FEDERAL COURT OF AUSTRALIA INCOME TAX - assessable income - whether forgiven loan deemed to be dividend under s 108 Income Tax Assessment Act 1936 - consideration of word 'credit' - adequacy of consideration and documentation in relation to forgiven loan - whether loan commenced outside statute of limitations period - consideration of substantive effect of forgiving loan in circumstances - effect of legitimate commercial reason - forgiveness of loan deemed to be dividend and therefore assessable income. Income Tax Assessment Act 1936, s 108 Limitations of Actions Act 1936 (SA), ss 35(a), 48(3)(b)(ii) Law of Property Act 1936 (SA), s 15 Deputy Federal Commissioner of Taxation v Black (1990) 25 FCR 274, distinguished Webb v Federal Commissioner of Taxation (1922) 30 CLR 451, considered James v Federal Commissioner of Taxation (1924) 34 CLR 405, considered Commissioner of Taxes (Victoria) v Nicholas (1938) 59 CLR 230, considered MacFarlane v Federal Commissioner of Taxation (1986) 13 FCR 356, applied LONSDALE SAND AND METAL PTY LTD v COMMISSIONER OF TAXATION SG 62 of 1997 MANSFIELD J ADELAIDE 5 MARCH 1998 IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY SG 62 of 1997 BETWEEN: LONSDALE SAND AND METAL PTY LTD Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: MANSFIELD J DATE OF ORDER: 5 March 1998 WHERE MADE: ADELAIDE THE COURT ORDERS THAT: 1. Appeal dismissed. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA SOUTH AUSTRALIA DISTRICT REGISTRY SG 62 of 1997 BETWEEN: LONSDALE SAND AND METAL PTY LTD Applicant AND: COMMISSIONER OF TAXATION Respondent JUDGE: MANSFIELD J DATE: 5 March 1998 PLACE: ADELAIDE REASONS FOR JUDGMENT This appeal principally concerns the question whether the forgiveness of a debt by a company in the circumstances can properly be deemed to be a dividend under s 108, Income Tax Assessment Act 1936 ("the Act"). Lonsdale Sand and Metal Pty Ltd ("Lonsdale") lodged its income tax return for the financial year ended 30 June 1993 on 10 March 1994. It declared its taxable income to be $20,502. The Commissioner of Taxation ("the Commissioner") duly issued an assessment based upon the information in that taxation return. On 2 February 1996, the Commissioner issued a notice of amended assessment adjusting Lonsdale's taxable income for the financial year ended 30 June 1993 to $314,988, an increase of $294,486. That amended assessment assessed the income tax payable on that income and also imposed additional tax for the understatement by way of penalty under s 226K of the Act and further by way of interest under s 207A of the Act. Lonsdale lodged a notice of objection to that assessment. It is dated 19 March 1996. It put in issue the question of whether the $294,486 was additional assessable income of Lonsdale under the Act. It had been so assessed by the Commissioner under s 108 of the Act. The Commissioner allowed the objection only to the extent of not imposing the additional penalty tax. He affirmed the assessable income by Lonsdale, by reason of s 108 of the Act, and the additional tax by way of interest. The end result was that Lonsdale was faced with an amended assessment of income tax of $122,845 and interest of $19,403, with credit being given for the initially assessed income tax of $7,995. The present appeal is against that decision. Lonsdale argues that no part of the $294,487 was taxable income properly so treated in the light of s 108 of the Act, and that the interest component on the additional tax should in any event have been remitted. THE TRANSACTION At material times Lonsdale carried on business as a sand and metal supplier. Its share holders at least until 18 March 1993 were Maxwell Bernard O'Neil and Gordon Joseph O'Neil ("the O'Neils"). The O'Neils also held in excess of 50 per cent of the issued shares in Screenings Pty Ltd ("Screenings"). Screenings owed all of the shares in Murrayview Irrigation Co Pty Ltd ("Murrayview"), which directly held in excess of 50 per cent of the issued shares in Southern Quarries Pty Ltd ("Southern Quarries") and indirectly through another corporate entity the balance of those shares. Those corporate entities were but part of the corporate structure of what was called in the evidence the Screenings group ("the Screenings group"). Between 16 May 1985 and 30 June 1992 Lonsdale progressively borrowed monies from members of the Screenings group, including in particular Southern Quarries and Screenings. Those advances were made on an unsecured and interest free basis and were repayable at call. Loans were not individually documented but were recorded in the books of the respective companies from time to time. The loan balances between Lonsdale and Southern Quarries and Screenings were: Southern Quarries Screenings 30 June 1985 $180,894 30 June 1985 Nil 30 June 1986 $220,544 30 June 1986 $ 1,726 30 June 1987 $265,828 30 June 1987 $ 3,068 30 June 1988 $277,128 30 June 1988 $ 1,585 30 June 1989 $293,128 30 June 1989 $ 2,075 30 June 1990 $321,128 30 June 1990 $ 7,809 30 June 1991 $321,128 30 June 1991 $12,800 30 June 1992 $270,048 30 June 1992 $18,287 28 February 1993 $270,048 28 February 1993 $24,438 30 June 1993 Nil 30 June 1993 $ 322 I observe that that indebtedness between the Lonsdale and Southern Quarries decreased by some $51,080 in the financial year ended 30 June 1992. Both Screenings and Lonsdale are private companies within the meaning of s 108 of the Act: see s 103A of the Act. The audited financial accounts of Lonsdale indicate that, in its balance sheets up to and including its accounts of 30 June 1992, its liabilities were declared to include as current liabilities monies owing to the intergroup entities of Southern Quarries and Screenings with the appropriate amount of indebtedness specified for the particular year. In some years the loans were described as loans at call. The net assets of Lonsdale in the financial years from 1990, 1991 and 1992 showed a deficiency in shareholders funds of $142,125, $33,702, and $25,000 respectively. It was trading profitably. As its accounts show for the financial year ended 30 June 1993, its net assets had then increased from a shortfall of $25,000 the previous year to a surplus in shareholders equity of $279,534. Apart from a trading profit brought to account in that year, the loans from Southern Quarries and Screenings were no longer declared as liabilities. Its shareholders equity was said to include reserves of $294,486 described in notes simply as transfer to capital profits reserve. The only financial statement of Screenings in evidence for the year ended 30 June 1993 shows that it had a very substantial shareholders equity, and that its operating profit before income tax for