CATCHWORDS Income tax - Allowable deductions - Carry-forward losses + Holding in subsidiary company ~ Continuity of beneficial ownership of shares in holding company - Principles of interpretation ~ Existence of contract or arrangement with specified purpose - Whether subjective or objective purpose - Continuance of arrangement - Parties to arrangement - Evidence - Income Tax Assessment Act 1936, ss.80, SOAA, 80A, 80B, 80C, 80D, 80E. THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA v. COOPER BROOKES (WOLLONGONG) PTY.LTD. No. G90 of 1977. Coram : Brennan, Deane and Fisher JJ. 15 August 1979. Sydney. IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) No. G90 of 1977 v) GENERAL DIVISION ) ON APPEAL FROM THE SUPREME COURT OF NEW SOUTH WALES ADMINISTRATIVE LAW DIVISION BETWEEN : THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA = Appellant AND : COOPER BROOKES (WOLLONGONG) PTY.LTD. Respondent ORDER Brennan, Deane and Fisher Ju. JUDGES MAKING ORDER DATE OF ORDER 15 August 1979. Sydney. WHERE MADE THE COURT ORDERS THAT: "2. Phe appeal be allowed. 2. The order of the Supreme Court of New South Wales be set aside and in lieu thereof 1t be ordered: that the appeal by Cooper Brookes (Wollongong) Pty.Ltd. to that Court against its assessment to income tax in respect of the year of income ended 30 June 1971 be dismissed, that the assessment be confirmed, and that Cooper Brookes (Wollongong) Pty.Ltd. Pay the costs of the appeal to the Supreme Court incurred by The Commissioner of Taxation of the Commonwealth of Australia to be taxed. --/2 3. The respondent pay to the appellant his costs of this appeal to be taxed. mene ee IN THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) . ) No. G90 of 1977 GENERAL DIVISION ) ON APPEAL FROM THE SUPREME COURT OF NEW SOUTH WALES ADMINISTRATIVE LAW DIVISION BETWEEN : THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Appellant AND : COOPER BROOKES (WOLLONGONG) PTY. LIMITED Respondent CORAM : Brennan, Deane and Fisher JJ. 15 August 1979 REASONS FOR JUDGMENT BRENNAN J: In this case, I have had the advantage of reading my brother Fisher's reasons for judgment. I agree that the appeal should be allowed, and I am content to follow in the steps which lead his Honour to that conclusion. I would, however, add briefly my reasons for holding that s.80C(3) of the Income Tax Assessment Act 1936 does not have the effect of applying s.80B(5)(c) to a case falling within s.80C(1) as though the phrase "for the purpose of enabling the company to take into account a loss that the company 22/2 has incurred" read "for the purpose of enabling the holding company to take into account a loss that the holding company has incurred". Section 80C(1) provides that, notwithstanding ss.80, 80AA and 80A "but subject to this section and to section eighty E" of the Act, a loss incurred by a subsidiary company shall not be taken into account for the purposes of s.80 or s.80AA unless the Commissioner is satisfied of two conditions referred to in the subsection. The conditions are, first, that the holding company which had a controlling interest in the subsidiary company at any time during the year of loss, also had a controlling interest in the subsidiary at all times during the relevant year of income; and, second, that shareholders who beneficially owned shares carrying not less than 40% of the voting, dividend and capital distribution rights in the holding company at all times during the year of loss, also beneficially owned shares carrying rights of those kinds in the holding company at all times during the relevant year of income. If the beneficial owners of shares in the holding company carrying rights of the kind referred to in s.80C(1) during the whole of the year of income had not beneficially owned shares carrying those rights during the whole of the year in which the subsidiary incurred the relevant loss, s.80C(2) empowers the Commissioner to take into account 2/3 for the purposes of s.80 or s.80AA such part of the loss as he considers to have been incurred while they had beneficially owned shares carrying those rights. Subsections (1) and (2) of s.80C each apply to a loss incurred by a subsidiary, and define the conditions upon which it is or may be allowed as a deduction in a subsequent year of income, pursuant to s.80 or S-80AA. Neither subsection applies to a loss incurred by a holding company before a particular year of income, for the deductibility of such a loss falls for consideration under s.80A. But there is a legislative intention, too clear to mistake, common to s.80A and s.80C, as to the condition relating to continuity of beneficial ownership of shares upon which a company may be allowed a deduction: the condition is expressed in s.80A(1) with respect to the taxpayer company in precisely the same terms as it is expressed in s.80C(1) with respect to the holding company of the taxpayer company; and in s.80A(2) it is expressed with respect to the taxpayer company in precisely the same terms as it is expressed in s.80C(2) with respect to the holding company of the taxpayer company. Indeed, the only circumstance which takes the loss incurred by a taxpayer subsidiary company out of the application of s.80A is that the taxpayer was a subsidiary at a time during the year of loss (s.80C({1)). 2.2/4 / Subsections (3) to (8) of s.80B have effect, as s.80B(1). provides, "for the purposes of the application of [s.80A] in determining whether a loss incurred by a company...is to be taken into account...". Section 80C(3) applies the same subsections in relation to a holding company for the purposes of the application of s.80C(1) or s.80C(2) - provisions which also relate to whether a loss incurred by a company is to be taken into account. The symmetry of the provisions suggests that subsections (3) to (8) of s.80B are to provide a common dictionary for the operation of the condition relating to continuity of beneficial ownership of shares in the taxpayer company when s.80A applies, or of shares in a holding company of a taxpayer company when s.80C applies. Paragraph (c) of s.80B(5) might therefore be expected to have a like operation with respect to the deductibility of a subsidiary's loss under s.80C, to the operation which it has with respect to the deductibility of a company's loss under s.80A. Paragraph (c) denies deductibility to a loss otherwise falling within s.80A where a contract agreement or arrangement, referred to in that subsection, was entered into for a purpose of obtaining a deduction for the loss. Prima facie, paragraph (c) should be construed in its application to a case under s.80C as denying deductibility to a loss otherwise falling within that section - that is, a 2/5 re) a" subsidiary company's loss - where a contract, etc., was entered into for_a purpose_of_,obtaining a deduction for the subsidiary company's loss. No doubt the contract, etc., referred to in paragraph (b) relates to the continuity of shareholding in the holding company, but the relevant purpose is connected with the deductibility of a loss falling within s.80C - the subsidiary's loss. To hold otherwise would attribute an operation to s.80C(3) and s.80B(5)(c) which would be incongruous in comparison with the operation of s.80B(1) and s.80B(5)(c). Yet there is nothing to suggest any difference in legislative intention as to the respective applications of s.80B(5) (c) by s.80B(1) and by s.80C(3), wnless one fastens on the phrase in s.80C(3): "as if references in those sub-sections to the company were references to the holding company...". But s.80C(3) applies the whole of the operation of subsections (3) to (8) to cases falling within s.80C, and the quoted phrase may be construed as interpretative, requiring references to a company to be references to the holding company, when that interpretation does in truth apply the whole of the operation of subsections (3) to (8) to the condition relating to continuity of shareholding in a holding company under s.80C. To fulfil that legislative intent of s.80C(3), as ascertained from its context, I would construe the -.-/6 ee ee reference to"company'in s.80B{5)(c) as applied by s.80C(3) to be a reference to the company which was to be enabled to take into account the loss referred to in that paragraph. Accordingly, I concur in the judgment of Fisher J. The appeal should be allowed with costs. I certify that this and the 5 preceding pages are a true copy of the Reasons for Judgment herein of nis honour Mr. Justice Brennan. Ki d sly Cooma Associate ° Dated:/S August 1979. a eee em aa a A TE ee em IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY No. G9O of 1977 GENERAL DIVISION ON APPEAL FROM THE SUPREME COURT OF NEW SOUTH WALES ADMINISTRATIVE LAW DIVISION BETWEEN: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Appellant COOPER BROOKES (WOLLONGONG) le PTY. LIMITED Respondent CORAM: Brennan, Deane and Fisher JJ. Wednesday -15 August, 1979. REASONS FOR JUDGMENT DEAWE J: I have had the benefit of reading the judgment of Fisher J. I agree with the conclusions which he reaches and, subject to what is said hereunder, with the reasons which he advances for those conclusions. The one question upon which I would add some comments for myself concerns the construction of s.80C(3) of the Income Tax Assessment Act, 1936 ("the Act"). Pe Cah IF NS A SP A RR I senate eaete nas o= enema ne = =: The sub-section has since been repealed and references to it and to other provisions of the Act are to the relevant provision in the form applicable to the year of ancome ended 30 June, 1971. Section 80C(3) extended the primary operation of s.80B(5) by providing that, in the specified circumstances, references to "the company" in the provisions of that sub-section should be read as references to "the holding company or the interposed company as the case may be". If the provisions of s.80C(3) are given their strict literal meaning, the present case does not fall within s.80B(5), and the latter sub-section does not destroy the