Taxation, Federal Commissioner of v Patcorp Investments Ltd [1976] HCA 67

High Court of Australia Mason, J. McTiernan, Gibbs, Stephen and Jacobs JJ. Taxation, Federal Commissioner of v Patcorp Investments Ltd

ORDER Patrick Corporation Limited v. Commissioner of Taxation of the Commonwealth of Australia Appeals allowed with costs. Assessments remitted to the Commissioner for reassessment in conformity with the reasons for judgment. Usual order as to exhibits. Patrick Corporation Limited v. Commissioner of Taxation of the Commonwealth of Australia Appeal allowed. Each party to pay its own costs. Assessment remitted to the Commissioner for reassessment in conformity with the reasons for judgment. Usual order as to exhibits. Minsoul Pty. Limited v. Commissioner of Taxation of the Commonwealth of Australia Minwall Pty. Limited v. Commissioner of Taxation of the Commonwealth of Australia M.T.A. Pty. Limited v. Commissioner of Taxation of the Commonwealth of Australia M.T.B. Pty. Limited v. Commissioner of Taxation of the Commonwealth of Australia M.T.D. Pty. Limited v. Commissioner of Taxation of the Commonwealth of Australia Appeals dismissed with costs. Assessments confirmed. Usual order as to exhibits. Appeals dismissed with costs. 1973, May 17 Mason J.

delivered the following written judgment:—

These eight appeals were heard together. Three appeals are by Patrick Corporation Ltd. (which I shall call "Mining Traders", the name by which the company was known until its corporate name was changed to Patrick Corporation Ltd. in the second half of 1970). The three appeals by Mining Traders relate to the income years ended on 30th June 1968, 1969 and 1970. In assessing the company to income tax the Commissioner refused to allow it rebates on dividends which it received from eight companies, including Austin Sales (Australia) Pty. Ltd. ("Austin Sales"), in which it bought shares that were subsequently sold at a loss and on which it performed what is commonly known as a "dividend-stripping" operation.

The remaining five appeals are by companies which, with the exception of Minsoul Pty. Ltd. ("Minsoul"), were at all relevant times wholly-owned subsidiaries of Mining Traders. Minsoul's share capital is owned as to one-half by Mining Traders. The five appeals relate to the income year ended on 30th June 1970 and in each case the Commissioner in assessing the appellant to income tax refused to allow it a rebate on a dividend which it received from Austin Sales, in which each appellant bought shares and sold them at a loss after receiving the dividend, a dividend-stripping operation having been performed. Consequently the appeal by Mining Traders in respect of its income for the year ended 30th June 1970 and the appeals by the other appellants raise a common question in relation to the receipt of dividends from Austin Sales.

In each of the eight appeals the Commissioner assessed the appellant to income tax on the footing that it was entitled to deduct as a loss the difference between the purchase price which it paid for the shares in the company from which it received the dividend and the sale price of those shares, as appears by the adjustment sheet which issued with each notice of assessment. But in the course of argument, counsel for the Commissioner sought to justify the assessments on the ground, among others, that the losses so incurred were not incurred in the course of the ordinary trading activities of the companies and were not deductible.

The Commissioner also contended that at the time when the dividends in question were declared and paid neither Mining Traders nor any of the other appellants in the case of Austin Sales was entered as a shareholder in the register of members of the company which declared the dividend. A consequence, so it was said, is that s. 46 has no application to the payments made to the appellants which they claim to be rebatable dividends. The appellants conceded that they were not registered as shareholders at the time of the declaration and payment of dividends, with the exception of the dividend declared by Remfore Pty. Ltd. ("Remfore") and the second dividend declared by Harbour Holdings Pty. Ltd. ("Harbour Holdings") as to which there is an issue of fact.

It will be convenient to deal separately with each of the transactions by which Mining Traders acquired shares in the relevant companies, caused them to declare and pay dividends and sold those shares, including the Austin Sales transactions in which the other appellants participated, but before doing so I shall summarize the facts so far as they provide a general background to the particular transactions.

Mining Traders was incorporated in 1967. Since its incorporation it has been closely associated with the stockbroking firm of Patrick & Co., whose partners have held not less than 35 per cent of its share capital. From its inception it carried on business as a share trader. In the course of this business it entered into a large volume of transactions in the three income years in question. As its corporate name suggests, it traded principally, albeit not exclusively, in the stocks and shares of mining companies. On infrequent occasions it bought and sold industrial stocks and shares in listed and unlisted companies. The other appellants also carried on business as share traders in the year ended 30th June 1970. The appellant M.T.A Pty. Ltd. ("M.T.A.") devoted part of its activities to pegging mining claims and making application for mining tenements, but these activities have no relevance.

In the three years in question there was a boom in mining shares in the Australian share market. Mining Traders and its subsidiaries traded very successfully. In these years the business of the appellants seems to have been managed by Patrick & Co. For the most part the business decisions were taken by Mr. M. R. L. Dowling, a partner in Patrick & Co. and a director of Mining Traders, after consultation with others, including no doubt his fellow directors.

As might be expected, in the course of their share trading business the companies had regard to the fiscal advantages which were available under the Income Tax Assessment Act to shareholders in exploration, prospecting and mining companies. The Act encouraged mining activity and investment in the class of companies mentioned by offering deductions to shareholders in them. In particular, ss. 77A (which was repealed by s. 7 (1) of the Income Tax Assessment Act (No. 2) of 1969), 77C and 77D enabled a taxpayer to deduct moneys paid by way of application money and calls (or a proportion thereof) in respect of shares in certain exploration, prospecting and mining companies. These deductions are of substantial importance and I am satisfied on the evidence which has been led for the appellants that their availability in particular cases was a very important consideration in determining whether a company carrying on business as a share trader would enter into a particular transaction of purchase. The availability of an income tax deduction might make an investment economically attractive, although it was anticipated at the time of purchase that the shares to be acquired would yield less on sale than their purchase price.

No less important a consideration to a company carrying on business as a share trader was the deductibility for tax purposes of losses which the company sustained on the purchase and sale of shares acquired in the course of carrying on that business. Again, I have no doubt that the availability of a tax deduction for such losses was an important factor in determining whether a company carrying on such a business would enter into a particular transaction.

The transactions now in question did not involve shares in mining companies. However, it is the appellants' case that they entered into the transactions motivated by fiscal advantages, that the transactions were entered into in the course of the appellants' share trading business, not otherwise, and certainly not in the course of some other and different business. The Commissioner's case is that the transactions were not entered into in the course of the appellants' ordinary share trading business.

In the critical transactions the appellants acquired shares in companies which had accumulated large amounts of profits available for distribution by way of dividends to shareholders. By s. 46 of the Act a shareholder, being a resident non-private company, was entitled to a rebate in its assessment to income tax of the amount obtained by applying the average rate of tax payable by the shareholder to the amount of dividends included in its taxable income. The value of shares in a company having such accumulated profits naturally reflected the existence of assets consisting of accumulated profits available for distribution by way of dividend subject to a s. 46 rebate.

The advantages of performing a dividend-stripping operation on such a company are obvious. The dividends are rebatable and, subject to the arguments of the Commissioner, the inevitable loss on the resale of the shares is a tax deduction. The loss on the resale of the shares is inevitable because the assets of the company as they existed at the time of acquisition are depleted by the distribution of the valuable asset consisting of the accumulated profits. Moreover, on the assumption that the loss on resale is a tax deduction, an assumption made by the appellants, the acquisition of shares in such a company offers an opportunity of reducing the tax liability of the purchaser by offsetting the loss on resale against the profits which it has otherwise made in the year of income.

In Investment & Merchant Finance Corporation Ltd. v. Federal Commissioner of Taxation [1] , this Court held that shares acquired by a taxpayer company, a dealer in shares, in another company for the purpose of a dividend-stripping operation, with the intention of causing a dividend to be declared and of then selling them, formed part of the trading stock of the taxpayer although it had not so treated them in its return of income. It was considered that the taxpayer was entitled to a deduction equal to the difference between the purchase price and the sale price of the shares, notwithstanding that a dividend had been received in the previous year of income and that a rebate of tax had been allowed in respect of that dividend.

1. (1971) 125 C.L.R. 249.

Counsel for the Commissioner sought to distinguish this decision on the facts. It was said that in the present case the circumstances surrounding the entry by the appellants into the transactions now under consideration were altogether different from the circumstances as Windeyer J. found them to be in the I.M.F. Case [2] , so different indeed that it is proper to conclude that the shares when purchased did not form part of the trading stock of the appellants. In this respect counsel for the Commissioner relied on the recent decisions of the House of Lords in F.A. & A.B. Ltd. v. Lupton (Inspector of Taxes) [3] and Thomson (Inspector of Taxes) v. Gurneville Securities Ltd. [4] . One matter which calls for consideration is the extent to which, if at all, these decisions should be regarded as enunciating a proposition of law different from the principle expounded by this Court in the I.M.F. Case. The consideration of this question must await an examination of the particular transactions in the order in which they occurred.

1. (1970) 120 C.L.R. 177. 2. [1972] A.C. 634. 3. [1972] A.C. 661.

The account of these transactions which follows is based largely on the documentary evidence tendered by the appellants, as explained by the appellants' principal witness, John Albert Keir, a partner in Patrick & Co., who acted as alternate director for Mr. Dowling in Mining Traders. It was not suggested that his evidence was other than accurate. However, he was not present at a number of relevant directors' meetings. Mr. Dowling, whose knowledge might have been expected to be more extensive and revealing, did not give evidence.

Remfore Pty. Ltd. ("Remfore")

Mr. Bush, a partner in Cooper Bros. & Co., the accountants for the James Patrick group of stevedoring companies, which, despite the similarity in name, had no connexion with Patrick & Co., suggested to the directors of Mining Traders that it would be to the advantage of that company to acquire the share capital of Remfore, a dormant company in the James Patrick group, for the purpose of a dividend-stripping operation. By reason of a reorganization of the group, Remfore had, before May 1968, ceased to carry on any trading activity. Its only assets consisted of loans to associated companies amounting to $208,033 repayable at call and an amount of $200 cash at bank. It had no liabilities and its undistributed profits on 28th May 1968 amounted to $138,233. The directors of Mining Traders accepted Mr. Bush's suggestion and steps were taken immediately to effect the acquisition.

By an agreement in writing dated 28th May 1968 Mining Traders agreed to buy and Patrick Bulk Stevedoring (A.C.T.) Pty. Ltd., the owner of the share capital in Remfore, agreed to sell the entire issued capital of Remfore for the sum of $208,233. According to the minute book of Remfore a meeting of directors of that company held on that day approved, subject to stamping, transfers of the whole of the issued capital of the company to Mining Traders and directed that the transfers be registered.

On the same day, 28th May 1968, cheques totalling $208,033 were drawn in favour of Remfore by its creditors and the cash standing to Remfore's credit with its bank was withdrawn by cheque. On the following day these cheques were deposited to the credit of a new bank account in Remfore's name at the Bank of New South Wales head office. Remfore's assets were consequently comprised in this one account.

On 28th May a cheque was drawn by Remfore in favour of Mining Traders in the sum of $208,233 by way of loan to enable Mining Traders to pay the purchase price fixed by the agreement of that date. The loan agreement was not recorded in writing and was not referred to in the minutes of Remfore or those of Mining Traders. The cheque was not presented for payment until 30th May.

Again on 28th May a cheque in the sum of $208,233 was drawn by Mining Traders in favour of Patrick Bulk Stevedoring (A.C.T.) Pty. Ltd. It represented the purchase price payable under the agreement of 28th May. It was presented and cleared on 29th May.

On 31st May a meeting of directors of Remfore resolved that a dividend of $138,232.68 be declared and paid out of the unappropriated profits to shareholders "registered on the books of the company at 31st May". On the same date Mining Traders drew a cheque in favour of Remfore in the sum of $138,250 by way of partial repayment of the loan previously made to it and so as to enable Remfore to pay the dividend which it had declared. On the same day Remfore drew a cheque in favour of Mining Traders for the amount of the dividend that had been declared.

By an agreement dated 3rd June 1968 between Mining Traders and Patrick Nominees Pty. Ltd., a nominee company owned and controlled by Patrick & Co., Mining Traders agreed to sell and Patrick Nominees Pty. Ltd. agreed to buy the entire share capital in Remfore for the sum of $79,676.31. The nominee company acted in this transaction as nominee of Patrick & Co. Before Mining Traders executed the agreement made on 28th May its directors knew that Patrick Nominees Pty. Ltd. would purchase the share capital in Remfore ex dividend on the terms on which they were subsequently purchased by that company.

On 3rd June 1968 Remfore drew a cheque in favour of Patrick & Co. for $69,983 by way of loan to Patrick & Co. It was subsequently deposited to the credit of Patrick & Co.'s bank account on 9th July 1968 when Patrick & Co. drew a cheque in favour of Mining Traders in the sum of $79,676.31, representing the consideration payable by it for the share capital of Remfore under the agreement of 3rd June 1968.

E. P. & A. Fraser Pty. Ltd. ("Fraser")

This company was also a member of the James Patrick group. As a result of the group reorganization it had, before April 1969, ceased to carry on any trading activity. Its principal assets consisted of debts payable on demand, owing by associated companies, including a debt of $190,497 owing by Patrick Stevedoring Company (Victoria) Pty. Ltd. ("Patrick Stevedoring"). As at 21st April 1969 the company and its two wholly-owned subsidiaries had undistributed profits in the following amounts:

E. P. & A. Fraser Pty. Ltd. $55,206 E. P. & A. Fraser (Melb.) Pty. Ltd. $98,193 E. P. & A. Fraser (Outports) Pty. Ltd. $35,848

By an agreement dated 21st April 1969 Mining Traders agreed to buy and Patrick Stevedoring, the owner of the share capital in Fraser, agreed to sell the whole of the issued capital in that company for the sum of $190,497. According to the minute book of Fraser the directors of that company resolved on 22nd April that transfers of the entire issued capital of the company from the existing shareholders to Mining Traders and its nominees be registered.

On 22nd April, Mining Traders drew a cheque in favour of Patrick Stevedoring for $190,497, the purchase price of the shares. On 18th April, Patrick Stevedoring had drawn a cheque in the same amount in favour of Fraser in repayment of the loan owing to that company. As Fraser had no bank account the cheque was indorsed in favour of Mining Traders and deposited to the credit of its bank account on 22nd April. The indorsement of the cheque to Mining Traders was by way of loan by Fraser to that company.

On the following day, 23rd April 1969, the minute book of Fraser records that its directors resolved to declare a dividend of $189,247 in favour of the shareholders in the company as at that date. On the same day a cheque in that amount was drawn by Mining Traders in favour of Fraser. It represented partial repayment of the loan made by Fraser to Mining Traders. The cheque was indorsed by Fraser in favour of Mining Traders and deposited to the credit of that company's bank account. The indorsement and delivery of the cheque back to Mining Traders was intended to represent payment of the dividend.

The minute book of Mining Traders records that at a meeting of directors held on 24th April 1969 it was resolved to accept an offer from Warrina Pty. Ltd. ("Warrina"), a family company of Mr. Reid, the solicitor for the James Patrick group, to purchase the whole of the issued capital of Fraser for $4,250. On the same day a written agreement was executed between Mining Traders and Warrina for the sale by Mining Traders to Warrina of the whole of the issued capital in Fraser for $4,250. Before Mining Traders executed the agreement made on 21st April 1969 its directors knew that Warrina was willing to purchase the share capital of Fraser ex dividend on the terms on which it subsequently purchased.

A cheque dated 24th April 1969 in the sum of $4,250 was drawn by Warrina in favour of Mining Traders.