that year was in excess of $2,000,000. Its expenses for that year include an item 'loan written off $294,486'. Its liabilities include loans to intergroup entities and loans to Southern Quarries which had increased by in excess of $1,000,000 during that year. Its receivables include a loan due by Lonsdale of $322. The debt of Lonsdale at 30 June 1992 is shown as $18,287. It had the same auditors and accountants as Lonsdale during that year and, I infer, for the whole of the period in question. I infer its financial accounts for the earlier years reflected the amount of the loan to Lonsdale from time to time. No financial statements of Southern Quarries are in evidence. During the latter part of 1992, the shareholders of Lonsdale determined to offer to sell 50 per cent of their shares in Lonsdale to Adelaide Brighton Investments Pty Ltd. The proposed price was $135,000. An offer was accordingly made to the directors of Adelaide Brighton Investments Pty Ltd by letter of 18 December 1992. It is unnecessary to explore the reasons why that proposal was made, save to note that it was in response to a perceived strategic objective of Lonsdale. The letter of offer apparently included with it a balance sheet for Lonsdale as at 30 November 1992 (not put in evidence). That letter indicated that, after clearing intercompany balances, the net assets of Lonsdale were in the order of $270,829. Hence the offer to sell half the shares for $135,000. Following negotiations, agreement was reached for the purchase of 50 per cent of the shares in Lonsdale for that amount on the basis that all debts owed by Lonsdale to other members of the Screenings group would be discharged in full prior to settlement. The mechanics by which that process occurred are also not in issue. By entries made in the journals respectively of Southern Quarries, Screenings and Lonsdale, on about 28 February 1993 the amount then owing by Lonsdale to Southern Quarries of $270,048 was converted in the Southern Quarries journal to an amount owing by Screenings to Southern Quarries, and in the Screenings journal it assumed that liability to Southern Quarries and it was credited with the debt previously owing by Lonsdale to Southern Quarries as then owing by Lonsdale to it in the amount of $270,048. The debt then recorded as owing by Lonsdale to Screenings was made up of that $270,048 "assigned debt" and the amount previously directly owing by Lonsdale to it which at that date had increased to $24,438. It then released or "wrote off" the debt then owing by Lonsdale to it of $294,486. The transaction was described in the Southern Quarries journal "disposal (Lonsdale) owing to Screenings" and in the Screenings journal as "acquiring (Southern Quarries) debt owing by (Lonsdale)", and in the next entry as "write off debt owing (Lonsdale) . . . forgiving debt owing." In the Lonsdale journal, the successive entries appear as the Southern Quarries debt becoming a debt due to Screenings described as "aggregating inter-coy debt" and then in relation to the Screenings the debt of $294,486 as "debt forgiven by Screenings". Minutes of the meeting of directors of Screenings held on 17 March 1993 record that it was resolved that the intercompany debt of $294,487 be forgiven by Screenings "so as to facilitate the sale of 50 per cent of Lonsdale Sand & Metal Pty Ltd to Adelaide Brighton Cement Investments Ltd". There is no other documentation of that debt re-arrangement and release or forgiveness. On 18 March 1993 share transfers to effect the sale of half the shares in Lonsdale to Adelaide Brighton Cement Investments Ltd for $135,000 were executed by the O'Neils. The sale of those shares was duly settled. It is clear enough that, subject to the arguments addressed on behalf of Lonsdale and the Commissioner to which I shall shortly refer, the transaction sought to be effected was the aggregation or taking over of Lonsdale's debt to Southern Quarries by Screenings, and then the release of the aggregated debt by Screenings so that the shareholders of Lonsdale could dispose of 50 per cent of their shares in Lonsdale on the basis proposed, namely with its assets clear of intercompany loans. That is what happened. THE CONTENTIONS Section 108(1) of the Act provides: "If a private company: (a) pays an amount to an associated person by way of an advance or loan; or (b) pays or credits an amount on behalf of, or for the individual benefit of, an associated person; so much (if any) of the amount paid or credited as, in the opinion of the Commissioner, represents a distribution of profits shall, for the purposes of this Act other than Division 11A of Part III and Division 4 of Part VI, be deemed to be a dividend paid by the company: (c) to the associated person as a shareholder in the company; (d) out of profits derived by the company; and (e) on the last day of the year of income of the company in which the payment or credit referred to in paragraph (a) or (b) is made." Lonsdale is accepted to be an associated person of Screenings at material times: s 26AAB(14) of the Act. The Commissioner took the view, applying the words of s 108(1) of the Act as relevant, that Screenings as a private company credited an amount on behalf of or for the individual benefit of Lonsdale as an associated person, so that he could treat the release or forgiveness of the debt totalling $294,486 as being a dividend paid by Screenings to Lonsdale out of the profits of Screenings on 30 June 1993, and so assessable as income in that financial year. He points out that Screenings in that year had substantial profits available for distribution, and that the taxable income of Screenings was in fact reduced by the amount of the debt forgiven because that amount was "expensed" as a loan written off in arriving at the operating profit of Screenings for that year. Lonsdale's several contentions are: (a) the forgiveness of the debt cannot amount to a payment or credit on behalf of or for the benefit of Lonsdale within the meaning of s 108(1)(b); (b) even if the forgiveness of a debt may in certain circumstances constitute a credit given under s 108(1), so as to constitute a distribution of profits, it did not do so in the particular circumstances because there was no consideration for the forgiveness of debt and no deed effecting that forgiveness, so the forgiveness itself was not binding; (c) even if the particular forgiveness of the debt is generally caught by s 108(1), (i) the distribution of profits was for $72,216 only because the balance of the $294,486, namely $222,270 represented amounts due by Lonsdale to Southern Quarries and to Screenings as at 30 June 1986, and so were amounts which were statute barred