continuity of beneficial ownership of shares which is necessary if the taxpayer 1n the present appeal is to be entitled to the benefit of the disputed deduction in respect of losses of previous years. On the other hand, if the direction embodied in s.80C(3) to read references to "the company" in the manner indicated, is construed as subject to an implied qualification that they are to be so read "where appropriate", s.80B(5), in its extended operation, has the effect of destroying that continuity of beneficial ownership. Ordinarily, I would be loathe to attribute to the provisions of a taxing act a meaning different from their literal meaning where the literal meaning would not, and the attributed meaning would, deprive a taxpayer of a deduction to which he or it would otherwise be entitled. The legislative intent must be derived from the words which the Legislature has seen fit to use. The fact that the literal interpretation of the words used by the Legislature may seem to result in a weet ee ene EE re more favourable result to a taxpayer than the Legislature may have! intended does not, in itself, constitute any warrant for a court disregarding the literal meaning of the words which the Legislature has used and attributing to those words a quai- ified meaning which it is assumed the Legislature intended to convey. In the present case however, as Fisher J. has illustrated, a literal reading of the words used in s.80C(3) would result in taxpayers who were plainly not intended to be caught by the provision being deprived of the benefit of deductions to which they would otherwise be entitled. If the direction contained in the sub-section is read as qualified by the words "where appropriate" that unintended result would be avoided. In these circumstances, it 1s plainly legitimate to regard the importance of the fact that such a qualification of the words used would have the result of depriving the taxpayer in the present appeal (and presumably other taxpayers) of the benefit of a deduction in respect of past losses to which they would otherwise be entitled, as discounted by the consideration that it is reasonably clear that it would be quite anomalous for the taxpayer and others in the same circumstances to enjoy the benefit of the deduction. The implication of words such as "where appropriate" in a legislative direction to substitute words in another legislative provision so as to apply that legislative provision to circumstances to which it would not otherwise be applicable does not involve doing violence to the words which the Parliament has used. Where, as in the present case, the direction to substitute the different words is given 1n respect of a variety ~~ aa eee of different legislative provisions, the implication can be t made almost as readily as can the implication of the qualificat-— ion "subject to a contrary intention" in a definition section. In my view, the qualification "where appropriate" should be implied in the provisions of s.80C(3). The appeal to this Court should be allowed with costs. The orders made by the Supreme Court of New South Wales should be set aside and, in lieu thereof, it should be ordered that the appeal to that Court be dismissed with costs. { corltiy fuat this and the preecding pages are a {rue copy of ihe reasons for Judgment hercin of His Honour Mr, Justice Deane , ASSOCIATE Dita 7 -&- 79 in THE FEDERAL COURT OF AUSTRALIA ) ) NEW SOUTH WALES DISTRICT REGISTRY ) No. G90 of 1977 ) ) GENERAL DIVISION ON APPEAL FROM THE SUPREME COURT OF NEW SOUTH WALES ADMINISTRATIVE LAW DIVISION BETWEEN: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Appellant - and - COOPER BROOKES (WOLLONGONG) PTyY. LIMITED Respondent CORAM: Brennan, Deane and Fisher JJ. 15 August 1979. REASONS FOR JUDGMENT FISHER J.: This 1s an appeal by the Commissioner of Taxation ("the Commissioner") from a decision of the Supreme Court of New South Wales in its Administrative Law Division. The Supreme Court upheld an appeal by Cooper Brookes (Wollongong) Pty. Lamited ("the taxpayer") against an income tax assessment issued against the taxpayer 1n respect of the year of income ended 30 June 1971. At 1ssue in the appeal 1s the taxpayer's entitlement in the assessment of income for that year to a deduction of the amount of losses incurred by 1t in two prior years. The taxpayer 1n the years of income ending 30 June 1964 and 30 June 1965 ("the years of loss") accumulated losses totalling $44,077. In its return of income for the year ending 30 June 1971 ("the year of income") it claimed to be entitled to an allowable deduction of the amount of these accumulated losses. The Commissioner in his assessment rejected this claim stating in the adjustment sheet that he relied upon s.80C and in particular that "in pursuance of s.80B (5) the shares held by E.H. King in Wellington Holdings Pty. Lamited have been treated as shares not beneficially owned by him at any time during the year of income and the Commissioner accordingly cannot be satisfied in terms of s.80C (1)(b)." Wellington Holdings Pty. Limited at all relevant times beneficially held all] of the issued shares in the capital of the taxpayer. The taxpayer objected to the assessment and the Commissioner disallowed the objection. On appeal to the Supreme Court of New South Wales, Woodward J. found an favour of the taxpayer and allowed the appeal. Before the trial judge two substantial 1ssues arose, namely 1. whether by virtue of s.80C (3) of the Income Tax Assessment Act 1936 ("the Act") s.80B (5) had an extended application to a case such as the present where the taxpayer claiming the benefit of a loss incurred in a previous year was, at all relevant times, a subsidiary of some other company, and 2. whether there was before him evidence upon which it was reasonable to infer a relevant arrangement between Mr. E.H. King, ("King") the continuing shareholder in the holding company Wellington Holdings Pty. Limited ("Wellington") and Network Pinance Limited ("Network") the purchasing shareholder or any person on its behalf. uw Tlzis Honour also gave consideration to Lwo subsidiary questions, namely whether s.80A and s.80C of the Act have a cumulative effect and whether the grant by King of a proxy on 24 May 1968 came within s.80B (5)(b) and (c) of the Act. It 1s agreed by counsel for both parties that the former subsidiary question does not arise for determination on this appeal. On the hearing before the trial judge, little prominence appear to have been qiven to an alternative contention upon which the Commissioner relied before this Court. That contention, which was clearly raised by the Commissioner's letter of particulars dated 4 May 1977, was that there was a relevant arrangement between Kang and the Scheme Trustees ("the trustees"). In his judgment Woodward J. concentrated his attention almost exclusively upon the possible existence of the alleged arrangement between King and Network. On the hearing of the appeal counsel for the Commissioner put as his primary submission that there was evidence from which it was reasonable to infer an arrangement between King and the trustees. As in my op2znion this submission should be upheld at 1s necessary for me to traverse the evidence because, even though 1t 1s not 1n dispute, certain portions thereof assume a different significance when considered in relation to the alternative arrangement that was alleged. It was not suggested that this alternative submission was not properly open to the Commissioner on the appeal to this court. It will be necessary from time to time to refer to particular sections of the Act as they were at the relevant time and it is appropriate to set them down at the outset. They are: "s.80A — (1) Notwithstanding sections eighty and eighty AA of this Act, but subject to the next succeeding sub-section, and the next four succeeding sections a loss incurred by a taxpayer, being a company, in a year before the year of iancome shall not be taken into account for the purposes of section eighty or section e1ghty AA of this Act unless — (a) the company satisfies the Commissioner; or (b) 1n the case of a company that 1s not a private company in relation to the year of income, the Commissioner is satisfied that 1t 18S reasonable to assume, that, at all times during the year of income, shares in the company carrying between them - {c) the raght to exercise not less than two- fafths of the voting power in the company; (d) the right to receive not less than two- fifths of any dividends that may be paid by the company; and (e) the right to receive not less than two-fifths of any distribution of capital of the. company in the event of the winding up, or of a reduction in the capital of the company, were beneficially owned by persons whos, at all tames during the year in which the loss was incurred beneficially owned shares in the company carrying rights of those kinds. s.80B - (5) Where - (a) a person who beneficially owned any shares in the company at all times during the year in which the loss was incurred also beneficia- ly owned shares 1n the company at any time (an this sub-section referred to as 'the relevant time') during the year of income; (b) before or during the year of income, that person entered into a contract, agreement or arrangement, or granted or was granted a right, power or option (including a contingent right, power or option), that, in any way, directly or indirectly, related to, affected, or depended for its operation on - (1) the beneficial interest of that person in the Last-mentioned shares, or the value of that interest; (22) the right of that person to sell, or otherwise dispose of, that aunterest or any such sale or other disposition; (111) any rights carried by those shares, or the exercise of any such rights; or s.80C - (1) (iv) any dividends that might be paid, or any disliibulion of capital that might be made, in respect of those shares, or the payment of any such dividends or the making of any such distribution of capital; and (c) the