IS) 79 aa\nq BAC. CATCHWORDS Income tax - Division 7 tax - Co-operative companies - Holding company engaged in wine merchandising - Subsidiaries engaged in other activities - Definition of "co-operative company" - Primary object of business - Purpose of establishment - Dominant purpose - Income Tax Assessment Act 1936 (Cth.) Div.7, Div.9, ss.1C3A(2) (b), —— 103A(2) (d) (v), 117, 120(1) (ec). Income tax ~- Division 7 tax - Dividends - Resolution to pay interim dividend to holding company - Book entries - Resolution to rescind interim dividend - Reversal of book entries - Whether dividend "paid" or "credited" - Whether assessable - Income Tex Assessrent Act 1936(Cth.) Div.7, s.6(1) (defanition of "paid"), s.44(1) (a). BROOKTON CO-OPERATIVE SOCIETY LIMITED v, THE COMMISSIONER OF TAXATION No. G48, G49, G50, G51 of 1977. Coram : Brennan, Deane and Fisher JJ. Sydney 1 May 1979 IN THE FEDERAL COURT OF AUSTRALIA } ) NEW SOUTH WALES DISTRICT REGISTRY ) ) GENERAL DIVISION ) No. G51 of 1977 ON APPEAL FROM THE SUPREME COURT OF NEW SOUTH WALES BETWEEN 3 BROOKTON CO-OPERATIVE SOCIETY LINITED - Appellant AND 3 THE COMMISSIONER OF TAMATIC Respondent ORDER JUDGES MAKING ORDER Brennan, Deane and Fisher JJ, DATE OF ORDER 1 May 1979. WHERE MADE Sydney. THE COURT ORDERS THAT 1. The appeal be dismissed. 2. The appellant pay the respondent his costs of the appeal to be taxed. costs of the appeal to the Supreme Court less the taxed costs (if any) of the issue as to the reduction by $47,915 of its taxable income for the purposes of Division 7. 2. The appellant pay to the respondent his costs of the appeal to this Court to be taxed less the taxed costs (if any) of the issue as to the reduction by $47,915 of the appellant's taxable income for the purposes of Division 7 for the 1973 year. IN THE FEDERAL COURT OF AUSTRALIA of 1977 ) ) NEW SOUTH WALES DISTRICT REGISTRY } No. G48, 49, 50, Sl ) GENERAL DIVISION ) ON_ APPEAL PROM THE SUPREME COURT OF NEW SOUTH WALES BETWEEN : BROOKTON CO-OPERATIVE SOCIETY Appellant AND : THE COMMISSIONER OF TAXATION Respondent CORAM : Brennan, Deane and Fisher JJ. the First day of May 1979 BRENNAN J. The Brookton Co-operative Society Limted (the appellant) is a company formed under the Co-operation Act 1923 (N.S.W.). It seeks to show that at all tames during the income years ended 30 June 1972, 1973 and 1974 it was a co-operative company as defined in s.117 of the Income Tax Assessment Act 1936 and that, in consequence, it is entitled to be assessed to tax in those years as a co- operative company under Division 9 and as a public company under Division 7 (s.103A(2) (b)). t was assessed on the footing that it was not a co-operative company. It pursued objections to its assessments for those income years before a Board of Review, and on appeal to the Supreme Court of New South Wales. It failed in those proceedings and by leave appeals to this Court. The primary question upon which the appellant's status depends is whether the company satisfies that part of the definition of "co-operative company" which is expressed in s.117(1) (ad) in these terms: "...a company...which...is established for the purpose of carrying on any business having as its primary object or objects one or more of the followang:~ (d) the rendering of services to its shareholders; " Evidence relevant to the elements of this definition was led before the Board of Review and, by consent, tendered before the Supreme Court without alteration or addition. Oral evidence was given by Mr. Bainton, Q.C. He explained how a group of professional men who encountered difficulties an looking after their respective personal affairs, and who appreciated that a co-operative society was entitled to deduct from its assessable income the rebates distributed among its shareholders, thought of forming a co-operative society to render services of varying kinds to its members. Finding a considerable interest among their colleagues for the proposal, they decided to form a co-operative that might buy different commodities required by the members, the ---/3 first commodities to be wine and other beverages. The appellant was formed accordingly on 28 July 1971, and its rules contained its objects: " The objects of the society shall be - (a) the acquisition of commodities for disposal or distribution among its shareholders and no others, (b) the rendering of services to its shareholders and no others, (c) without prejudice to the generality of clauses (a) and (b) the objects of the society shall include - (i) the purchase for resale to its share- holders, but no others, of consuner goods including