading at the time when it entered into the partnership deed, it is necessary to ascertain the nature of Jensen's activities at that time. The findings of the learned trial judge, whose careful analysis of the evidence was not challenged, furnish the facts upon which this inquiry proceeds. Rath J. in Westraders Pty. Ltd. v. Federal Commissioner of Taxation (1977) 17 ALR 232 found that Jensen carried on the business of share trading in the years ended 30th June, 1971, to 30th June, 1975, inclusive. He found that all the shares transferred to Jenspart were acquired as assets in Jensen's business of share trading. (at p314)
His Honour made further findings with respect to Jensen's part in the formation of partnerships of which it should be a member and to which it should transfer shares which had been the trading stock in its business as a share trader. Jenspart was one of those partnerships. (at p314)
There were four others. His Honour found: "Jensen was instrumental in forming four other partnerships, shortly after the formation of Jenspart. It appears that these other partnerships had shares transferred to them by Jensen, and that these shares were also sold in the year ended 30 June 1975 with similar tax deduction advantages for the partners. I mention this in this context because these other partnerships, as well as Jenspart, participated in the financial transactions connected with the purchase of the shares transferred by Jensen to Jenspart" (1977) 17 ALR, at p 239 . The benefit to Jensen in the formation of the partnerships and the sale to them of shares which Jensen was holding was the payment of a fee or commission to Jensen in consideration of its signing an election under s. 36A (2) with a view to conferring a tax benefit upon its respective co-partners. His Honour found: "Jensen was paid a fee or commission by each of its co-partners in Jenspart in consideration of its signing this s. 36A 'election'. The amount of the fee was between 15 and 20 per cent of the tax deduction required: the larger the deduction required, the lower the rate. The fee was non-refundable in the sense that, if it proved the deduction was not in fact allowed in law, the fee could not be recovered. Similar fees or commissions were paid to Jensen by its co-partners in the other four partnerships formed by it in the same income tax year for the same tax deduction purpose. In all it collected in such fees 'well over' one million dollars" (1977) 17 ALR, at p 240 . His Honour further found: "Early in May 1975 Jensen made plans for another business activity, namely the promotion of partnerships. This new business was intended to take advantage of the deemed price provisions of ss. 36 and 36A. In order that the desired result might be achieved, it was necessary for Jensen to be a member of the partnership, and to bring into the partnership shares which by some process had suffered a considerable diminution in value since their acquisition by Jensen. These shares had to be trading stock in a business carried on by Jensen. The shares transferred to Jenspart answered this description, having been acquired for the purpose of sale in Jensen's business as a sharetrader" (1977) 17 ALR, at p 250 . (at p315)
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 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 immediately prior to Jensen's entering into the deed of partnership. (at p315)
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 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 which it was instrumental in forming. When the share trading business ceased, the character of the shares as assets in a business of share trading fell away. (at p316)
His Honour's finding that the relevant shares were trading stock in Jensen's business of share trading does not conclude the question of the character of the shares immediately prior to the change in proprietary interests to which s. 36A (1) relates. (at p316)
The transfer of the shares to the members of Jenspart is not properly to be seen as a transfer on sale of the trading stock of Jensen's share-trading business. It was of the essence of the scheme, and it was the fact, that the shares were not sold to the other members of the partnership. The shares were brought in as Jensen's contribution to the capital of the partnership and the consequent change in proprietary rights is referable not to a business of share trading but to the new commercial activity to which his Honour referred. The shares were withdrawn from sale in the share-trading business, in order that Jensen's proprietary interest in them could be devoted to the new commercial activity. (at p316)
The change in ownership of the shares effected by cl. 4 of the partnership deed did not attract the operation of s. 36A, for the shares were not assets in a business of trading in those shares at that time. The provisions of s. 36(1) which may create an allowable deduction for a deemed purchase price were thus not made to apply to the acquisition of the shares by Jenspart. Jenspart is not to be deemed to have incurred any cost different from the cost it incurred in fact in purchasing the shares. (at p316)
I would allow the appeal with costs, set aside the judgment of the Supreme Court, and order that the respondent's appeal to that court be dismissed with costs. (at p316)