contract, agreement ox arrangement was entered anto, or the right, power or option was granted, for the purpose, or for purposes that included the purpose, of enabling the company to take into account for the purposes of section eighty or section eighty AA of this Act a loss that the company had incurred ina year before the year in which the contract, agreement or arrangement was entcred into or the right, power or option was granted or a Loss that the company maght incur in that last mentioned year, the Commissioner may, subject to the succeeding provisions of this section, treat those shares as not having been beneficially owned by that person at the relevant time. Notwithstanding sections eighty and eighty AA and eighty A of this Act but subject to this section and to section eighty E of this Act, where a company in which no other company had a controlling interest (in this section referred to as 'the holding company') had a controlling interest in another company (in this section referred to as 'the subsidiary company') at any time during a year in which a Joss was incurred by the subsidiary company, the loss shall not be taken into account for the purposes of section eighty or section eighty AA of this Act unless the Commissioner is satisfied that, at all tames during the year of income of the subsidiary company - (a) the holding company had a controlling interest in the subsidiary company; and (b) shares 1n the holding company carrying between them ~ (2) the raght to exercise not less then two-fifths of the voting pover an the company; (12) the right to receive not less than two-fifths of any dividends that may be paid by the company; and (231) the right to receive not less than two-fifths of any distribution of capital of the company in the event of the winding up, or of a reduction in the capital of the company, were benficially owned by persons who, at all tames during the year in which the loss was incurred by the subsidiary company, beneficially owned shares in the holdang company carrying rights of those kinds. s.60C - (3) For the purposes of the application of either of the last two preceding sub-sections the provisions of sub-sections (3) to (8) inclusive of the last preceding section apply in relation to the holding company and in relation to every company that was at any relevant time interposed between the holding company and the subsidiary company as 1f references in those sub-sections to the company were references to the holding company or to the interposed company as the case may be." The taxpayer was incorporated on 20 October 1961 under the name Ken Bridges Pty. Limited. Subsequently but prior to the relevant years 1t changed its name to Cooper Brookes (Wollongong) Pty. Limited. Shortly after its incorporation the taxpayer had an issued capital of $3,000 held as follows: A.d. De Montford 1 K.J. Bridges 150 J.K. Cranston 150 King 2,699 J.K. Cranston transferred his 150 shares on 22 November 1962 to Cooper Brookes Pty. Limited. E.vI. King Woldiangs Pty. Limited was iancorporated on 30 April 1962 and subsequently it changed 1ts name to Wellington Holdings Pty. Limited ("Wellington"). Oa the day of its incorporation certain allotments of shares were made which shares together with the subscribers shares were held as follows: King 1 Class A, 14,999 Class B. J.A. King (Mrs) 1 Class A, 499 Class B. D.G. McKay 1 Class B. A.J. De Montford 1 Class B. King and Mrs. J.A. King ("Mrs. King") were directors of Wellington until sometime in the month of May 1968. % On 19 April 1963 King transferred hos holding of 2,699 shares in the taxpayer to Wellington, and the taxpayer remained a subsidiary of Wellington at all relevant times. Wellington had an addition to the taxpayer three further subsidiaries, Cooper Brookes Pty. Limited, Cooper Brookes Trading Co. Pty. Lamited and Cooper Brookes Industries Pty. Limited. These five companies are, where appropriate, referred to compendiously as "the Wellington Group". It would appear that in the years of the early sixties each of these companies incurred losses. The taxpayer incurred its relevant losses in the years of income ending 30 June 1964 and 30 June 1965. In each of these years it 18 accepted that King owned beneficially more than forty percent of the 1ssued shares an Wellington (1n which no other company held a controliing anterest) and that Wellington held beneficially more than forty percent of the shares 1n the taxpayer and was its holding company an terms of s.80C (1). At a meeting of directors of Wellington held on 28 April 1965 King and Mrs. King resolved to place that company into voluntary liquidation. On 12 May 1965 Mr. C.K. Roberts ("Roberts") a chartered accoantant, was appointed liquidator of Wellington. On 7 June 1965 a winding-up order was made by the Supreme Court of New South Wales in respect of each of the other four companies (anclusive of the taxpayer) in the Wellington Group. Mr. C.H.R. Jackson ("Jackson"), a chartered accountant and a partner of Roberts, was appointed offic1al liquidator in each instance. The Wellington Group had little in the way of assets other than their tax losses and nothing significant appears to have occurred in the ensuing two years. On 18 July 1967 King and Mrs. Kang entered into an agreement in writing with Roberts and Jackson (therein called "the Scheme Trustees") to which agreement I would attach some significance. It recited the holding by the Kangs of anter alia 11,999 shares in Wellington, which 1s almost exactly sixty percent of 1ts issued shares and the fact that they were to transfer these shares to the"purchaser of the tax losses"of the subsidiaries of Wellington in consideration of the sum of $1,200. It further recites that the trustees were selling the structure of Wellington to a company which was acquiring the same for the benefit of the tax losses of certazn of the subsidiaries of~ Wellangton. The agreement further recited that the sum of $1,200 would be paid direct to the trustees who 'ould dispose of the same in accordance with the terms of the scheme of arrangement. In the events that happened this sum was established as represent-— ang the fees of the trustees. By the covenants of the agreement the Kings acknowledged that they had no claim to the sum of $1,200 and that the trustees were entitled to deal with it in their absolute discretion subject only to the scheme of arrangement. Moreover the Kings covenanted that they would make no enquiry nor would they be entitled to enquire into the manner of administration of the scheme by the trustees. There 1s evidence that the particular transaction envisaged at the time of this agreement fell through. It 1s however significant that this 1s the only evidence (apart from the proxy) of any express authority having been given by the Kangs or either of them to the trustees and there are some indications that the arrangements in this agreement at least in relation to the sum of $1,200 were carried through into the ultimate scheme. Certainly the trustees appear to have assumed that they had authority to enter into comnitments on behalf of the Kings. The trial judge when commenting in his reasons on this agreement said that although the number of shares is different the transfer referred to in that agreement was probably the transfer set out in the fifth schedule to a subsequent agreement made by deed on 19 April 1968, thereby no doubt linking together the two agreements. For my part I see further sagnificance in the differing number of shares bat will reserve my comments until I am considering the latter agreement. It is also noteworthy that the first agreement merely recites an oblagation on the part of the Kings to transfer a certain number of shares, and does not indicate how many each 1s obliged to transfer. The next event to occur was the making on 19 April 1968 of a deed between the trustees as Scheme Trustees and Network, described therein as the lender. This deed provided in consider-— ation of the loan of certain monies to enable the scheme to be carried out, and subject to other stated terms, the trustees would on completion of the scheme deliver to Network a transfer of all the issued shares in Wellington for the consideration set forth an the f1fth schedule to the deed. Roberts as liquidator of Wellington undertook to sanction such transfers. The trustees covenanted to apply to the Supreme Court of New South Wales for an order staying the wanding-up of Wellington and also to apply to that court for an order confirming a reduction of capital of Wellington in such form as Network should require. The trustees further covenanted that contemporaneously with the completion of the scheme they would cause a board meeting to be 10. held by each of the companies 1n the Wellington Group and cause all such resolutions to be passed and all such persons "appointed to or resigned from the board" as the lender might require. The fifth schedule to the deed set out the consideration to be paid as abovementioned to be again the sum of $1,200 but in this instance not merely in respect of sixty percent of the shares as under the previous agreement and not in respect of all of the issued shares as contemplated in the body of the deed but un respect of all but two of the issued shares which two were retained by King. The deed of 19 April 1968 does not relate or recite the authority which the trustees had to arrange for the transfer of the shares for the stated consideration, or their authority to call board meetings and to have resolutions passed and appointments or resignations of board members effected. Rather at tends to assume that persons associated with Wellington, whether as directors or shareholders, would concur in whatever arrangements the trustees made. The deed 1s ain the form of an agreement between the trustees as Scheme Trustees on the one hand and Network Finance Limited the lender on the other part. In addition to the matters already referred to it recites the winding-up of each of the companies