foodstufis, liquvours (sic), electrical appliances, motor vehicles, accessories, furniture and furnishinces, stationery and goods and chattels cf any description. (ii) to act as the agent of its shareholders, but no others for the purchase on their behalf of consumer goods, including foodstuffs, liquours (sic), electrical appliances, motor vehicles, accessories, furniture and furnishings, stationery and goods and chattels of any description, and the arranging of travel, accommodation, holiday and the like services. (iii) to provide to shareholders, but no others, stenographical, secretarial, accounting, advisary (sic) and any other services desired or required by the Socicty's shareholders or any of then, (av) the transaction of any business in furtherance of or in accordance with any of the Society's objects in any other State and in any Territory of the Commonwealth of Australia. (v) the establishment of branches or agencies in any State or Territory of the Commonvealth for the more convenient carrying out in any such place of the business of the Society. " 22/4 The services of a manager were obtained. The first manager had had some experience with wines, and was in the office of an accountant who was one of the proroters of the appellant. The functions which the manager performed in connection with wine were described by the learned trial judge (Helsham C.J. in Eq.) in these terms: "Basically there was a manager who arranged for supplies to merbers from one or more retailers; deliveries were made to members, who paid the Supplier; the supplier then paid a commission on wines so bought to the socrety of the nature of 7 - 10 per cent. The Liguor Act prevented the society from buying and re-selling liquor, so it acted really as an interrediary to take orders, pass them on, and receive a commission from sellers who delivered to members. The society, through the manager, gave periodic information to members in monthly bulletins about what was available and other matters of interest; the bulletins started in October 1971. It seems that the supplying of wine from retailers to members began about October 1971 also, " The wine activities continued in later years, and the appellant earned commissions of $408, $1,178 and $1,443 in the respective income years of 1972, 1973 and 1974. Drawing on other sources of income presently to be menticned, the appellant resolved to distribute rebates or bonuses tc its members based upon their wine purcnases, in the amounts of $2,500, $8,615 and $12,521 respectively on purchases made in the years 1972, 1973 and 1974, the distribution to be made in the year after the year in which the purchases were made. Ia fact, only $2,295 and $4,316 were distributcd in the respective income years 1973 and 1974. eee fD The conduct of the wine activities of the appellant was relied on to constitute the "carrying on of a business having the rendering of services to its shareholders as its primary object", and it was submitted that the appellant was established for the purpose of carrying on that business, and that it was therefore a "co-operative company". In order to consider that submission, it 1s necessary to refer to some other matters in which the appellant had an interest. The appellant invested its capital and derived a small income from that source. It also held shares in a number of wholly-owned subsidiary companies, the shares in which were given to it. (The Co-operation Act prohivited the appellant from investing its funds in these subsidiaries). The subsidiaries were engaged in purchasing the shares in companies which were in a position to distribute dividends or assets in specie to their shareholders, and in procuring those companies after purchase to make those distributions, These activities, which were sometimes referred to in the evidence as "dividend stripping",were on a large scale. The share trading accounts of a number of subsidiaries war iD tenderec, and it suffices to refer to ore, Boongt! Invastments Pty.Ltd., which was one of the first subsidiaries acquired by the appellant (it was acquired on 27 June 1972), and which appears to have had the largest share trading account. ~.