The Austral Stevedoring & Lighterage Co. Pty. Ltd. ("Austral")

This company was also a member of the James Patrick group. It had, before June 1969, ceased to carry on any trading activity. Shortly before 25th June 1969 it agreed to dispose of a freehold property which it owned. Its only asset then was an amount of $112,786 owing to it by Patrick Stevedoring. The company had no liabilities and it had reserves shown in a balance sheet prepared by Cooper Bros. in June 1969 as follows:

RESERVE $ $ Special reserve (debit balance) (Note) (22,853) Profit unappropriated 35,639 Note: SPECIAL RESERVE 12,786 Balance, 30th June, 1968 35,639 Less transfer to profit and loss account 35,639 — Loss on sale of freehold land and buildings 22,853 Debit balance 23rd June, 1969 $22,853

By an agreement dated 25th June 1969 Mining Traders agreed to buy and Patrick Stevedoring agreed to sell the whole of the issued capital of Austral for $112,786. The agreement contained a warranty on the part of the vendor that the unappropriated profits of Austral were not less than $35,639. Annexed to the agreement was a copy of a balance sheet dated 26th June 1969. It is evident at the least that the agreement or the balance sheet bears an incorrect date. In my opinion it is more probable that the date given by Cooper Bros. to their balance sheet is correct and that accordingly the purchase agreement was executed not on 25th June but on some later date, probably 26th or 27th June.

The minute book of Austral records that on 25th June 1969 (a date which in my view is also incorrect and which should probably be 26th or 27th June) at a meeting of directors of Austral it was resolved that share transfers from existing shareholders to Mining Traders and its nominees be approved and registered. A cheque dated 25th June 1969 was drawn by Mining Traders in favour of Patrick Stevedoring in the sum of $144,124, representing the purchase of the share capital in Austral and of certain shares in Thomas Napier & Co. Pty. Ltd. ("Napier").

A cheque dated 27th June was drawn by Patrick Stevedoring in favour of Austral for $112,786, being the repayment of moneys owing to Austral by Patrick Stevedoring. The cheque was indorsed by Austral (which had no bank account) in favour of Mining Traders and deposited to the credit of that company's bank account on 27th June 1969. On the same day a cheque was drawn by Mining Traders for $112,786 in favour of Patrick & Co. According to the evidence of Mr. Keir, the indorsement of the first cheque by Austral represented a loan by that company to Mining Traders and the second cheque constituted a repayment by Mining Traders of that loan, the deposit being credited in the books of Patrick & Co. to Austral on 30th June.

According to the minute book of Austral a meeting of directors on 27th June 1969 resolved that a dividend of $35,639 be declared and paid out of unappropriated profits "as at this date to the shareholders of the company". On 30th June, Patrick & Co. paid a cheque to Mining Traders for $35,639, representing the dividend so declared; the amount was debited to Austral in Patrick & Co.'s books.

By an agreement in writing dated 30th June 1969 Mining Traders agreed to sell and Calaird & Co. Pty. Ltd. ("Calaird") agreed to buy the whole of the issued shares in Austral for the amount of $78,147. Calaird was a company owned by Mr. McGrath, a partner in Patrick & Co. Before Mining Traders executed the agreement dated 25th June 1969 its directors knew that Calaird would purchase the share capital of Austral ex dividend on the terms on which it subsequently purchased. This agreement was completed by the giving of a cheque dated 30th June 1969 drawn by Patrick & Co. in favour of Mining Traders for $78,147.

Thomas Napier & Co. Pty. Ltd. ("Napier")

This company was also a member of the James Patrick group. It had, before June 1969, ceased to carry on any trading activity. At 25th June 1969 its sole asset was an amount of $31,338 owed to it by Patrick Stevedoring. The company had no liabilities and had a fund of undistributed profits amounting to $26,324. By an agreement in writing dated 25th June 1969 Mining Traders agreed to buy and Patrick Stevedoring agreed to sell the whole of the issued capital of Napier for the amount of $31,338. The agreement contained a warranty by the vendor that the unappropriated profits were not less than $26,324. Annexed to the agreement was a copy of a balance sheet dated 26th June 1969. Again it seems that either the date of the agreement or the date of the balance sheet is incorrect. I think it probable that the date of the balance sheet is correct and I therefore conclude that the agreement was actually executed on a date later than 25th June, probably 26th or 27th June.

The minute book of Napier records that on 25th June (a date which I believe to be incorrect) the directors approved and directed that there should be registered transfers from the existing shareholders of the entire share capital of Napier to Mining Traders and its nominees. The probable date of this meeting was, I think, 26th or 27th June.

A cheque dated 25th June 1969 was drawn by Mining Traders in favour of Patrick Stevedoring for $144,124, representing the purchase price of the shares in Napier fixed by the agreement dated 25th June 1969 and of the shares in Austral to which I have previously referred. It was presented and paid on 30th June. A cheque was drawn by Patrick Stevedoring in favour of Napier for $31,338. It was indorsed by Napier (which had no bank account) in favour of Mining Traders and deposited to the credit of its bank account on 27th June 1969. The cheque represented a repayment by Patrick Stevedoring of the moneys which it owed Napier. The indorsement of the cheque was by way of loan from Napier to Mining Traders.

A cheque dated 27th June 1969 was drawn by Mining Traders for $31,338 in favour of Patrick & Co. According to Mr. Keir, this cheque constituted a repayment of the loan made by Napier to Mining Traders. It was credited to Napier in the books of Patrick & Co.

The minute book of Napier records that on 27th June the directors of Napier resolved that a dividend of $26,324 be declared and paid out of unappropriated profits of the company to the shareholders of the company "as at this date". On 30th June 1969, Patrick & Co. drew a cheque in favour of Mining Traders for the amount declared by way of dividend. The cheque was debited to Napier's account in the books of Patrick & Co. and paid to the credit of Mining Traders' bank account.

By an agreement in writing dated 30th June 1969 Mining Traders agreed to sell and Jakel Pty. Ltd. ("Jakel") agreed to buy the whole of the issued capital in Napier for $6,014. Jakel was a company owned by Mr. Keir and his wife. Before Mining Traders executed the agreement dated 25th June 1969 its directors knew that Jakel would purchase the share capital of Napier ex dividend on the terms on which it subsequently purchased. This agreement was completed by the giving of a cheque drawn by Patrick & Co. on behalf of Jakel on 30th June 1969 in favour of Mining Traders for $6,014.

Stevedoring Insurance Co. Ltd. ("Stevedoring Insurance")

This company was also a member of the James Patrick group. Before June 1969 it had ceased to carry on any trading activity. On 25th June 1969 its sole assets consisted of a debt repayable on demand owing by its holding company, Victorian Stevedoring & General Contracting Co. Pty. Ltd. ("Victorian Stevedoring"), amounting to $22,022 and cash at bank consisting of $78. The company had no liabilities and its undistributed profits amounted to $21,100.

By an agreement in writing dated 25th June 1969 Mining Traders agreed to buy and Victorian Stevedoring agreed to sell the whole of the issued capital of Stevedoring Insurance for $22,022. The agreement contained a warranty by the vendor that the unappropriated profits of Stevedoring Insurance were not less than $21,100. Annexed to the agreement was a copy of a balance sheet dated 26th June 1969. In this case it is evident from a letter dated 27th June 1969 from Patrick Stevedoring to Mr. Mapperson of Victorian Stevedoring that the agreement for purchase was not executed by Victorian Stevedoring until some date after 27th June 1969. When the document was so executed I am unable to say, but it seems clear that cheques were handed over between Victorian Stevedoring and Mining Traders on 27th June 1969, notwithstanding that the written agreement was not then formally executed by the vendor.

These cheques consisted of a cheque dated 25th June drawn by Mining Traders in favour of Victorian Stevedoring for the purchase price and a cheque bearing the same date drawn by Victorian Stevedoring in favour of Stevedoring Insurance for the same amount. The cheque for the purchase price was not then delivered against an instrument of transfer of the shares, for the instrument of transfer was on that date sent to Melbourne for execution by the vendor in the presence of its secretary. The evidence does not establish when it was executed or when it was delivered to the purchaser.

The minute book of Stevedoring Insurance records that on 25th June 1969 at a meeting of its directors there were tabled four instruments of transfer of shares in Stevedoring Insurance from existing shareholders to Mining Traders and that it was resolved that the transfers be approved and registered. The minute book is incorrect, at least to the extent to which it records the date of the meeting as having taken place on 25th June 1969. No duly completed transfer of shares by Victorian Stevedoring to Mining Traders could have been presented until 28th June at the earliest, and probably not until a later date.

The cheque for $22,022 drawn in favour of Victorian Stevedoring by Mining Traders was on 30th June 1969 deposited to the credit of the payee's bank account. The cheque dated 25th June drawn by Victorian Stevedoring in favour of Stevedoring Insurance was indorsed to Mining Traders by way of loan and paid into the bank account of that company on 27th June.

By a cheque dated the same day in favour of Patrick & Co. for $22,022 Mining Traders repaid this loan. The amount of the cheque was credited to the account of Stevedoring Insurance in the books of Patrick & Co.

The minute book of Stevedoring Insurance records that on 27th June 1969 the directors of Stevedoring Insurance resolved that a dividend of $21,100 be declared and be paid out of unappropriated profits of the company to the shareholders of the company "as at this date". The minute book in my view ascribes an incorrect date to the meeting; it took place, I think, not earlier than 28th June and not later than 30th June. On 30th June 1969 Patrick & Co. drew a cheque in favour of Mining Traders for the amount of the dividend of $21,100, debiting the account of Stevedoring Insurance in its books. The cheque was deposited to Mining Traders' bank account on the day on which it was drawn.

By an agreement in writing dated 30th June 1969 Mining Traders agreed to sell and W. J. Edwards, a partner in Patrick & Co., agreed to buy the whole of the issued capital in Stevedoring Insurance for $2,000. Before Mining Traders executed the agreement dated 25th June 1969 its directors knew that Mr. Edwards was willing to purchase the share capital of Stevedoring Insurance ex dividend on the terms on which it subsequently purchased. This agreement was completed when Patrick & Co. on behalf of Mr. Edwards drew a cheque on that date in favour of Mining Traders for $2,000.

The Yarra Investment Co. Pty. Ltd. ("Yarra")

This company was also a member of the James Patrick group. Before April 1970 it had ceased to carry on any trading activity. Its sole assets were amounts due to it from companies of the James Patrick group totalling $774,850.

By an agreement in writing dated 13th April 1970 Mining Traders agreed to buy and Patrick Stevedoring agreed to sell the whole of the issued capital of Yarra for $774,850. The agreement contained a warranty that the undistributed profits of Yarra were not less than $698,182. The agreement refers to an annexed balance sheet which is dated 16th April. It appears from a letter dated 21st April 1970 from Patrick Stevedoring to Mr. Mapperson that the agreement bears an incorrect date; it was not executed by the vendor before 23rd April 1970.

The minute book of Yarra records that on 13th April 1970 at a meeting of directors duly completed transfers of the issued shares in that company from existing shareholders to Mining Traders were approved and that it was resolved they be registered. Mr. Keir concedes that the meeting did not take place on 13th April and that it must have taken place at some subsequent date; in my opinion it took place not earlier than 23rd and not later than 30th April 1970.

The minute book of Yarra also records that on 20th April 1970 the directors of Yarra resolved that a dividend of $698,182 be paid out of the unappropriated profits of the company to the shareholders "as at this date". The minute is incorrect, at least to the extent to which it records that resolution as having taken place on 20th April 1970—so much is conceded by Mr. Keir. It seems from Mr. Keir's evidence that the meeting took place on 30th April or immediately thereafter.

The incorrect dates attributed to meetings in the minutes are explained by the circumstance that they appear to have been prepared in advance of the events which they record and that there were delays, not anticipated, in dealing with the assets of Yarra in the course of bringing them to the condition in which they were intended to stand at the time of the proposed sale of the shares to Mining Traders.

The minute book of Mining Traders records that on 22nd April 1970 a meeting of directors resolved to sell the whole of the issued share capital in Yarra to Patrick Nominees Pty. Ltd. for $76,688, the price fixed by an agreement bearing the same date between Mining Traders and Patrick Nominees Pty. Ltd. acting as nominee of Patrick & Co. Again the evidence establishes that the meeting of directors did not occur on 22nd April and that it probably occurred on some day thereafter. The probability is that the agreement between Mining Traders and Patrick Nominees Pty. Ltd. was made shortly after the date on which the dividend of $698,182 was declared and that a minute of Yarra recording that on 22nd April 1970 the directors of that company approved completed transfers of the share capital in Yarra from Mining Traders to Patrick Nominees Pty. Ltd. was likewise incorrect.

On 30th April 1970 a cheque for $774,850 drawn by Patrick & Co., dated 13th April 1970, in favour of Patrick Stevedoring was delivered to that company. The amount represented the purchase price of the shares in Yarra payable by Mining Traders under the agreement dated 13th April 1970. It was paid into a bank account in Melbourne on 1st May and paid by Patrick & Co.'s bankers in Sydney on 4th May. On 30th April 1970, the day on which this cheque was delivered to Patrick Stevedoring, Yarra lent the same amount to Mining Traders by means of a cheque dated 23rd April. This cheque was deposited to the credit of the bank account of Mining Traders on 30th April. The declaration of the dividend of $682,000 on 30th April had the effect of reducing the amount of the indebtedness of Mining Traders pro tanto.

The amount of $774,850 paid by Patrick & Co. by way of purchase price of the shares in Yarra was reimbursed by Mining Traders' cheque dated 30th April 1970 drawn in favour of Patrick & Co. for the same amount.

The directors of Mining Traders knew before it entered into the agreement dated 13th April 1970 that Patrick Nominees Pty. Ltd. was willing to purchase the shares in Yarra ex dividend for the sum of $76,688. This sum was paid by means of an entry on the ledger card of Mining Traders with Patrick & Co. on 23rd November 1971.

Harbour Holdings Pty. Ltd. ("Harbour Holdings")

This company was incorporated in Western Australia. Before June 1969 it sold its stevedoring business to the James Patrick group. At that time its assets consisted of cash or negotiable securities. It had a fund of undistributed profits and, at the suggestion of Mr. Bush, the directors of Mining Traders decided to acquire the whole of its share capital in order to perform a dividend-stripping operation.

To overcome the difficulty presented by the circumstance that Harbour Holdings was in June 1969 a public company for tax purposes, Remfore, a private company, initially acquired the share capital in Harbour Holdings and subsequently transferred it to Mining Traders.

In July 1969 Remfore therefore acquired the whole of the issued capital in Harbour Holdings at a price which was equivalent to the full assets backing of the shares less 5 per cent. At this time the principal asset of Harbour Holdings was cash at bank in the order of $500,000 which was lent to three borrowers (one of whom was Mining Traders in the sum of $150,000).

By an agreement dated 3rd April 1970 Mining Traders agreed to buy and Remfore agreed to sell the whole of the issued capital of Harbour Holdings for $500,400. By the agreement the vendor represented that Harbour Holdings had undistributed profits of not less than $336,850.

The minute book of Harbour Holdings records that on 24th April 1970 at a meeting of directors it was resolved that the following transfers be registered on the company's Canberra register:

Transferor Transferee No. of Shares Remfore Mining Traders 37,500 Patrick Nominees Pty. Ltd. Robert John Beaton as nominee for Mining Traders 500

It was noted that the transfers were unstamped and that Mining Traders had undertaken to see that the transfers were correctly stamped in due course.

