Papua New Guinea Law Reports - 1976
[1976] PNGLR 571
SC111
PAPUA NEW GUINEA
[SUPREME COURT OF JUSTICE]
THE CHIEF COLLECTOR OF TAXES
V
THOMAS
Waigani
Frost CJ Raine Saldanha JJ
24-27 May 1976
3 December 1976
INCOME TAX- Scheme or arrangement for avoiding payment of tax - What constitutes - Companies - Division of profits as capital and net income - Effect of unconditional operation of s. 361[dcxxiii]1 of Income Tax Act 1959 on arrangement caught within if - Income Tax Act 1957 ss. 4, 48, 361[dcxxiv]2.
A company, Theo Thomas & Co. Pty. Ltd. incorporated in Papua New Guinea had at the 31st December, 1970, an issued share capital of 24,135 shares of $2.00 each and at the same date the share capital and reserves of the company amounted to $695,754.00 representing an asset backing of $28.83 per share were held as follows:
W. T. Thomas (the appellant)	11,619shares	$334,946	
G. C. Thomas (the appellant’s mother)	6,008 shares	173,197	
D. M. Thomas (the appellant’s wife)	500 shares	14,414	
M. E. Marr	6,008 shares	173,197	
 	24,135	$695,750	
The company accountant, concerned that if the company continued to make profits the value of its shares and consequently the value of the shareholders’ equity would increase and there might not be sufficient liquid funds to pay probate duty in the event of any of the shareholders dying (G. C. Thomas being in her eighties), consulted a senior tax consultant in Sydney as a result of which certain arrangements were proposed and put into effect. These were that a company incorporated in New Guinea and known as Rainau Holdings Pty. Ltd. (hereinafter called Rainau) issued 10,000 shares  of $1.00, 6,250 thereof to Theo Thomas Investment Co. Pty. Ltd., (an Australian Company in which the appellant had a controlling interest) and 3,750 shares to Gidgiewa Pty. Ltd. (an Australian Company in which M. E. Marr had a controlling interest). The shareholders in Theo Thomas & Co. Pty. Ltd. then executed transfers of their shares to Rainau which expressed consideration therefore to be as follows:
W. T. Thomas	$360,158.00	
G. C. Thomas	$186,248.00	
D. M. Thomas	$15,500.00	
M. E. Marr	$186,248.00	
Cheques were drawn on the bank account of Rainau (which had arranged a temporary overdraft of an amount in the vicinity of $750,000.00) in favour of each of the transferors for the consideration expressed to be payable in the share transfers and then negotiated through accounts in the name of the transferors with the Commonwealth Trading Bank at Rabaul. In the cases of D. M. Thomas and G. C. Thomas accounts were opened specifically for this purpose. The transferors then drew their own cheques in favour of Rainau for identical amounts, the amounts of the purchase price of the shares being treated as loans by the transferors to Rainau, repayable on demand, and loan accounts were raised in the books of that company.
There was in evidence a document which on its face contained the Minutes of a meeting of directors of Theo Thomas & Co. Pty. Ltd. held on the 15th November, 1971 when it was resolved that a dividend of $425,000.00 be declared and credited out of accumulated profits of the company at the 30th June, 1971, such dividends to be credited to the account of Rainau forthwith. The price of the shares acquired by Rainau was $748,154.00, but the amount of $425,000.00 represented the pre-acquisition profits standing in the books of Theo Thomas & Co. Pty. Ltd.
The Chief Collector of Taxes treated as income derived by the appellant during the financial year ending 30th June, 1972, the sum of $204,593.00 calculated by treating as income of the appellant that proportion of the dividend of $425,000.00 declared by Theo Thomas & Co. Pty. Ltd. which his shareholding bore to the total shareholding in that Company.
On appeal against this assessment of income tax, Williams J. found that there was an arrangement within the meaning of s. 361 of the Income Tax Act, 1957 with a twofold purpose.
(1)      To “freeze” the assets of the original shareholders in Theo Thomas & Co. Pty. Ltd. for estate duty purposes.
(2)      To enable distributions to be made from accumulated profits of Theo Thomas & Co. Pty Ltd. to reach its original shareholders in the form of non-taxable capital sums which sums, but for the arrangement would be taxable income; and that the tax avoidance was not an incidental feature of the arrangement entered into but was an important part of it, but that the arrangement did not have the purpose or effect of relieving the appellant from liability to pay income tax on the sum of $204,593 in the year of income in respect of which the assessment under appeal was made, for the appellant had not received that sum pursuant to the arrangement.
