dice fax — fetercabace Lest eotr, Te PF Ch Thay, Mine t - 2 Nes ae1 woye re o - ' COomeny that 2t bus receawed woety, peas OG ware. a. LU ias oupersscd om prop2.en Co st lone Vics 2. eyo OP aLvolo tls, - : : a an & ae hoe oe . ' ' - ow oe ae =sy7 77 "+ nar ~- we fe . . oo at 7G att 7 mt s ey Ael 1026, s.77DCts. (3) end (9%. arom ~ 7, . in - faa BP ANT WA. Wa. Gtoof 1°77 c cr co3 a) Gye 4oy Ne ere = hee . zs o a G2 Le) Hy ie] NI SUECES TALTPCG ORDER: Eovern C.J., FPraak. ond Deone JJ. vA oo Noyes + ~ . DATE i*Das .- Toth November, i977 (HG COURT CRET-S Tih: 3. The respondent pay the appellant's cosls ox the apreal and of tne proceecings in the Luprenc Court af i 1 Australia. MeN GH AT cL Vester ax eu AZ te] © ~ Respouden CORLM: Been 46th Vovesber, 1977. This 18 en eprecl fron a juderent of o ms Tas L léxatic: ° which confirmed the disallowance by the Commissioner of a deduction of %250,000 clained by 'him Creel: Consolid.ced N.L. 2n ats return of income for the year enace 350th June 1972 Whim Creek Consolidated W.L. 15 a no l1abi1it; company incorporated in Western Australia and is a resident g WN for the purposes of s.77D of the Incoze Tax Asuessnont Act 1926 as it then was. Western Australia and is a mining is ¢ subsidiary of the apoellent, The apvellanc was the furd2ng coxpany Westfield tie exploration company for the ir mining The tivo companies had the same local divectors. Tee Lolie 1:8 ic & staccmomt of ms i4e% December 1969 to 3Cth Juie 1270 1st July 1970 to 20ta June 1971 ist July 1971 to 26th dune 1972 27th June 1972 to 30tn Jue 13°/2 o a) ry red a I iC tetty fou! Nib eke) ewww | OQ Oo re) ad (here laarter an. end VENUES. The emounts were debited in the appellant's books to Vestfieldts loan account end credited in the books of Yestfield to the appellat's aevanuce eccount. The following 15 a statenont of the exsmeuditure by Westticiad on mooning end prospecting:-— Nigt Decerhber 1969 to 30th June 1970 » &2,532 1st July 4970 to 30th June 1977 fon AVF ist July 1971 to 30th June 1972 $267 , 597 ist July 1972 to 350th June 1°73 $230 , 203 = > «4 > Sg a 1st July 1973 to 3ist December 1974 $506,558 The issue in this case arises in relation to an application ade by the eppellant to Westfirid on 26th June i°7? in that these tal of that comosnv. On 25th June 1972 the darectors of Westfield eocolyec e fh oO Oo re] j— tf c ct and the appellant was registered 2s the helder of 500.000 shar s of fifty cents each fully pard. Tho appeilait's acvance accou > was debited with the sum of $250,000, being the amount of the subsc indepcedne necessary ripticn money en the sherss. thus riducing Wee tl1el ss to che apsellant by ict amount, 1t w1il be to refer later to the circumstances 1n more detail. wm Pursuant to 3.77D(3). Westiieid lodged ith the Coumzssizoner a Geclaratzon wich, omitting formal parts, read as fcllovs (2) (4) (5) ( is a 'mining ccmmany? P) the Act. Vestfi1eld Ibusrers (7.A.) N.L. received durinre the year ended 20th June, 1972, 'moneys peid on 5 ag defined in cectaca 770(1) of che wct, ara to $250,000 trum a company which is a 'residence! Auscrelia vithin the meauing of 'Resident' cen in sections 6(1) and 77D(4) of the Act. Vestiield Minerals (W.A.) N.L. has expended. or propeses to ogecrd, the 'moneys paid on sheres' on 'mining or prespccling outgoings! as defined in section 77D(7) of the Act. 'Moneys psid on snares! was received from Whim Creek Consolsdated N.L. whose registe red office is situated at c/~ Lindquist Stacy and Fountain, 81 St. George's Terrace, Perth, vial, The Commissioner in due course fave a nctice WIMse. Ty 407 Some ia Wectfield Minercls (.2.) wre the purposes of section 77 that I am vot satisfica th received as tedyencet' end c lodgec on behnalt of co. > (3) of section 770 of tat . constitutes Monee 2 fe) ne section (1) of sscezon 7D. Accordingly the above declaration has nev been accepted," 1972, the atvellant claimed a deduction cursuass to s.77L(4) in respect of the sum of $250,000. 'lhe Commissioner, by notice of assessment, accompanieca by an adjustment shect, d + the deducticn, etating:-— "Section. 