-/6 Between 29 April 1971 and 30 June 1972, Boongil acquired shares for a cost of $1,132,146, received dividends of $1,230,130, and at the end of the year valued the shares on hand at $30. Between 1 July 1972 and 30 June 1973, it sold the shares on hand for $30, acquired other shares for a cost of $4,416,681, received dividends of $427,589, sold some of the shares for a further $3,853,897, and at the end of the year valued the shares on hand at $287,424, The share trading accounts of other subsidiaries likewise show large financial transactions. Some of the moneys received by the subsidiaries as profits were distributed to the appellant as dividends, and were included in the returns of income furnished by the appellant to the respondent in respect of the income years 1972, 1973 and 1974: in 1972 those dividends amounted to $3,000; in 1973, to $130,202 (subsequently reduced by $47,915); and in 1974, to $8,500. Other profits were held and not distributed by the subsidiaries. The commercial success of the subsidiaries' businesses depended upon their shedding the status of private companies for the purposes of Division 7. %xIn order to become public companies as defined by s.103A(2) (a) (v), the holding couwpany of the subsidiaries had to be a public company, and the appellant's promoters hoped that 1t would have that status. The benefit to the subsidiaries of acquiring the status of a public company was foreseen by the promoters of the appellant before its formation, Mr. Bainton deposed: 22/7 "... Some one or more of us realised that such companies have public company status under the Income Tax Assessment Act and that at that time there was a great deal of traffic in what was then known as excess distribution companies, It may be [subsidiaries of] a co-cperative society could enjoy some of the business that was apparently about. After the co-operative had in fact been formed it acquired, I thank initially one, but it may be two subsidiary companies. """ He explained that he foresaw the advantage of subsidiary companies acquiring public company status to avoid the application of Division 7 and to permit the profitable undertaking by the subsidiaries of dividend stripping an¢ capital reduction operations. The subsidiaries becare subsidiaries of the appellant in one of three ways, as Mr. Bainton's evidence showed. 'The first way was by the gift of September Six Pty.Ltd., a company controlled by the promoters of the appellant. The shares given were transferred to and held by the appellant or its nominee. One of the companies which became a subsidzary in this way was RHD Investments Pty.Ltd. The arrangements for the formation of RHD Investments Pty.Ltd. and for its becoming a subsidiary were made prior to or, at the latest, contemporaneously with the formation of the appellant. The second way was by the gift of RHD Investments Pty.Ltd. after it became a subsidiary. The shares given were transferred to and'held by the appellant or its nominee. ---/8 The third way was under a settlement of money madc by September Six Pty.Ltd. The trustees of the settlcment applied the funds made available to them in subscribing for or purchasing shares in companies, some of which they held in trust for the appellant, some oi which they transferred to the appellant to be held by it. Ac least 14 subsidiaries were acquired in this way, 8 an the 1972 year, and 3 each in the 1973 and 1974 years. The dividends received by the appellant were paid by the subsidiary companies Tunwin Pty.Ltd., RHD Investments Pty.Ltd., Sans Holdings Pty.Ltd. and Wyomee Investments Pty.Ltd, The promoters, sensing the risk to the continuance of the appellant as a wine-buying co-operative if it acquired cash resources, secured options in favour of September Six Pty.Ltd. over 45 of each parcel cf 50 shares issued to the appellant's members. The options given by the original members of the appellant were dated prior to the formation of the appellant, though they may have been given later. The reason for requiring the members to give options over their shares in the appellant was stated by Mc. Bainton: "...if those dividends turned out to be substantial there was an obvious tcmptation to the majority of members to want to get their hands on cash. We did not want that to occur. We wanted the society to continue." 2/9 Meow toe ee The promoters doubtless wanted the society to continue to carry on a co-operative busincss of buying wine and other commodities, and to confer public company status upon the subsidiaries. But the question which is posed by s.117(1) is not whether the promoters, or some of them, wanted the appellant to perform the functions which they had assigned to it, but whether the appellant "is established for the purpose" specified in the sub- section. The sub-section requires that a Cefined purpose should be the purpose for which the company is estublished; it does not suffice that a defined purpose be merely a purpose of establishment. The establishment of a company can be said to be for the