Williams J. further held that a sum of $9,334.26 appearing in the loan account of the appellant, had reached the hands of the appellant in the income year under question and was part of his taxable income.
On appeal therefrom, by the Chief Collector of Taxes and on a cross appeal by the appellant taxpayer against the finding that there was an arrangement under s. 361:
Held
(1)      An arrangement will be brought within s. 361 of the Income Tax Act 1957, if it has as one of its purposes, tax avoidance, (Newton v. Commissioner of Taxation [1958] A.C. 450) provided that such a purpose is not merely inessential or incidental to the arrangement, in which case the arrangement will not be brought within the section because “the arrangement cannot necessarily be labelled as the means to avoid tax”.
(Hollyock v. Federal Commissioner of Taxation (1971) 125 C.L.R. 647 at p. 657 per Gibbs J.)
(2)      Whilst s. 361 of the Income Tax Act 1957 is not concerned with motives of individuals but with the purpose of the arrangement as gathered from its terms, that does not mean that the Court may not look at the words used and declarations of intention by the parties as a guide to that purpose.
(3)      In the circumstances there was an arrangement within the meaning of s. 361 of the Income Tax Act 1957: in addition to estate planning the arrangement had as one of its purposes the avoiding of liability imposed by the Act upon the taxpayer by ensuring that subsequent distributions of profit by the Company would be received by Rainau and not the taxpayer in whose hands it would be taxable, and such sums would be available to the taxpayer as capital sums in repayment of the loan, and that purpose was not merely incidental or inessential to the arrangement.
(4)      The arrangement therefore being avoided as against the Chief Collector of Taxes, the next question was whether it had been shown that there had come into the hands of the taxpayer, pursuant to the arrangement, money or money’s worth which the Chief Collector of Taxes was entitled to treat as income derived by him.
(5)      In the circumstances, the debt owed to the taxpayer, which was to be repaid from time to time by distribution of dividends, was not an asset which the Chief Collector of Taxes was entitled to treat as money’s worth in the hands of the taxpayer.
(6)      Of the dividend paid by Theo Thomas & Co. Pty. Ltd. to Rainau Holdings Pty. Ltd. in the year ended 30th June, 1972 the sum of $19,009.95 (and not the sum of $9,334.26) the reduction out of the loan account constituted part of the assessable income of the appellant for that year.
(7)      Both the appeal and the cross appeal should be dismissed.
Cases Cited
Hancock v. Federal Commissioner of Taxation (1961) 108 C.L.R. 258.
Newton v. Commissioner of Taxation [1958] A.C. 450.
Chief Collector of Taxes v. Bailes [1973] P.N.G.L.R. 411.
Bell v. Federal Commissioner of Taxation (1953) 87 C.L.R. 548.
Mayfield v. Commissioner of Taxation (No. 1) (1961) 108 C.L.R. 303.
Mayfield v. Commissioner of Taxation (No. 2) (1961) 108 C.L.R. 323.
Rowdell Pty. Ltd. v. Federal Commissioner of Taxation (1963) 111 C.L.R. 106.
Mangin v. Inland Revenue Commissioner (N.Z.) [1971] A.C. 739.
Hollyock v. Federal Commissioner of Taxation (1971) 125 C.L.R. 647.
Ellers Motor Sales Pty. Ltd. & Others v. Commissioner of Taxation of the Commonwealth (1969) 44 A.L.J.R. 1.
Ashton & Another v. Inland Revenue Commissioner (N.Z.) [1975] 1 W.L.R. 1615.
Slutzkin v. Federal Commissioner of Taxation 76 A.T.C. 4019.
Europa Oil (N.Z.) Ltd. (No. 2) v. Inland Revenue Commissioner (N.Z.) [1976] 1 W.L.R. 464.
Appeal
This was an appeal from a judgment of Williams J. allowing a taxpayer’s appeal from an amended Assessment of Income Tax for the year of income ending on 30th June, 1972. The relevant facts are set out in the reasons for judgment hereunder of Frost C.J.