JUDGE2

DEANE J. I have had the benefit of reading the judgment of Toohey J. I agree with the conclusions which he reaches and with the reasons which he advances for those conclusions. I would add some comments for myself on the question whether the shares owned by Jensen Mining and Investment Ltd. ("Jensen") which became the property of Jenspart Trading Company ("Jenspart") were, at the time of that change of ownership, property being trading stock of a business. These shares were in the capital of nineteen different companies. I shall refer to them as "the relevant shares". (at p316)

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. They were acquired 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 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 Corporation Ltd. v. Federal Commissioner of Taxation (1971) 125 CLR 249 ; Curran v. Federal Commissioner of Taxation (1974) 131 CLR 409 and Federal Commissioner of Taxation v. Patcorp Investments Ltd. (1976) 51 ALJR 40 ). 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. (at p317)
Between the time of Jensen's acquisition of the relevant shares and the time their ownership changed from Jensen to Jenspart, Jensen's business activities underwent a change in that it commenced the activity of promoting partnerships to which shares purchased as part of dividend stripping operations could be transferred after the dividend had been declared and received. The learned trial judge found that Jensen made plans for this business activity early in May 1975. The activity commenced in the same month. It involved Jensen receiving both consideration for the shares transferred to a partnership in the form of a credit in the partnership accounts and a fee or commission from the other partners in the relevant partnership in consideration of Jensen signing an election pursuant to s. 36A of the Income Tax Assessment Act 1936 ("the Act"). After it commenced this activity, Jensen did not dispose of shares other than by way of transfers to such partnerships of which it was a member. Transfer to such a partnership was followed by sale of the shares in the course of a share-trading business carried on by the relevant partnership. (at p317)
Jenspart was such a partnership. It consisted of Jensen and seventeen other partners (including the taxpayer). It was constituted by an agreement of 28th May, 1975. That agreement provided that the relevant shares would be held by Jensen upon trust for the partnership until the same were transferred to the partnership and registered in the names of the partners or were disposed of by the partnership in the course of its business. The capital account of Jensen in the books of the partnership was to be credited with the sum of $115,000 which the partners agreed was the market value of the relevant shares at the commencement of the partnership. Jensen executed transfers of the shares to Jenspart on 27th June, 1975. On that day, Jenspart disposed of all the relevant shares, other than the small holding of shares in Beneficial Finance Corporation Ltd., at a profit. (at p318)
One of the conditions of operation of s. 36A of the Act is that a change has occurred in the ownership of "property constituting the whole or part of the assets of a business and being trading stock . . .". The question arises whether, at the time their ownership changed from Jensen to Jenspart, the relevant shares constituted "assets of a business . . . being trading stock". The relevant time is immediately prior to that change in ownership. At that time, the shares were owned by Jensen. The condition of the operation of the section will have been satisfied if the shares either remained trading stock of Jensen's business as a share trader or had become trading stock of some new business carried on by Jensen. (at p318)
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 trader. 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 (see Rose v. Commissioner of Taxation (1951) 84 CLR 118 ). Such a narrow approach to the effect of a transfer of shares to a partnership of which the transferor is a member accords ill, however, with accountancy practice or commercial reality in a case where the transfer is the result of arm's length business dealings and when it is proposed that the shares transferred will be sold by the partnership in the course of a business of share trading carried on by it. In the absence of agreement to the contrary, a member of a partnership has no definite or separate share or interest in any particular item of partnership property. He has an undivided beneficial interest in the totality of partnership assets and is entitled to insist that they be applied for legitimate purposes, of the partnership (see, generally, Livingston v. Commissioner of Stamp Duties (Q.) (1960) 107 CLR 411, at p 453 and Canny Gabriel Castle Jackson Advertising Pty. Ltd. v. Volume Sales (Finance) Pty. Ltd. (1974) 131 CLR 321, at pp 327-328 ). (at p318)
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. 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 interest 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 acquired and whose members other than Jensen would pay to Jensen an additional amount for the benefit of a s. 36A election. 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 (see, Investment and Merchant Finance Corporation Ltd. v. Federal Commissioner of Taxation (1971) 125 CLR 249 ; Federal Commissioner of Taxation v. Patcorp Investments Ltd. (1976) 51 ALJR, at pp 44-45, 53 ). The learned judge at first instance found that, at the time the change in ownership of the relevant shares occurred, they constitued trading stock of Jensen's share-trading business. I can see no warrant for interfering with his finding in that regard. On the contrary, I agree with it. (at p319)
In the result, I am of the view that the sophisticated tax avoidance procedures 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 which the Parliament has determined is required by the nation for the common 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 served 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 (see Ransom v. Higgs (1974) 1 WLR 1594 ; Inland Revenue Commissioners v. Duke of Westminster (1936) AC 1, at p 19 ). (at p320)