A cheque dated 3rd April 1970 was drawn by Mining Traders in favour of Remfore in the amount of $500,400. This cheque was indorsed by Remfore in favour of Patrick & Co. and was banked to the credit of that firm's account on 22nd May. The cheque represented the purchase price for the acquisition of the share capital in Harbour Holdings. The amount was credited to Remfore in the books of Patrick & Co.

At a meeting of directors of Harbour Holdings held on 28th April 1970 a dividend of $40,000 was declared. A cheque for this amount was drawn on 30th April by Harbour Holdings in favour of Mining Traders. It was indorsed to Patrick & Co. and banked to the credit of that firm's account. The amount was credited to Mining Traders in the books of Patrick & Co. A further dividend was declared at a meeting of directors of Harbour Holdings on 22nd May 1970 when it was resolved "that a dividend of $404,150 be declared payable on 29th June 1970".

On 29th June the moneys lent by Harbour Holdings were repaid to Patrick & Co. and by it to Harbour Holdings by cheque dated 29th June for $500,234.01 which was deposited to the credit of that company's bank account on the same day. Again on the same day Harbour Holdings drew a cheque in favour of Patrick & Co. for $404,150; it represented payment of the dividend declared by Harbour Holdings on 22nd May; it was credited to Mining Traders' account in the books of Patrick & Co.

By an agreement in writing dated 30th June 1970 Mining Traders agreed to sell the whole of the issued shares in Harbour Holdings and the trustees of a trust known as the Thornton Trust agreed to buy the whole of the issued share capital in Harbour Holdings for $76,250. This sale was made pursuant to an arrangement made before the agreement by Mining Traders to buy the shares from Remfore was entered into.

By a cheque dated 29th June 1970 drawn on behalf of the Thornton Trust the sum of $76,250 was paid to Mining Traders. This cheque was paid into the account of Mining Traders on 30th June and transfers of the shares were approved at a meeting of the Board of Harbour Holdings on the same day.

The transfers to Mining Traders were entered in the share register of Harbour Holdings before 22nd May 1970.

Austin Sales (Aust.) Pty. Ltd. ("Austin Sales")

This company was a wholly-owned subsidiary of British Leyland Motor Corporation of Australia Ltd. ("B.L.M.C."). It had ceased trading long before June 1970. Its assets consisted of $6,151,678 owed to it by its holding company and $20 cash at bank. The company had no liabilities and a fund of unappropriated profits in excess of $6,000,000.

Mr. Bush had initially suggested to Mr. Keir that Austin Sales was a company suitable for a dividend-stripping operation. Later, in June 1970, Mr. Rosenblum, the solicitor for Cadiz Corporation, a company which deals in companies with funds of undistributed profits, informed a partner of Patrick & Co. that the share capital in the company was for sale. The directors of Mining Traders decided that, with other purchasers, namely, the other appellants and A.O.M. Securities Pty. Ltd., a company having no connexion with Mining Traders, it would acquire the whole of the issued share capital of Austin Sales, the proportion of the share capital of Austin Sales to be allocated to Mining Traders being 80,310 out of 181,010 issued shares. Before the directors of Mining Traders decided to acquire the shares in Austin Sales they required to be satisfied that the company could resell them ex dividend almost immediately at a predetermined price. It seems, as a result of discussions with Mr. Davidson, a director of A.O.M. Securities Pty. Ltd. and Hill Minerals N.L., who acted as solicitor for Mining Traders and the other purchasers in the Austin Sales transactions, that the directors of Mining Traders were satisfied that the company's shares in Austin Sales could be resold ex dividend to Hill Minerals N.L. at the price at which they were ultimately resold.

On 29th June 1970 the directors of Mining Traders resolved to purchase 80,310 shares in Austin Sales from B.L.M.C. for $2,740,461.55 and to execute a written agreement for sale. The agreement for sale dated 30th June provides for the sale of the Austin Sales share capital for the sum of $6,176,698, the proportion of shares to be allocated to each purchaser being specified in the Schedule. The shares to be acquired by each purchaser were as follows:

Mining Traders 80,310 Minsoul 12,700 Minwall 7,900 M.T.A. 3,800 M.T.B. 7,900 M.T.D. 50,300 A.O.M. Securities 18,100

By the agreement the vendor warranted that Austin Sales had no liabilities and cash at bank in the sum of not less than $6,151,698.

The sale of the shares, the declaration and payment of the dividend by Austin Sales and the resale of the shares were all carried into effect on 30th June 1970. Speed was of the essence of the transactions.

Patrick & Co. had been granted standing overdraft accommodation on a daily basis in very large amounts by the Bank of New South Wales and the Commercial Banking Co. of Sydney. At or about 10 a.m. on 30th June 1970, Patrick & Co. with its cheque obtained a bank cheque from the Bank of New South Wales in favour of the Commercial Banking Co. of Sydney in the sum of $4,172,980. A few minutes later this cheque was deposited to the credit of Patrick & Co. at the Commercial Banking Co. of Sydney, Castlereagh and Hunter Street Branch. Patrick & Co. then drew a cheque upon its account at this branch of the bank in an amount of $6,176,698 in favour of the Commercial Banking Co. of Sydney. The bank thereupon provided a bank cheque in that amount in favour of B.L.M.C., representing the total purchase price for the shares.

The amount of the bank cheque was, at about 11 a.m. on the same day, remitted by telegraphic transfer to the manager's account in the Australia and New Zealand Bank, Canberra City Branch, where it was held on behalf of Patrick & Co. It was transferred to another manager's account on behalf of B.L.M.C. and then remitted by telegraphic transfer to the Australia and New Zealand Bank, Martin Place and George Street, Sydney. It was credited to the B.L.M.C. account at that branch at about 11.30 a.m. on that day.

On the same day B.L.M.C. deposited in a new account opened for Austin Sales at the same branch in Sydney of the Australia and New Zealand Bank the sum of $20. Again on the same day, after there had been credited to its account at this branch the cheque for $6,176,698, B.L.M.C. deposited a cheque in the sum of $6,151,697.98 to the credit of the new Austin Sales account. Again on the same day, a cheque was drawn upon that account by Austin Sales for an A.N.Z. bank cheque in favour of Patrick & Co. in an amount equal to that of the lastmentioned cheque. The bank cheque was paid into No. 2 Account of Patrick & Co. at the Bank of New South Wales. Patrick & Co. then drew a cheque on its No. 2 Account at the Bank of New South Wales in the sum of $1,978,717.98 in favour of the Commercial Banking Co. of Sydney. This cheque was deposited in Patrick & Co.'s account with the latter bank on the same day.

After the sum of $6,176,698 had been credited to B.L.M.C.'s account, a meeting of directors of Austin Sales was held at 11 a.m. in the office of the Sydney manager of the A.N.Z. Bank. At this meeting transfers from the existing shareholders of the whole of the share capital in Austin Sales to Patrick Nominees Pty. Ltd., Mr. Keir and Mr. Davidson as nominees for the purchasers were approved. At the same meeting the existing directors resigned and Mr. Dowling, Mr. Keir and Mr. Davidson were appointed directors. Mr. Beaton was appointed secretary. According to Mr. Keir, the books and share register were then handed to Mr. Beaton.

At 11.45 a.m. a meeting of the new directors of Austin Sales was held at the offices of Patrick & Co. It was then resolved that the company declare an interim dividend totalling $5,789,677.98 "payable to Patrick Nominees Pty. Ltd. on behalf of beneficial shareholders in the following proportions":

Minsoul $406,209.50 Minwall $252,681.50 M.T.A. $121,543.00 M.T.B. $252,681.50 M.T.D. $1,608,845.50 Mining Traders $2,568,788.50 A.O.M. Securities $578,928.48

To the extent of $5,789,677.98 the cheque for $6,151,697.98 drawn on Austin Sales' account represented the dividend declared by that company. The balance represented a loan to A.O.M. Securities.

When it received the bank cheque issued by the bank for $6,151,697.98, Patrick & Co. on 30th June 1970 credited the account of each of the purchasers in its books with the amount of that part of the Austin Sales dividend to which it was entitled.

The amount standing to the credit of Mining Traders in the books of Patrick & Co. on 30th June 1970 before the Austin Sales transactions took place was $1,635,019.45, an amount substantially less than the purchase price payable by Mining Traders for its Austin Sales shares, namely, $2,740,461.55.

At 12.15 p.m. on 30th June the directors of Mining Traders resolved that an agreement dated 30th June providing for the sale of the whole of the shares in Austin Sales ex dividend to Hill Minerals N.L. should be executed and at 12.45 p.m. the directors of Austin Sales resolved that share transfers from Patrick Nominees Pty. Ltd. and Mr. Keir in favour of Hill Minerals N.L. should be registered. Mr. Davidson continued to hold one share in the company and remained a director. Mr. Dowling and Mr. Keir resigned in favour of nominees of Hill Minerals N.L. Patrick & Co. drew a cheque in favour of Hill Minerals N.L. for $362,020 which was the amount of the purchase price payable by it to Mining Traders and others upon the sale to it of the whole of the shares in Austin Sales ex dividend. This seems to have been treated as a loan by A.O.M. Securities to Hill Minerals N.L. A.O.M. Securities were debited with a loan on the same day and in the same amount from Austin Sales.

Entry of Mining Traders in the Register of Members of Remfore and Harbour Holdings.

At this point it is necessary to examine the relevant issues of fact peculiar to the acquisition by Mining Traders of shares in Remfore and Harbour Holdings. In these two cases it was submitted that the evidence establishes that Mining Traders was entered on the register of members of the company at the time when resolutions were passed distributing the undistributed profits by way of dividend. In the case of Harbour Holdings this submission relates to the second declaration of dividend, for it is conceded that on any view Mining Traders was not registered as a shareholder when the first declaration of a dividend of $40,000 was made on 28th April 1970.

In the case of Remfore the issue turns on the evidence which was given by Mr. Bush, a partner in Messrs. Cooper Bros., the auditors of Remfore. It will be recalled that the transfers of shares from the former shareholders to Mining Traders were directed to be registered by a resolution of the directors of Remfore passed at a meeting held on 28th May 1968, and that a dividend of $138,232.68 was declared in favour of shareholders "registered on the books of the company at 31st May 1968" by a resolution passed at a later meeting of the directors on the day mentioned in the resolution. Mr. Bush stated that he was present at the meeting held on 28th May, that he then took possession of the books, records and share transfers of the company and left them at the office of Patrick & Co. He further said that to the best of his recollection he entered Mining Traders in Remfore's register of members as a shareholder on that day. The relevant folio in the register is in Mr. Bush's handwriting and records as the date of the transfer "28.5.68". However, it is fair to say that Mr. Bush does not have a precise recollection of the occasion when the entry was made. He conceded that it is not impossible that the entry was made after the shares had been entered on the Canberra register of Remfore, but said that it is unlikely that this occurred.

By the resolution directing registration it was resolved that the shares should be registered on the company's Canberra register where they had previously been held. In an inter-office memorandum dated 31st May 1968, Mr. Bush instructed Mr. Owen in the Canberra office of Cooper Bros. to register the shares on the branch register. In that instruction he made no reference to their previous registration in the principal register of Remfore. Under s. 157 of the Companies Act, 1961 N.S.W. it is provided that a share held on the branch register should first be entered in that register and subsequently entered in the duplicate branch register kept in association with the principal register. However, notwithstanding these considerations I accept Mr. Bush's recollection and I therefore approach the matter on the footing that Mining Traders was entered as a shareholder in the register of members of Remfore on or before 31st May when the dividend was declared.

In the case of Harbour Holdings the issue depends on the evidence of Mr. Beaton, who was at the relevant time employed by Mining Traders. The meeting of directors which resolved that the share transfers from Remfore to Mining Traders and from Patrick Nominees Pty. Ltd. to Mr. Beaton should be registered was held on 24th April 1970. The first dividend of $40,000 was declared at a meeting held on 28th April 1970 and the second dividend of $404,150 was declared at a meeting held on 22nd May 1970. The three meetings were held at the offices of Patrick & Co. in Sydney. The books of Harbour Holdings were held by Cooper Bros. in Perth until 15th May 1970. There had been an exchange of cables between Cooper Bros. in Perth and Patrick & Co. in the previous fortnight, in which Patrick & Co. had urgently sought delivery of the books to enable the entry of transactions as the subsequent sale of the shares to the Thornton Trust was in contemplation. The books were despatched from Perth on 15th May 1970 under cover of a letter of that date addressed to Patrick & Co. Mr. Beaton had no precise recollection of when he received the books or of when he made the entries in the share register. However, he said, and it is not disputed, that the entry in the share register of Harbour Holdings was made by him. That entry records "24.4.70" as the date on which Mining Traders and he became shareholders. In the case of Mining Traders the date actually recorded is "22.4.70", but unquestionably this is a clerical error. Mr. Beaton said that although the entry was made subsequently, it was dated back to the date of the meeting when the transfers came before the board of directors and that this was done in accordance with standard practice.

Mr. Beaton said that he was under instructions from Mr. Keir to have the books written up promptly as the transaction with the Thornton Trust was to be carried into effect. He believed that the entries were made on 18th May or immediately thereafter, notwithstanding that the share transfers were not then stamped, and indeed were not stamped until the following year. Again, notwithstanding the criticisms which have been made of the appellants' case on this issue, I think it probable that the entries were made in the register of members before the second dividend was declared by Harbour Holdings on 22nd May.

In all the other transactions (including the first dividend declared by Harbour Holdings) the dividends were declared and paid before the transfers of shares from the vendors to the purchasers were registered. Except in the case of Austin Sales, the transfers were subsequently recorded and the shares were registered in the names of the purchasers. But in the case of Austin Sales the vendors' shares were transferred to Patrick Nominees Pty. Ltd., Mr. Keir and Mr. Davidson as nominees for the purchasers, with the result that the appellants' names did not appear in the Austin Sales register of members at any time. On these facts it was submitted for the Commissioner that the moneys received by the appellants pursuant to the declaration of dividend made by each of the companies which were acquired were not "private company dividends" within the meaning of this expression as it is defined by s. 46 (1) of the Income Tax Assessment Act. The section must be read in the light of the definition of shareholder contained in s. 6 (1) of the Income Tax Assessment Act. The word is there defined so as to include "member or stockholder".

The appellants' answer (except as to Austin Sales) is that it is enough that their names were subsequently entered on the register in respect of the shares acquired and that entry in the register of members, when made, relates back to the date when it should have been made, that is, when the directors of the company approved the transfers or directed that they be registered.

Although the word "shareholder" ordinarily signifies a person who is registered as the holder of shares (seeAvon Downs Pty. Ltd. v. Federal Commissioner of Taxation [5] ), the word "member" may be wide enough to include a subscriber to the memorandum who is a person whose name is not entered in the register of members (Companies Act, 1961, s. 16). And the provisions of s. 151 (1) with respect to keeping of the register of members indicate that a person's character as a member is initially ascertained by reference to circumstances dehors the register.

1. (1949) 78 C.L.R. 353, at pp. 363-365.

The requirement in s. 151 that there should be entered in the register "(b) the date at which the name of each person was entered in the register as a member" in my view refers, not to the date on which the entry was physically made, but to the date on which he should have been entered in the register as a member, that is, in the case of a subscriber to the memorandum, the date on which he subscribed and, in the case of a transferee, the date on which the directors approved the transfer, or resolved that it be registered. It is the duty of the officers of a company to give effect promptly to the company's obligation to enter the names of its members in the register. The statutory provision is to be read accordingly as authorizing, indeed requiring, the entry in the register of the date when the directors approved, or directed the registration of, the transfer to the transferee. In all cases other than Austin Sales, the entries in the registers of members correctly show the membership of Mining Traders as having commenced when the dividends in question were paid.