purpose of carrying on a business of a stated kind when the dominant purpose of the company's existence 1s the carrying on of that business (cf. Jacob v. Federal Commissioner of Taxation (1971) 45 A.L.J.R.568 at p. If the company exists for a number of purposes, only one of which is the statutory purpose, and the statutory purpose is not dominant, 1t 18 not right to describe the statutory purpose as the purpose of the company's establishment, On the other hand, 1f the statutory purpose be the dominant purpose, it 1s the purpose of the company's establishment though other and subsidiary purposes may be found, To attribute a purpose to the establishment of a company, reference must be rade to the whole of the --/10 10. surrounding circumstances. It is not the purpose of an individual mind which is dctarminative, but the purpose which an observer who knows the material facts and circumstances (including those which are foreseen 23 possible future events) would predicate of the establishment. The material facts and circumstances unclude the company's constitution, the activities actually carried on, the company's history and its control (per Fullagar J. in A. & S. Ruffy Pty.Ltd. v. Federal Commissioner of Taxation (1958) 98 C.L.R.637 at p.656). These facts and circurstances may alter from time to time, anc the purpose of establisivrent may correspondingly change. It is not sufficient to look to the formation of the company and to ascertain what was, at that tine, the purpose of its formation. In Renmark Fruitcrowers Co- operated Ltd. v. Federal Commissioner of Taxation (1963) 69 ATC 4135, Menzies J. at p.4137 held that the relevant question "1s whether, at a particular time, the company js established for the purpose stated". The periodic operation thus given to the words "as established" requires a determination whether, at a given time, the company 1s then established for the statutory purpose. If the purpose of its establishment at a given time 1s not the purpose defined by s.117(1), the company does not, at that time, have the status of a co-operative company. The statutory purpose is the ---/il il. carrying on of a business of a kind stated in the sub-section. The kind of business which falls within the statutory purpose is stated to be a business "having as its primary object or objects one or more of the" objects specified in the lettered paragraphs (a) to (fe). Provided any one of the objects enumerated jn parayvaphs (a) to (e) of sub-s.(1) is a pramary object of the business, it is immaterial that the business has another of those objects either as a primary or non-prinary object. i) ce ® fa 67] ce ie) The reference to "object" in the definitio lead the reader, by an asscc1ation of ideas familiar tn the context of company law, to consider the company's memorandum of association; but the object to which the definition refers 1s not an object of the commany. but an object of the company's business (a distinction not observed in s.120(1)(c), perhaps because the statutory antecedents of s.117(1) and s.120(1) (c) were antroduccd unto income tax legislation by different amending Acts: s.117(1) may be traced to s.4 of the Income Tax Assessment Act 1925, and s.120(1)(c) to s.8 of the Tncomne Tax Assessment Act 1930). Ar enquiry as to the primacy of a given object of the business does net depend exclusively upon the objects contained in the company's memorandum (Ruffy's case, supra, per Dixon C.J., Williams and Webb JJ at p.649). The memorandum may be regarded, however, as a relevant factor in the enquiry (per Fullagar J., in ~.-/12 ee a no le 12. Ruffy's case at p.656; Revesby Credit Union Co-operative Ltda. v. Federal Commissioner of Taxation (1955) 112 C.L.R. 564 at p.576), and it 1s material to ascertain whether the business which is in fact being carried on 1s within the company's objects (Renmark Fruitgqrowers' case, supra, ver Menzies J. at p.4137). The test of primacy, as the rajority judement srointced out in Ruffy's case (supra, at p.649) "may not always bes quite easy, but relatively speakine, the test...may be considered practicable". Fullagar J. (at p.656) thought that light may be thrown on the primary object of the business (as well as on the purpose of the company's establishment) by "the activities actually carried on by the company,..its history, constitution and control," In Social Credit Savines y 2 and Loans Society Ltd. v. Tederal Commissioner of Ta.cation (1971) 125 C.L.R.560 at p.567, Gibbs J. thought it right to refer to "the activities actually carried on by the company". In the present case, the evidence shows