Counsel
LJ Priestley QC with him PA Benson for the appellant (Chief Collector of Taxes)
RJ Bainton QC and RHB Wood for the respondent (taxpayer)
Cur. adv. vult
23 December 1976
FROST CJ:  This is all appeal from a judgment of Williams J., allowing a taxpayer’s appeal from an amended Assessment of Income Tax for the year of income ending on 30th June, 1972. The amendment which was appealed against increased the taxpayer’s income by $204,593.00. This was a proportionate portion of a dividend declared by a company called Theo Thomas & Co. Pty. Limited — “the Company”. What led the Chief Collector to make the increase was the existence, in his opinion, of an arrangement the purpose of which was to avoid tax under the Income Tax Act, s. 361.
So far as is material to this case, that provision provides that every contract agreement or arrangement is, so far as it has or purports to have the purpose or effect of in any way, directly or indirectly:
...
(c)      defeating, evading, or avoiding any duty or liability imposed on any person by the Act; or
(d)      preventing the operation of the Act in any respect, absolutely void, as against the Chief Collector, or in regard to any proceeding under the Act, but without prejudice to such validity as it may have in any other respect or for any other purpose.
Williams J. held that there was such an arrangement which had the purpose of avoiding income tax, but that the amount of the dividend was not paid or received by the taxpayer pursuant to any arrangement. It is against the latter finding that this appeal is brought. However, his Honour did hold that a different item in a much smaller sum, viz. $9,334.26, was so received during the year of income pursuant to the arrangement.
There is also a cross-appeal by the taxpayer against his Honour’s finding that there was an arrangement under s. 361, and also his ruling that a ground of appeal sought to be raised at the hearing was outside the ambit of the objection. The ground was that, in any event, there was no valid declaration of the dividend in question, a point which if decided in favour of the taxpayer would, of course, have determined the appeal in his favour.
Section 361 is in practically the same terms as s. 260 of the Income Tax Assessment Act 1936-1971 of the Commonwealth of Australia. Under the Constitution, Sch. 2.12.(2) recourse may be had to outside decisions for their persuasive value. Accordingly I propose to refer at the outset to the construction established by the decisions of the High Court of Australia and the Privy Council in England, on appeal from the High Court, and also the New Zealand Court of Appeal upon a similar provision to be found in the New Zealand Land and Income Tax Act 1954, with a view to determining their persuasive value.
For the purposes of this case I do not find it necessary to go into the facts of the many cases which were cited to this Court. They are invariably of great complexity, for as Sir Owen Dixon said, in another context, in a judgment relied upon by the Chief Collector, the “resource of ingenious minds to avoid revenue laws has always proved inexhaustible” — Hancock v. Federal Commissioner of Taxation[dcxxv]3. Whether the same ingenuity is exercised in Papua New Guinea also, and it will fall to this Court to consider similar cases of most complicated facts, remains to be seen. The leading case is Newton v. Commissioner of Taxation[dcxxvi]4 which went on appeal from the High Court to the Privy Council. The relevant passages from the judgment, which is accepted as the basis of the construction of the section, are to be found in the judgment of Williams J. The section was considered by the pre-Independence Full Court in Chief Collector of Taxes v. Bailes [dcxxvii]5. The other cases include Bell v. Federal Commissioner of Taxation [dcxxviii]6; Mayfield v. Commissioner of Taxation (No. 1)[dcxxix]7; Mayfield v. Commissioner of Taxation (No. 2)[dcxxx]8; Rowdell Pty. Ltd. v. Federal Commissioner of Taxation [dcxxxi]9; Mangin v. Inland Revenue Commissioner (N.Z.)[dcxxxii]10; Hollyock v. Federal Commissioner of Taxation [dcxxxiii]11; Ellers Motor Sales Pty. Ltd. & Others v. Commissioner of Taxation of the Commonwealth [dcxxxiv]12; Ashton & Another v. Inland Revenue Commissioner (N.Z.)[dcxxxv]13; Slutzkin v. Federal Commissioner of Taxation [dcxxxvi]14; Europa Oil (N.Z.) Ltd. (No. 2) v. Inland Revenue Commissioner (N.Z.)[dcxxxvii]15.
The decision in the last-named case was strongly relied on by the taxpayer’s counsel. It was given by the Privy Council upon the New Zealand provision in the interval since the judgment of Williams J. was delivered.
It was relied on because of a statement of several things which the Privy Council noted in connection with the section, and particularly the requirement that for an arrangement to fall within the section it must have the purpose of, in effect, the avoidance of tax. Lord Denning said in Newton’s case[dcxxxviii]16 that it was not necessary that avoidance should be the sole purpose or effect of the arrangement — “the section can still work if one of the purposes or effects was to avoid liability for tax”. This must be so for, as his Lordship pointed out, the “section distinctly says ‘so far as it has’ the purpose or effect” (ibid.). In the present case Williams J. held that the arrangement he found to have been made had two purposes, to be mentioned presently, one of which was tax avoidance, which was “not an incidental feature of the arrangement entered into but was an important part of it”.