Consequently, I am of the opinion that the moneys received by the appellants pursuant to the declaration of dividend by each of the companies acquired other than Austin Sales were "dividends" within the meaning of s. 46.

The case of Austin Sales calls for independent consideration. For the appellants it was submitted that the word "shareholder" should be read as signifying not only a person who is entitled as against the company to be entered as a member in the register but also a purchaser of shares who is beneficially entitled to them as against the person registered as the holder of them. Reliance was placed upon the principle that a contract for the sale of shares in a company whose shares are not available for sale on the market is capable of specific performance and that the vendor of such shares holds them as trustee for the purchaser on completion of the contract. To my mind, this argument does not assist in resolving the problem, which is essentially a question of elucidating the meaning of the word in the light of the extended definition contained in s. 6 (1). It is not enough that the word includes a member. A person who is a beneficial holder of shares in a company (save, perhaps, a subscriber to the memorandum) but who is not, and has not, been entered in the register as the holder of those shares cannot accurately be described as a "shareholder" or a "member" of the company within the meaning of the Act (see Norman v. Federal Commissioner of Taxation [6] ). For this reason I am of opinion that the amounts paid to the appellants by Austin Sales pursuant to the declaration of dividend do not fall within the provisions of s. 46 (2).

1. (1963) 109 C.L.R. 9, at p. 16.

The next, and perhaps the most important, question is whether in relation to the dividends declared and paid by companies other than Austin Sales the amounts received by the appellants were rebatable under s. 46. I am bound by the decision of this Court in the I.M.F. Case [7] and it follows from this decision that the payments are rebatable. I am unable to discern any basis on which this case can be distinguished. Some different circumstances have been pointed to by counsel for the Commissioner, in particular the nature and scale of the transactions, their frequency, but to my mind they make no difference. The transactions were all similar to the Macgrenor transaction in that the shares were acquired for the purpose of a dividend-stripping operation. As Menzies J. said of the Macgrenor transaction in the I.M.F. Case [8] :

It was undoubtedly true that the attraction of the transaction lay in the concurrence of three features, namely, that the purchase price would be deductible from assessable income; that the dividend to be received would be rebatable and that the sale of the shares would result in a loss which would, it was expected, be deductible from other income of the year in which the loss was made. This observation has equal application to the present case. Emphasis was given to the circumstance that before entering into the transactions the appellants were aware that there was a buyer for the shares ex dividend and were aware also of the terms on which the buyer was willing to purchase. But this, so it seems to me, does not affect the conclusion that the shares were acquired as trading stock, or the conclusion that there was a receipt of dividends within the meaning of s. 46. 1. (1971) 125 C.L.R. 249. 2. (1971) 125 C.L.R. at p. 262.

When the Full Court decided the I.M.F. Case [9] it had before it two decisions of the House of Lords, Griffiths (Inspector of Taxes) v. J. P. Harrison (Watford) Ltd. [10] andBishop (Inspector of Taxes) v. Finsbury Securities Ltd. [11] , which supported the conclusion reached by the majority of this Court. Since then the House of Lords in F.A. & A.B. Ltd. v. Lupton (Inspector of Taxes) [12] and Thomson (Inspector of Taxes) v. Gurneville Securities Ltd. [13] , has held that where a taxpayer enters into a transaction for the purpose of a dividend-stripping operation with the manifest object of securing a tax advantage the transaction does not constitute a dealing in stocks and shares and therefore forms no part of the trading activities of a dealer in stocks and shares. The Commissioner relied on this decision but in my view, having regard to this Court's decision in the I.M.F. Case, I should not follow it.

1. (1971) 125 C.L.R. 249. 2. [1963] A.C. 1. 3. [1966] 1 W.L.R. 1402; [1966] 3 All E.R. 105. 4. [1972] A.C. 634. 5. [1972] A.C. 661.

For the same reasons I cannot give effect to the Commissioner's argument that the amount of the loss which Mining Traders sustained in the transactions other than Austin Sales is not deductible. Such a conclusion is inconsistent with the decision and the reasoning of the majority in the I.M.F. Case [9] .

1. (1971) 125 C.L.R. 249.

There remains the question whether the appellants' claim that dividend payments are rebatable is defeated by s. 260. The right to a rebate is specifically conferred by the statute in the circumstances to which it refers and which in my view obtain in this case. I am unable to see how s. 260 can defeat the operation of s. 46. This conclusion is, I think, supported by the decision in Rowdell Pty. Ltd. v. Federal Commissioner of Taxation [14] .

1. (1963) 111 C.L.R. 106.

Appeal by Patrick Corporation Ltd. in respect of the year ended 30th June 1968.

The taxpayer was assessed to tax on a taxable income of $135,802, the amount shown in its return, but it was denied its claim to a rebate on the dividend received from Remfore Pty. Ltd. in the sum of $138,232. The manner in which the Commissioner dealt with the transaction is shown by the adjustment sheet as follows:

Transaction in respect of shares in Remfore Pty. Ltd. has been assessed on the following basis:—

$ Sale price 79,676 Dividend 138,232 217,908 Cost price 209,065 Profit $8,843

No amount in respect of this transaction has been treated as subject to rebate in terms of section 46.

In view of the conclusions which I have reached this approach to the transaction was incorrect. A trading loss of $129,389 was sustained on the transaction which required to be taken into account in ascertaining the taxpayer's share trading profit for the year. At the same time the dividend of $138,232 should have been brought to account as a separate receipt and the rebate attributable to it allowed.

There having been no alteration to the taxable income returned by the taxpayer, the assessment should be amended so as to allow the taxpayer a rebate on the amount of the dividend received from Remfore Pty. Ltd.

Appeal by Patrick Corporation Ltd. in respect of the year ended 30th June 1969.

The taxpayer was assessed to tax on a taxable income of $283,488, an amount not challenged by the taxpayer. However, its claim to a rebate on the dividends declared by The Austral Stevedoring & Lighterage Co. Pty. Ltd., E. P. & A. Fraser Pty. Ltd., Thomas Napier & Co. Pty. Ltd. and Stevedoring Insurance Co. Ltd. was denied. The transactions involving the share capital of these companies was approached by the Commissioner in the same manner as he dealt with the Remfore Pty. Ltd. transaction.

In the circumstances the assessment should be amended so as to allow the taxpayer a rebate on the dividends received by the taxpayer as stated hereunder:

From The Austral Stevedoring & Lighterage Co. Pty. Ltd. $35,639 E. P. & A. Fraser Pty. Ltd. 189,246 Thomas Napier & Co. Pty. Ltd. 26,234 Stevedoring Insurance Co. Ltd. 21,100 $272,219

Appeal by Patrick Corporation Ltd. in respect of the year ended 30th June 1970.

The taxpayer was assessed to tax on a taxable income of $3,205,623, the amount shown in its return. It was denied its claim to a rebate on the dividends received from The Yarra Investment Co. Pty. Ltd., Harbour Holdings Pty. Ltd. and Austin Sales (Aust.) Pty. Ltd. The transactions involving the share capital of these companies was approached by the Commissioner in the same manner as he dealt with the Remfore Pty. Ltd. transaction.

I have held that the taxpayer is not entitled to a rebate on the amount of $2,568,708 received from Austin Sales.

In the circumstances the assessment should be amended so as to allow the taxpayer a rebate on the dividend of $698,182 received from The Yarra Investment Co. Pty. Ltd. and the dividend of $444,150 received from Harbour Holdings Pty. Ltd., a total of $1,142,332.

Appeals by Minsoul Pty. Ltd., Minwall Pty. Ltd., M.T.A. Pty. Ltd., M.T.B. Pty. Ltd. and M.T.D. Pty. Ltd. in respect of the year ended 30th June 1970.

In each case the appeal involves no challenge to the amount of taxable income as assessed. The only issue is whether the taxpayers are entitled to a rebate on the dividends which they received from Austin Sales (Aust.) Pty. Ltd., an issue which I have resolved adversely to the taxpayers and the appeals must be dismissed.

The following written judgments were delivered:—

1976, Aug. 17 McTiernan J.

These appeals were heard together and are appeals from the judgment and orders of Mason J. These appeals concern the income tax returns of:—

1. Patcorp Investments Ltd. (formerly known as Patrick Corporation Ltd. and originally known as Mining Traders Ltd.) for the years ended 30th June 1968, 30th June 1969 and 30th June 1970.

2. Minsoul Pty. Ltd. for the year ended 30th June 1970.

3. Patrick Corporation Securities Ltd. (formerly known as Minwall Pty. Ltd.) for the year ended 30th June 1970.

4. M.T.A. Pty. Ltd. for the year ended 30th June 1970.

5. M.T.B. Pty. Ltd. for the year ended 30th June 1970.

6. M.T.D. Pty. Ltd. for the year ended 30th June 1970.

Patrick Corporation Securities Ltd., M.T.A. Pty. Ltd., M.T.B. Pty. Ltd. and M.T.D. Pty. Ltd., at all relevant times, were wholly-owned subsidiaries of Patcorp Investments Ltd. The share capital of Minsoul Pty. Ltd. was, at all relevant times, owned as to one-half by Patcorp Investments Ltd.

The taxpayers described themselves in their income tax returns variously as "investors", "investment company", and "investors and share traders". Their main activity was, however, trading in stocks and shares.

The transactions in question are fully described in the judgment of Mason J. It is sufficient to say, for my present purpose, that the critical transactions involved the taxpayers acquiring shares in companies which had accumulated large amounts of profits available for distribution by way of dividends to shareholders. A dividend was then declared in favour of the taxpayers who subsequently sold the shares at a loss since the assets of the companies as they existed at the time of acquisition were depleted by the distribution of the valuable asset, the accumulated profits. This type of transaction is commonly known as a dividend-stripping operation. The taxpayers in their taxation returns then sought to have the dividends rebated in accordance with s. 46 of the Income Tax Assessment Act 1936, as amended, ("the Act") and the loss on the resale of the shares deducted as a tax deduction in accordance with s. 51 of the Act.

Section 46 of the Act, so far as is material, provides that a shareholder in a company is entitled to a rebate in its assessment to income tax of the amount obtained by applying the average rate of tax payable by the shareholder to the part of any dividends included in its taxable income. Section 51 provides:—

(1) All losses and outgoings to the extent to which they are incurred in gaining or producing the assessable income, or are necessarily incurred in carrying on a business for the purpose of gaining or producing such income, shall be allowable deductions except to the extent to which they are losses or outgoings of capital, or of a capital, private or domestic nature, or are incurred in relation to the gaining or production of exempt income.

(2) Expenditure incurred or deemed to have been incurred in the purchase of stock used by the taxpayer as trading stock shall be deemed not to be an outgoing of capital or of a capital nature.

Section 46 rebate: It is clear from the evidence that at the date the dividends were paid to the taxpayers by the companies the taxpayers had acquired for the dividend-stripping operations, the taxpayers were correctly entered on the registers of members of those companies in all cases except Austin Sales (Aust.) Pty. Ltd. Section 6 (1) of the Act defines a "shareholder" to include a "member". The directors of the various companies (except in the case of Austin Sales (Aust.) Pty. Ltd.) had, at the time the dividends in question were paid, either approved or directed the registration of the transfer of the shares to the taxpayers. Moneys received by the taxpayers pursuant to the declaration of dividend by each of the companies acquired, other than Austin Sales (Aust.) Pty. Ltd., were thus "dividends" within the meaning of s. 46. The amounts paid to the taxpayers by Austin Sales (Aust.) Pty. Ltd. pursuant to the declaration of dividend by that company do not come within the relevant provisions of s. 46 since in this case the taxpayers were beneficial holders of those shares and in such a situation the taxpayers cannot be described accurately as a "shareholder" or a "member" of the company. It must be concluded therefore that the conditions of s. 46 were fulfilled and that the taxpayers are entitled to a rebate on dividends declared and paid by the companies other than Austin Sales (Aust.) Pty. Ltd.

Section 51 deduction: Mason J. felt he was bound by the decision of this Court in Investment & Merchant Finance Corporation Ltd. v. Federal Commissioner of Taxation [16] and concluded that the amount of the losses sustained by the taxpayers in the dividend-stripping transactions other than Austin Sales (Aust.) Pty. Ltd. were deductible. Two decisions of the House of Lords, Griffiths (Inspector of Taxes) v. J. P. Harrison (Watford) Ltd. [17] and Bishop (Inspector of Taxes) v. Finsbury Securities Ltd. [18] were referred to by Menzies J. in the I.M.F. Case [16] to support the conclusion of the majority. Since then, however, the House of Lords has decided F.A. & A.B. Ltd. v. Lupton (Inspector of Taxes) [19] and Thomson (Inspector of Taxes) v. Gurneville Securities Ltd. [20] . In the F.A. & A.B. Ltd. Case, it was held by Lord Morris of Borth-y-Gest and Lord Guest that where a taxpayer buys shares to conduct a dividend-stripping operation the share dealing transaction does not come within the area of trade of a dealer in shares. Viscount Dilhorne and Lord Donovan held that if a transaction viewed as a whole (including the manner of its implementation) was entered into with the purpose of securing a tax advantage then the transaction cannot be viewed as forming part of the trading activities of a dealer in stocks and shares. Lord Simon of Glaisdale expressed a similar opinion. In theGurneville Securities Ltd. Case Lord Morris of Borth-y-Gest, Lord Guest, Viscount Dilhorne, Lord Donovan and Lord Simon of Glaisdale reiterated the opinions they had expressed in the F.A. & A.B. Ltd. Case. In my opinion the views expressed by their Lordships in these two cases are to be preferred and should be followed here with the result that the outgoings on the purchase of the shares in the companies the taxpayers were endeavouring to dividend strip are not within s. 51 nor are they proceeds of sale within s. 25 of the Act. It cannot be said that the outgoings were incurred as an incident of the taxpayers' share trading business. They were not designed to achieve anything for those businesses except save the profits of the businesses from tax. In the circumstances the outgoings do not come within the second limb of s. 51 and they also fall outside the first limb since the shares acquired were not trading stock and hence the cost of the shares would be non-deductible capital expenditure, not saved by s. 51 (2). The proceeds of sale are not assessable under s. 25 since they are proceedings of a capital nature.

1. (1971) 125 C.L.R. 249. 2. [1963] A.C. 1. 3. [1966] 1 W.L.R. 1402; [1966] 3 All E.R. 105. 4. (1971) 125 C.L.R. 249. 5. [1972] A.C. 634. 6. [1972] A.C. 661.

The assessments should be remitted to the Commissioner to be amended or adjusted in accordance with these reasons for judgment.

Gibbs J.

These appeals are brought from orders of Mason J. made on the hearing of appeals against the decision of the Commissioner of Taxation to disallow objections lodged against the assessment to income tax in each of eight cases. The relevant facts are fully set out in the judgment of Mason J. and his Honour's findings have not been challenged in any material respect. It is, however, necessary to give some account of the facts for the purpose of showing the nature of the questions we have to decide and the arguments advanced in relation to them.