that there was only one business carried on by the appellant, and that business had but one object: the object of buying wanc fer, or of facilitating the buying of wine by, the company's shareholders - an object to which IT shall refer as the wine-buying object. Winc-buying was within the appellant's constitution, it 1s to be found in the history of the business and was perhaps che only activity in which the appellant was engaged. The businesses of dividend stripping were the .../13 13. A businesses of the subsidiaries, not of the appellant. nd ny pe thus one is not concerned to enquire whether dividend stripping rather than wine-buy ng is the priuary object of the appellant's business. The appellant's activities with respect to its subsidiaries were those of a holding company, but the evidence is not sufficiently precise to show that the appellant engaged in a business of managing the portfolio of shares which it held an the subsidiaries. Although the only business shown to have been carried cn by the appellant had wine-buying as its prinery object, that does not determine the application of s.117(1). Thea basic question of purpose of establishment remains to ba answered, In my view, what emerges from the evidence,and 1t emerges with clarity, is that the dominant purpose of the appellant's establishment from its formation to the end cf the relevant income years, was not thc purpose of carrying on a business having wine~buying as 1+s primary object. Rather, the dominant purpose of cstublishing the appellant was to hold shares in, and thereby Lo confer h the status of subsidiary upon, the companies whose shar2s should be transforred tc it. No deubt 1 waco hoped chat the operation of s.103A(2)(d@)(v) would thereby clothe the subsidiaries with the tax-protective mantle of public company status. The dominance of one purpose of a company's establishment over another is not necessarily to be answered by a cormarison of the degree of activity + /14 14, involved in fulfilling one purpose or the other, for a purpose may be susceptible of fulfilment wrth little or no activity on the part of the company. Uittle or no activity was required on the part of the appellant to hold the shares in the subsidiaries, yet the dominance of that purpose appears from a consideration of the funencial importance of the subsidiaries' activities to the apsellant and 1ts members, the magnitude of those activities and the fiscal significance of public company status upon the result - of those activities to the suhsidiaries and to the appetianr. The donznant purpose of the appellaut's establishme ut is not a purpose defined sy s.li7({l1), and the appellant therefore did not acquire the status of a co-operative compen under Division 9 or of a public company under Division 7. Paradoxically, it was the very importance of cloth=ny the subsidiaries with the mantle of public company status wl.ich rendered ineffective the attempt to do so, lt was not sufficient to attract the operation of s.117(1i) that the appellant was established for the subsidiary purpose of carrying on a business having the primary object of wine- buying - a purpose which, had 21t been the dominant puvrpo.ss, would have conferred the status of a co-operative company on the appellant. It follows that, in my judaqrent, Helsham C.J. an Eq., was right in dismissing the appeals to the Supreme Court in relation to the appellant's status. we -/15 15. A further question rclates to the assessable income of the apnellant in the 1973 tax year. Tts income was at first returned at $130,202, but subsequencly an amended return excluded $47,915 of this sum. The excludoda sum represents the amount declared as an interin dividend to be paid by Tunwin Pty.Ltd. to the appellant. 'The resolution declaring the dividend t'as passed on 23 April 1973 by the directors of Tunwin, Messrs.Bainton, Grant and Smith in the following terms: im Cividend of ana credited to on Co-operative avaLtlakle to u " Resolved that $47914.97 Le the acccunts of Society Limited that company on fs]B Cl KK ) fay] ri) (9) ag Br QO cry od ie) : is) a wu ty Oo pan oro we Or!) Po The Tunwin directors were also directors of the appellanc. The minutes of the appellant's directors' meeting of 15 "lay 1973 note the advice given to that meeting that the Tenwin dividend, inter alia, "had been declared and |was] due to the Society". It was resolved that "upon receipt of these dividends the money be invested on fixed cepos1t". The relevant journal entry was made in the books of Tunwin and credited to the appellant in Tunwin's "Sundry Creditors" ledger. The amount