His Honour reached that conclusion by applying the test laid down by Gibbs J. in Hollyock v. Federal Commissioner of Taxation[dcxxxix]17.
In the cases I have referred to various descriptions have been given within which a purpose must fall if the arrangement is to be caught by the section. The descriptions include “at least the principal purpose”, “the dominant purpose”, and in the Europa case[dcxl]18 “the main purpose”. To adopt any of these tests, it seems to me, with respect to the eminent judges who have held otherwise, would be to read into the section a requirement which is not suggested by the words contained in it.
I would go back to Lord Denning’s reasons and hold that it is a sufficient interpretation of the Papua New Guinea section that an arrangement is brought within it if the arrangement has as one of its purposes tax avoidance. Some support for the retention of this test is to be found in Ashton’s case[dcxli]19. I would then adopt, as Williams J. did, the approach of Gibbs J., and, as the only qualification required, exclude cases in which tax avoidance is merely inessential or incidental to the arrangement. The reason is that in those cases “the arrangement cannot necessarily be labelled as the means to avoid tax”. Hollyock v. Federal Commissioner of Taxation[dcxlii]20.
I do not consider that there is a material difference between the test laid down in the Europa case[dcxliii]21 and that adopted by Williams J. that the section required not merely an incidental feature but an important purpose. For in describing a purpose caught by the section in the terms “main or one of the main purposes” it was clear that their Lordships were contrasting such a purpose with a purpose outside the section in which the avoidance of tax was incidental to the arrangement. It therefore seems that both Gibbs J. and Williams J., and the Privy Council, in using respectively the terms “important” and “main”, which, it is true, express different shades of meaning, were merely describing, by way of contrast, the same concept of a purpose not incidental to the arrangement.
The other main question of law which arises in this case is the effect which s. 361 has upon the taxpayer’s liability if there is found to be an arrangement to avoid tax within the meaning of that section. It is provided that insofar as the arrangement has that purpose, directly or indirectly, it is absolutely void as against the Chief Collector but without prejudice to such validity as, in effect, it may otherwise have. As Lord Denning said in Newton’s case[dcxliv]22, that is not a very precise use of the words “absolutely void”.
The cases referred to establish that the section is an “annihilating” provision; the tax authority can ignore not only the arrangement but also each and every step or transaction taken by the taxpayer as part of the arrangement. But as Lord Denning pointed out, this does not in itself create liability to tax. His Lordship went on to say that in order to make the taxpayer liable it must be shown that moneys have come into the hands of the taxpayers which the tax authority is entitled to treat as income derived by them — Newton’s case[dcxlv]23.
The expression “moneys” has been seen to cause difficulty. I would adopt the view of Dixon C.J. that Lord Denning did not intend “to distinguish between moneys or any other form of asset the receipt of which may constitute the derivation of income” — Hancock v. Federal Commissioner of Taxation[dcxlvi]24. Sir Owen Dixon then gave the instance of an immediately convertible security which was relevant to the facts of that case. Further assistance is to be found in the Europa case[dcxlvii]25, where the Privy Council clearly considered that what Lord Denning had in mind was the basic requirement of some derivation of income under the statute. Their Lordships said that the provision was not a charging section, and further, “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”.
These considerations are relevant upon the facts of the present case, because, at least upon one branch of the Chief Collector’s submissions, the income alleged to have been derived was the dividend, or a proportionate part of it, and, as defined in the Act, dividend does not necessarily connote a distribution in money or property but includes an amount received out of profits derived by the Company which is credited by a company to a shareholder. Income Tax Act, ss. 4, 48(1)(a). Also material is s. 13, which provides that income shall be deemed to have been derived by a person although it is not actually paid over to him but is re-invested, accumulated etc., or otherwise dealt with on his behalf or as he directs.
The first matter to be considered is the issue raised under the cross-appeal, that the judge at first instance was in error in holding that an arrangement existed within the meaning of s. 361. To disturb this finding it is necessary that this Court should be convinced on the facts that the finding was wrong.