During the years of income ended 30th June 1968, 1969 and 1970 respectively, Mining Traders Ltd. (whose name later became Patrick Corporation Ltd. and is now Patcorp Investments Ltd.) ("Mining Traders") carried on the business of trading in stocks and shares. In each of those years it conducted a dividend-stripping operation on the shares of one or more private companies. There were eight such transactions in all, but seven of these may be considered together, since they were indistinguishable in all material respects save one, which will be mentioned. The seven private companies the subject of these transactions were the following: in 1968, Remfore Pty. Ltd. ("Remfore"); in 1969, E. P. & A. Fraser Pty. Ltd. ("Fraser"), Austral Stevedoring and Lighterage Company Pty. Ltd., Thomas Napier & Co. Pty. Ltd. and Stevedoring Insurance Co. Ltd.; in 1970, Yarra Investment Co. Pty. Ltd. ("Yarra") and Harbour Holdings Pty. Ltd. ("Harbour Holdings"). It is convenient to refer to each of these companies as "the stripped company". In each case the stripped company had ceased to trade, but had a fund of undistributed profits and had assets which could readily be realized. Mining Traders entered into an agreement to buy the whole of the issued capital of the stripped company, for a price which in four cases was the same as the value of the assets, in one case was a little more and in another a little less; in the seventh case the value of the assets was not established by the evidence. Transfers of the shares to Mining Traders were executed, and a meeting of directors of the stripped company resolved that the transfers be registered. Subsequently it was resolved that a dividend be paid out of unappropriated profits. According to the unchallenged findings of Mason J., the transfers to Mining Traders of the shares in Remfore and Harbour Holdings were in fact registered before the dividend was declared on the shares in the former company and before the second of two dividends was declared on the shares in the latter company, but in all the other transactions (including the first dividend declared by Harbour Holdings) the dividends were declared and paid before the transfers of shares were registered. This is the one possible point of distinction between these seven transactions. However, in each case the share register shows that Mining Traders became a shareholder on the day on which registration was approved. After the dividend had been received Mining Traders resold all the shares in the stripped company to another company at a price very much less than it had paid for them. The resale took place within a short time—usually a matter of days—after Mining Traders had first agreed to buy the shares. The entire operation was in each case carried out within one financial year, and towards the end of that year; in four cases the shares were resold on 30th June and in the other cases the resales were made in the month of April or the month of June. In each case the directors of Mining Traders bought the shares with the knowledge that they could be resold as in fact they were, and with the intention of engaging in the dividend-stripping operation. The purchases were financed by loans made by the stripped company, and cheques were exchanged for this purpose. In each transaction the purchase and resale of the shares resulted in a substantial loss to Mining Traders, but Mining Traders received dividends which—except in one case—more than offset that loss so that on the whole Mining Traders ended the transaction with a net gain. The exception was the case of Yarra, where the loss on resale was exactly balanced by the amount of the dividend so that there was ultimately neither gain nor loss. Mining Traders, in its returns of income tax, showed an overall profit (in 1968 and 1969) or loss (in 1970) on share trading which was arrived at after deducting or including, as the case may be, the losses incurred on the sale of the shares in the stripped company, i.e. the difference between the price paid for the shares and the price obtained on their resale. The dividends received from the stripped companies were treated as income but Mining Traders claimed to be entitled to a rebate in respect of the whole amount of the dividends under s. 46 of the Income Tax Assessment Act 1936, as amended ("the Act"). The Commissioner, in his assessment, refused to allow any rebate under s. 46, and in consequence assessed Mining Traders to tax on the basis that on each transaction it had made a profit calculated by deducting the cost price of the shares from the sum of the price received on resale and the dividends received. Mason J. upheld the contentions of Mining Traders in respect of all these transactions and from his decision in these cases the Commissioner has appealed to this Court (Appeals 109, 110 and 102).

The effect of the transactions may be illustrated by taking one example. On 21st April 1969 Mining Traders agreed to buy and Patrick Stevedoring (Victoria) Pty. Ltd. ("Patrick Stevedoring"), the owner of the share capital in Fraser, agreed to sell the whole of the issued capital in Fraser for $190,497. The similarity of the name of Patrick Stevedoring to that which Mining Traders later adopted is quite coincidental, for the companies were in no way connected. On 22nd April 1969 the directors of Fraser resolved to register the transfers of the shares to Mining Traders and its nominees. The share register shows that Mining Traders became a shareholder on 22nd April 1969. On the same day Mining Traders drew a cheque in favour of Patrick Stevedoring for $190,497, the price of the shares. On the same day a cheque for $190,497 drawn by Patrick Stevedoring in favour of Fraser in repayment of a loan and indorsed by Fraser in favour of Mining Traders was deposited to the credit of Mining Traders' bank account—the indorsement was by way of loan from Fraser to Mining Traders. On 23rd April 1969 the directors of Fraser resolved to declare a dividend of $189,247. On the same day a cheque in that amount was drawn by Mining Traders in favour of Fraser in partial repayment of the loan made by Fraser to Mining Traders. The cheque was indorsed by Fraser in favour of Mining Traders and credited to the latter's bank account; this indorsement and delivery of the cheque back to Mining Traders was intended to represent payment of the dividend. On 24th April 1969 Mining Traders sold the whole of the issued capital of Fraser to Warrina Pty. Ltd. for $4,250. Mining Traders claimed that it made a loss of $186,247 ($190,497 minus $4,250) on the resale of the shares and that the dividend of $189,246 [sic] was entirely rebatable. The Commissioner reassessed on the footing that as a result of this transaction Mining Traders made a profit of $2,999 ($4,250 plus $189,246 [sic] minus $190,497). The discrepancy of $1 in the amount of the dividend is quite immaterial.

The eighth transaction with which these appeals are concerned involved the purchase and later resale of the entire share capital of Austin Sales (Australia) Pty. Ltd. ("Austin"). The purchasers were Mining Traders, the appellants Patrick Corporation Securities Ltd. (formerly Minwall Pty. Ltd.), M.T.A. Pty. Ltd., M.T.B. Pty. Ltd. and M.T.D. Pty. Ltd. (all of which were wholly-owned subsidiaries of Mining Traders), the appellant Minsoul Pty. Ltd. (whose share capital was owned as to one-half by Mining Traders) and another company A.O.M. Securities Pty. Ltd. (which had no connexion with Mining Traders and is not a party to the present proceedings). By an agreement dated 30th June 1970 it was recited that British Leyland Motor Corporation of Australia Ltd. had agreed to sell and the purchasers had agreed to purchase in the proportions set out in the schedule the whole of the issued shares in Austin for $6,176,698. It was a term of the agreement that completion of the purchase should take place on 30th June 1970 "when the said issued shares shall be transferred to the Purchasers ". All the appellant companies carried on business as share traders in the year ended 30th June 1970. This transaction was also a dividend-stripping operation, and was in most respects conducted in the same way as the seven transactions already discussed. There were, however, some points of distinction, one of which Mason J. regarded as crucial. On 30th June 1970 the directors of Austin passed a resolution in the following terms:

The Chairman advised that British Leyland Motor Corporation of Australia Limited the beneficial owner of the whole of the issued share capital of the company had agreed to sell its shareholding in the Company to the undermentioned purchasers in respect of the number of shares set opposite their respective names:—

[Then followed the names of the purchasers and the respective numbers of the shares.]

The Chairman produced written directions from the purchasers directing that the transfers of shares be in the names of Nominees on behalf of the purchasers as follows:—

Patrick Nominees Pty. Limited 181,008 shares John Albert Keir 1 share Brian Henry Davidson 1 share

The Chairman then tabled transfers of shares from British Leyland Motor Corporation of Australia Limited to the Nominees in respect of the numbers of shares abovementioned.

It is resolved that the transfers be accepted and that the shares be registered in the books of the Company in the names of the respective transferees.

It is noted that the transferees accepted the transfers of shares to nominees for the purchasers abovementioned.

At a later meeting, held on the same day, it was resolved that Austin declare an interim dividend totalling $5,789,677.98 "payable to Patrick Nominees Pty. Limited on behalf of beneficial shareholders in the following proportions"; there were then set out the names of Mining Traders and the other appellant companies and A.O.M. Securities Pty. Ltd. and the amount of dividend payable on behalf of each. The exchange of cheques made to enable the transaction to be effected was carried out on behalf of the purchasers by Patrick & Co., a firm of stockbrokers closely associated with Mining Traders, and on 30th June 1970 that firm, having received from Austin a cheque representing the dividend, credited the account of each of the purchasers in its books with the amount to which each was entitled. By a further agreement made on 30th June 1970 Mining Traders, the other appellant companies and A.O.M. Securities Pty. Ltd. agreed to sell the whole of the issued shares in Austin to Hill Minerals N.L. for $362,020. After the dividend and the price received on the resale of the shares in Austin have been set off against the cost of the purchase of those shares, this transaction, unlike the others, resulted in an overall loss—which in total exceeded $25,000. Later on 30th June the directors of Austin tabled a transfer of all the shares held by Patrick Nominees Pty. Ltd. and Mr. Keir to Hill Minerals N.L. and it was resolved that the transfers be accepted and the shares be registered in the name of Hill Minerals N.L. It was noted that Mr. Davidson held one share in his own name as nominee for Hill Minerals N.L. In these circumstances neither Mining Traders nor any other of the appellant companies was ever entered in the register of Austin as the holder of any shares. Mason J. held that in consequence none of them was "a shareholder" within s. 46 and that for that reason no rebate was allowable under that section. From this decision appeals have been brought by Mining Traders (Appeal No. 101—there are thus cross-appeals in respect of Mining Traders' assessment for the year 1970) and the other appellant companies (Appeals Nos. 103, 104, 105, 106 and 107). It will be convenient to use the expression "the appellant companies" to refer generally to Mining Traders as well as to the other companies which are appellants.

According to the submission made on behalf of the appellant companies, the results of these transactions have been correctly shown in their income tax returns for the following reasons. The price received on the resale of the shares was assessable income within s. 25 of the Act. The dividends received were included in the assessable income by virtue of s. 44, but were rebatable in accordance with s. 46. The amount paid to purchase the shares was an allowable deduction within s. 51. On behalf of the Commissioner it was strongly urged in reply to these submissions that each of the transactions fell within s. 260 of the Act and that the effect of that section was to avoid, as against the Commissioner, the whole transaction—the purchase of the shares, their resale and the declaration of a dividend. In the circumstances of the present case it is convenient, before discussing s. 260, to consider the position on the assumption that the transactions did not fall within the scope of that section. It is also convenient to proceed, in the first place, on the further assumption that the appellant companies were all shareholders within ss. 44 and 46 of the Act at the time when the dividends were received—an assumption which is of course admittedly correct in relation to the receipt by Mining Traders of the dividend in Remfore and the second dividend in Harbour Holdings. On these assumptions the Commissioner did not advance any argument in support of the view that the appellant companies were not entitled to a rebate under s. 46, but he did contend that the purchase price of the shares was not an allowable deduction under s. 51, because the expenditure on the purchase of the shares was not incurred as an incident of the business of share trading carried on by the appellant companies and was of a capital nature. Consistently with this view he argued, or conceded, that the proceeds of the sale of the shares were not part of the assessable income under s. 25.

It was not challenged that each appellant company was a dealer in shares. It was clearly established that in the case of each transaction the appellant company bought the shares with the intention of taking the dividend and then reselling the shares within a short time. If the purchase and sale of the shares formed part of the appellants' business of share trading there can be no doubt that the proceeds of the sale of the shares would be assessable income, or that the expenditure incurred in the purchase of the shares would be deductible under s. 51. Such expenditure would not be of a capital nature, because in the circumstances mentioned the shares would be trading stock within s. 51 (2). So much was established by Investment & Merchant Finance Corporation Ltd. v. Federal Commissioner of Taxation [21] . However, the Commissioner contended that the transactions presented such extraordinary features that they should properly be regarded as isolated dealings not forming part of the ordinary ebb and flow of the business of share trading carried on by the appellant companies. The so-called extraordinary features of these transactions go only to show that the motive that inspired the appellant companies to enter into the transactions, and the effect which they were intended to achieve, was to improve their taxation position by taking advantage of the provisions of s. 46 of the Act. In addition it might be said, in relation to the shares in Austin and possibly also in relation to those in Yarra, that it was not intended to make a commercial gain, i.e. that the only object of those transactions was to derive a fiscal benefit. However, the fact that a dividend-stripping operation is carried out for the purpose of obtaining taxation advantages, and not to make a profit, does not mean that it must be regarded as outside the scope of the taxpayer's share trading business, or that the shares cannot be treated as trading stock. The Commissioner's submissions are contrary to what was decided in Investment & Merchant Finance Corporation Ltd. v. Federal Commissioner of Taxation. In that case the shares were purchased and the dividends received in one income year and the shares were resold in the next income year and the amount which the taxpayer paid for the shares exceeded what it got by way of dividend and on resale. The question for decision was whether the shares were trading stock whose value at cost should be taken into account in the second year of income. The majority of the Court answered this question in the affirmative. Walsh J. said [22] :

I do not assert, of course, that shares are always trading stock in the hands of their owner; and even where the owner is a dealer in shares the circumstances may show that particular shares are not trading stock. But when shares are bought by a dealer in shares and it is intended that they are to be resold and that this will probably occur in the not distant future, I do not think they are to be denied the description of trading stock, either because the trader expects or intends that they will be sold at less than their cost price or because he seeks to obtain a commercial advantage from the transaction otherwise than from a profit on the resale, that is, an advantage from an expected dividend and from an expected taxation benefit. It may be observed that both Windeyer J., whose decision at first instance was reversed on appeal, and McTiernan J., who dissented on the appeal, agreed with the majority of the Court that the amount expended in buying the shares was deductible in the first year of income [23] . On behalf of the Commissioner it was submitted that this case was distinguishable, but I am unable to agree that the circumstances of that case differed from those of the present in any material particular. It is true that in that case arrangements for the resale of the shares had not been made prior to their purchase, and they were not in fact resold for more than a year, but it had been planned from the outset that the shares should be resold. 1. (1971) 125 C.L.R. 249. 2. (1971) 125 C.L.R. at pp. 270-271. 3. (1970) 120 C.L.R., at p. 189; (1971) 125 C.L.R., at p. 259.

In the argument of the Commissioner reliance was placed upon two decisions of the House of Lords by which it was held that the dividend-stripping transactions there in question, which had been carried out for the purpose of establishing claims against the revenue, should not be regarded as being trading transactions in the course of the taxpayers' trade of dealers in shares: Lupton (Inspector of Taxes) v. F.A. & A.B. Ltd. [24] ; Thomson (Inspector of Taxes) v. Gurneville Securities Ltd. [25] . The question which the House of Lords had to decide in those cases arose under s. 341 of the Income Tax Act, 1952 U.K., which applied where "any person sustains a loss in any trade ". It is unnecessary for present purposes to discuss in detail the reasoning by which their Lordships reached their conclusion, but a few short passages will illustrate the nature of their approach. In Lupton's Case, Lord Morris of Borth-y-Gest said [26] : "some transactions may be so affected or inspired by fiscal considerations that the shape and character of the transaction is no longer that of a trading transaction", and Lord Simon of Glaisdale said [27] : "what is in reality merely a device to secure a fiscal advantage will not become part of the trade of dealing in shares just because it is given the trappings normally associated with a share-dealing within the trade of dealing in shares". In Thomson's Case, Lord Donovan said [28] : "when shares are bought for the sole or main purpose of dividend-stripping, the transaction is not a trading transaction; and a loss shown by the writing down of the value of the shares consequent upon the dividend-stripping is not a loss sustained in trade". This reasoning cannot, I think, be reconciled with that accepted in Investment & Merchant Finance Corporation Ltd. v. Federal Commissioner of Taxation [29] , and if the two sets of statutory provisions were the same in relevant respects it might be necessary to reconsider what was said in the latter case in the light of these decisions of the House of Lords. However, the scheme of the English legislation is very different from that of the Australian Act. In particular the English legislation does not contain a provision like s. 260 of the Act which is aimed generally at tax avoidance. The presence of s. 260 makes it impossible to place upon other provisions of the Act a qualification which they do not express, for the purpose of inhibiting tax avoidance. In other words, it is not permissible to make an implication which does what s. 260 fails to do in preventing the avoidance of tax. If it is suggested that a taxpayer has engaged in a device to secure a fiscal advantage, and the relevant provisions of the Act do not expressly deal with the matter, the case depends entirely on s. 260. These considerations are sufficient to distinguish the two decisions of their Lordships. Moreover, the Parliament, by enacting s. 46A of the Act (which was not in force at the time material to this case), has legislated in an attempt to overcome what it regarded as the undesirable effects of the decision in Investment & Merchant Finance Corporation Ltd. v. Federal Commissioner of Taxation, and that is a further reason why we should not reconsider the authority of that case.