an the group and the earlier appointment of the two trustees as official liquidator and liquidator respectively. It recites also the undertaking on the part of the trustees to seek the approval of the Equity Division of the Supreme Court of New South Wales to the provisions of a scheme of arrangement in respect of each of the four subsidiary companies. Each such ll. scheme was set out in a schedule Lu-lLhe deed. Finally, the deed recites that, as abovementioned, the lender had agreed to lend to each of the subsidiaries a sum of money, which sum was 1n respect of each of the subsidiary companies other than the taxpayer as appears from the scheduled schemes, on the basis of twelve and a half cents for each dollar of losses confirmed by the Deputy Commissioner of Taxation as allowable by way of deduction under s.80 of the Act. In the case of the taxpayer the calculation vas at the rate of nine cents for each dollar of losses. The deed additionally provided that the sum of $1,200 vould be refundable to the purchaser of the Wellington shares 1f the trustees were unable to comply with the provisions of the agreement ombodied in 1t for any reason other than death of a shareholder. Somewhat surprisingly, in the event that the agreement could not be completed because of the death of a shareholder the sum of $1,200 was to be forfeited to the trustees to meet their costs and expenses. This perhaps indicates that the trustees were satisfied that the shareholders would concur in all arrangements made an effect on their behalf under the scheme and to that extent coincides with the clause concerning enquiry in the first agreement. The trustees were satisfied that it could be assumed thst all would go according to their plan so long as the share- holders remained alive. There 1S also in the deed a similar provision in respect of a loan by Network to Cooper Brookes Pty. Limited, namely that it was refundable in full to the lender in the event of the trustees being unable for any reason other than death to comply with the provisions of the scheme. In the latter event, namely 12. the death of a shareholder, the amount of the loan was forfe1ited to the trustees to meet their costs and expenses. Thereafter King played the part doubtless expected of him an the implementation of the scheme. On 3 May 1968 he transferred to Network all but 2 of his B Class shares for a stated consider- ation of $899.82. There 1s evidence to the effect that he did not ever receive from the company a certificate for the 2 shares whach thereafter he held. It would appear that during the month he resigned as a director of Wellington as this fact was reported at a meeting of members of the company held on 31 May 1968. In respect of this meeting King appointed Roberts or failing him P.M. Somerset (Robert's Solicitor) as his proxy. The form of proxy 1S set out in the reasons of the trial judge but no evidence was called in respect of the giving of the proxy or the reasons therefor or in relation to any of the activities of Kang at this time. On 8 May 1968 King and the other shareholders in Wellington transferred the balance of the issued shares (other than the 2 Class B shares retained by King) to Network or its nominees. Thereafter the 20,002 1assued shares in Wellington were held as follows: Network 2 Class A 19,997 Class B Network Management & Control Finance Pty. Ltd. 1 Class B King 2 Class B On 24 May 1968 a meetang of creditors of Wellington was held for the purpose of approving the remuneration of Roberts, 13. the liquidator. Roberts and Jackson were the only persons present. They held proxies from a number of the creditors. The trustee of the Superannuation [Funds of three of the subsidiary companies gave his proxy in favour of the Chairman Roberts, doubtless in reliance upon the fact that King had some weeks earlier confirmed that he and his \1ife had agreed to waive any claim they might have against the funds. Subsequent to that conversation this trustee executed a release of debt in favour of Wellington on behalf of each of the funds. The meeting of 24 May 1968 approved the appropriation of the balance of the funds held in the liquidator's account to the remuneration of the liquidator. The proxy given by King an favour of Roberts ox failing him his solicitor P.M. Somerset was 1n respect of an extra-ordinary general meeting of members of Wellington held on 31 May 1968 and at any adjournment thereof. This meeting vas attended by representatives of the two Network shareholders and Roberts as proxy for King. It was short and the minutes recorded as follows: "The Chaarman advised the meeting that the liquidation of the Company had been stayed and the previous directors were no longer in office. All the shareholders of the company being present, it was therefore resolved that Peter Andrew Somerset and C.K. Roberts be appointed directors of the company." There 1s as the trial judge states, no evidence that King was informed of the purpose of the meeting, or of the result at was intended to achieve. Nor was there any evidence of the reason why he gave a proxy for the meeting. Admittedly at the date of the meeting his shareholding in the company was negligible but this meeting to appoint new directors was required under the scheme, an essential feature of which was the application to 14. the Supreme Court of New South Wales to approve a reduction in the capital of Wellington. A meeting of the new directors of Wellington was held following the meeting of members. The minutes of this meeting at which Roberts presided contained the following statement: "The Board noted the agreement by the liquidators of the company with Network Pinance Limited for the sale of the structure of the subsidiaries to Network Finance Limited for the benefit of the tax losses available for recoupment in those companies, and that pursuant to the agreement it was necessary that the capital of this company (Wellington be reduced to a small nominal amount for the scheme of arrangement with the creditors to be implemented." The meeting approved resolutions for presentation to an extra-ordinary general meeting of members fixed for 4 June 1968, and directed that notices should be forthwith dispatched concerning the meeting. Two copies of the notice were sent to King, one envelope being addressed to North Ryde, and the other to North Baldwin (sic) Victoria, doubtless intended as North Balwyn. Neither of these addresses coincides with King's address on the form of his proxy for the earlier meeting or his address in the share certificate for his two shares which was sealed on that day. There was no evidence that King received either of the notices and he did not attend the meeting. At the meeting two special resolutions were passed, one relating to the reduction of capital and the other sanctioning the arrangement under s.273 of the Companies Act 1962 (N.S.W.) ("the Companies Act") which had previously been approved by the creditors. The reduction of capital was confirmed by the Supreme Court on 17 June 1968. The two Class A shares and 19,995 Class B shares is. held by Network were cancelled, leaving the capital comprising 5 Class B shares, of which King held 2, Network 2 and Network Management 1. King was thus restored to the position of a substantial shareholder, holding the necessary forty percent of the 1ssued capital. On 17 October 1968, shortly after the obtaining on 14 October 1968, of the approval by the Supreme Court of the scheme of arrangement in so far as it related to the four subsidiary companies a meeting of directors of Wellington was held and four additional directors were appointed. Roberts and Somerset then resigned. One of the directors, W.E. Fisher ("Fisher") was appointed secretary of Wellington and its representative pursuant to s.140 of the Companies Act. Prior to the approval of the Supreme Court of the scheme of arrangement a meeting of creditors of the taxpayer was held pursuant to an order of that court. Jackson and Roberts as proxies for the creditors the bulk in value of whom were members of the subsidiaries of the Wellington Group were the only persons present. The minutes of the meeting record that Jackson reported as follows: "In addition he had entered into an agreement for the sale of the company structure of Cooper Brookes (Wollongong) Pty. Limited and those of several of the associated companies to a public company interested in acquiring them for the benefit of their recoupable tax losses. The terms of the sale provided that the buyer would make available further monies for distribution to creditors in compromise settle- ment of their claims but completion of the sale was subject unter alia, to the various Cooper Brookes Companies involved entering into Court - approved schemes of arrangement with theiar creditors. It was the scheme of arrangement applicable to Cooper Brookes (Wollongong) Pty. Limited (in liquidation) which was now before the present meeting of creditors." 