and could not therefore be recovered by Southern Quarries or by Screenings respectively at the time of the forgiveness of those debts in any event; (ii) the relevant distribution of profit was only the $24,438 owing by Lonsdale to Screenings before the assignment of the Lonsdale debt to Southern Quarries, because that assignment was invalid and ineffective as it was not assigned in accordance with s 15 of the Law of Property Act 1936 (SA); (it was not expressly put, but if correct this contention could also accumulate on proposition (i) so that the $24,438 would also further reduce by the $1,726 owing by Lonsdale to Screenings at 30 June 1986 and said to be statute barred); (iii) alternatively, the real distribution of profits was $24,438 only because the amount of the Southern Quarries debt assigned to Screenings and then released by it of $270,048 was acquired by Screenings on the basis that would immediately be forgiven, and therefore in reality had no value; and (d) finally, and discretely, the additional tax imposed by way of penalty interest under s 207A should have been remitted by the Commissioner in the proper exercise of his discretion under s 207A of the Act. I shall deal with each of those contentions separately. DOES SECTION 108 APPLY TO THE FORGIVENESS OF A DEBT? Section 108(1) in its present form was enacted by the Taxation Laws Amendment Act (No 3) 1987, effective from 13 November 1987. The decision of Deputy Federal Commissioner of Taxation v Black (1990) 25 FCR 274 related to the earlier expression of s 108(1) of the Act, which then provided: "If amounts are paid or assets distributed by a private company to any of its shareholders by way of advances or loans, or payments are made by the company on behalf of, or for the individual benefit of, any of its shareholders, so much, if any, of the amount or value of those advances, loans or payments, as, in the opinion of the Commissioner, represents distributions of income shall, for the purposes of this Act other than the purposes of Division 11A of Part III and Division 4 of Part VI, be deemed to be dividends paid by the company on the last day of the year of income of the company in which the payment or distribution is made." It will be noted that, as then in force, s 108(1) was limited in its operation to payments, advances or loans to or on behalf of or for the individual benefit of a shareholder, rather than to an "associated person", and that it did not explicitly provide for the crediting of an amount on behalf of or for the benefit of a shareholder. In Black (above), a company controlled by a taxpayer which maintained a loan account of monies advanced to the taxpayer from time to time forgave the indebtedness of the taxpayer. The Commissioner issued amended assessments increasing the taxpayer's assessable income in respect of the 1985 and 1986 financial years by $80,339, being the amount of the debt forgiven by the company. It was contended that the writing off or forgiving of the debt should be treated as an advance or loan by the company to enable the taxpayer to repay his debt to it, so that the $80,339 was deemed to be a dividend under s 108 of the Act. The Commissioner failed on that contention. Sweeney J said (at 280): "In my opinion, it is not permissible to construe the deeming provisions of sec. 108(1) so as to embrace forgiveness of a debt, on the basis that it produced the same effect as would have flowed from a different transaction. If the Parliament had intended to produce such a result, it would have been easy to include in the section a reference to a debt being forgiven or an obligation released. It is not open to regard the forgiveness of the taxpayer's debt as a payment made by the company on behalf of, or for the individual benefit of, the taxpayer within the meaning of the section." Nor did the definition of "dividend" assist the Commissioner. It provides: " 'dividend' includes - (a) any distribution made by a company to any of its shareholders, whether in money or other property; (b) any amount credited by a company to any of its shareholders as shareholders; and". There had been no distribution made by the company to the taxpayer, because there had been no dealing out or bestowal by reason of the foregoing of the receipt of payment from the taxpayer. Nor had there been any amount credited by the company to the taxpayer "as shareholder", that is in the capacity of shareholder as distinct from the capacity of debtor. Thus, his Honour did not need to consider and did not address whether the forgiveness of the debt constituted an amount credited to a shareholder in those circumstances. Counsel for Lonsdale acknowledged that the decision was not directly on point. He contended, however, that consistent with the reasoning in that decision it is implicit from s 108(1) of the Act in its present form that the payment or crediting must be on behalf of or for the benefit of the associated person in that person's capacity as shareholder rather than as, for example, in that person's capacity as debtor. It was argued that this follows especially from the requirement that the Commissioner be satisfied that the payment or credit be "a distribution of profits". The definition of "dividend" has not altered since that decision. Despite that submission, in my view, that decision does not assist in resolution of the present issue. It is clear that Sweeney J paid particular regard to the precise words then in the section. The absence of any words to encompass the forgiveness of a debt or the release of an obligation were significant. So too was the requirement that the payment be for or on behalf of a person as a shareholder. The introduction of the word "credited" may well increase the scope of operation of s 108 to encompass the present circumstances. It is designed clearly to broaden its reach. So, too, is the introduction of the concept of associated person. Whether that increased range does in fact extend to the present circumstances is the question now before me. Nor do I think the contention is consistent with the express terms of s 108(1) of the Act. It would be reading into that section words which are not there to support the argument. There is no reason why subclauses (a) and (b), in this respect, should be read differently. There is no mandate in subclause (a) to require the payment to an associated person to be in that person's capacity as shareholder. It is the character of the payment which attracts the operation of s 108 rather than the character of the recipient, beyond the recipient's eligibility to qualify as an associated person. If that be so, consistency dictates that subclause (b) be approached