770 ciaim not allowable $250,000." The appellant duly lodged a notice of objection ed. The appellant chen recuested the objection be treatea as an appeal and forwarded to the Supreme Court oz Western Australia. This was done and the matter came on to be heard by the Supreme Court. The appeal was disiisse and the azsessment was confirmed. Ti the reasons for judgment, the central question vas stated to be:- (3) Ss that has, in on shares may sub-section 2 Within one mc ts wathit suc Lodge with th signed by the company has ¢ those moneys mining or pro a ey BySet ca oan =] IHNMREHKO r Be 1p > ee rm) G (3) eS Otay oe ad a Gos Q fo p vos or? i tye pele wD oo oe oF =ti- bw a Awe ation wir the 20RD a Fae coubttul coe TO Pei eve4»n L to this sect vr of 3ncoms, pr tho purposes visions 10 aad ter The end o ther & ob Cc d, or proposes Specified 1n the acclaratso% upon + op yep NZ OuteEILAgsS . re) @ 43 2 @ I+ = 4) 3 ch the! "C2 ert, natoal Loa c¢1Or ail PT AAS eben, 1 Furs F972 £ OWoic2s er the + onions only @ Mining Cone moneys paid fi aie such of ther edin (4) The amount ot anv moneys pore peid by a person 1n a year of incowe oft cha a commeny and included 10 moneys speci: declaratic ca lodged by the coumany undex preceding sub-sect rgen shall evngect tr bos aa allowable deduction Irom tne ae derived by that person in that year (5) If, at any tine, the 2s not sebtisfied, es to acy monevs epectt2 aration duly lodged by @ company under sub- of this section, that those moneve hay 12 be expended by the corvenay in aces. de Geclaraticn. the Commissioner mév inforn tie cs ce in venting given for th LUZPOSOK AT lon. that he is nor so sh rE ny Leis so inforred, the aro "8S urd. 7 tre last orccecaneg a Geclersine shell be asuuced ov ae @ stub' or the deducticn bere ing sor tre! proportion 2as the amoui 2 othe mot ich the Commissioner is not so satisiied bes amount of the moneys specified 1n the declara satisfaction of the amount payable on allotasnt of the shares an accoxvdercs with the procedure wiich was edopted, coastituced payment end r of the act, "moneys pard" to and "received" by the coapany io) Oo fo) ll 'g a ° he ° iS ® te is) BD Nan spect off the shares, The learned titel dJudee beld that 1t did not. Wis Honour referred to the rule which applied under ccvpeny upon payab & Cross ny le were mutually extinguished by an egreed set off, this ana & oS 3 to payment for the shares "in cash" for the purpeses of that legislation. For the formmlation of the rule, generally referr:c as the ruio in Svargo's Case (In re Jernony & Nonteauc Co.) f moneys the shares cr, to use the language (1873) L.R. 8 Ch. App. 407 at p.412), tho learned trial Jucye Joserh v. Cambell (1933) 5) C.L.R. 317 at p.324. Reference may aly he v. Sceeves f om (Wiet.) Por. Liamated (1951) c.u 408 at pp.420-1 and Currin + of Tezatinn (1674) 131 C.L.&. 409 at pp.tiseitl a? necessarily feli cutside cf s.77D,. The cuestaici Gepends ultimately upon the applicatacn of the vords of s.77D vo the facts of the particular case. icarned Jude said:- "But thac 1s not this iste thar? vas no 'sum certain immediately 7 appellant. nor 7) " rood soteoTr' of such ¥ asun. There wes sin 1 on a general deb2t account." This Court hes jurisdiction to hear and ceterrine eral Covrt of Austrs]ic ..tb GC. juviecdictzod an ince tax matcers (Fe ian appea), the Court 1s to have regard tu the evidence given 1n the proceedings out of which the apnea arose and has power to draw infercaces of in its diseretion, vo recelvs fuecther evidence (5.27). it: or vary the jgudgrent appealed from and give such jucsment or nce such order as, 34 all the circumstances, 1t thinks C26, or vetuce + ke 37 rder (2.2°S(i}< ane (b)) vo mexe an orner B.20(1}(a) anc Dd . In hearirg such apnesis frie gudguasmts om errrims of Supreme Cource gudgcs involvie, Cecisious py tres on queec™: ts of fet, thi. Court Will epoly ie prpimcavtes widen weve Te, 0 on by the High Court in Peterson v. Dererson (19535) SA C.L.R. 272 end, o er arereee ee ee Neble (1971) 125 7.L.R. conclusion. fe turn nov to e:emination of tne s ian this case and the cvidence which was before the learned Juste. Dealing 1 sum certain impedratcly rauyeble, 1: secms rhot the stress nvr: ls upon there being ne sum imiedsetvely payavie. The amount wins to the appellant by Westfielec was always caneble of precise ascertainment end appeered in the relevant accounts of the tyvu companies. It was not a disputed amoynt cac il was not a fluctuating amoint, exczpt insofar as the aprellant from tuc 7) time lent' further amounts to give its operating subsidisr add@ilional working capital. The question vhother the amount wes immediately payable raises more 2: rPicul fy. Shares N.L. - cf Vastfield at the 2 rb TL ls "Less