16. The scheme of arrangement was approved at the meeting, subject to any modifications the court might require. On 14 October 1968 the court approved the scheme. On 30 June 1970 the directors of Wellington declared a dividend of $130 and resolved that the same be paid to the holders of the Class B ordinary shares as follows: Network $78 King $52 On 9 July 1970 a cheque for $52 was forwarded by post to King at North Balwyn, and a certificate of posting was tendered in evidence. The letter vas unclaimed and returned to Network, At this stage it was doubtless apparent that Wollongong had commenced to operate profitably and funds were becoming available for the payment of dividends. At about this tame a further scheme was conceived which had the consequence as far as King was concerned of ensuring that he did not participate in any subsequent dividend declared by Wellington out of profits made by the taxpayer. It was essential of course that he retain his forty percent shareholding during the ensuing year, but from the point of view of Network doubtless desirable that he was denied the right to participate in distribution thereafter of profits made in that year by the tax- payer. The scheme is described 1n detail by the trial judge and his finding on the scheme and the manner of its implementation were not subject to challenge before us. In essence the plan was for Wellington to borrow from Network sufficient funds to enable it to subscribe to a substantial new assue of capital by 17. the taxpayer and to secure its borrowing by a charge in favour of Network over all of its shares in the taxpayer. At the appropriate time Network would make demand, Wellangton would default and Network would foreclose, thus depriving Wellington of the totality of 1ts interest in the taxpayer. For present purposes the details of the implementation of the scheme are not relevant, but what 1s significant 1s the manner in which 1 would appear that the interests of King as a substantial albeit minority shareholder were ignored. The plan was carried unto effect 1n the period late December 1970 - early January 1971, and the Annual General Meeting of Wellington was held on 31 December 1970. King was not present and there is no record of him having received or having been sent a notice of the meeting. There was no discussion at the meeting of the - proposals which were then before the directors in respect of the borrowing and taking up of the additional shares in the taxpayer. The scheme worked according to plan. Throughout the year ending 30 June 1971 King held his forty percent interest in Wellangton and thus indirectly a forty percent interest in Wellington's shareholding an the taxpayer. On 1 July 1971 Network made demand, and payment not being made, on that day purported to foreclose. On the same day a meeting of directors of Wellington noted the foreclosure. On the same day the darectors of the taxpayer approved the transfer of the shares subject to the charge from Wellington to Network. On the following day 2 July 1971 the directors of the tax- payer declared a dividend of $38,000 out of the profits for the 18. year ending 30 June 1971, the same to be credited exclusively to the account of Network. The desired result was achieved, an that King received neither directly or in any way indirectly any benefit from the dividend paid. On 29 October 1971 the taxpayer lodged its return claiming the Losses as an allowable deduction. By letter dated 26 January 1972 the Commissioner sought iznformation for the purpose of determining compliance by the taxpayer with s.80C of the Act. The taxpayer's advisors replied by letter dated 20 March 1972 and set out information much of which 1s already recorded in these reasons and made certain submissions. They stated in particular that there never had been any communication with or contact by any representative of Network with King, and this fact is confirmed by the oral evidence at the hearing. They further stated that the only persons having any dealings with King were Jackson and Roberts, chartered accountants of the firm of Hungerford Spooner & Co, who were Scheme Trustees for the ereditors of the company for the purposes of the scheme of arrangement. They also disclosed as relevant the agreement of 18 July 1967, and described 1t as relating to the appropriation of the consideration paid to King and his wife for the shares transferred by them. They acknowledged that this consideration was "in fact the amount required to pay the fees of the trustees aun relation to the scheme of arrangement, and was arrived at accordingly as being required to be paird by the purchaser for the transfer of such shares." Subsequent to this correspondence with the Commissioner, Wellington made further efforts to pay King the dividend declared 19. on 30 June 1970. A cheque was forwarded to him in Bouganville on 17 April 1972, which he acknowledged by letter dated 1 June 1972. Wellington then for the first time corresponded with the Australian Post Office concerning non-delivery of mail to King and in December 1972 notice of an extra-ordinary general meeting was sent to him which this time he received. Notwithstanding Wellington's renewed interest 12n King, no mention was made to ham of any events which had occurred in the intervening years and in particular of the fact that Wellington had been deprived of 1ts interest in a profitable subsidiary, namely the taxpayer. By letter dated 4 May 1977 the Commissioner set out the facts and circumstances "which were then accepted and taken into consideration by the Commissioner in determining, pursuant to s.80B (5) of the Income Tax Assessment Act 1936-71, to treat the shares held by E.H. King in Wellington Holdings as not having been beneficially owned by him at all times during the year of income ended 30 June 1971." Clause 21 sets out the Commissioner's case as to the existence of the alleged arrangement and 1s as follows: "21. That having regard to the above facts and circumstances there existed a contract, agreement or arrangement of the kind referred to in s,80B (5) (b) and (c) in that there existed a contract, agreement or arrangement entered into by Nr. ELH. King e1ther personally or through the agency of Mr. C.K. Roberts and/or Mr. C.H.R. Jackson with persons acting on behalf of any one or more of Network Finance Limited and Network Management and Control (Finance) Pty. Limited and/or Messrs Roberts & Jackson as trustees of the scheme of arrangement; the terms of the said contract, agreement or arrangement, being that each party thereto vould do all things necessary to ensure the continued availability to the taxpayer of the relevant losses and including the various relevant things referred to in the preceding paragraphs; the sa2rd contract, agreement or arrangement being one which directly or indirectly related to, affected or depended for 1ts operation on the retention by Mr. Kang at all relevant times of a 40% beneficial shareholding interest in Wellington Holdings Pty. Limited and which directly or indirectly related+to or affected the value of that anterest, the pucpose of all parties being to enable the taxpayer to take into account for the 20. purposes of s.80 of the Act losses which the taxpayer had incurred 1n the said years of loss being years before the year in which the said contract, agreement or arrange- ment was entered 1nto." It 1s to be noted that the parties to the arrangement are alternatively stated, inter alia as King personally or through his agents on the one hand and Network or Roberts and Jackson on the other. The trial judge concentrated his attention on King and Network as parties to the alleged arrangement, but on the hearing of the appeal counsel for the Commissioner, as has been mentioned, relied pramarily on the parties being King and the trustees. At the hearing oral evidence was tendered on behalf of the taxpayer. Fisher as secretary of the taxpayer and also secretary of Network gave evidence both oral and on affidavit of the acquisition by Network of the Wellington Group. He was the only witness called by the taxpayer, and in particular there was no explanation for the failure to call King or Roberts and Jackson. The Commissioner called Colin Le Tet, the trustee of the three superannuation funds referred to above, who deposed by affidavit and orally to the waiving by the Kings of their claim under the superannuation funds of which he was the trustee. The trial judge commented in his reasons that he accepted the evidence of Fisher, particularly to the effect that there had been no contact between King and Network. It would appear that the trial judge substantially relied upon this evidence in reaching in his ultimate finding that there was no evidence from which 21t would be reasonable to infer a relevant arrangement between King and Network. The first crucial question 1s one of construction, namely whether the provisions of s.80B (5) have any application in the 21. present circumstances. As to the question whether s.80A and 80C have a cumulative effect it 1s one which counsel agree does not here arise for consideration. Additionally counsel for the Commissioner accepts that at all relevant times King had a benef- icial interest 1n the shares 1n Wellington in his name. Thus af s.80B (5) has application the question 1s whether the Commissioner is entitled pursuant to the provisions of that sub-section to treat the shares as not having been beneficially owned by King at the relevant time. A further question 1s whether King had by the giving of the proxy for the meeting of 31 March 1968 granted a right or power within the provisions of the saird sub-section. I will deal in the farst instance with the question of construction, for my view 1s that if s.80B (5) has no application in the present circumstances, the appeal must be dismissed. The threshold question of construction arises in applying in accordance with the direction in s.80cC (3), s.80B (5)(c) to the circumstances of the present matter, namely where the loss which 1s sought to be deducted 1s a loss in the subsidiary company. Section 80C (3) directs that inter alia s.80B (5) as to be applied as if the references in the latter sub-section to the company were references to the holding company. The consequence 1s that the vords 1n s.80B (5)(c) "for the purpose of enabling the company to take anto account a loss that the company had ancurred" must be read in the situation of s.80C as "for the purpose of enabling the holding company to take into account a loss that the holding company had incurred." It 21s common ground that this is the correct literal reading of the sub-section. The consequence 18 that in the present circumstances s.80B (5) can 22. not possibly be used by the Commissioner hecause the loss which 1s to be taken into account 1s the loss that the subsidiary company, the taxpayer. has incurred and not any Loss which the holding company Wellington, has incurred. Counsel for the Commissioner accepts the above as the appropriate literal construction, but