The appeal should be dismissed with costs. (at p320)

JUDGE3

TOOHEY J. In its income tax return for the year ended 30th June, 1975, the respondent taxpayer claimed a deduction of $248,844, described as "tax loss in share-trading partnership Jenspart Trading Co." That deduction was disallowed by the commissioner but was later upheld by Rath J. It is against his Honour's decision that this appeal is brought. (at p320)

Counsel for the commissioner formulated as the basic questions involved in the appeal "whether ss. 36 and 36A, or either of them apply, and if so whether they apply in the manner that is contended for by the respondent". (at p320)
Those sections of the Income Tax Assessment Act 1936 arise for consideration in this way. The partnership of Jenspart Trading Co. ("Jenspart") was formed in May 1975 and during the remainder of that financial year it bought and sold many shares. In its first year of operations, the year under consideration, Jenspart claimed a tax loss of $6,463,484 of which 3.85 per cent, $248,844, was the taxpayer's proportion. That loss arose from the treatment by Jenspart and in turn by the taxpayer of a large number of shares bought by the partnership at what was called "deemed cost in accordance with s. 36A(2) election". In assessing the taxpayer the commissioner disallowed its share of loss; this had the effect of converting what had been returned as an overall loss of $3,593 into a taxable income of $234,965. The precise mechanics employed by the commissioner to arrive at this figure were explained by counsel. It is unnecessary to detail them, except to note that an amount of $349, being the taxpayer's share of Jenspart's book profit for the year, was not, on adjustment, brought into account by the commissioner. The reason for this seems to have been that the commissioner treated the particular transactions generating Jenspart's claimed loss of $248,844 as neutral for the purposes of the Act, that is as giving rise neither to assessable income nor allowable deduction. (at p320)
On 28th May, 1975, the taxpayer entered into partnership with Jensen Mining and Investments Ltd. ("Jensen") and seventeen others, some individuals and other companies. The partnership business was described as that of "traders and dealers in shares, share options, stocks and other securities including the purchase and sale of the same and interests in the same . . .". The initial capital of the partnership consisted of shares beneficially owned by Jensen in a number of companies which, from the commencement of the partnership, Jensen held upon trust for the partners, and the sum of $345,000 in cash contributed by the partners other than Jensen. (at p321)
On 27th June, 1975, Jensen executed transfers to Jenspart of the shares listed in the partnership agreement and which were held in nineteen companies. The same day Jenspart transferred those shares, other than shares in Beneficial Finance Corporation Ltd., in four separate parcels, one to each of the following - Pitt Securities Pty. Ltd., S.I.M.S.A. Nominees Pty. Ltd., Lupsup Pty. Ltd. and London Nominees Pty. Ltd. The sale price of the shares from Jensen to Jenspart was $111,284.20 and from Jenspart to the four companies $125,199.60. What was a resultant profit to Jenspart of $13,915.40 became a substantial tax loss by reason of an election made under s. 36A(2) of the Act by Jensen and the other partners. (at p321)
The effect of that election was to attribute to the shares "the value . . . that would have been taken into account at the end of the year of income if no disposal had taken place and the year of income had ended on the date of the change". This was the "deemed cost" of $6,584,513 already mentioned, the original cost to Jensen. When Jensen transferred its shares to Jenspart most of them had been the subject of a dividend stripping operation, hence the fall in value. Jensen's incentive to join in the s. 36A election was a fee payable by its co-partners and geared to the amount of the deduction required by each. (at p321)
The notice of appeal contained a number of grounds. One, seeking to invoke s. 260 of the Act, an argument rejected by Rath J., was formally abandoned during the hearing. The remaining grounds may be summed up in this way: 1. Although in terms of s. 36A(1) there was a change in the ownership of or in the interests of persons in property, that property did not answer the description in the subsection of "the whole or part of the assets of the business and being trading stock . . .". 2. The shares transferred from Jensen to Jenspart did not become "an asset of a business" carried on by Jenspart, hence par. (a) of sub-s. (2) of s. 36A was not complied with and no election could be made pursuant to that subsection. 3. Section 36A does not stand on its own. It relates to and is controlled by s. 36(1) of which it is an extension. The transfer of the shares from Jensen to Jenspart was in the ordinary course of carrying on Jensen's business. Thus the requirement contained in par. (c) of s. 36(1) that "the disposal was not in the ordinary course of carrying on that business" was not met and s. 36A could have no application. (at p321)
The judgment of Rath J. sets out at length the history of this matter and the facts upon which the application of ss. 36 and 36A depend. Apart from some matters, described as "immaterial", the commissioner did not challenge any of the facts found but did challenge what were said to be inferences drawn. In connexion with such vital matters as whether the shares constituted trading stock of Jensen, and the nature of the business carried on by Jenspart, I am of the opinion that Rath J. was for the most part making findings of fact and not drawing inferences. In broad terms his Honour's reasons remain unchallenged except as to the interpretation of certain expressions in ss. 36 and 36A and the relationship between those sections. This makes it unnecessary to set out in detail all the somewhat complicated facts of this case. I would be content to proceed from his Honour's findings to consider the operation of ss. 36 and 36A except that some reference must, I think, be made to the reasons in order to make clear what are truly findings of fact and what, if any, are inferences. (at p322)