DEPSARED U7 'O2TLITy fdvence frou Holding Conpeny When Creek Cornsolidetedi N.L. 450,000" Me. MoRee, Secretary of the cmpollant, erd Nr. Lindourst, Cheirren cf the evncllc-ct, gave evidence or matter. Tic. KcRae, in his cross-exenlnaation, gave evidence as " ank cyou lisve tald es thet it received all of 2c ing tron Vinnie Creek? Q. Was L~atcrest nayable on any of tnem*? A. Vo. Q. They were free of anterest loans? A. Yes. Q. Is th re anything in the manutes that deals with the manner h they vere granted? in the anunval reports — an the directors! minutes? © noticed, no," Q. Bul noth A. Not that In his re-examination, he gave further evidence as follows: "Q. PrPPrer > My learned friend asked you if you thought the terms of the loans made by Whim Creek to Westfiéld were long term loans. You said "Yes". I would just like to ask you in what sense you meant that they were - in the sense that they were ow1ng for a long time or in a sense they were made for a fixed term? For a long time was my interpretation. Had been owing for along time? I beg your parden? They had been owing for a long time? Yes. Was there any evidence 1n the books that they had been made for a fixed term, such as 12 months, six months, two years? Not to my knowledge. I haven't sighted anything." Mr, Lindquist, in his examination 1n chief, gave the following evidence:-— Ng, We have heard that advances were made by Whim Creek to Westfield - various amounts over times. On what terms were these advances made? At call. At call? At call and as money was required. "At call" — you mean repayable on demand? Repayable on demand. Was any loan made for any fixed term at any time? Not to my knowledge. You would have known about it if there had been? I would have." In his cross-examination he gave the following evidence :- Turning to the moneys that were lent by Whim Creek to Westfield, were they payable on demand? . Yes. . Did that apply to each of the particular loans made? They were all the same — all made at call; no fixed term. Q. Is there no written record anywhere in the minutes of either company setting out the terms of each of then? A. I cannot answer that without going through the minute book." In re-examination, he gave the following evidence :- "Q. Mr. Lindquist, my learned friend just referred to the balance sheets and a deferred liability of $450,000 under the Whim Creek balance sheets of a long-term advance. Could you explain these - why they appear in the balance sheet this way? A. Well, the deferred liability is ~-- I suppose we all knew that it wasn't going to be repaid within close proximity to the preparing of the balance sheet and probably that is why it was shown that way, but I really can't —-- Q. Do you mean it would be a waste of time calling it up unless you were applying for shares? A. Well, at that stage it would have been. Q. But. do you know whether any fixed term was agreed between the companies? A. No, there was no fixed term." One might, perhaps, speculate that where the parent company was providing working capital to its subsidiary in the form of loans to enable it to undertake the desired exploration and had no intention of defeating this purpose by calling the money up, some steps would be taken in the respective balance sheets to reflect this position. One might imagine that the parties would not wish to hamper the operations of the subsidiar by presenting its accounts in such a way as to suggest it might be insolvent. Perhaps there are better ways in which the matter could have been dealt with, as, for example, by means of explanatory notes to the balance sheets. However that may be, there emerges from the material which we have quoted, no evidence that the loan was for a fixed term and, in our view, no reasonable basis for inferring that there existed between the appellant and Westfield some contractual term in relation to the loans which made them payable as a matter of law otherwise than on demand. The learned trial Judge does not say that he disbelieved the evidence of Mr. McRae or Mr. Lindquist and, indeed, no sufficient reason appears why he should have done so. He makes no comment on the manner or demeanour of either of these witnesses. His Honour seems simply to have inferred that the loans were not, in law, repayable on demand because of the wording of the headings in the balance sheets. This is a finding which appears to us, taking the evidence before