of $47,914.97 wes reflected tn the Financial staterents of beth covpanies ut tne 30 dune i573, At the time when the interim dividend was declared, Tunwin was under a contingent liability to make certain payments pursuant to a contract which had yielded the profit required to support the interam dividend. «+ -/16 16. The Tunwin directors had thought 1t right not to make provision, oz sufficient provision, for the cnnting liability before declaring the interim dividend. e L ne Subsequently, Tunwin was required to mect that liabalit and, after meeting it, 1t had insuff: cient funds or remaining profits out of which to pay $47,914.97 to the appellant. When the liability was vat, the Tunwin Girectors purported to rescind the declaration 9f the dividend, by passing the following resolution at a meeting held on 10 Decerber 1973; "RESOLVED that it nov being apparent *ronm an examination of certain here sale agreeme.ts from which the corrany had antic rated Goriving of profit an respect of the yerr endcd 30/6/72 that there were not profits of $47,914.97 derived during that period, the declaration of a dividend of $47,914.97 on 29th April, 1973, be rescinded, the credit of $47,914.S7 to Brookton Co-onerative Society Limited be reversed and th Brookton Co-operative Society Li:nited pe requc to acknowledge and accept the reversal or this credit." at + a ea On the same day the appellant's directors resoivoc to "accept the said rescission and the corresponding alteration an the credit to at". The question is whether the arount which was credited to the appellant's account with Tunvin forms part of its assessable income for the 1973 tne oma yoar Its first return of that year's income, ancluded the relevant amount, forsed the basis of an which assessment to primary and Division 7 tax. The notice of assessment to primary tax was i3ssucd on 30 April 1974, and «2/17 17. the objection which the appellant made to that assessment was limited to challenginy the respondent's basis for assessing the appellant to tax as a private company. A notice of assessment to Division 7 tax was issued on 17 March 1975, to which an objection was lodged dated 13 May 1975. The objection raised tne ground that - "the undistributed a~ount of tnceme derived during the year enced 30th Jane, 1973 1s not more than $82,287 for the reason that the amount of dividends received durine the said year was in fact $282,237 and not $130,202 as ancluded in the tamab'o ircc'e of the said year in the Income Tax Return submitted." On 2 June 1975, the appsllant wroc2 a lettcr to the Deputy Commissioner of Tamation enclosing an amended 1973 return to exclude "the amount of a @ivicend from Tunwain Pty.Ltd, which was reversed in the 1974 accounts when it vas found that Tunwin did not have enovgh funds to pay the dividend." The respondent disallowed the objection and contends that the amount was a dividend "paid" to Lhe appellant within the meaning of that term when used in refecence ta dividends in the Income Tax Assessarent Act, 1936 and thus formed part of the apnellant's assassable income (s.44(1) (a) "Pang" is given an extended meani.g in the Act, and it ancludes "credited" (s.6(1)). Tne meaning of "credited" was referred to by Isaacs J. in Webb v. Federal Commissioner of Taxation (1922) 30 C.L.R.450 at p.479: .-./18 18. "The Legislature, aS 1t appears to me, has by the word 'credited' sought to reach cases where, through a memoer or sharechold2r who has been tpaid'' the dividend or bo.us, taere has been credit in the company's books imputed to the share he holds...But, at all cvents, 'profits credited or paid' are, as 1t seems to me, pointed to 'profits' which have in some way been made a debt by the company to the shareholder, &c. In the case of a shercholder, that would be by a 'dividend or bonus' - or even by 'interest' used in the sense of distribution of profits. But the declaratioa of a 'divicend' creates a cebr (In re Severn and Wye end Severn Errdage Railway Co. ((i3 6) i Ch. 559, at p.564). " An@ in Inland Revenve Commissioner (N.%.) v. Taylor (1964) 9 A.I.T.R.374, Henry J, referred to Webb's case and said at p.383: "The essence of the expression is that a dabt by the corpany to the shareholccr is recorded as a4 credit 1n his account with the company. The inquiry 1s thus narrowed down to a consideraticn whether or not the @irectors did create a Gebk between the corpany and th= shareholder and recorded that debt 1n an account with the shareholder.,.The entry coulc become « 'creeait an account' only when tne directors decided to pay it." Provided the credit shown in a taxpayer's account with the company declaring the dividond represcrts a debt coving to the taxpayer, the dividend is "credited" and, in thac sense, "paid" for tie purpose o ie te tea tT) ran) elic » Where a final dividend is credited atter 1t 1s Geclared, as in the Severn Bridge Railway Co. case, the amount credited 1s a debt and may form part of a shareholder's assessable income as a "dividend paid". .../19 19. But it is otherwise where en interim dividend is declared by directors whose pov: ace exe d in me) Yeon the terms of Tunwin's article $9. 