contends that the terminology 1s not so intractable as to make 1t impossible for a court to give effect to what he submits is the clear intention of the legislature. He supports this approach by pointing to the capricious consequences of a literal application, namely that a subsidiary company might lose the benefit of its losses merely because there was 1n relation to the holding company an arrange- ment relating to the losses of the holding company. It would accord with authority, he contended, for the court to strain to avoid such an unjust result and referred to the dicta in Tackle Industries Pty. Ltd. v Hann (1973-1974) 130 C.L.R. 321 at p.331 where Barwick C.J. said, "It 15 in my opinion, a sound rule of statutory construction that a meaning of the language employed by the legislature which vould produce an unjust or capricious result is to be avoided. Unless the statutory language is intractable, an intention to produce by ats legislation an unjust or capricious result should not be attributed to the legis- lature." I would also refer to the comments in like vein of Lord Reid in Cramas Properties Ltd. v Connaught Fur Trimmings Ltd. 1965 2 A.E.R. 382 at p.386. "It 1s true that on my interpretation of this provision this change of language can only be explained as a mistake on the part of the draftsman in failing to revise his draft so as to bring the language anto line. Some attempt was made to advance reasons why the draftsman might have adopted this language deliberately, although he intended that 'the tenant's business' should have its ordinary meaning: but I found those reasons quite unconvincing. This is an extremely complicated Act, and we do not know and 23. cannot inquire what changes may have been made before it passed into law. Fortunately draftsmen do not often make mistakes, but I cannot suppose that every draftsman 1s entirely free from that ordinary human failing. I find it very much easier to infer such a mistake than to suppose that the draftsman deliberately sought to introduce a novel and irrational rule by means which no draftsman worthy of the name would adopt. The canons of construction are not so rigid as to prevent a realistic solution." Counsel for the taxpayer submitted that on the question of antractability or flexibility of the Language of s.80C (3) in 1ts application to s.80B (5) the meaning of the words was so clear that the Court had no option but to read them literally. He referred to the doubts expressed in Kolotex Hosiery (Australia) Pty. Ltd. v Federal Commissioner of Taxation (1973-1974) 130 C.L.R. 64 at p.85 at first instance per Mason J. and on appeal 132 C.L.R. 535 at pp. 540-547 per Barwick C.J. and at p. 574 per Gibbs J. as to the proper construction of the sub-sections, and acknovledged that the resolution of this question was left open. In my opinion the purpose of s.80C (3) is clear, namely to give the Commissioner when he 1s dealing with the losses of a subsidiary company the same discretion as he has when dealing wath the beneficial ownership of shares 1n a company which was not a subsidiary company. Section 80C (3) is not a enactment of substantive law imposing an obligation, but rather a machinery provision for introducing into the sections dealing with a particular situation, namely holding and subsidiary companies, provisions expressly enacted in respect of another situation. The draftsman was motivated by the commendable desire to abbreviate rather than again set out in full inter alia, s.80B (5) wath such adjustments as necessary to adopt it to a different situation. Frequently in such circumstances the words "mutatis mutandis" are inserted to indicate that changes may be necessary fry 24, in points of detail when the incorporated provisions are operating in the new field. The use by the draftsman of the final words in s.80C (3), "as the case may be", 1S an exemple of a comparable drafting technique directing that such adaption as 1s appropriate in the particular circumstances of an interposed company should be performed. This view as to the effecting of the legislative intent is consistent with a statement of Mason J. (made in the context of an examination of s.80B (5){c) but, in my opinion, of more general application) in Federal Commissioner of Taxation v Students World (Australia) Pty. Ltd.78 A.T.c. 4040 at p.4048; (1978) 52 A.L.J.R. 298 at p.303. This statement is referred to with apparent approval though in the same context, in the joint judgment of Gibbs and Mason JJ. in Federal Commissioner of Taxation v Lutovi Investments Pty. Ltd. 78 A.T.C. 4708 at p.4714 with which judgment Murphy J. expressed his agreement. The words of Mason J. 1n the Students World case, supra are as follows: "Although the traditional rule has been that clear words are required to impose a tax, so that the taxpayer has the benefit of any doubts or ambiguites, a provision introduced by way of an attack on tax avoidance should be given the wide meaning evidently intended; it should not be cut down in the interest of precision (Greenberg v Inland Revenue Commissioner (1972) A.C. 109 at p.137; Inland Revenue Commissioners v Joiner (1975) 1 W.L.R. 1701 at p.1706)." In circumstances such as in the present case and particularly where the 1antention of the legislature 1s as clear as in my opinion it 1s, the terminology of the machinery provision 1s not so intractable as to deny a reasonable as opposed to a literal construction. In my opinion the words "reference 1n those sub- sections to the company were references to the holding company" in s.80C (3) should be read as though the words "where necessary or appropriate" were inserted after the word '"xreferences" 25. secondly appearing. Alternatively s.80C (3) should be read as 1f£ the words "mutatis mutandis" were inserted after the vord "apply". It follows that 1n my opinion s.80B (5) 1s available to the Commissioner in this matter if the circumstances are other- wise such as to render its provisions applicable. On the question whether there was evidence to support an anference of a relevant arrangement, the trial judge confined himself exclusively to considering an arrangement as between King and Network or some person on behalf of Network. He said that he had been invited to make a finding as to whether or not there existed between Network and King an arrangement of the kind referred to in s.80B (5). His ultimate conclusion on this topic was that there was no evidence from which it would be reasonable to infer that there existed a relevant arrangement between King and Network or any person on its bchaif. He gave no indication of having given attention specifically or really at all to the possibility of an arrangement between King and the trustees. On the hearing before us counsel for the appellant put at the forefront of his submissions the contention that there was evidence from which it would be reasonable to infer an arrange- ment between King and the trustees. Such an approach was fore- shadoved by the particulars given by the Commissioner by paragraph 21 of his letter of 4 May 1977 set out above. The trial judge gave no consideration to this as an alternative view of the evidence. There 1s no dispute as to the objective facts, 26. which however may assume a different significance if under consideration as supporting or denying the drawing of a different anference. In my opinion there are objective facts from which it is reasonable to infer the existence of a relevant arrangement between King and the trustees. In these circumstances counsel for the Commissioner contended that s.190 of the Act places the onus on the taxpayer to establish that the assessment 1s excessive. He relied upon the words of Barwick C.J. in Gauci v Federal Commissioner of Taxation (1975) 135 C.L.R. 81 at p.87 where he said: "If, on the other hand, the acquired property 1s resold within what may fairly be described as a time proximate to its acquisition, the requisite purpose may be inferred. Thereafter, the taxpayer must overcome the prima facie inference there drawn. Unless he does so, s.190 will require the confirmation of the assessment. That was the situation in Pascoe v Commissioner of Taxation (1956) 30 A.L.J. 402; 6 A.I.T.R. 315 and in Jacob v Commissioner of Taxation (1971) 45 A.L.J.R. 568." Gauci's case involved the question whether the acquisition of the property was "for the purpose of profit making by sale" within the terms of s.26 (a) and therefore formed part of the taxpayer's assessable income. Jacobs J. indicated his agreement with the Chief Justice on the issue of the application of s.190 when he said at p.90 of that case: ",..before s.190 could operate there must have been something 1n the evadence from which an inference could have been drain of an antention on their part to resell at a profit." In my opinion it is not necessary for the Commissioner to rely upon what was said by the majority in Gauc1's case to justify the making of the relevant finding as to an arrangement. Moreover the observations in the dissenting judgment of Mason J. appear to have commended themselves to the majoraty of the Full Haigh Court ain McCormack v Federal Commissioner of Taxation (1979) 79 A.T.c. 4111. 