him as a whole, to be plainly wrong so that the intervention of this Court is called for. Turning to the second finding that there was no agreed set off, it is to be noted that in the minutes of the appellant of a meeting of directors of 26th June 1972 held at 9.30 a.m. the following resolution appeared :— "APPLICATION It was resolved to apply for 500,000 shares FOR SHARES: of 50¢ each in Westfield Minerals (W.A.) N.L. and the Common Seal of the Company was placed on the form of application in the presence of the Board. The Secretary was instructed to request Westfield Minerals (W.A.) N.L. to allow the deduction on these shares under Section 77D of the Income Tax Assessment Act. It was Resolved that past edvances made to Westfield Minerals (W.A.) N.L. and held as a credit to the loan account in that Company, be applied as to $250,000 1n payment of the shares applied for.". It is also to be noted that in the minutes of Westfield of a meeting of directors on 26th June 1972 held at 11.00 a.m., the following resolution appears:-— "APPLICATION The Secretary tabled an application by FOR SHARES: Whim Creek Consolidated N.L. for 500,000 ordinary shares of 50¢ each with the request that these shares be subject to a Section 77D deduction under the Income Tax Assessment Act. It was resolved that the shares be and they are hereby allotted and that the Company grant the request for the shares to be issued under Section 77D of the Income Tax Assessment Act." The set off against the loan account was recorded in a memorandum from Mr. Lindquist, as Director of Westfield, to his co~directors dated 26th June 1972 which was in the following terms:- "I confirm that a Board Meeting of the Company was held today and was attended by myself and C.A.K. Stacy (Alternate for Dr. D.R. Derry). The Company allotted 500,000 ordinary shares of 50¢ each to Whim Creek Consolidated N.L. and agreed that this application would be the subject of a taxation deduction under Section 77D of the Income Tax Assessment Act and the Secretary was requested to make the necessary declaration to the Taxation Department. Payment for these shares has been satisfied by the advances which Whim Creek has made to this company and the loan account has been reduced accordingly." The shares in question were allotted as fully paid and there was evidence that in the accounts of Westfield there was an entry in the journal recording that the advance account of the appellant was debited in respect of the sum of $250,000 and the share application account was credited in respect of an equal amount. With all respect to the learned trial Judge, it appears to us that the only reasonable inference from the evidence before him was that there was an agreed set off of the sum of $250,000. The second question mentioned earlier, was whether Westfield could properly make the declaration which it lodged. It appears to us that on the facts of this case that question does not arise. It is not suggested the declaration was fraudulent or a sham. Under s.77D(3) and (4) it is the lodgment of the declaration that matters, not the justification of its terms. Section 77D appears to us to be concerned with the encouragement of financial assistance by way of moneys paid on shares of companies engaged in mining or exploration so as to add to the capital and further the desired extension of mining and exploration (Mullens v. Federal Commissioner of Taxation (1976) 6 A.T.R. 504). The procedure envisaged by s.77D(4) and (5) supports this view. The taxpayer who has subscribed for shares in a mining company may be a member of the public who has not any knowledge of, still less any control over,the manner in which the mining company conducts its affairs. Section 77D(4), subject to any other relevant provision of s.77D, gives him a statutory right to a deduction for moneys which he has paid on shares, provided the company has lodged with the Commissioner a declaration 1n writing signed by the public officer of the company in terms which comply with s.77D(3). In the present case the appellant has paid money on shares and the company receiving the money has lodged a declaration in appropriate terms. On the material before us, we consider the appellant is therefore entitled under s.77D(4) to a deduction, unless the Commissioner has given notice under s.77D(5). The position of the Commissioner is safeguarded by the provisions of s.77D(5). If