the same way. No reason was put forward, nor is it apparent to me, why that should not be the case in respect of s 108(1)(a) and (b). Furthermore, subclause (c) deems that the payment is to the associated person as a shareholder in the company. If it were a requirement of s 108(1)(a) and (b) that the benefit be given to a person in the capacity of shareholder, then subclause (c) would simply be redundant. I do not think there is any sufficient reason otherwise shown to regard that subclause as redundant. The use of the defined term "associated person" should simply be given its proper operation. It is accepted that Lonsdale is an associated person of Screenings. The enactment of ss 108 and 109 in their present form in 1987 did not alter their purpose in ensuring that dividends disguised as taxable loans or advances were nevertheless treated as dividends subject to taxation as assessable income. Their repeal and re-enactment then was described as directed to curing "technical" deficiencies in their operation: Explanatory Memorandum, Taxation Law Amendment Bill (No 3) 1987, at 39. It is plain, in my view, that s 108 is a provision to catch amounts somehow passed to an associated person of a private company which in fact make over profits or income of the company as, in substance, dividends which are paid or credited in a way which appears to represent a different transaction. The effect of such a payment, if it falls within s 108(1), is that for the purposes of the Act it is deemed to be a dividend paid by the company to the associated person as a shareholder in the company, out of profits derived by the company, and during a particular year of income. Section 44 of the Act provides for dividends to be included in assessable income. The effect of subclauses (c)-(d) of s 108(1) have the effect of making any amount caught within the net of the earlier part of s 108(1) being assessable income by reason of s 44. Section 108(1) will apply to the transaction only if, on its clear terms, it does do so. Black (above) provides an illustration of that proposition. It is for the legislature to determine the circumstances in which the deeming of dividends should operate. It is necessary to determine whether the subject transaction is caught by the Act. There is nothing to suggest that the word "credited" in s 108(1)(b) should be given any particular confined meaning. It is not separately defined in the Act. Its general meaning includes: "to enter upon the credit side of an account; give credit for or to; to give the benefit of such an entry to (a person, etc)" (The Macquarie Concise Dictionary, 2ed, at 218). As noted above, it is an expression which appears in the definition of "dividend" in the Act. It has been the subject of observations by the High Court, in relation to income tax legislation, in a number of cases. In Webb v Federal Commissioner of Taxation (1922) 30 CLR 451, a company reconstruction led to the substantial undistributed profits of one company being applied to the issue of shares in a new company, which shares were allotted pro rata to the shareholders of the former company. The new company acquired the business and assets of the old company. The issue of the new shares did not involve "profits or bonus credited or paid" by the old company to its shareholders. Knox CJ, Gavan, Duffy and Starke JJ said (at 461): "Nothing was either paid or credited to the shareholders, because they neither received any specific sum of money in currency, nor did they obtain the benefit of any such sum by way of credit entry, set-off, or other statement of account. Nor was the distribution of "profits" within the meaning of sec. 14(b). In our opinion the words "profits credited or paid" in that sub-section mean moneys detached from the assets of the company suitable for distribution to the shareholders. On distribution such moneys become their income in contradistinction to their interest in the remaining assets of the company which continue to be their capital. In this case there was no detachment." Isaacs J (at 479) referred to the word "credited" as involving cases where, without actual payment, there has been credit in the company's books imputed to the shares held, and so somehow involving a debt by the company to the shareholder. His Honour observed that the distribution of surplus assets in winding up creates nothing in the nature of a debt by the company to anybody. The observations of Dixon J in Jolly v Federal Commissioner of Taxation (1933) 50 CLR 131 at 142, and 149-150, upheld by the Full Court in its very brief decision (at 153) are to similar effect. In his reasons (at 142) Dixon J said of the description - dividends, profits or bonus credited or paid to the taxpayer as a member of the company: ". . . the description was satisfied if the shareholder received a specific sum of money in currency or obtained the benefit of such a sum by way of credit entry, set-off or other statement of account". In James v Federal Commissioner of Taxation (1924) 34 CLR 405 a company decided to capitalise accumulated profits and to issue the shares so generated as bonus shares to its members pro rata. The accumulated profits were declared as a bonus to the shareholders. Entries to reflect the implementation of that decision were made in the company's books, dealing separately with each shareholder. The Court found that there had been "credited" to the shareholders a bonus, so as to constitute assessable income. The bonus sum was in fact credited to the shareholders, and was then applied by the company on behalf of the shareholders to, and credited as payment pro tanto for, the liability created by the issue and acceptance of shares. Finally, I refer to Commissioner of Taxes (Victoria) v Nicholas (1938) 59 CLR 230. In that case also, a capitalisation of reserves from the profits of a company was effected by an issue to shareholders of fully paid up bonus shares. It was held that that constituted "a profit or bonus credited" to the shareholders within the meaning of the applicable taxation legislation. Rich J said (at 244): "When the Act of Parliament speaks of "crediting" it is not discussing book keeping, but the appropriation of profits to answer the purposes of the shareholder. If the shareholder obtains shares, stock, debentures, bonds or any other negotiable or transferable form of obligation of the company or interest in its assets, and the consideration which otherwise must be supplied by him consists in an appropriation by the company of profits to that end it would seem to me to be the very thing meant by "crediting" the profits." As a matter of principle, I can see no reason why in appropriate circumstances