27. The taxpayer lead no evidence to counter the drawing of the appropriate inference which fact in my view militates in favour of it being drawn. In the particular circumstances (to which I refer aun detail later) the learned trial judge should have found that there was an arrangement between King and the trustees. The objective facts are primarily to be found in the documentary evidence tendered to the tr1zal judge. There is the agreement of 18 July 1967 between King and his wife and the trustees which recites that the trustees have agreed to sell the structure of Wellington to a company which was acquiring the same for the benafit of the tax losses of certain of its sub- sidiaries and the agreement of King and his wife to sell approx- imately sixty percent of the shares of Wellington to the purchaser. King and his wife acknowledge that they have no claim to the consideration of $1,200 payable for these shares, which 1s to be applied in accordance with the terms of the scheme. Moreover they covenant that they will not enquire and not be entitled to enquire into the manner in which the trustees administer the scheme of arrangement. An essential feature of the scheme was the selling of "the structure" of Wellington Holdings, which must mean or at least anclude the selling of the shares though not necessarily all the shares in Wellington. Even though there is evidence that the particular sale in contemplation at this time Was not concluded, there is evidence that the parties treated this agreement as remaining on foot, certainly in respect of the application of the proceeds of sale of shares. This evidence 1s to be found in the letter of Touche Ross & Co to the Commissioner of 20 March 1972 already referred to. aA 28, On 19 April 1966 the trustees entered snto an agreement with Network. Neither King nor his wife was a party to this agreement though their interests as shareholders in and as directors of Wellington were affected by 1t. The trustees purported to procure the transfer of all or alternatively all but two of the 1ssued shares in Wellington to Network, and for the same consideration, $1,200, as nine months earlier was payable in respect of sixty percent of the shares. Again the sum of $1,200 vas to be dealt with in accordance with the scheme, and in a specified circumstance was expressly appropriated to the fees of the trustees. They also agreed to cause a , meeting of the directors of Wellington (King and his wife) to be held at which all resolutions would be passed and all appointments and resignations obtained as required by Network. The conclusion 1s at least open that the trustees either had an arrangement with King that he would do everything asked of him to assist in bringing the scheme for sale of the tax losses to a successful conclusion or that they understood they vould have no difficuity in obtaining his concurrence. That they already had such an arrangement receives support as the most likely conclusion not only from the existence of the agree- ment of 18 July 1967 but also from certain terms of the arrange- ment with Network. 1f they had a pre-existing understanding with King, the trustees were justified 1n assuming that, subject to obtaining Supreme Court approvals the schsme would be carried to completion. However, if King died prior to completion the scheme could founder and so would their entitlement to the fees of $1,200. Yo cover this possibility, namely the arrangement with King being frustrated by his death, the scheme 29. provides Lhak the $1,200 should be forfeited to the scheme trustees to meet their fees and expenses. A similar provision preserving a further sum of $1,652 as fees of the trustees an the event of the death of King 1s to be found in the agree- ment in respect of a loan for that amount to one of the subsidiary companies. Further objective facts which are at least consistent with the existence of an arrangement are the transfer by King of more shares for a lesser consideration than originally contem- plated, his resignation as a director other than at a meeting of directors, his release of any claim to superannuation fund benefits, his granting of a proxy to Roberts for the extra- ordinary general meeting which appointed the directors who were to implement the scheme and the failure of these directors (Roberts and his solicitor) to ensure he received notice of the meeting which approved the reduction in capital. Moreover the conduct of Network in ignoring King's interests as a shareholder, an failing to supply him with his share certificate, to notify ham of meetings, and to make efforts until after the communications with the Commissioner to get to him his dividend and generally an relation to the divesting of Wellington's interest in the taxpayer one day prior to the declaration of a dividend is consistent with a belief by Metwork that King had no further interest in Wellington or its subsidiaries. Such a belief would only have been aroused by the trustees as Network had no contact with King. These are the objective facts from which in my opinion it 1s reasonably open to draw the conclusion that King and 30. Lhe trustees had arrived at an arrangemenLl. It 1s therefore necessary to consider the nature of the arrangement and whether it 1S an arrangement within the provisions of s.80B (5)(b). Counsel for the Commissioner submitted that the arrangement was to the effect that King would do everything that was asked of him by the trustees in relation to his interest in the Wellington shares and the Wellington Group whether as a director, member or creditor and him. With this as a formulation instant case I agree. The essential nature of "an of a discussion in the course of nothing that was not asked of of the arrangement in the arrangement" was the subject the joint judgment of Gibbs supra at p.4712 delivered and Mason JJ. in the Lutovi case, subsequent to argument in this matter with which judgment, as I have said, Murphy J. expressed his agreement. Their Honours when addressing their minds to the arrangement referred to in s.44 (2D)(b) of the Act said: "In the context of s.260 an arrangement 1s something less than a binding contract or agreement, something in the nature of an understanding which may not be enforceable at law (Newton v Federal Commissioner of Taxation at p.7). A similar view has been taken of an arrangement falling within s.80B (5) (see K. Porter & Co. Pty. Ltd. v Federal Commissioner of Taxation 74 A.T.C. 4093 at p.4100; (1974) 1 N.S.W.L.R. 536, at pp.542-544; 77 A.T.C. 4472; (1978) 52 A.L.J-R. 41; Federal Commissioner of Taxation v Students World (Australia) Pty. Ltd. 78 A.T.c. 4040; (1978) 52 A.L.J.R. 298. It 1s, however necessary that an arrangement should be consensual, and that there should be some adoption of 1t. But in our view it 1s not essential that the parties be committed to it or are bound to support it. An arrangement may be informal as well as unenforceable and the parties may be free to withdrav from it or to act inconsistently with it, notwithstanding their adoption of it." 31. As to the term "arrangement" in s.80B (5)(b) both parties referred without dissent to the reasoning of Mahoney J. in K,. Porter & Co. Pty. Ltd. v Federal Commissioner of Taxation cited in the preceding quotation from the Lutovi case. There his Honour discussed the possibility that an arrangement may follow from express statements or actual representations. He went on at p.4099 of 74 A.T.C.; "In the absence of such a statement or actual representation, the element of commitment to the course of conduct may be inferred or implied from the dealings between the parties." This, I thank, 1s the manner in which the drawing of an inference or an arrangement 1s open in the present case. In a like vein in the Full Court of the Federal Court of Australia in the Lutovi case, 78 A.T.C. 4289 at p.4301 (1978) 20 A.L.-R. 157 at p.175 Deane J. said in respect to the "adoption" of an arrangement under s.44 (2D)(b): "Section 44 (2D)({b) assumes that a relevant arrangement will be 'entered into' by the parties to it. It does" not follow that it 1s necessary that there be formal acceptance of, or committal to, such an arrangement by such parties. A plan can be propounded without prior arrangement and be constituted as an arrangement by acceptance of or adherence to it implicit in the performance of steps Which 1t encompasses or the acceptance of benefits which result from its implementation." It was also not suggested in argument before us that an arrangement between a continuing shareholder and trustees could not come within s.80B (5)(b) and this implied concession was clearly 1n accord with authority. In the Students World case, supra at p.4045 Mason J. expressed the view that a clause ina scheme of arrangement, 32. entered into between the shareholders of the taxpayer company and the trustee of the scheme (which clause provided for the possible transfer of portion of the shares of the shareholders at the discretion of the trustee) was an arrangement coming within s.80B (5)(b). Jacobs and Aickin JJ. did not dissent from this view of Mason J., rather holding that the arrangement vas not within s.80B (5)(b) on a different ground. Section 80B (5)(b) provides that the arrangement must be one that in some way, directly or indirectly related to, affected or depended for its operation on the beneficial interest of King in his retained shares, his right to sell or otherwise dispose of such interest, or any rights carried by those shares or the exercise of any such rights. It seems to me that the inferred arrangement was clearly dependent for its operation upon, and clearly affected his beneficial interest in his retained shares, and counsel for the taxpayer did not contend to the contrary. King has accepted the position that he should neither sell nor otherwise dispose of his retained shares and should not exercise any of his rights as a shareholder unless in either instance requested to do so. Counsel for the respondent in the present case submitted that there was no evidence or at least an insufficiency of evidence to support the drawing of an inference that there was a relevant arrangement between King and the trustees. I am of opinion that there was sufficient evidence. Also even assuming there was an arrangement which affected the retained shares he submitted that the effect of this arrangement was spent by the time of the year of income and being so spent was not caught 33. by s.80B (5)(b). There seems to be no clear authority that if the effect of the arrangement was spent prior to the year of income, 1t 1s outside s.80B (5)(b). Certaanly there 1s some authority that zt 1s not essential that the arrangement continue in operation during the year of ancome; cf the K. Porter case, in the High Court, supra at p.4477 per the joint