Jensen began in 1958 as a merchant banker but in 1971 changed its course to that of a mining and investment company. The managing director, Mr. P.R. Fox, whom his Honour called "a truthful and accurate witness", described the company's operations between September 1970 and 30th June, 1975. They showed a significant activity in the purchase and sale of shares in listed companies. Having examined that evidence, Rath J. concluded: "The following inferences of fact are in my view properly to be drawn on this evidence." In summary they were: 1. Jensen was an active trader in shares during the financial years ended 30th June, 1971, and 1972. 2. Its activity could fairly be classified as a business of share trading. 3. During the financial year ended 30th June, 1973, its share trading in listed shares was still significant. In that year it entered into two other fields of share dealing. The first, which related to two companies (Toomar Investments Pty. Ltd. in 1973 and Renmore Pty. Ltd. in 1974), was designed to acquire the real estate holdings of those companies although the shares were later transferred to Jenspart and then sold by Jenspart, in each case for a nominal sum. The second was to participate in divn 7 schemes. These schemes were entered into with the object of making a profit from dividends and from the sale of the shares. All these dealings were held by his Honour to be "part of the share-trading activities of Jensen". 4. In 1974 there was no activity on the stock exchange by Jensen but it continued its divn 7 schemes which amounted to carrying on a business of share trading. 5. In the year ended 30th June, 1975, Jensen entered into a number of diverse share transactions, many of which related to divn 7 schemes and others involved dividend stripping and sale. 6. Early in May 1975 Jensen embarked on another activity, the promotion of partnerships to take advantage of the provisions of ss. 36 and 36A of the Act. 7. All the shares transferred by Jensen to Jenspart, other than those in P.P. Bauer Holdings Pty. Ltd. and Endsleigh Investments Pty. Ltd., were acquired before the business of promoting s. 36A partnerships was contemplated by Jensen. (at p323)
In my view the conclusions reached regarding Jensen's specific activities were truly findings of fact which were not challenged and in any event were entirely warranted by the evidence. His Honour's description of Jensen as a share trader and as engaged in the business of share trading may be categorized as inference but I think more accurately represents an evaluation, based on unimpeached findings of fact concerning the company's activities. This Court should not interfere with that evaluation unless satisfied that it was wrong (Edwards v. Noble (1971) 125 CLR 296, at pp 304-306 ). For my part I am satisfied that it was right. (at p323)
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 cumdividend 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: ". . . 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" (per Barwick C.J. (1971) 125 CLR, at p 255 ). (at p323)
"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" (per Menzies J. (1971) 125 CLR, at p 262 ). Jensen's activities in 1975 were a mixture of such transactions and more orthodox share dealings. In that year the company bought shares in many companies at a cost of $37,125,479 and sold shares for a total price of $508,386. To describe it, as his Honour did, as a share trader and as engaged in the business of share trading was not only warranted but was almost inevitable. (at p323)
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 within the meaning of that term in s. 36A(1). (at p323)
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. The definition in s. 6(1) of the Act that trading stock "includes anything produced, manufactured, acquired or purchased for the purpose of manufacture, sale or exchange . . ." operates cumulatively upon the ordinary meaning of the term (Federal Commissioner of Taxation v. St. Hubert's Island Pty. Ltd. (1978) 138 CLR 210 ). Section 36A requires that the property to which the change occurs constitute "the whole or part of the assets of a business and being trading stock . . .". In the St. Hubert's Island case Jacobs J. commented: "I do not find it possible to answer the question whether the land was trading stock except through an examination of the nature of the business of which the land may be the trading stock . . . . I cannot separate the question whether the land was trading stock of the taxpayer from the question whether it was an asset of a business carried on by the taxpayer, as I shall attempt to explain" (1978) 138 CLR, at p 234 . It is true that his Honour was there speaking of s. 36(1) but his comments apply equally to s. 36A. A consequence of this approach is that the broad language of the definition of trading stock must be read down. Thus something acquired for purposes of sale will not constitute trading stock unless, in the words of Jacobs J. it is "an asset of a business of trading in that stock" (1978) 138 CLR, at p 234 . Although the St. Hubert's Island case had not been decided by the High Court when Rath J. delivered judgment, his Honour adopted much the same approach when he said: "These shares had to be trading stock in a business carried on by Jensen. The shares transferred to Jenspart answered this description, having been acquired for the purpose of sale in Jensen's business as a sharetrader" (1977) 17 ALR, at p 250 . It may well be, as the commissioner argued, that some shares were acquired primarily for their real estate backing and some shares for the purpose of dividend stripping and their sale in that devalued form. His Honour found that shares were acquired for purposes of which sale was one, not in the sense of an alternative, but for sale either after they had been put to some use such as a divn 7 scheme or without being put to any such use. In both Investment and Merchant Finance Corporation Ltd.'s case (1971) 125 CLR 249 and Federal Commissioner of Taxation v. Patcorp Investments Ltd. (1977) 51 ALJR 40 shares were held to constitute trading stock even though sold after a dividend stripping operation. (at p324)