the forgiveness of a debt may not fall within the operation of s 108(1)(b). If a company is owed money by a shareholder, and declares a dividend but satisfies its debt to the shareholder created by the declaration of the dividend by crediting that amount against the amount owing by the shareholder, there is no doubt that the credited amount would be assessable income in the hands of the shareholder. Section 108 is designed to confront circumstances where, in a less obvious way, there is in reality a disguised dividend to an associated person. The decisions referred to indicate that, at the least, there must be something in the nature of an allocation or appropriation of the company's resources to an individual shareholder or to the shareholders each individually. That, by the words of s 108, may extend to persons who are associates of the company. Once a separate transaction occurs (whether in favour of only one, or a number, or each shareholder in the sense that each gains an identifiable separate benefit from it), it is appropriate to look to the nature of the transaction to determine if it falls within s 108. There will be some circumstances where the making of an advance or loan may thus be caught. There will be circumstances where more complex transactions may thus be caught: cp. MacFarlane v Federal Commissioner of Taxation (1986) 13 FCR 356. There will be circumstances where the forgiveness of a debt will be caught. Whether that is so depends upon the existence of a particular transaction, and its substantive nature and effect. It will not, by any means, be every forgiveness of debt that will be caught. It will be caught, in my view, if the crediting of an amount against a shareholder's (or associate's) loan account is recorded in the books of the company and in substance constitutes an appropriation of the profits of the company for the benefit of the shareholder (or associate). There are, of course, circumstances in which debts may properly be forgiven or written off and which have no element of appropriation of funds from the profits of the company. Thus, the commercial circumstances in which the transaction occurs will be relevant. On the other hand, the wider commercial strategy being implemented may or may not involve as one of its elements precisely the sort of conduct which s 108 is designed to catch. That there is, in such circumstances, a legitimate commercial reason for undertaking the particular transaction said to be caught by s 108 will not of itself remove that particular transaction from the tentacles of s 108; cp. Kenneth A Summons Pty Ltd v Federal Commissioner of Taxation (1986) 86 ATC 4979. In my view, the present transaction was in substance the crediting of an amount by Screenings on behalf of, and for the individual benefit of, Lonsdale. That was the substantive nature of that part of the transaction. The journal entries reflect that. The minutes reflect that. That there was a wider, and sensible, commercial reason for doing so, namely to structure Lonsdale so that the sale of shares in Lonsdale, and the price to be paid for them, was effected and calculated respectively after intercompany debts had been forgiven, does not diminish that conclusion. It is not simply a matter of the accounting entries, but having regard to the substantive transaction itself which they both evidence and reflect. There is no suggestion that the forgiveness of the debt was prompted by any other consideration, eg. that it was not recoverable. There is no reason to think that Lonsdale did not have available to it revenue or profits to meet any payment of money to Screenings. Indeed the evidence indicates that it did. It also indicates that the written off debt reduced Screenings' profit in that year, presumably impacting upon its taxation liability. Let it be supposed that Screenings had gifted to Lonsdale, and paid directly to it, moneys sufficient to repay Screenings the loan. Gifting would have been necessary to enable Lonsdale to have funds to clear the intercompany loan accounts. I have little doubt that that would, in the circumstances, attract s 108. In my view, the actual process adopted in substance by forgiveness of the debt was a crediting for Lonsdale in circumstances where the Commissioner legitimately regarded it as representing a distribution of profits. It was also contended on this aspect of the case that s 108(1)(b) requires the payment of credit to be given to or on behalf of a third party rather than to the associated person. It is not apparent to me why that should be so. Subclause (a) certainly is limited to an amount paid to an associated person by way of advance or loan. The expression "pays or credits" in subclause (b) is clearly designed to have a wider range of operation. Although it may be that its scope may extend to payments or credits in favour of a third party rather than to the associated person, I see no reason why that is necessarily so. The contention, if correct, would not serve the apparent purpose of the section. It would leave an irrational gap in its area of operation. A 'crediting' transaction does not necessarily involve a third party at all. It may be on behalf or for the individual benefit of the associated person, without a third party being involved at all. It would be illogical to construe subclause (b) to limit its operation to circumstances where the payment or credit involves a third party where it is made on behalf of or for the individual benefit of the associated person. Finally, on this aspect, it was argued that it was not Lonsdale which in reality received the distribution of profits from Screenings, but Southern Quarries, as Lonsdale ceased to be a debtor of Southern Quarries and Screenings became a debtor of Southern Quarries. However, as a result of the overall transaction, Southern Quarries' position has not changed, except that the identity of its debtor is Screenings rather than Lonsdale and perhaps the capacity of Screenings to repay that debt may be better than that of Lonsdale. But overall its assets or liabilities have not altered. Screenings' position has altered. It has reduced its current assets and its net assets by $296,486. It has done so because it has released the debt to Lonsdale. That reduction in its current assets and its net assets is reflected by the release of Lonsdale's debt. The beneficiary was Lonsdale. Lonsdale, as its records illustrate, also increased its net assets by the amount of the forgiven indebtedness. Accordingly, I reject that contention. ADEQUACY OF CONSIDERATION The contention is that there has been no binding release of the debt, and so no crediting of any amount which falls under s 