To turn now to the facts of the case the Company, which was incorporated in 1960 or earlier, had plantation and other interests in the Rabaul area. The share capital was 24,135 shares of $2.00 each, of which the taxpayer was the holder of 11,619, the remainder being equally divided between his mother and his sister, Mrs. M. E. S. Marr, except for 500 shares held by his wife.
In December 1970 the share capital and reserves amounted to $695,754. When applied to the number of shares issued, this figure gave a value per share in excess of $28.00. But at no time did the Company have any substantial liquid funds. Its assets were invested in plantations, trading stock and in a subsidiary company.
The evidence shows that in 1969 Mr. Burton, who lived in Sydney and was the Company’s accountant, pressed the respondent with the effects of the directors’ financial policy of declaring relatively small dividends and ploughing the major portion of the profits back into plantation improvements and generally improving the assets of the Company.
The usual but not invariable practice had been to declare a relatively modest dividend amounting to $24,135 per annum. This was designed to cover the regular monthly drawings of $600 per month to the respondent and $300 per month to his mother and sister, and other expenditure of the shareholders. The consequent rise in shareholders’ funds gave Mr. Burton concern that if the Company continued to make profits the value of the shares must increase and therefore the value of the shareholders’ equity, with the consequent problems of raising sufficient funds to pay probate duties when there were no available liquid funds. This consideration was particularly relevant in the case of the respondent’s mother who was in her eighties and who, it transpired, died on 28th July, 1972.
In his evidence Mr. Burton persisted that, in view of the large amount of undistributed profits, the purpose of the transactions later completed remained as one to plan the estates of the shareholders so that the value of the respective shareholdings should be frozen at current figures. (The alternative of a sale of the mother’s shares was not really practicable in the case of this private Company.’ This was indeed the proposal mentioned by Mr. Burton in his letter of 11th July, 1969 in which he suggested that there were ways and means by which the respondent’s mother could divest herself of all her assets, and if she did she would save approximately $30,000 in death duties, a proposal which at that time did not interest the respondent. However, what appears from the correspondence is a clear inference that in the passage of time another scheme did emerge which was the purpose of avoiding income tax, and it was the inference to be drawn from the correspondence rather than the oral evidence of Mr. Burton which the trial judge preferred to accept.
The first relevant transaction which took place was in relation to a company described as a subsidiary of the Company, and called Plantation Equipment Pty. Ltd. The original shareholders and directors were the respondent and his wife, who each held one share. By a resolution in February 1971, the Company’s name was changed to Rainau Holdings Pty. Limited. It was this company, Rainau, to which the sale of the shareholding of the taxpayer and his family was made.
It is plain from Mr. Burton’s letter of 21st May, 1971 that discussions bad been going on for some time for the transfer of the shareholdings to a holding company, and that the financial basis of the transfer was to be for the actual value of the shares, that is to say, more than $28.00 per share, involving a total sum of $695,754. Rainau was the holding company envisaged. It was in this letter that Mr. Burton informed the taxpayer that he was seeking outside advice from a Sydney firm, Messrs. Fell & Starkey, as tax consultants, to which the taxpayer gave his approval by letter dated 26th May, 1971. To indicate that tax avoidance was at least one purpose of the proposal it is sufficient to cite Mr. Burton’s words in his next letter dated 28th May, 1971. He said that he had set out what the values of various shareholders’ shareholding (which he had done in the previous letter) would be “if you sold out to a holding company and thus enable funds to be distributed to the family free of income tax”.
The proposal was for the sale of the shares to Rainau, and also the restructure of that company because the purchase price would need to be left upon loan account with Rainau. It was felt that under the Income Tax Act, s. 144, the Chief Collector could, if deemed expedient, class the repayments of the loan as a dividend, if the shareholders in Rainau were the same persons who were owed money by the Company. So it was thought it would be better to have different shareholders in Rainau other than the taxpayer and his family. One means of getting over this problem was to substitute their private investment companies, both registered in Australia, as the new shareholders. This would mean that the share capital of Rainau would be held by Theo Thomas Investment Co. Pty. Limited, and Gidgiewa Pty. Limited, the controlling interest in which was held in the case of the former by the taxpayer, and in the case of the latter by his sister, Mrs. Marr. It was proposed that the nominal capital of Rainau amounting to $10,000 should be divided between the taxpayer’s company as to 6,250 shares of $1.00, and Mrs. Marr’s company, as to 3,750 shares of $1.00. But is also appears that the need for estate planning, especially in the case of the taxpayer’s mother, was also a consideration.