1. [1972] A.C. 634. 2. [1972] A.C. 661. 3. [1977] A.C. at p. 647. 4. [1977] A.C. at p. 660. 5. [1972] A.C. at p. 675. 6. (1971) 125 C.L.R. 249.

The expression "trading stock" is defined in s. 6 (1) of the Act to include anything purchased for the purposes of sale. The shares in the stripped companies answered that description. The purchases were made, not as "individual forays in particular stocks" (as in Williams v. Federal Commissioner of Taxation [30] ), but by companies which carried on the business of share trading. The only reason advanced for isolating the transactions in question from the general run of the business of the appellant companies was that they were designed for the purpose of tax avoidance, but for the reasons I have given I consider that that reason cannot be accepted, apart from s. 260. I therefore hold that the appellant companies were entitled to a deduction under s. 51 in respect of the expenditure incurred in the purchase of the shares in the stripped companies, unless s. 260 avoided any part of the transactions. Similarly, of course, the price obtained on resale was income under s. 25.

1. (1972) 128 C.L.R. 645, at p. 656.

I now turn to consider whether the appellant companies were shareholders in the stripped companies at the respective times when the dividends in those companies were declared and paid. By s. 6 (1) of the Act, "shareholder" is defined to include "member or stockholder", but that definition provides no assistance in the present case, because in the case of a company limited by shares a member must be a shareholder. For present purposes, the terms "shareholder" and "member" are synonymous. Their meaning must be sought in the rules of company law. Section 16 of the Companies Act, 1961 N.S.W. (as amended) provides (inter alia) as follows:

(4) On and from the date of incorporation specified in the certificate of incorporation, but subject to this Act, the subscribers to the memorandum together with such other persons as may from time to time become members of the company shall be a body corporate by the name contained in the memorandum

(5) The subscribers to the memorandum shall be deemed to have agreed to become members of the company and on the incorporation of the company shall be entered as members in its register of members, and every other person who agrees to become a member of a company and whose name is entered in its register of members shall be a member of the company.

These provisions appear to declare, in the clearest possible way, that a person, other than a subscriber, does not become a member of a company until his name is entered on the register. By s. 151 the company is required to keep a register of its members and to enter therein (inter alia)—

(a) the names and addresses of the members

(b) the date at which the name of each person was entered in the register as a member.

Counsel for the appellant companies submitted that the effect of this section is that the register records the fact of membership but does not in itself confer the status of membership. This submission, however, gives too little weight to the words of s. 16 and is opposed to the views that have consistently been expressed in cases decided on similar company legislation.

In Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation [31] and Dalgety Downs Pastoral Co. Pty. Ltd. v. Federal Commissioner of Taxation [32] this Court considered the effect of s. 80 (5) of the Act as then in force, which referred to "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". It was held that a person "held" shares within this provision by having his name on the register. In Avon Downs Pty. Ltd. v. Federal Commissioner of Taxation, one Jack L. Vivers had bought and paid for 258 shares before the last day of the year, but the resolution that the transfer be registered was not passed, and the transfer was not in fact registered, until after that day. Dixon J. said [1] : "Beneficially the 258 shares belonged to Jack L. Vivers, but until his transfer was registered and his name placed on the share register he could not be said to "hold" them within the meaning of s. 80 (5)." In Dalgety Downs Pastoral Co. Pty. Ltd. v. Federal Commissioner of Taxation it was again contended that a beneficial owner, not on the register, "held" the shares, and again the contention was rejected. The Court said [2] :

Indeed it is not too much to say that the verb "hold" and its variants, when used in relation to shares in companies, normally refers to the legal ownership of the shares according to the register of members. The Companies Acts of the United Kingdom and of the several States of the Commonwealth have uniformly used the word in this sense, and common usage has followed their example. Before a different meaning is accepted, some justification must be found in the context, or the subject-matter. Later in the judgment, the Court referred to the definition of shareholder in s. 6 of the Act and to ss. 108 and 109 of the Act, and said [3] : The policy manifested by these sections might quite well have led to their being expressed so as to be applicable to loans made or remuneration paid to persons entitled to shares in equity only, as well as to registered members, but evidently the uncertainty resulting from a desertion of the register of members as the sole source of information as to the persons in respect of whom the sections apply was considered a decisive practical reason for not carrying the policy to that length. The same uncertainty provides no less cogent a consideration in relation to s. 80 (5) In Federal Commissioner of Taxation v. Angus [4] , a taxpayer was entitled under the will of her late father to a life interest in one-third of his residuary estate which consisted of shares in a company incorporated and resident in Singapore. Notwithstanding his death the shares continued to stand in his name on the company register but pursuant to a direction given to the company by the trustees of the estate one-third of the amount of the dividends was paid by the company direct to the taxpayer. The question which the Court had to decide, whether the income was exempt under s. 23 (q) of the Act, is not one which now concerns us. However, if the taxpayer had been a shareholder she could not have claimed the protection of s. 23 (q), because of the provisions of s. 44 (1A). The Court held that she was not a shareholder: see per Dixon C.J. [5] , per Fullagar J. [6] , and per Menzies J. [7] . Dixon C.J. said [5] that the executors or trustees of the deceased shareholder should be regarded as shareholders for the purpose of the payment of dividend and any tax thereon; that does not indicate a departure from the general rule that the shareholder is the person whose name is entered on the register, for the name of the deceased shareholder remained on the register: see A. L. Campbell & Co. Pty. Ltd. v. Federal Commissioner of Taxation [7a] where the position of the personal representatives of a deceased shareholder is discussed. 1. (1949) 78 C.L.R. 353. 2. (1952) 86 C.L.R. 335. 3. (1949) 78 C.L.R., at p. 363. 4. (1952) 86 C.L.R., at pp. 341-342. 5. (1952) 86 C.L.R., at p. 343. 6. (1961) 105 C.L.R. 489. 7. (1961) 105 C.L.R., at p. 501. 8. (1961) 105 C.L.R., at p. 506. 9. (1961) 105 C.L.R., at p. 515. 10. (1961) 105 C.L.R. at p. 501. 11. (1951) 82 C.L.R. 452.

These decisions affirm the general principle that entry on the register is necessary to constitute membership of a company, and clearly establish that the beneficial ownership of shares, without registration, does not make a person a shareholder. In my opinion it follows that none of the appellant companies was ever a shareholder in Austin. It is true that they became the beneficial owners of the shares in that company. However, no transfers of the shares were executed in favour of the appellant companies, no resolution was passed by Austin or its directors that the appellant companies be registered and they never were registered. Since they were not shareholders of Austin they were not entitled under s. 46 to a rebate in respect of the sums which they received as a result of the declaration of dividends in that company. For this reason, appeal No. 102 brought by Mining Traders, and appeals No. 103, 104, 105, 106 and 107 brought by the other appellant companies, must fail.

Mining Traders was clearly a shareholder in all the other stripped companies—it was duly registered as such—but (except in the two cases mentioned, of Remfore and Harbour Holdings) registration was not effected until after the dividend had been declared. The registration, when effected, showed that Mining Traders had become a member on the date on which registration had been approved—a date which was before that on which the dividends were declared. The register correctly showed the date "at which" the name of Mining Traders was entered in the register (see s. 151 (1) (b) of the Companies Act), rather than the date on which its name was registered. According to the register, therefore, Mining Traders was a shareholder in all the stripped companies (except Austin) when the dividends were declared. This is in my opinion sufficient for the purposes of ss. 44 and 46 of the Act. To depart from the register would lead to the practical inconvenience mentioned in Dalgety Downs Pastoral Co. Pty. Ltd. v. Federal Commissioner of Taxation [7b] . The present case of course is one in which the register does not need rectification—it is correct.

1. (1952) 86 C.L.R. 335.

We were referred to some cases in which it was held that where the holding of shares is a condition precedent to becoming a director, the director must be actually registered before he is appointed; it is not enough that at the date of his appointment he had acquired an absolute right to registration and that he was subsequently registered: Spencer v. Kennedy [8] ; Holmes v. Keyes [9] ; reversed on other grounds [10] . It is unnecessary to consider whether those decisions were correct, but if it be assumed that they were correct, they do not lay down any rule of general application that a person to whom a transfer has been approved for registration, and is subsequently registered, cannot thereafter be regarded as having been a shareholder at a time after the approval but before the actual registration, even though the register shows that he was a shareholder at that time. Astbury J. recognized the limited scope of the decision in Spencer v. Kennedy when he said [11] :

They contend that as before their appointment the Morgan transfers were passed for registration, and nothing but the purely ministerial act of registration remained to be done, they really held one share each before they were appointed. For many statutory purposes that may be so. But they were not members until they were actually registered If a person ought to have been on the register on a certain day and he is subsequently registered as from that day, speaking generally I consider that it should be held that he was a shareholder on that day. The registration, assuming it to be a proper registration, operates retrospectively from the date on which it was effected to the date at which the name of the shareholder was entered in the register. In any case, for the reason of convenience already mentioned, I consider that the fact that Mining Traders was registered as a shareholder as at the date at which the dividends were declared, and rightly so registered, is enough for the purposes of s. 46. It follows that in my opinion Mining Traders was entitled to the rebates which it claimed in respect of all of the stripped companies except Austin, subject to two further questions that remain to be considered. 1. [1926] Ch. 125. 2. [1958] Ch. 670, at pp. 675-676. 3. [1959] Ch. 199. 4. [1926] Ch., at p. 134.

It was submitted on behalf of the Commissioner that the effect of ss. 46 (2) (b), 46 (7) (a) and 50 (a) of the Act is to require the deduction allowable under s. 51 in respect of the purchase of the shares, or alternatively the loss incurred on the purchase and resale of the shares, to be deducted from the amount of the dividends paid on those shares with the result that no amount remains subject to the rebate. By s. 46 (2) (b) the rebate is to be arrived at by applying the average rate of tax payable by the shareholder to the part of any dividends that is included in its taxable income. Section 46 (7) (a) defines "the part of any dividends that is included in the taxable income of a shareholder" as meaning "the amount remaining after deducting from the amount of the dividends included in the assessable income of the shareholder the deductions allowable to the shareholder under this Act from income from dividends". It was accepted in Rowdell Pty. Ltd. v. Federal Commissioner of Taxation [12] that those words refer to s. 50 (a), which provides as follows:

Where the assessable income is derived from more than one of the following classes of income, that is to say, income from personal exertion, income from property other than dividends, and income from dividends, the following provisions shall apply to all allowable deductions:—

(a) where a deduction or part of a deduction relates directly to income from dividends (whether of the year of income or of a previous year of income) the deduction or part of the deduction, as the case requires, shall be made successively from income from dividends, from income from property other than dividends and from income from personal exertion.

The question therefore is whether the purchase price of the shares, or the loss made on the purchase and resale of the shares, is a deduction which "relates directly" to the income from the dividends. I find it difficult to see how the price paid for shares is a deduction which relates directly to the dividends paid on those shares, and even more difficult to accept that the loss on the purchase and resale of the shares answers that description. However, the question is the subject of authority; it was answered in the negative by the majority of this Court inRowdell Pty. Ltd. v. Federal Commissioner of Taxation [13] . No reason has been shown why we should review the correctness of that decision on this point, and this contention made on behalf of the Commissioner must be rejected. 1. (1963) 111 C.L.R. 106. 2. (1963) 111 C.L.R., at pp. 118-119, 137-138; cf. at p. 127.

The final question for consideration is whether s. 260 has any application to the present case. In Investment & Merchant Corporation Ltd. v. Federal Commissioner of Taxation [14] the Commissioner did not seek to rely on s. 260 and the effect of that section was not considered by the Court. However, in Rowdell Pty. Ltd. v. Federal Commissioner of Taxation [15] the Commissioner did seek to invoke s. 260 against taxpayers who had acquired shares in circumstances which Kitto J. described in the following words [48] :

The transaction consisted in buying shares in the company at prices somewhat lower than the net value of its assets, stripping the company of the whole or a large part of its accumulated profits by means of declarations of dividends or distributions in liquidation or both, and then re-selling the shares if the company was not in liquidation, or, if it was in liquidation, participating in a liquidator's distribution of capital. The Commissioner there sought to apply s. 260 so as to treat the taxpayer as having obtained, not dividends subject to exemption from or rebate of tax, but other income of a taxable character by virtue of the acquisition of the shares. However, the Court held that s. 260 had no application. Kitto J. (with whose judgment on this point Dixon C.J. agreed) said [49] : No doubt among the considerations which led Rowdell to enter into the transactions was the consideration that its tax liability resulting from the transactions would be reduced by the application of ss. 44 (2), 46 and 107 (or whichever of them should apply in the circumstances); but it is impossible to point to any tax liability which Rowdell would have incurred if the arrangement had never been made and for the avoidance of which the arrangement was a concerted means. Menzies J. [50] expressed a similar view. That decision appears to me, with all respect, to be in complete accord with the leading authorities on s. 260. A taxpayer who is entitled to a rebate in respect of dividends does not, by arranging to receive the dividends, avoid any liability imposed on him by the Act. In Europa Oil (N.Z.) Ltd. v. Inland Revenue Commissioner [51] , Lord Diplock, speaking of the New Zealand section which corresponds to s. 260, said: Any liability of the taxpayer to pay income tax must be found elsewhere in the Act. There must be some identifiable income of the taxpayer which would have been liable to be taxed if none of the contracts, agreements or arrangements avoided by the section had been made. Those remarks apply equally to s. 260. In Rowdell Pty. Ltd. v. Federal Commissioner of Taxation [52] the taxpayer did no more than arrange his affairs so as to receive income which was rebatable and s. 260 does not apply to such an arrangement. The Commissioner submitted that the purpose of the arrangements made in the present case was to avoid the tax that would have been payable on the income derived by Mining Traders from its other trading activities. This argument is superficially attractive because, as has been mentioned, the circumstances show quite clearly that the transactions were entered into with a view to their taxation advantages. However, an arrangement whose purpose is to reduce the amount of tax that a taxpayer will have to pay is not necessarily an arrangement whose purpose is to avoid a liability to tax. It was the fact that the dividends were rebatable that made the transactions in the present case so attractive from a fiscal point of view. The shares could be sold at a loss because the declaration of the dividend lowered their value and there would have been no fiscal advantage if the dividends had attracted tax. As I have just indicated, s. 260 did not prevent the appellant companies from arranging their affairs so that the income that they received would include dividends subject to a rebate. Nor does s. 260 enable the Commissioner to treat the expenditure on the purchase of the shares as if it had never been made. In Cecil Bros. Pty. Ltd. v. Federal Commissioner of Taxation [53] , Dixon C.J. said that he had great difficulty in seeing how s. 260 could apply to defeat or reduce any deduction otherwise truly allowable under s. 51. Kitto and Windeyer JJ. agreed with his judgment, and Taylor J. said that he shared that difficulty. Although there is no doubt that the decision reached in that case was correct, it has been suggested that the doubts expressed as to the application of s. 260 to deductions under s. 51 were not well founded: Hooker-Rex Pty. Ltd. v. Federal Commissioner of Taxation [54] ; Franklin's Selfserve Pty. Ltd. v. Federal Commissioner of Taxation [55] . It is unnecessary for the decision of the present case to resolve that question. The expenditure made on the purchase of the shares was in truth the price paid by the appellant companies for the purpose of obtaining income. It was not for the Commissioner to say that they should have paid less or more, or that they should not have bought the shares at all. Whether the whole of any of these transactions, or part, be examined it is not possible to find an arrangement whose purpose was to avoid tax. The purpose was to buy, and later resell, shares the dividends from which would be rebatable. It may rightly be said of the present case, as I said in the very different circumstances of Federal Commissioner of Taxation v. Casuarina Pty. Ltd. [56] , that "no liability to tax imposed by the Act on the company is avoided for whatever tax is appropriate to its situation remains payable". The Commissioner relied on a line of cases in which arrangements, which might be described as dividend-stripping operations, were struck down by s. 260: Bell v. Federal Commissioner of Taxation [57] ; Newton v. Federal Commissioner of Taxation [58] ; Hancock v. Federal Commissioner of Taxation [59] ; Federal Commissioner of Taxation v. Ellers Motor Sales Pty. Ltd. [60] . Those were all cases in which the arrangement had the purpose of giving the character of capital to what, apart from the arrangement, would have been received as income and thus of avoiding liability for tax on the amounts received. They are distinguishable from the present case in which the Commissioner's submissions, when analysed, will be seen as an attempt to deny to Mining Traders a rebate to which the Act gives it an entitlement. In other words, the arrangements which the Commissioner seeks to challenge cannot be predicated to be an attempt to avoid tax—they were an attempt (and a successful attempt) to take advantage of the benefit given by s. 46. In my opinion s. 260 has no application to the case. It follows that the Commissioner's appeals must also fail. 1. (1971) 125 C.L.R. 249. 2. (1963) 111 C.L.R. 106. 3. (1963) 111 C.L.R., at p. 121. 4. (1963) 111 C.L.R., at p. 125. 5. (1963) 111 C.L.R., at p. 134. 6. [1976] 1 W.L.R. 464, at p. 475; [1976] All E.R. 503, at p. 54. 7. (1963) 111 C.L.R. 106. 8. (1964) 111 C.L.R. 430, at p. 438. 9. (1970) 123 C.L.R. 71, at p. 86. 10. (1970) 125 C.L.R. 52, at p. 74. 11. (1971) 127 C.L.R. 62, at p. 104. 12. (1953) 87 C.L.R. 548. 13. (1958) 98 C.L.R. 1; [1958] A.C. 450. 14. (1961) 108 C.L.R. 258. 15. (1972) 128 C.L.R. 602.