108(1). Lonsdale argues that it still owes Screenings $294,486 in addition to any other loans. It is a little curious that Lonsdale would want to assert the existence of a debt of $294,486 so as to avoid a liability to the Commissioner of somewhat less than half the debt. Reliance was placed upon Case W115 of 1989 (1989) 89 ATC 899. That was the Administrative Appeals Tribunal decision from which the appeal to Sweeney J in Black (above) was brought. The Tribunal found (at 913) that the resolution to "forego" the debt by the company and the entry in its books of account to give effect to that resolution was "nothing more than a unilateral act on the part" of the company, so that although the company was substantially controlled by the taxpayer: ". . . it was not done in such a way so as to confer any right upon (the taxpayer) against the company such as would have entitled him to resist a claim for payment of the debt. There is no basis in the evidence before me for (the taxpayer) to contend that he was released, whether by deed under seal or by any agreement which consideration was given, or that he so acted in consequence of the company's representations as to be entitled to allege an estoppel. Once that is recognised, it follows that nothing has passed to (the taxpayer). His liability to the company remains as it was." That passage of the Tribunal's reasons was referred to in Black (above, at 279), and Sweeney J noted that on the appeal there was no challenge to any finding of fact. It is true that there is no deed of release. Nor is any consideration specifically expressed for the release of the debt. Consideration may be found in the O'Neils and the relevant members of the Screenings group agreeing that Screenings and Southern Quarries, at Lonsdale's request, would agglomerate its debt to Screenings, and then Screenings as part of the Screenings' group would release Lonsdale's debt, on the basis that the O'Neils as the Lonsdale shareholders would agree to offer 50 per cent in the shares in Lonsdale to Adelaide Brighton Investments Pty Ltd for a certain sum. The Commissioner did not specifically contend for such a finding. It was also submitted on behalf of Lonsdale that no relevant estoppel could arise. Reference was made to Legione v Hateley (1983) 152 CLR 406, a well known case involving a promissory estoppel on the particular facts of that case. I note in particular the joint judgment of Gibbs CJ and Murphy J at 419-420. In my view the answers to that contention proffered by the Commissioner are correct. The decision to forgive the debt was not a unilateral one. It stemmed from a desire on the part of the Screenings group to put Lonsdale in a position where it could accommodate the wishes of Lonsdale to spread the shareholding. That was not simply a wish of the shareholders, apparently, but of the Screenings group as a whole. It is unnecessary to refer to the commercial considerations identified as the reason why that was desirable. It was part of "a package". It involved at an individual level Southern Quarries agreeing to assign its debt owed to it by Lonsdale to Screenings in consideration of Screenings agreeing to pay Southern Quarries the same amount, and Screenings agreeing with Lonsdale to release that debt. At a group level, it involved intra-group arrangements to release Lonsdale from its intercompany debts so that its shareholding could be spread. In the events which happened, I have no doubt that it was intended by all parties that the release or forgiveness would operate as a permanent forgiveness of the debt. It was so resolved by the directors of Screenings. The consequence of the release of the debt was to increase the net asset value of Lonsdale from a slight negative figure to a figure where the amount sought for 50 per cent of the shareholding in Lonsdale was about equal to 50 per cent of the net asset value of Lonsdale as disclosed in its restructured balance sheet. The proposal then put to Adelaide Brighton Investments Pty Ltd was based on that restructured balance sheet, following the forgiveness of the debt, to justify the price. It was clearly the intention and expectation of Screenings and Southern Quarries that that should occur. The document so presented was obviously acted upon by the purchaser of the shares in Lonsdale. The evidence satisfies me that the proposal to dispose of 50 per cent of the shareholding in Lonsdale was not simply a private transaction of the shareholders of Lonsdale, but was an implementation by the Screenings group of a strategy in the face of a perceived corporate difficulty in the operations of Lonsdale and to facilitate its commercial operations. The Screenings group had formed a view that it was desirable, for commercial reasons, that the shareholding in Lonsdale should be widened beyond those who were then effectively the only shareholders in the Screenings group. Lonsdale participated in that decision. The forgiving of the debt was part of the implementation of the decision. Furthermore, as the evidence shows for the 1993 year, and I infer for earlier and subsequent years, the companies which were members of the Screenings group including Southern Quarries, Screenings and Lonsdale all had common auditors and accountants. In the financial accounts for 1993, at least, both the directors and the accountants and auditors have certified the accounts as representing a true and correct and fair picture of the companies' affairs. In each instance the indebtedness previously of Lonsdale to Southern Quarries and to Screenings has disappeared from the Lonsdale current liabilities, and on the other hand the new indebtedness of Screenings to Southern Quarries (previously an indebtedness of Lonsdale to Southern Quarries) has apparently been included in the current liabilities of Screenings (although a global sum only appears in the accounts). Accordingly, I reject that contention on the part of Lonsdale. THE AMOUNT OF THE DEBT FORGIVEN It was first contended that the distribution of profits which s 108 could activate is limited to $72,216.97 because of the amount purportedly forgiven, $221,270 was statute barred, having been owing at 30 June 1986. Section 35(a), Limitations of Actions Act 1936 (SA), provides that, subject to the Act, an action founded upon a simple contract must be commenced within six years after the cause of action accrued. Time runs from the date of the loan or advance: Ogilvie v Adams (1981) VR 1041; Nicholson v City Bank Savings Ltd (Lander J, Supreme Court of South Australia, 13 September 1995, unreported); Young v Queensland Trustees Ltd (1956) 99 CLR 560 at 566. It was contended that the acknowledgement in the annual accounts