Faced with a submission on behalf of the commissioner that the shares had been acquired for the purposes of Jensen's business of promoting s. 36A partnerships, his Honour's finding was that: "all the shares transferred to Jenspart (other than those in P.P. Bauer Holdings Pty. Ltd. and Endsleigh Investments Pty. Ltd.) were acquired before the business of promoting s. 36A partnerships was contemplated" (1977) 17 ALR, at p 250 (at p324)
The shares in P.P. Bauer Holdings Pty. Ltd. were acquired by Jensen on 12th or 13th May, 1975, following negotiations over several months. Mr. Fox said that Jensen acquired those shares for two reasons: "There was a cash asset backing greater than the purchase price so that it would make a profit; if it could be sold to a partnership then that was another thing we had in mind, but there were no prospective purchasers of those shares at the time." To the question: " . . . was it in your mind that at least one of the purposes of the acquisition would be the transfer to some 36A partnership in due course?", he answered: "Yes". (at p325)
Jensen acquired the shares in Endsleigh Investments Pty. Ltd. on 27th May, 1975. In Mr. Fox's words: "Purchased in its normal share-trading activities . . . Yes - I am sure at that stage we thought we would be able to sell it to Jenspart, yes." Speaking of both companies his Honour said: " . . . the proper inference in my view is, as I have said, that those shares also were acquired as assets in Jensen's business as a share trader" (1977) 17 ALR, at p 250 . (at p325)
Earlier his Honour had described the negotiations for these shares as in "the ordinary course of Jensen's activity as a dividend stripper (though a partnership was contemplated as a likely purchaser)". (at p325)
The inference drawn was consistent with the evidence. Furthermore neither on the grounds of appeal nor truly in argument was this Court invited to deal with the shares in P.P. Bauer Holdings Pty. Ltd. and Endsleigh Investments Pty. Ltd. differently from the other shares transferred by Jensen to Jenspart. (at p325)
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. (at p325)
The second ground of appeal was that the shares transferred by Jensen to Jenspart did not answer the description of an asset of a business carried on by the partnership, being "the person or persons by whom the property is owned after the change" (s. 36A (2) par. (a)). In contrast with the opening words of s. 36A(1) the requirement is that the property becomes an asset of a business carried on by a person or persons by whom the property is owned after the change; the additional requirement of being trading stock does not exist. There is nothing in the language of the section that requires the property to be received as trading stock. What is necessary is that it becomes upon the change in ownership an asset of a business carried on. While s. 36A(1) looks primarily at a change that has occurred by reason of the formation or dissolution of a partnership or a variation in its constitution, the section read as a whole does not require that the business carried on after the change be the same business as that carried on before. Counsel for the taxpayer conceded "that one must show for the judgment below effectively to be upheld that the partnership put the shares that were acquired from Jensen to trading . . .". That concession may have been unnecessarily wide if made expressly in regard to s. 36A(2), but in any event his Honour accepted that Jenspart was in business as a share trader from the day after its formation, that the shares transferred to it from Jensen were sold as part of its share-trading activities and were an asset of the business carried on by it, that although there were special circumstances relating to the acquisition and disposal of those shares, those special features were irrelevant to the question whether the shares were assets in the share-trading business of Jenspart. Whether these conclusions were findings of fact, inferences, an evaluation or a mixture, there was ample evidence to support them and nothing this Court heard afforded any ground for interfering with them. (at p326)
The third and final ground of appeal involved questions of fact and of law. In short it was that s. 36A is an extension of s. 36 and that before any election may be made under the former it is necessary that the requirements of the latter be met. In particular, so the argument ran, the requirement in par. (c) of s. 36(1) that "the disposal was not in the ordinary course of carrying on that business" is essential before s. 36A may operate. (at p326)
Section 36A(1) contains language that largely repeats pars. (a) and (b) of s. 36(1) but omits the words of par. (c). If the commissioner is right a consequence is that a transaction meeting all the requirements of s. 36A(1) but arising from a "disposal" of trading stock in the ordinary course of carrying on business cannot ground an election under s. 36A(2). Section 36A was introduced by amendment No. 90 of 1952, one purpose of which was to meet the situation disclosed by Rose v. Commissioner of Taxation (1951) 84 CLR 118 . That decision confined the operation of s. 36 to a transfer of the proprietor's ownership of assets, excluding a transfer of an undivided fractional interest in them. No doubt s. 36A was intended to extend the operation of s. 36 and no doubt it had that effect. At the same time it introduced what counsel for the commissioner described as "an ameliorating provision", whereby on notice by the notional transferor and transferee the value of the property for the purposes of s. 36 will be "the value (if any) that would have been taken into account at the end of the year of income if no disposal had taken place and the year of income had ended on the date of the change". (at p326)
The commissioner's argument was that since s. 36A is an extension of s. 36 the operation of the former requires that all facts necessary for the operation of the latter exist. (at p326)