For the reasons given I am in agreement with the conclusions reached by Mason J. I would dismiss all the appeals.

Stephen J.

I have had the advantage of reading the reasons for judgment of Gibbs J. and of Jacobs J. and am in agreement with them. I would accordingly dismiss these appeals and cross-appeal.

Jacobs J.

There are before the Court eight appeals from decisions of Mason J. in one of which there is a cross-appeal:

1. Appeal by the Commissioner of Taxation relating to the extent of liability to tax of Patcorp Investments Ltd. (formerly called Patrick Corporation Ltd. and before that called Mining Traders Ltd.) in respect of the year of income ended 30th June 1968. The appeal is against the allowance by Mason J. of an appeal by the taxpayer against the non-allowance of a rebate under s. 46 of the Income Tax Assessment Act 1936 (as amended) in respect of an amount of $138,232 received by Patcorp Investments Ltd. from Remfore Pty. Ltd.

2. Appeal by the Commissioner of Taxation relating to the extent of liability to tax of Patcorp Investments Ltd. in respect of the year of income ended 30th June 1969. The appeal is against the allowance by Mason J. of an appeal by the taxpayer against the non-allowance of a rebate under s. 46 in respect of the following amounts: $35,639 received by Patcorp Investments Ltd. from The Austral Stevedoring and Lighterage Co. Pty. Ltd.; $189,246 received from E.P. & A. Fraser Pty. Ltd.; $26,324 received from Thomas Napier & Co. Pty. Ltd.; and $21,100 received from Stevedoring Insurance Co. Ltd.

3. (1) Appeal by Patcorp Investments Ltd. relating to the extent of its liability to tax in respect of the year of income ended 30th June 1970. The appeal is against the dismissal by Mason J. of an appeal by the taxpayer against the non-allowance of a rebate under s. 46 in respect of an amount of $2,568,708 received by the taxpayer from Austin Sales (Aust.) Pty. Ltd. (2) Cross-appeal by the Commissioner of Taxation against the allowance by Mason J. of an appeal by the taxpayer against the non-allowance of a rebate under s. 46 in respect of the following amounts: $698,182 received by Patcorp Investments Ltd. from Yarra Investment Co. Pty. Ltd.; and $444,150 received from Harbour Holdings Pty. Ltd.

4. Appeal by Minsoul Pty. Ltd. in respect of the year of income ended 30th June 1970 against the dismissal by Mason J. of an appeal by the taxpayer against the non-allowance of a rebate under s. 46 in respect of an amount of $402,209 received by the taxpayer from Austin Sales (Aust.) Pty. Ltd.

5. Appeal by Minwall Pty. Ltd. in respect of the year of income ended 30th June 1970 against the dismissal by Mason J. of an appeal by the taxpayer against the non-allowance of a rebate under s. 46 in respect of an amount of $252,681 received by the taxpayer from Austin Sales (Aust.) Pty. Ltd.

6. Appeal by M.T.A. Pty. Ltd. in respect of the year of income ended 30th June 1970 against the dismissal by Mason J. of an appeal by the taxpayer against the non-allowance of a rebate under s. 46 in respect of an amount of $121,543 received by the taxpayer from Austin Sales (Aust.) Pty. Ltd.

7. Appeal by M.T.B. Pty. Ltd. in respect of the year of income ended 30th June 1970 against the dismissal by Mason J. of an appeal by the taxpayer against the non-allowance of a rebate under s. 46 in respect of an amount of $252,681 received by the taxpayer from Austin Sales (Aust.) Pty. Ltd.

8. Appeal by M.T.D. Pty. Ltd. in respect of the year of income ended 30th June 1970 against the dismissal by Mason J. of an appeal by the taxpayer against the non-allowance of a rebate under s. 46 in respect of an amount of $1,608,845 received by the taxpayer from Austin Sales (Aust.) Pty. Ltd.

The appeals by the taxpayers have a common ground, namely, that Mason J. was in error in finding that, though the dividends included in the taxable income of the respective taxpayers otherwise fell within the terms of s. 46 (2) of the Act, nevertheless the taxpayers were not entitled to rebates in their respective assessments because they were not at the relevant time "shareholders" in the companies from which the dividends were received.

The two appeals and the cross-appeal by the Commissioner raise the ground that Mason J. was in error in finding that the taxpayer Patcorp Investments Ltd. was a "shareholder" of the companies from whom dividends were received. They raise a number of other grounds which I will consider later in these reasons.

In the two appeals and the cross-appeal by the Commissioner the name of the purchaser Patcorp Investments Ltd. (or Mining Traders Ltd. as it was then named) was either prior to or subsequent to the declaration of dividends entered into the register of the respective companies as shareholder; but in each case the resolution of the directors of the companies approving the transfer to Patcorp Investments Ltd. was passed before the declaration of the dividend. Mason J. concluded that, provided the resolutions approving the transfer had been passed, the transferees were correctly to be regarded as "shareholders" within the meaning of s. 46 thenceforth even though the entries were made subsequently. In my opinion he was correct in this conclusion.

When the word "shareholder" is used in the Income Tax Assessment Act it refers to a person who is regarded as a shareholder under the general law governing the relationship of a person so described to the association in which he has a share. It has been so held in the case of a shareholder in a corporation the capital of which is divided into shares. See particularly Dalgety Downs Pastoral Co. Pty. Ltd. v. Federal Commissioner of Taxation [61] . By the definition in s. 6 the word "shareholder" includes a member or a stockholder. The inclusion of the former word covers a subscriber to the memorandum of association and a member of a corporation the capital of which is not divided into shares and a member of an unincorporated association, not being a partnership, whether or not the capital is intended to be so divided. See the definition of company in s. 6.

1. (1952) 86 C.L.R. 335, at pp. 341-343.

However, to say that in the law governing incorporated companies a person is only a "shareholder" at any particular date if his name appears on the register of members at that date is an over-simplification. For some purposes, e.g. qualification as a director, it has been decided (prior to the enactment of what is now s. 116 of the Companies Act, 1961 N.S.W.) that a person is only the holder of shares if at the date of his appointment as director he appears on the register of members (Spencer v. Kennedy [62] ). On the other hand it is fundamental to company law that despite the language of such sections as s. 16 (5) and s. 151 (1) the register of members is not conclusive. Indeed, s. 151 (4) makes it clear that the register is no more than prima facie evidence of the matters which it is required or authorized to contain. The provision in s. 155 that the register may be rectified embodies the concept that, once it is rectified, the rights of the person whose name is entered therein or removed therefrom are determined as at the date at which the rectification is ordered to have effect. It appears to me that the question which arises in the present case is whether the meaning of "shareholder" in the Income Tax Assessment Act is confined to a person whose name appears on the register of members. In my opinion it is not. It also includes a person who is entitled as against the company to be registered and whom the company is absolutely entitled to register as a member of the company. If a company is at the relevant date absolutely entitled to register the person concerned and he is absolutely entitled to have the register rectified so that his name appears thereon as a shareholder at that date, such a person has more than a beneficial interest in the shares enforceable primarily against the vendor. He is in a direct relationship with the company involving reciprocal rights and duties between them.

1. [1926] Ch. 125.

In the present case once the directors of each company had approved the respective transfers and directed registration the transferee was absolutely entitled to have its name entered on the respective registers. It was not only beneficially entitled to the shares as property with consequent rights against the vendor in whose name the shares stood. It was entitled vis-à-vis the companies to be treated as a shareholder and to be registered as such and was therefore a "shareholder" within the meaning of the Income Tax Assessment Act. I do not regard this conclusion as inconsistent with the reasoning in the Dalgety Downs Case [63] despite the generality of some of the statements therein. The particular question now being considered did not there arise and my conclusion conforms with the approach of the Court in that case.

1. (1952) 86 C.L.R. 335.

I turn now to the appeals by the taxpayers in relation to the Austin Sales (Aust.) Pty. Ltd. transactions. The only ground of appeal by the various taxpayers is that Mason J. was in error in holding that they were not respectively "shareholders" within the meaning of s. 46 so as to be entitled to the rebates provided for in that section.

The facts upon which this conclusion was based are set out in the reasons for judgment of Mason J. and his findings of fact in this respect are not challenged. It is therefore not necessary to repeat them at length in the present context. It is sufficient to say that the sale of the shares, the payment of the dividend by Austin Sales (Aust.) Pty. Ltd., and the resale of the shares were all carried into effect on 30th June 1970. As Mason J. said, [63a] "Speed was of the essence of the transactions". A sum of $6,176,698 was credited to the account of the vendor shareholder, British Leyland Motor Corporation of Australia Ltd. Thereafter on the same day a meeting of the directors of Austin Sales (Aust.) Pty. Ltd. was held. Transfers from British Leyland Motor Corporation of Australia Ltd. to Patrick Nominees Pty. Ltd., Mr. Keir and Mr. Davidson were approved. New directors were then appointed. Shortly afterwards a meeting of the new directors was held. An interim dividend was declared, the dividend now in question. It was declared "payable to Patrick Nominees Pty. Ltd. on behalf of beneficial shareholders in the following proportions" and the sums of money payable as dividend to the various appellants were set out. The dividend was then paid to Patrick Nominees Pty. Ltd. who credited the account of each of the purchasers with the share of the dividend to which it was beneficially entitled. Thereafter on the same day the Austin Sales shares of Patrick Nominees Pty. Ltd. and Mr. Keir were sold ex dividend to Hill Minerals N.L. and the new directors of Austin Sales (Aust.) Pty. Ltd. resolved that share transfers from Patrick Nominees Pty. Ltd. and Mr. Keir to Hill Minerals N.L. should be registered.

1. Ante, at p. 267.

Thus the appellants' names did not, and were never intended to, appear in the Austin Sales register of members at any time. The shares were transferred to Patrick Nominees Pty. Ltd., Mr. Keir and Mr. Davidson as nominees, that is in the context, as trustees for the new beneficial owners, the appellants.

Mason J. held that a person who is a beneficial owner of shares in a company (save perhaps a subscriber to the memorandum) but who is not, and has never been, registered in the register as the holder of those shares cannot accurately be described as a shareholder within the meaning of the Income Tax Assessment Act. It is this conclusion which is challenged by the appellant taxpayers.

The appellants, in respect of the amounts received from Austin Sales (Aust.) Pty. Ltd., were not "shareholders" within the meaning of s. 46. They were not registered as such and they had no absolute right against the company Austin Sales (Aust.) Pty. Ltd. to be registered; nor did that company have any right to enter their names as members. Further, it seems to me that Federal Commissioner of Taxation v. Angus [64] is an authority directly opposed to the contention that these appellants were shareholders. In that case it was claimed that certain income of the taxpayer was exempt income under s. 23 (q) upon the ground that it was derived from Singapore, that it was not exempt from income tax in Singapore, and that the tax thereon had been paid in Singapore. These conditions were found by the majority to be satisfied in somewhat complex circumstances which it is not necessary to consider for present purposes. The facts so far as they are presently relevant were that the taxpayer was entitled under the will of her father to a life interest in one-third of his residuary estate. Included in the latter were shares in a Singapore company. The shares continued in the name of the deceased father in the company register, but the company at the direction of the trustees paid one-third of the dividends direct to the taxpayer, less Singapore income tax. The taxpayer claimed that the income was exempt income under s. 23 (q). If the income received by the taxpayer was a dividend received by her as shareholder in the company, then by virtue of s. 44 (1A) the dividends would be part of her assessable income unaffected by the provisions of s. 23 (q). That would have been sufficient to establish a liability in the taxpayer to Australian income tax on the amount in question. However the case proceeded on the basis that the taxpayer did not receive the dividends as a shareholder in the company although the ultimate source of the income was the distribution of the dividend. Dixon C.J. stated [65] :

But she was not a shareholder: she was in fact a beneficiary in the estate of the shareholder on the register who had died some years earlier and she received the dividends under a direction by the executors to the company to send the dividends directly to her. Had she been a shareholder she could not have claimed the protection of s. 23 (q) for the dividends, because sub-s. (1A) of s. 44 of the Assessment Act, which was inserted by Act No. 11 of 1947 to overcome the effect of the decision of this Court in Reid v. Federal Commissioner of Taxation [66] provides that the operation of sub-s. (1) of s. 44 shall not be affected by the provisions of par. (q) of s. 23. Now s. 44 governs the liability of dividends to income tax and sub-s. (1), so far as material, provides that the assessable income of a shareholder in a company (whether the company is a resident or non-resident) shall, subject to the section, if he is a resident include dividends paid to him by the company out of profits derived by it from any source. Had she been the shareholder the result would have been that the dividends received by the taxpayer from the company must have been included without regard to s. 23 (q) Further on he said [67] : It seems reasonably plain that she ought not to be regarded as a shareholder receiving dividends but as a beneficiary of a trust. Although they have never been formally placed upon the company's register, it seems that the executors (or trustees) should be regarded as the shareholders for the purpose of payment of dividend and any consequent tax thereon: see Halsbury's Laws of England, 3rd ed., vol. 6, pp. 262, 263 and the cases there cited and A. L. Campbell & Co. Pty. Ltd. v. Federal Commissioner of Taxation [68] .