the Commissioner is not satisfied that the moneys paid on the shares have been or will be expended by the company 1n accordance with the declaration, he may inform the company in writing that he is not so satisfied. The consequences specified in s.77D then follow. The learned trial Judge took the view that the Commissioner had given a s.77D(5) notice. We find ourselves unable to agree with this view. His Honour treated as being a notice under s.77D(5), the notice in which the Commissioner stated:- "TJ am not satisfied that the amount d& $250,000 received as 'advances' and specified in the declaration lodged ... constitutes 'moneys paid on shares! as defined in sub-section (1) of section 77D." The difficulty with his Honour's view is that under s.77D(5), the opinion to which the Commissioner has to direct his mind is whether or not he is satisfied the moneys specified in the declaration have been or will be expended by the company in accordance with the declaration. The notice given in the present case does not express any lack of satisfaction about that matter. Indeed, the notice makes 1t plain that the Commissioner thought it unnecessary to consider that question because he took the view that there were no moneys paid on the shares. Had he taken the view that $250,000 had been paid on the shares, as we have concluded, the notice which he gave affords no indication of what his view may then have been. In forming the view that he did, the Commissioner appears to have directed his attention to the question whether the initial receipt by Westfield of the money at the time the advances were made constituted a receipt, for the purposes of s.77D, of "moneys paid on shares". He did not, it would seen, advert to the question whether satisfaction of the appellant's liability upon allotment of the shares by set-off against the moneys owing to the appellant constituted, for the purposes of the section, payment and receipt of the amount of the subscription moneys. He may well have been fortified in adopting that approach by the contents of a letter of 17th May, 1973 from Westfield's solicitors in which the relevant "moneys paid on shares" was identifzed nct by reference to the book entries relating to the set-off of the $250,000, but by reference to "the advances! which, in their capacity as such, clearly did not constitute "moneys paid on shares". In the context of all the facts, it was, however, clear that the "moneys paid on shares" referred to in Westfield's declaration pursuant to s.77D(3) were the subscription moneys in respect of the 500,000 shares which were allotted to the appellant. We have held that these moneys were paid and received, for the purposes of s.77D, at the time when the relevant book entries were made. The fact that, in a subsequent letter, Westfield wrongly indicated that the subscription moneys had been "paid" at the time of the original advance instead of at the time of the relevant debit does not deprive Westfield's declaration of its operative effect as a declaration pursuant to s.77D(3) in relation to money which had in fact, for the purposes of the section, been paid on those shares. If the Commissioner was not satisfied that these "moneys paid on shares" had been or would be or, in circumstances where the subscription moneys were satisfied by set-off against an existing indebtedness, could be expended by Westfield. on "mining or prospecting outgoings" as defined in s.77D(1) of the Act, the appropriate procedure appears to have been for him to have given to Westfield notice in writing pursuant to s.77D(5). This, as has been said, he failed to do. It follows that the appellant was entitled to a deduction in the amount claimed. The question whether the Commissioner was or remains entitled to give a notice pursuant to s.77D(5) and the effect of any such notice, in the event that he subsequently gives it, does not arise for consideration in this appeal. The present assessment cannot stand. The appeal will be allowed and the assessment remitted to the respondent Commissioner to be amended in the manner appropriate to the circumstances then existing. The respondent Commissioner will be ordered to pay to the appellant its costs of the proceedings below and of this appeal. I hereby certify that this and the preceding seventeen (17) pages are a true copy of the Court's Reasons for Judgment. A Date: 16th November, 1977. wR cee Associate