The question posed by the relationship between the two sections is a narrow one but it is not free from difficulty. In the end it depends upon the meaning to be given to the words in s. 36A(1), " . . . section thirty-six of this Act applies as if the person or persons who owned the property before the change had, on the day on which the change occurred, disposed of the whole of the property to the person, or all the persons, by whom the property is owned after the change". Rath J.'s answer was: "In brief, s. 36A(1) lays down its own conditions of application. If it does apply, then a disposition within s. 36(1) is deemed to have occurred" (1977) 17 ALR, at p 251 . The commissioner's answer was that when s. 36A (1) says that s. 36 "applies as if", it means that the latter section will apply so long as its own terms have been met. If the commissioner's answer is right, in a s. 36A situation there will be no right of election if what is notionally a disposal was in the ordinary course of carrying on business. (at p327)
In my opinion there are several reasons why the commissioner's answer is not right. To begin with s. 36A, in terms at any rate, creates its own conditions of application by referring to a change in ownership of property constituting the whole or part of the assets of a business and being trading stock, to that property becoming an asset of a business carried on by the person or persons by whom the property is owned after the change and to the fractional interest required to be still held by the person or persons by whom the property was owned before the change took place. If it be unnecessary to refer back to pars. (a) and (b) of s. 36 (1), and it is unnecessary because these matters are covered although in different terms by s. 36A, it seems curious that one should have to refer back to par. (c) of the earlier section. There is a reason why par. (c) was not repeated in s. 36A and why it is not appropriate to refer to that paragraph for the operation of that section. It is that in Rose's case (1951) 84 CLR 118 the sort of change in ownership envisaged by s. 36A was held not to be a disposal within the language of s. 36(1). Paragraph (c) of that section speaks of "the disposal", being that mentioned in par. (a). But the disposal referred to in that paragraph is not the change in ownership contemplated by s. 36A. Hence it would have been inappropriate for s. 36A to draw in, expressly or by reference, the language of par. (c) of s. 36(1). And if s. 36A was introduced to meet the gap revealed by Rose's case, there was in that case no consideration of disposal in the ordinary course of carrying on business. In other words, there is nothing in the background to the introduction of s. 36A that points to its operation being dependent upon the matter mentioned in par. (c) of s. 36(1). (at p327)
When s. 36A provides that in the circumstances there mentioned s. 36 "applies as if . . .", it means, as Rath J. suggested, that a disposition within and for the purposes of s. 36(1) is deemed to have occurred. And that means occurred so that "the value of that property shall be included in the assessable income of the taxpayer, and the person acquiring that property shall be deemed to have purchased it at a price equal to that value". That result is brought about when the circumstances mentioned in s. 36A(1) exist. When the circumstances mentioned in s. 36A(2) exist as well, the value of the property may be altered for tax purposes by a notice of election. (at p328)
In my opinion this is how the words "applies as if . . . " should be read. They look to the legal consequences or effect of s. 36 and do not merely bring the two sections into contact with each other. The Shorter Oxford English Dictionary offers among the meanings of "apply": "To bring (a law, test etc.) into contact with facts, to put into practical operation." When the conditions of s. 36A(1) have been met, the result is to put s. 36 "into practical operation". That choice of meaning is warranted by the considerations mentioned earlier and also by the contrast to be found in the Act with language such as in s. 26AAA:

"(4) Where -

(a) sub-section (2) applies in relation to the sale of any property by a taxpayer . . . . " (at p328)

Language of that sort and comparable provisions, as may be found for instance in s. 36(4) and (5) and in s. 36A(2)(a) and (4), dictate an inquiry to establish whether the requirements of the other provisions have been satisfied. (at p328)
On the view I have taken of the relationship between ss. 36 and 36A it is unnecessary to consider a further question whether in fact there was a disposal in the ordinary course of carrying on Jensen's business. (at p328)
Since there is no dispute that a change occurred in the ownership of or in the interests of persons in property constituting the whole or part of the assets of Jensen's business and since I am of the opinion that those assets were trading stock and that upon the change in ownership or interests that property became an asset of a business carried on by Jenspart, it follows that the right to elect a value in the terms of s. 36A(2) existed and was properly exercised. (at p328)
There is, however, one other matter that should be noted. Earlier in these reasons I spoke of the way in which the commissioner adjusted the taxpayer's return. This might be thought to give rise to a quite basic issue, whether anything paid by Jenspart for the transfer of the shares to it could be an allowable deduction. Indeed one of the grounds of appeal was: "8. That the Supreme Court should have held that the cost to Jenspart of the shares disposed of by Jensen was not an outgoing to which s. 51 of the Act was applicable." That was not argued as an independent ground, the issues being confined to ss. 36 and 36A. A submission was considered by Rath J. who said: "In order to ascertain the 'partnership loss' within the meaning of s. 90 it becomes necessary to determine whether either limb of s. 51 would give rise to an allowable deduction. It was said that the sale price of the shares was not assessable income under the first limb; nor was there any nexus between the deemed cost to Jenspart and any business carried on by it under the second limb. In effect the argument was that the proceeds of the sale of these shares by Jenspart was capital, not income. Sub-section (2) of s. 51 was not applicable, because (it was said) the shares were not trading stock of Jenspart. I have already held that the shares were acquired, held and disposed of by Jenspart as trading stock in its business as a trader in shares and if this is correct, then the argument falls at the threshold" (1977) 17 ALR, at p 253 . (at p329)
It may be that because of the way in which the parties approached s. 36A(2) par. (a) before this Court an answer to the question - were the shares an asset of a business carried on by Jenspart? - was thought effectively to dispose of any issue regarding s. 51. At any rate, in view of his Honour's findings that Jenspart was in business as a share trader from the day after its formation and that it sold the shares as part of its share-trading activities " . . . there can be no doubt . . . 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)" (Patcorp Investments' case per Gibbs J. (1976) 51 ALJR, at p 44 ). (at p329)
Since writing this, I have read the reasons of Deane J., with particular reference to his Honour's comments regarding the character of the shares, immediately before their transfer to Jenspart, as still part of the trading stock of Jensen's sharetrading business. I agree with his Honour's comments and his conclusion in that regard. (at p329)

ORDER

Appeal dismissed with costs.

[1979] FCA 23

23 MARCH 1979