Notwithstanding the acceptance on the part of the Commissioner of the assumption that sub-s. (1A) of s. 44 cannot prevent the application of s. 23 (q) to this case if otherwise it be applicable it is not easy to avoid some uneasiness at the seeming anomaly that is occasioned. For apparently if the appellant had been entitled to the shares instead of an equitable life interest in them and had been registered accordingly she could have had no recourse to s. 23 (q); but because she has an equitable life interest only and is not the shareholder her recourse to s. 23 (q) is not barred by sub-s. (1A) of s. 44.

Fullagar J. stated [69] : The income received by her was not dividend income, but income of a trust estate, in which she had a beneficial interest for her life, and it is on that basis that the question in the present case must be approached and decided. The position is the same as if the short cut had not been taken but the trustees had received the two dividends from the company, and had paid one-third of each to the taxpayer. A very important result of this is that the case is not governed by s. 44 (1) and (1A) and s. 45 of the Australian Assessment Act, and it will not be necessary to refer further to those provisions. Menzies J. stated [70] : What the company did instead of paying the dividends to the trustees—as in strictness it should have done—was to divide them equally into three and pay one portion to each life tenant. Although it is necessary to recognize that the taxpayer was not a shareholder in the company and that what she received was in her hands part of the income of the trust estate and not dividends paid to a shareholder, there is no doubt that the income in question was derived from Singapore where the trustees were resident, and if s. 23 (q) of the Income Tax and Social Services Contribution Assessment Act can apply at all, the matter for determination thereunder is whether that income was exempt from income tax in Singapore. 1. (1961) 105 C.L.R. 489. 2. (1961) 105 C.L.R., at p. 498. 3. (1947) 73 C.L.R. 282. 4. (1961) 105 C.L.R., at p. 501. 5. (1951) 82 C.L.R. 452, at pp. 455-460. 6. (1961) 105 C.L.R., at p. 506. 7. (1961) 105 C.L.R., at p. 515.

It is correct to state that it was not argued in Federal Commissioner of Taxation v. Angus [71] on behalf of the Commissioner that the taxpayer was a shareholder and that the moneys received by her were dividends. Therefore the Court did not determine this question after a disputed hearing between the parties. However, the passages which I have quoted show that there was no hesitation in the acceptance by the Court of the view that a beneficiary in these circumstances was not a shareholder and this view was an essential step in the ultimate conclusion which was reached by the Court. It is probably correct that this Court would in such circumstances, more readily than it ordinarily would, reconsider a view so adopted; but, on the other hand, the construction and effect of the provisions of the Income Tax Assessment Act which has been adopted by the Court in one case as a basis for decision should not without very good reason be varied or discarded in a later case simply upon the ground that the particular point of construction or effect of the legislation had not been argued or fully argued in the earlier case. In the application of a fiscal Act of this kind, there must be consistency and as much certainty as its complexity will allow. The principle stated in Federal Commissioner of Taxation v. Angus [72] —that a beneficiary who is entitled to income which is the product of dividends is not thereby a shareholder—should be accepted as established law unless it can be said that it is clearly wrong. That certainly cannot be said. On the contrary, the plain fact of the matter is that the taxpayers here were not shareholders in any sense of the term.

1. (1961) 105 C.L.R. 489. 2. (1961) 105 C.L.R. 489.

The facts in the present case are stronger against the taxpayers' contention that they were shareholders within the meaning of s. 44 and consequently s. 46 than were the facts in Federal Commissioner of Taxation v. Angus. In the latter case the dividends were in fact received directly by the taxpayer beneficiary. In the present case the dividends were received by the trustee and the setting out in the resolution of the directors of the company of the beneficial interests of the taxpayers was no more than an acknowledgment of an intended or actual assignment of the dividends by the trustee by way of an appropriation among the beneficiaries. The assignment of a dividend does not bring the assignee within the description of shareholder in s. 44: Norman v. Federal Commissioner of Taxation [73] . It makes no difference that the assignment was by way of an appropriation of income of trust property among beneficiaries. I am therefore of the opinion that Mason J. was correct in his conclusion in this respect and that the appeals of the taxpayers fail.

1. (1963) 109 C.L.R. 9, at p. 16.

There remain to be considered the further grounds of the two appeals by the Commissioner in respect of the 1968 and 1969 years of income and the cross-appeal by the Commissioner in respect of so much of the 1970 year of income as relates to the shares in Yarra Investment Co. Pty. Ltd. and Harbour Holdings Pty. Ltd. In my opinion, just as the Commissioner has the benefit of the decision in Federal Commissioner of Taxation v. Angus [72] so on these further grounds of appeal he is faced with authority in this Court by which, unless it can be distinguished in the manner in which on his behalf it has been sought to distinguish it, a conclusion in his favour is precluded.

1. (1961) 105 C.L.R. 489.

The grounds raised by the Commissioner in each case are: (1) that the purchase of the shares, the declaration of dividend, and the sale of the shares in each of the various companies constituted a contract, agreement or arrangement within s. 260; (2) that, alternatively, the purchase price of the shares was not an allowable deduction under s. 51 (the receipt of the sale price thereof then being admitted not to be income within s. 25) and that the loss on sale was not a loss within s. 52; (3) that, alternatively, if the purchase price of the shares was an allowable deduction under s. 51, or if there was a loss under s. 52 on the purchase and sale of the shares, and if the dividend was rebatable under s. 46, nevertheless the effect of s. 46 (2) (b), s. 46 (7) (a), and s. 50 (a) was to cast against the respective dividends that part of the deduction under s. 51 which represented the price paid for the dividends or, alternatively, that the loss under s. 52 was, pursuant to the same provisions, thrown against the dividends.

It may here be noted that the rebate calculated under s. 46 would in each case be 100 per cent. On the other hand, if the lastly stated argument of the Commissioner be correct, then the deductions would in each case absorb the whole of the rebate under s. 46.

The Commissioner's submissions numbered (2) and (3) above are, it may be noted, not consistent with the assessments which he made. In each assessment the Commissioner assessed the taxpayer to tax on the footing that it was entitled to deduct as a loss the difference between the purchase price which it paid for the shares in the company from which it received the dividend and the sale price of those shares. This appears from the adjustment sheet issued with each notice of assessment. The Commissioner included the amount of the dividends in the taxable income but declined to allow the rebate on tax provided for in s. 46. If the purchase by Patcorp Investments Ltd. of the Remfore shares be taken as an example, the Commissioner allowed a loss of $129,389 on the purchase and sale of the shares but disallowed the 100 per cent rebate on the dividend of $138,323. The latter sum was therefore taxed. However, if s. 260 be applied as submitted by the Commissioner under (1) above, the purchase (at $209,065), the sale (at $79,676) and the dividend (of $138,232) should all be treated as void against the Commissioner. That is to say, the income of the taxpayer otherwise derived would be unaffected. The taxpayer should be deemed still to have the net amount expended by it on the purchase and sale of the shares, namely, $129,389, the difference between the cost price and the sale price of the shares. Since the dividend of $138,323 should be disregarded the amount by which the dividend exceeded the net amount can have no character of income. Again, if the purchase of the shares and the sale are treated as not made in the course of share trading as submitted in (2) above, the dividend will be rebatable under s. 46, but the loss on the purchase and sale of the shares, namely $129,389, will not be allowed. Nevertheless all the grounds relied on by the Commissioner may be considered.

Each of these dealings and transactions has been described in detail by Mason J. There can be no doubt that all were conceived and carried out as what are commonly called dividend stripping operations. The motive of the taxpayer was to reduce its liability to income tax on profits which, apart from these operations, had otherwise accrued during the fiscal years in which the operations were conceived and carried into effect. In order to reduce its liability to tax in respect of its other profitable activities in the manner adopted certain circumstances needed to exist. First, the taxpayer had to be a trader in shares so that a loss on the subject transactions could be set off against profits on other transactions. I do not think that it matters for present purposes whether a purchase of shares and a subsequent sale at a lower price is regarded as a loss under s. 52 or whether the purchase price is regarded as an outgoing under s. 51 and the sale price as income under s. 25, because the purchase and sale were in each case completed during the same year of income. There was no dispute that the taxpayer was a trader in shares. Therefore this condition was fulfilled.

Secondly, the shares must have been purchased in the course of the taxpayer's trading in shares, that is to say, in the course of that business the profit of which (if any) was assessable income. I shall return to this question presently.

Thirdly, the dividends declared, the so-called "dividend-stripping", must have been rebatable in the taxpayer's assessment for the year of income in which the dividend was declared. In other words the requirements of s. 46 must be satisfied. They were so satisfied in each of the instant cases.

Fourthly, the operation of purchase, declaration of dividend and subsequent sale must not be a contract, agreement or arrangement which falls within s. 260.

If these conditions were fulfilled, and unless the net outgoing on purchase and sale of the shares should be deducted by virtue of s. 46 (2) (b), s. 46 (7) (a) and s. 50 (a) from the amount of the dividends upon which a rebate is allowable, the taxpayer was entitled to claim the difference between the purchase price and the sale price of the shares as a loss (s. 52) (or alternatively to treat the purchase price as an outgoing (s. 51) and the sale price as income (s. 25)) and at the same time to receive a rebate of 100 per cent on the dividend.

Thus it receives a very substantial fiscal advantage but it is entitled to have the transactions regarded as part of its business of share trading and to the fiscal advantage unaffected by the operation of s. 260 unless the facts are relevantly distinguishable from those in Investment & Merchant Finance Corporation Ltd. v. Federal Commissioner of Taxation [75] . That, it seems to me, is the essential question to be determined on these appeals and it is necessary, therefore, to go first to the facts and the decision in that case. The taxpayer was a company which traded in shares. In October 1963 it bought certain shares for £86,503.17.0 with the intention of causing a dividend to be declared and of then selling the shares. This intention was effectuated. In November 1963 the dividend was declared and the taxpayer received £81,900. In December 1964 it sold the shares for £21. The taxpayer received a s. 46 rebate on the dividend in the year of income ended 30th June 1964. It claimed in respect of the following year of income a deduction of £86,483, the difference between the purchase price and sale price of the shares. It was held that it was entitled to the deduction.

1. (1971) 125 C.L.R. 249.

The question, then, is whether this decision is distinguishable. It has primarily been submitted that the applicability of s. 260 was not argued in the I.M.F. Case [75] . But if the relevant facts are not distinguishable I do not think that this is a valid reason for not following the earlier decision it being one on the applicability of a fiscal Act. What such a case actually decides is that in certain circumstances there is a certain liability, or freedom from liability, to assessment of income tax, whatever be the expressed reasons for that decision. If in another case the circumstances cannot be relevantly distinguished then the same result should follow if a necessary and most desirable uniformity in the principles of assessment of tax is to be achieved and preserved. The question is not so much whether the applicability of s. 260 was argued but whether it was overlooked and the decision given per incuriam. That is not suggested. It is true that the applicability of s. 260 involves a degree of factual inquiry and inference and therefore to a considerable extent its applicability is often a question of fact. But if the facts in one case are not relevantly distinguishable from those in another the same conclusion should follow partly because the ultimate conclusion is, or largely depends on, a question of law as to the true construction and legal effect of s. 260 and partly for the reason to which I have earlier adverted, the need for uniformity in application of a taxing Act. It seems to me that this need is particularly strong in the case of a statutory provision as notoriously difficult to interpret and apply as s. 260. If the court has held that a particular course of operations has a particular fiscal effect and if it has thereby expressly or even impliedly found that it is not a contract, agreement or arrangement falling within s. 260 it is for the legislature to make whatever special provision it thinks is necessary to displace the effect of the decision. There is now a special provision in the Act respecting rebate on dividends paid as part of a dividend-stripping operation. See s. 46A introduced by Act No. 47 of 1972 and subsequently amended.

1. (1971) 125 C.L.R. 249.

One difference between the present cases and the I.M.F. Case [76] is that in the latter the rebate had been allowed under s. 46 in the year prior to the year of sale of the shares. The question whether the dividend was rebatable therefore did not arise. But there could be no question that once the taxpayer was found to be a "shareholder" the conditions of s. 46 were satisfied both in the I.M.F. Case and the instant cases. The Commissioner appears in his notices of assessment in the instant cases and in the argument before Mason J. to have contended that the dividend payments alone were void under s. 260. Therefore Mason J. limited his consideration of s. 260 accordingly and he disposed of the contention in a few words:

There remains the question whether the appellants' claim that dividend payments are rebatable is defeated by s. 260. The right to a rebate is specifically conferred by the statute in the circumstances to which it refers and which in my view obtain in this case. I am unable to see how s. 260 can defeat the operation of s. 46. This conclusion is, I think, supported by the decision in Rowdell Pty. Ltd. v. Federal Commissioner of Taxation [77] . In my opinion he was undoubtedly correct in this conclusion. However on these appeals the Commissioner has contended that s. 260 strikes down not only the dividends but the purchase and sale of the shares as well, and it is that suggested effect of s. 260 which falls to be examined, in the light of the I.M.F. Case. 1. (1971) 125 C.L.R. 249 2. (1963) 11 C.L.R. 106

I do not find any relevant difference between the facts of the I.M.F. Case and the facts in the instant cases. There was no significant difference in motive or purpose, in so far as these can be distinguished, nor in substantial result of the operations. For the Commissioner it has been submitted that points of distinction are that the company whose shares were acquired in the I.M.F. Case had assets which had not been converted into cash, that the taxpayer did not buy the entire capital but only seven-tenths thereof that the taxpayer continued to hold the shares for at least fourteen months, that there was no arrangement to sell the shares before they were purchased and thus there was no predetermined purchaser or purchase price, that no special arrangements were made for financing the purchase and that there was no evidence or suggestion that the shares were acquired to shield from tax particular income which had already been derived. However, none of these matters was of special significance in that none of them led to the conclusion that the purpose of the operation was other than the stripping of the dividend and the consequent reduction in either the value of the sale price of the shares in order that a fiscal advantage might be obtained by virtue of the rebatability of the dividend under s. 46 (2) and the loss on the operation of share trading which was involved. The differences in the facts are no more than incidental. They are therefore not differences upon the basis of which the I.M.F. Case can be distinguished.

This conclusion means that in view of this earlier decision the Commissioner cannot succeed on his contention that the purchases and sales of the shares were not in the course of the business of trading in shares or in his contention that s. 260 applies to the purchases and sales and to the dividends declared.

The I.M.F. Case was decided before F.A. & A.B. Ltd. v. Lupton (Inspector of Taxes) [78] and Thomson (Inspector of Taxes) v. Gurneville Securities Ltd. (79). It may well be that the approach in those cases is not consistent with the reasoning in the I.M.F. Case which led to the conclusion that the purchase and sale of the shares by the taxpayer was part of the business of trading in shares but that is no sufficient reason for overruling the I.M.F. Case however cogent the reasoning in the English cases may appear to be. I do not find it necessary to express an opinion on this question. The reversal or alteration of the fiscal effect of the I.M.F. Case was a matter for the legislature.

1. [1972] A.C.

There remains the argument that the loss on the shares was deductible from the dividends alone and not from the profits of the taxpayer in the respective years of income. This argument was advanced and by majority rejected in Rowdell Pty. Ltd. v. Federal Commissioner of Taxation [80] . That decision must also be followed.

1. (1963) 111 C.L.R. 106.

I would dismiss the appeals and the cross-appeal.