of Lonsdale did not constitute a sufficient acknowledgement in writing to activate s 42 Limitations of Actions Act 1936 (SA) as it requires, in effect, a new and continuing contract. Section 42 requires an acknowledgement in writing signed by the party to be charged or its agent. Reference was made to Re Brookers (Australia) Ltd (in liquidation); Brooker v Pridham (1985) 38 SASR 475. There are a number of reasons why I reject that contention. In the first place, s 35(a) imposes a procedural bar to recovery of the debt; it does not abolish the right under contract to recover the debt: Curwen v Milburn (1889) 42 Ch.D. 424 per Cotton LJ at 434. It provides relief which may be invoked at the discretion of the debtor. Secondly, in my view, the acknowledgement of the debt in the accounts of Lonsdale each year constitutes a sufficient acknowledgement of the liability to revive the running of the six year time limit at each acknowledgement: Stage Club Ltd v Millers Hotels Pty Ltd (1981) 150 CLR 535; Spencer v Hemmerde [1922] 2 AC 507. The indebtedness was specifically acknowledged in the balance sheet of Lonsdale each year; cp. Jones v Bellgrove Properties Ltd [1949] 2 KB 700. In Brooker v Pridham (above), it was held that the acknowledgement of the debts in issue in the balance sheet of the company did not convey any promise to pay those amounts, as the company was at material times in dire straits. But, to adopt the words of Dixon J in Bucknell v Commercial Banking Co of Sydney Ltd (1937) 58 CLR 155 at 163-164, the "tenor of the promise" implied by reason of the acknowledgement of the debts in the accounts of Lonsdale is of a more substantive nature. I have described briefly above the net asset position and the trading performance of Lonsdale in the years running up to June 1993. Its net asset position was improving. It was trading profitably. In fact it significantly reduced its indebtedness to Southern Quarries during the financial year ended 30 June 1992. There is no reason to think that it did not acknowledge and intend to pay its debts to Southern Quarries and Screenings. Its accounts were audited on that basis. The very need to embark upon the debt forgiveness process undertaken illustrates that. The fact that its indebtedness increased from time to time, and in respect of the 1992 year significantly decreased, indicates an ongoing mutual expectation as to the intention that the debts would be repaid. I do not know the details of how the amount outstanding changed from time to time during each of the years concerned. I do not know whether there was a foundation for an acknowledgement of the debt beyond it being recognised in the accounts as the amount increased. Despite that, in my view, the accounts of Lonsdale from year to year did constitute an acknowledgement of the debt and (in the relevant sense) a new agreement to pay the outstanding debt as well as the increased debt. Finally, I note the provisions of s 48(3)(b)(ii) of that Act. It enables, in certain circumstances, an extension of time to be granted within which to bring proceedings. The movement in the debt outstanding, particularly the preparedness of Screenings and Southern Quarries to increase their loans, and the recognition (to use a neutral word) in the Lonsdale accounts of the loans, leads me to the view that I should not treat as a fait accompli that Lonsdale would successfully resist an extension of time being granted if sued by either Southern Quarries or Screenings. In my view the reverse is the case. The conduct of Lonsdale in procuring the agglomeration of the debts into Screenings, leaving Screenings with a substantial debt to Southern Quarries, points in the same direction. I think it likely that, if sought, an extension of time under s 48(3)(b)(ii) of that Act would have been granted. It was next contended by Lonsdale that the amount assessable by reason of s 108 of the Act should in any event only be the amount of the debt of Screenings, namely $24,438, and not the amount of the Southern Quarries debt of $270,048 assigned to Screenings for two reasons. Firstly, it was said that the assignment of the Lonsdale debt from Southern Quarries to Screenings was ineffective because it did not comply with s 15 of the Law of Property Act 1936 (SA) and did not amount to an equitable assignment. Reference was made to Norman v Federal Commissioner of Taxation (1962-1963) 109 CLR 9 especially per Windeyer J at 26-27. Secondly, it was contended, that there was no value in the debt forgiven because the debt assigned was at the time proposed to be forgiven, that is because Southern Quarries assignment of the Lonsdale debt to Screenings was in the expectation that Screenings would then forgive that debt, that debt had no value. Thus its forgiveness was also a forgiveness of something of no value. There is no absolute assignment of that debt in writing, nor any express notice in writing of the assignment given to the debtor Lonsdale. I accept that there was no assignment in law which complied with s 15, Law of Property Act 1936 (SA). But it is also necessary to determine whether there is an equitable assignment, and to consider whether there is any reason why otherwise it would be unconscionable if the assignment were not recognised. I have partly dealt with that question in relation to the contention that there was no consideration for the transaction involving the forgiveness of the debt. I will not repeat that, but in my view the consequence is that it would be unconscionable not to recognise the totality of the transaction. In addition, I agree with and respectfully adopt the approach of the Court in MacFarlane v Federal Commissioner of Taxation (above) in relation to such a submission. Beaumont J at 375 said in relation to s 108(1) in its then form: "It thus appears that the object of the legislation was to tax, in the hands of shareholders, payments made out of the profits or income of the company made for the benefit of shareholders even if no formal dividend was involved. For this purpose, "profits" and "income" were, apparently, regarded as the same thing: the statutes spoke of distributions of "income"; the note referred to distributions of "profits". It is important to notice that there was no suggestion in the note that informal distributions of the company's income or profits were to be taxed, in the shareholder's hands, only if the distribution of income or profits were permissible under the Company Law. The mischief aimed at by s 108(1) was the avoidance of tax on informal or "defacto" dividends - payments disguised as a different transaction but, in substance, dividends, because the payments in fact made over profits or