Avon Downs Pty Ltd v Commissioner of Taxation (Cth) [1949] HCA 26

High Court of Australia Dixon J. Avon Downs Pty Ltd v Commissioner of Taxation (Cth) [1949] HCA 26

ORDER Appeal dismissed with costs.

Cur. adv. vult.

J. Dixon delivered the following written judgment:—

Aug. 3 Dixon J

This is an appeal by a taxpayer pursuant to ss. 187 (b), 197, 198 (2) and 199 of the Income Tax Assessment Act 1936 as amended from an assessment to income tax based upon income derived during the year ended 30th June 1944. The taxpayer is a private company within the meaning of Div. 7 of Part III. of the Act.

Within the four years next preceding the year of income the company incurred losses amounting to £6,196. This sum the company claimed as an allowable deduction from its assessable income pursuant to s. 80 (2). If the deduction had been allowed the taxable income of the company would have been reduced to the negligible figure of £147. The deduction would be allowable but for sub-s. (5) of s. 80. Because of that sub-section the commissioner disallowed the deduction. It is a provision that was placed in the Act during the year of income, viz. 1943-1944. A practice had arisen, so it is said, of turning to account the existence of losses in unsuccessful private companies. If the proprietor of a profitable business wished to obtain a substantial deduction from his next year's assessable income and could find a private company which during the three or four previous years had incurred a large enough accumulated loss, he had only to induce the shareholders to transfer their shares to him. He could then vest his business in the company and claim the past loss as a deduction from the profits of his next accounting period. Apparently this procedure was practised widely enough to cause the legislature to introduce a provision excluding cases where the identity of the holders of the shares carrying the voting power, or of at least seventy-five per cent of them, had changed since the loss had been incurred. This is done by sub-s. (5) of s. 80. It provides that no loss incurred by a private company in any year prior to the year of income shall be an allowable deduction unless the company establishes to the satisfaction of the commissioner that, on the last day of the year of income shares of the company carrying not less than twenty-five per cent of the voting power were beneficially held by persons who beneficially held shares of the company carrying not less than twenty-five per cent of the voting power on the last day of the year in which the loss was incurred. No doubt the condition that the shares should be held beneficially was considered necessary to prevent the sale of the beneficial interest without a formal transfer, or at all events registered transfer, of the actual shares, so that the continuing shareholders would be reduced to the status of dry trustees or nominees.