XCO Pty Ltd v Commissioner of Taxation (Cth) [1971] HCA 37

High Court of Australia Gibbs J. XCO Pty Ltd v Commissioner of Taxation (Cth) [1971] HCA 37

ORDER Appeal allowed with costs limited to those of one day. Matter remitted to the Commissioner to re-assess in accordance with the reasons for judgment. Usual order as to exhibits.

Cur. adv. vult.

Gibbs J. delivered the following written judgment:—

Aug. 25 Gibbs J

This is an appeal from a decision of a Board of Review confirming an assessment made by the Commissioner of Taxation of income payable by XCO Pty. Ltd. ("XCO") in respect of the year ended 30th June 1967.

XCO is a company which was incorporated in Victoria on 29th June 1967. At all material times its issued share capital consisted of four ordinary fully paid shares of $1 each of which two were owned by Victor Thomas Davis and two by John Brent Horton and those two gentlemen were the directors of the company. It was formed in the following circumstances. In 1961, Davis and Horton had commenced to carry on in partnership a business of operating automatic car wash centres. The business proved successful and, in 1965, a number of companies were formed to conduct it. At the head of the structure was Auto-Magic Car Wash (Holdings) Pty. Ltd. ("Holdings") a holding company whose shares were all held by Davis and Horton and their respective family companies. Holdings had a number of wholly-owned subsidiaries of which one acted as a management company and the others carried on the business in Sydney, Melbourne, Brisbane and Adelaide. The operations of these companies were entirely controlled by Davis and Horton who were the directors of the management company.

Some time early in 1967, an accountant practising in Melbourne, Mr. E. J. Brown, told Davis and Horton that he knew of a company, Kenneth Wright Pty. Ltd. (whose name was later changed to Auto-Magic Car Wash (Management) Pty. Ltd., but to which I shall refer as the "loss company") which had incurred losses amounting to $290,000 and suggested that they should consider acquiring a sixty per cent interest in the company and taking advantage of the accrued losses as permitted by s. 80 of the Income Tax Assessment Act 1936-1967 Cth ("the Act"). Because of the provisions of s. 80A of the Act this benefit could not be obtained if an interest exceeding sixty per cent were acquired and Davis expressed concern that the shareholders who retained a forty per cent interest in the loss company might wish to participate in the profits which it might earn in the future, and asked how protection might be obtained against those shareholders, saying that he would not resort to underhand means for this purpose. Brown replied that the loss company owed debts of about $260,000 and suggested that the necessary protection might be obtained by taking assignments of these debts, the intention being that if the holders of the outstanding forty per cent interest demanded to participate in profits made by the loss company their demands could be defeated by the loss company paying, or threatening to pay, the debts to the assignee. Davis and Horton took advice with regard to Mr. Brown's proposals and subsequently decided to proceed with it and decided also that a new company should be formed for the purpose of taking assignments of the debts owed by the loss company.