'That Article provided that the dixyectors "may from time to time pay to the members such interim dividerds as appear to the directors to be justified by the profits of the company. Where directcrs, acting under suci. & power, resolve either to declare or to pay an interim diviccnd, the resolution itself does not create 2 debt owing by the company to the sharcholders, as Brightmen J. sare quoting the 13th ation of Buckler on the Companies Acts fH an Potel v. Inland Revenue Ceornissronwis [1971] 2? ALL ER at p.513: "The passage in Buckley reads: 'Where the directors aro authorised to pay interim dividends, a@ mere resolution to pay does not create a dsht as betiveen the company and the remkcr so as to prevent the directors from subsequently rescinding the resolution,' oO I think that 1s a correct conclusion from the decision in the Lagunas Nitrate case ((1901) 85 LT 22), which establishes that an interim dividend is, as it wece, sudject to the will of the directors until 1¢ 1s aciual'y paid mG. fa td In Industrzal Equity atd. v. Shactibura (197,) 52 A.L.J.R. 89, Mason g. cited Potel's case with approval saying: 50% 20. "There is a well recognized distinction between a power to declare a final dividend and a power to pay an interim dividend, ne consequence of the distinction 1s wnat althougn cue do C2 aracnon of a final divicend yives rise to a Gebr payab] by the company to the shareholcer imadsatelv ox from the Gate stipulated for payment, a resolution for the payment of an interim dividend does nok create such a debt in favour of the shareholder..." The Tunvin directors, acting in pursuance of Article 9° haa no power to create a debt enforceable by the rembers against the company. They had powcr to pay an interim dividend, but they could not create an obligation to pay it. Of course, payment may be made othervise than in cash (Thasxrvall v. Great Northern Rarlway [1910] 2 K.B.509) and an sore circumstances the entering oF iters in accounts bebtveen the company and the shareholder ray be an effective neoars ct making a payment (In re Har-ony_ and Montaguc Tin aad Cope Mining Comoany (Spargo's Cas2) (1873) L.R.8 Ch.App.40/; In re Paraguassu Steam Tranroad Company (Poerrao's Case) (1874) L.R.9 Ch.App.355). But the mere entering of a cr>ait an the books of a company in favour of a shareholdei dovs not necessarily pay the amount se entered. As Basvock C.J. sazd in Manzi v. Smith (1975) 49 A.L.d.R.376 at p.377: " We were referred to cases in whitch a paymore of money was held to have been made by means of entrics in boots oF aceornt., But arn .to5.8 caANas the entrics represeatcd cne agreerent of tre appropriate partics e.g., Eyles v. Eliis (1827, 4 Bung.112; 130 E.R.710, and ne i iarvany 7 and lontacve Tin and and Copper. Haining Co. (Spargo's ase) (1873), 8 LR, Ch.App.407. 'These decisions, quite clearly, are not aut thority for tne preposition for which they were advanced, namely that a payment oF money was made by thea making by the company of a journal cntry aun the books of account without reference to, or oe /21 21. without the agreement of, the persons said to be the recipients of the money. The company's assertions in its book. of acvount did not establish the indecbtecness of the appellants or any payment of money in discharge cf that indehtedness." No doubt it 1s open to a corpany and its shareholder to agree that the amount of an interim dividend to be paid should, on payment, be lent by the shareho.ider to the company, and to give effect to that agreement by appropriate hook entries which effect a pavrent of an anterim dividend and a lending of tne amount £v paid to the company (Lyles v, Ellis, sapra, Joseph v. Cavrbeil (1933) 50 C.L.8.317 at p.324). Where an agreement of that kind is made, the shareholder acquires a Cebt for the nency lent. The company's obligation is then to repay the moncy lent, and a payment in discharge of that ecbligation is not to be characterized as the payment of an interim dividend. (It may be different where an existing liability to pay a final dividend is sought to be