judgment of Stephen and Murphy JJ. though the discussion admittedly appears to be obiter, and the Students World case, supra at p.4049 per Mason J. in dissent. All three judges in the two cases pointed to the support for their view that they obtained from Menzies J. in Franklin's Self Serve Pty. Ltd. v Federal Commissioner of Taxation (1970) 125 C.L.R. 52 at pp.81-82. Nevertheless the taxpayer's counsel in the case before us directed our attention to other authority. In the K. Porter case, in the High Court, supra at p.4478 Jacobs J. expressly reserved the point, namely; "...whether the effect of an agreement or arrangement under s.80B (5)(b) must enure into the year of income." However, 1n the Students World case, supra at p.4050 Aickin J. who with Jacobs J. comprised the majority of the court (Mason J. dissenting, see supra) held that the arrangement between the continuing shareholders and the trustee, was not caught by s.80B (5)(b) for the following reason. Their Honours characterised the relevant arrangement as executory, giving a power which by its nature ceased as soon as 1t was exercised. In the case they were considering, the power had been exercised before the year of income so that as Aickin J. put it "the agreement or arrangement was therefore wholly spent." Jacobs J. continued to reserve his opinion on whether the effect of the agreement must enure into the year of income, being of opinion that the arrangement was incapable of doing any of the things described an s.80B (5){b). However, whatever the present state of the authorities, in this matter there is nothing in the evidence to suggest that the inferred arrangement did not remain on foot until such time as the purchaser had obtained the benefit of the tax losses. It was important to the purchaser that it should so remain as this was the reason for and the purpose of its purchase, and the trustees must have felt at least morally bound to ensure that if possible the purchaser obtained the benefit of 1ts purchase. Moreover the implementation of the loan and subsequent foreclosure plan at the end of the year of income which at least indirectly prejudiced King as a substantial shareholder without any reference to or consideration of his interest 1s consistent with the continued existence of the understanding. If the correct view of the law is that the arrangement must continue on foot into or throughout the year of income then in my view it 1s reasonable to unfer that such as here the case. Finally, 2t 18 to be noted that s.80B (5)(c) requires that the arrangement must have been entered into for the purpose of enabling the company (the taxpayer on my construction of the relevant sub-section) to take anto account a loss that the company had incucred in a year before the year 1n which the arrangement was entered into. It would appear that it as the subjective 35. purpose of the continuing shareholder with which the section 1s concerned. In this regard it 1s clear that even if knowledge of the use which Network could make of the purchased companies should be imputed to King, it 1s at least suggested by the authorities that such knowledge without more 1s not sufficient. Hovever knowledge of the use which an ultimate purchaser proposes to make of the company, and the further knowledge that the trustees were selling the companies for use by the purchaser an this way, together with the fact that King entered into an agreement (the agreement of July 1967) which was a necessary step in the trustees implementing the scheme are further signi ficart facts. In the K. Porter case, in the High Court, supra at pp. 4477- 4478 1n the joint judgment of Stephen and Murphy JJ. thear Honours relied on the following facts to hold that there was a "purpose" falling within s.80B (5)(c) namely, awareness or knowledge on the part of the continuing shareholders of the purpose of the scheme involved combined with action by them necessary to the scheme's success. This was enough to make the purpose of the scheme's promoters, which was clear, their purpose. As their Honours said: "l.. whether 'purpose' in par. (c) be related to the arrangement, viewed as distinct from the parties to it, or to the parties themselves, the requirements of the paragraph are, in our view, satisfied." In the Students World case, supra at pp. 4048-4049 Mason J. followed a closely similar line: "The reference to purpose in par. (c) seems to have been understood by Menzies J. (with whom Barwick C.J. agreed) an the Brian Hatch case as a reference to the subjective antention of the continuing shareholder... At first sight 36. it seems odd that the purpose of the continuing shareholder should be singled out as a relevant or critical factor. It 1s the purchaser rather than the continuing shareholder, who might ordinarily be expected to have the stated purpose in mind. However it 1s with the ownership of shares by the continuing shareholder that the sub-section 1s concerned. And in speaking of the purpose for which 'the right pover or option was granted! par. (c) seems to have in mind the purpose of the grantor. This in itself points to a subjective rather than objective, purpose, a notion which gains some support from the fact that in the case of a contract, agreement or arrangement it 1s the purpose for which 1t was entered into that 1s important, there being a prior reference in par. (b) te the continuing shareholder having entered into the contract, agreement or arrangement. This view of purpose in par. (c) has been taken not only by Barwick c.J. and Menzies J. in the Brian Hatch case, but also more recently by Stephen and Murphy JJ. in K. Porter. & Co Pty. Ltd. v Federal Commissioner of Taxation (Cth)." Mason J, concluded at p.4049: "It was an arrangement entered into for the purpose stated an pax. {c) because on the evidence which I have recounted the purpose of the purchaser \:as to gain control of the respondent so as to provide it with an income against which the losses could be deducted and this purpose was known to Mrs. MacPherson, the continuing shareholder. Indeed entry into the arrangement by the purchaser was explicable only on the footing that by obtaining control of the respondent the purchaser would provide 1t with an auncome from which the past Losses could be deducted. And the inference 1s irresistible that Mrs. MacPherson was aware that this was the intention of the purchaser, for on no other hypothesis could the purchase of the apparently worthless shares be explained." Aickin J. did not have to consider s.80B (5)(c) for the reason that he had held there was no relevant arrangement within s.80B (5)(b). However he did express his view at p.4053 that the relevant purpose was the subjective purpose of the continuing shareholder. Brief mention of the meaning of "purpose" in s.80B (5)(c) was made in the Lutovi case, in the High Court, supra at p.4713 an the joint judgment of Mason and Gibbs JJ. They contrasted 37. the objective purpose with which s.44 (2D) of the Acl was concerned with the subjective purpose of s.80B (5)(c) and referred to the Students World case, supra. They also compared s,260 of the Act where "purpose and effect" 12s spoken of. In the present matter the whole basis of the alleged arrange- ment between King and the trustees was to assist the latter to sell the Wellington Group companies to a purchaser who was to acquire them for the purpose of using the tax losses. It is my opinion that the proven facts comprise material on the basis of which it can be inferred that King, being aware of the purpose of Network and assisting to give effect to it, had the relevant purpose. It may not be that thas inference 1s "irresistible" but it 18 certainly open on the facts. There 1s therefore evidence from which it can be inferred that there was an arrangement between King and the trustees which complied in its essential features with the requirements of s.80B (5). In so far as it was alleged before the trial judge that the arrangement was between King and Network, I can accept that the taxpayer discharged its onus. It called Fisher who deposed to the fact that there was no contact at all between King and his companies or their officers. This evidence was accepted. However in respect of the arrangement between King and the trustees, the taxpayer called no evidence by way of rebuttal. King, the trustees or Somerset the solicitor for the trustees, all probably could have deposed to matters relevant to the existence or otherwise of the arrangement. However none of them were called and the taxpayer did not tender any other evidence which might deny the drawing of this particular inference. 38. The effect of this was discussed in the judgment of Woodward J, in the court below: 77 A.T.C. 4415 at pp. 4435-4436. I would adopt what he says on the authorities, among them McQueen v The Great Western Railway Co. LR 10 OB 569 at p.574 per Cockburn C.J. and Jones v Dunkel (1959-1960) 101 C.L.R. 298 at p.312 per Menzies J., to which he refers in support of his conclusion to the effect that where a witness avallable to a party could have been called to counter the drawing of a relevant inference the fact that he was not called 1s a factor in favour of the drawing of the inference. In all the circumstances the trial judge should in my opinion have found that there was a relevant arrangement between King and the trustees. The taxpayer must therefore fail and the assessment will stand. A further issue raised was 1n respect of the grant of the proxy to Roberts for the meeting of Wellington on 31 May 1968. It was contended that by the giving of the proxy King has, as contemplated by s.60B (5) granted a right or power which in some way depended for its operation on his beneficial interest in the retained shares. In the light of my conclusions above, it 1s not necessary for me to give consideration to this submission. I would allow the appeal with costs. "2 & true copy of 2 - 3073 for ertry thet this and the 37 Preceding ak & Jvagment of Mr. Justbee Figs ot