income of the company it would be a curious, and surely unintended, result if an attempt to tax an informal or "defacto" dividend could be thwarted because of failure to comply with the formalities of another area of the law. It could be no answer to the application of s 108(1) that the payment in question did not satisfy the technical demands of company law for the proper payment of a dividend . . ." There is no reason to think those observations are not applicable to s 108 in its present form. Put simply, in the operation of s 108, it is appropriate to have regard to what the parties to the transaction have actually done and acted upon, even if there is some question of whether the formalities of another area of the law have not been fully implemented. The critical thing in my view is that the transaction be certain. In Consolidated Trust Company Limited v Naylor (1936) 55 CLR 423, an issue arose as to whether the transfer of a mortgage gave the transferee the right to sue a surety on a covenant of guarantee contained in the mortgage. The mortgage had been assigned in accordance with the endorsement upon the mortgage under the hand of the mortgagee. It was contended nevertheless that the assignment did not entitle the transferee to sue on the guarantee as the guarantor had not itself consented to the assignment, nor had it been given notice to the assignment (see s 12, Conveyancing Act 1919 (NSW)). It was held that the endorsement amounted to an assignment of the respondent's covenant sufficient to satisfy the requirements of s 12 of that provision. Dixon and Evatt JJ at 439 discussed the degree of notice necessary to effect the assignment. Their Honours expressed approval of the observation in Warren's Choses in Action (1899) at 177-178 that the notice required is a direct and definite statement of a thing, as distinguished from supplying material from which the existence of such a thing may be inferred. The purpose, as their Honours said, is to ensure that actual notice that the debt has been assigned is given to the debtor. That is so that the debtor knows with certainty in whom the legal right vests to sue to recover the debt. Thus their Honours said (at 439): "The assignment must be by writing, but, if it is in writing, then notice to the debtor is necessary only to acquaint him with the fact that the debt is payable to the assignee and the statute requires that he shall be expressly notified. But, neither in its exact terms, nor according to its general intent, does the provision appear to make it essential that the notice should contain an express statement that the assignment is a written one." There is no doubt that Lonsdale had express notice of the assignment. It acted upon the assignment by presenting its revised balance sheet to the prospective purchaser of half of its shares. The three companies all had common shareholders and each had notice through their common membership of the Screenings group and their mutual participation in the process of eliminating the intercompany loans of Lonsdale. The three companies all apparently had one accounting officer, who on instructions from each, journalised the appropriate entries to affect the transaction. The circumstance is therefore different from that addressed in Robinson v The State of South Australia [1928] SASR 42. There is no scope for uncertainty as to the transaction: see Naylor (above) at 439. The journal entries of each company record the relevant parts of the transaction. The formalities of assignment are to ensure certainty, so that a creditor has a clear right to sue and the debtor a clear right to get a good discharge. In this instance, the repository of the right to sue is not in doubt. The fact of the discharge was clearly known to, and acted upon, by Lonsdale in the presentation of its revised balance sheet to the proposed new shareholder. For the same reasons, it is clear in my view that the debt assigned to Screenings by Southern Quarries, albeit in the expectation that it would be forgiven, was of value. It was of such value as to lead Screenings to agree to pay an equal amount to Southern Quarries as a debt. The real nature of the transaction did involve Screenings forgiving a debt which, after the assignment, it could have sued upon as against Lonsdale. Accordingly, in my view, the Commissioner correctly treated the value of the debt forgiven as the amount of the deemed dividend. THE INTEREST Finally it was contended that the Commissioner's decision under s 207A(4) of the Act to impose penalty interest of $19,403 was in error, and that the additional tax should be further remitted. There is no information before me as to the Commissioner's reasons for imposing that additional tax. What is apparent, from the consideration of the objection, is that the Commissioner has accepted that Lonsdale has a reasonably arguable position on the principle issue, and for that reason decided not to impose the penalty tax under s 226K. The purpose of the additional tax under s 207A is different. I do not think it necessarily follows that by reason of the Commissioner's attitude in respect of penalty tax under s 226K, as a matter of law he was bound to exercise his discretion under s 207A on the same basis. It is an exercise of discretion. The Court should not readily interfere. There is no material to indicate any error of law in the exercise of that discretion. There is no material which persuades me that it is so unreasonable a decision that no reasonable person could have reached it, either because the s 226K penalty was remitted or for any other reason. Contrary to the submission for the applicant, I do not consider that there is in the process any windfall element to the Commissioner. The amount of the debt forgiven, assessed as income in the hands of Lonsdale, has provided an expense item reducing Screenings profit to the same extent. The tax which I have found to be payable by Lonsdale was not paid in the period in which it would routinely have been paid, but its receipt was delayed by the absence of information about the forgiveness process for many months. In my view, no error in the exercise of the discretion to impose interest under s 207A has been shown: cp. Avon Downs Pty Ltd v Federal Commissioner of Taxation (1949) 78 CLR 353 at 360. I certify that this and the preceding twenty-two (22) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice Mansfield. Associate: Dated: Counsel for the Applicant: Mr T Murphy Solicitors for the Applicant: O'Loughlins Counsel for the Respondent: Ms A MacDonald Solicitors for the Respondent: Australian Government Solicitor Date of Hearing: 2 February 1998 Date of Judgment: 5 March 1998