exchanged for an 1do1tical liability for moneys lent: Re Associated Electronic Services v4 5 - Pty.Ltd. [1965] Qd.R.36). Where the entry of a crecit 3tem representing an interim dividend is allowed to remain by consent of the shareholder in the conprry's books, a nice question arises as to whether the shareholder has heen paid and has then deposited the amount of the dividend on loan with the company, or whether the dividend has not been paid at all. The answer to this question must turn upon the intention of the parties. In the present case, ---/22 22. the intention of the Tunwin directors as wxpressed by their resolution was not to pay the dividend until demand was made for it, It does not appear that any demand was made prior to the rescission of the resclution declziring the interim dividend, and the payment of the dividend thus remained "subject to the will of the directors". There is no evidence of the appellant's making of a loan of the amount of the dividend to Tunwin. The entries rade in the books and financial statements of Turin and of the appzllant de not show a payment of the dividend by Tunvin and a lending of the amount paid to Tunvin. Tunvwan's journal records tue amount to be paid upon the authority of the direutors' resolution declaring the interim dividend, and records Lhe reversal of that entry on the authority of the directors' resolution rescinding the prior resolution, There 3s no journel entry which records a payrent and a lending of the amount paid. The resolutions and the journal entries are consistent only wath the non-payrent of the interim dividend. As the interim dividend wes not paid, and@ as it was incepcble of giving rise to a debt before payment, the arount of the a jes interim dividend was not part of the appellant's assesszb ¢ income for the 1973 year, This conclusion in2kes it to a] ri a c oO ssary to examine the submission that the declaration of the interim dividend was invalid because there were no profits out of which that dividend might have been paid - a submission which might have required consideration of the reference in s.44(1) (xu ».-/23 23. dividends "paid out of profits". But as the dividend declared was not "paid" it is unnecessary to consider this submission. In my view, the dividend of $47,915 should not have been included in the amount first returned by the appellant as its 1973 income. Although the assessment to Division 7 tax assessed the undistributed amount upon which the tax was calculated in accordance with the appellant's original return of incore, 1t was assuned an argument both before the Supreme Court and this Court that it was open to the Court to direct an amendment of the assessment to reduce the tamable income of the appellant by the amount of the Tunwin d2wicend consequert upon the objection which was lodged to the assessrent to Division 7 tax. Though I should not wish to comment upon the correctness of the assumption in the absence of argument, it 1s right that the order of this Court should adopt the common basis of the submissions nade, and direct the amendment of the assessment in accordance with its view of the true quantification of the taxablo neome, The taxable ancome for the puvpo-es of culoulat- +r Division 7 tax should therefore be reduced by deducting Pa the amount of the Tunwin dividend. 2/24 24, This conclusion produces a @ifference between the taxable income upon which primary tax is assessed and the taxable income which 1s uscu to determine the undistributed amount upon which Division 7 tax was calculated in the 1973 year; but that consequonce flows from the appellant's failure to raise the relevant ground in 1ts objection to the assessment to primary tax and its consequent inability to seek relief upon that ground by pursuing such an objection on appeal against that assessment (cf. Cappid Pty.Ltd. v. FeGeral Comrissioner of Taxation, 70 ATC 4124 at p.4126 per Menzres J.). The objection to the assessment to Division 7 tax in the 1973 year should be allowed in part, and the appellant's taxable income for the purposes of calculating Division 7 tax should be reduced by $47,915. The judgment of the Supreme Court should be varied accordingly with consequential orders as to costs here and in the Supreme Court. The judgments of the Supreme Court in respect of the status of the appellant should be affirmed and, subyecc to the variation mentioned, the appeals should be dis.aissed with costs. oe I certify that tnis and the 23 ane preceding pa es ase a true couy of ene Reasons for Juugment herein of nis Eono Mr. Justice Grane , | ( Associate / Dated: | Me, (77%