Shortly after, on 3rd June, 1971, the taxpayer confirmed his approval of the suggested share structure of Rainau, and the proposed loan account. He then gave his go ahead.
Messrs. Fell & Starkey’s letter was dated the following day, and copies were sent on to the taxpayer by both his sister and Mr. Burton. That tax avoidance was one purpose of the proposals is shown again by the opening comment, that “you have asked for our advice on a means of diverting cash from the company to its shareholders without subjecting the latter to income tax in respect of any such distributions”. The proposal was in other respects made explicit. The purchase consideration of the shares was to reflect the accumulated profits and reserves, the profit arising from the sale was to be a capital profit, and therefore not such as to attract income tax. The purchase price for the shares was to remain on loan account, interest free and payable on demand, and to be extinguished from cash funds derived from dividends paid by the Company, the dividends were to be much greater in amount than those previously paid, and the increased amount was to be used for the part repayment of the company’s loan account. In addition the crucial basis of the proposal as a whole was referred to, which is that dividends received by Rainau as a company would not in effect be taxable because of the rebate provisions of s. 219 of the Income Tax Act. So that in fact there would be a saving of tax.
Having heard the evidence of Mr. Burton and the taxpayer, Williams J. was satisfied upon the whole of the evidence that the letter from Messrs. Fell & Starkey set out the substance of a scheme which was accepted by the taxpayer and the other shareholders. Although counsel for the taxpayer strongly argued that Mr. Burton’s oral testimony, in which he persisted that the sale of the share holdings and the later transactions were for the purpose only of estate planning, should have been accepted, in my opinion Williams J. was entirely justified upon the facts in taking the view that he did. Further, counsel’s other argument that the taxpayer had committed himself to Mr. Burton’s proposal prior to the receipt of the letter cannot assist the taxpayer, because the various transactions which all took place after the receipt of the letter were clearly adopted by the taxpayer and his family as the means of carrying out the scheme outlined in the letter.
Whilst it is established that the section is not concerned with motives of individuals but with the purpose of the arrangement as gathered from its terms, that does not mean, nor was it submitted, that the Court may not look at the words used and declarations of intention by the parties as a guide to that purpose.
The subsequent transactions were in fact as contemplated in Messrs. Fell & Starkey’s letter. On 30th September, 1971, Rainau issued 9,998 shares so that, upon allotment, the total shareholding was divided between Theo Thomas Investment Co. Pty. Limited, which held 6,249 shares, Gidgiewa Pty. Limited, which held 3,749 shares, and the respondent and his sister, each of whom retained one share.
Next, on 5th October, 1971, the respondent and the other shareholders sold their shares — all but one — in the Company to Rainau. In the case of the respondent the consideration, as shown in the transfer, was $360,158.00 which, on the evidence, was the amount of the asset backing of the shares. The purchase price of the shares was paid by a cheque drawn by Rainau upon a Rabaul bank through a temporary bank overdraft, and at the same time the respondent and the shareholder vendors by means of cheques drawn on their accounts paid the purchase price back to Rainau by way of loan. (In the case of the respondent’s wife and sister bank accounts were opened specifically for the purpose, and closed immediately after the single receipt and payment). During November the transfers of shares in the company were approved at a meeting of directors of the Company, and registered. Loan accounts for each former shareholder were issued in the books of the Company, the respondent’s loan account being credited with $360,158.
The price of the total shareholdings acquired by the respondent was $748,154.00 but the sum of $425,000 represented what was, in Mr. Burton’s view, the pre-acquisition profits standing in the books of the Company.
Next followed a declaration of the dividend of $425,000 by the Company on 15th November, 1971. No portion of this dividend was paid in actual cash. As a result of this series of transactions the shareholding of the respondent and the other shareholders of the Company, the value of which included accumulated profits of the Company, was converted into capital sums in the form of loan accounts in the books of Rainau. The Company’s dividend became payable to Rainau and, as I have indicated, it was not, in effect, taxable in the hands of Rainau.
There was, however, a reduction out of the respondent’s loan account in that year as a result of book entries simplifying a loan account between the respondent, the Company, and Rainau. At the hearing the respondent accepted that this adjustment amounted in law to payment by Rainau to the respondent. The amount of that reduction was found by the trial judge to be $9,334.26, and this was the sum which his Honour held constituted a payment pursuant to the arrangement. In this Court, however, it was submitted that upon the evidence the correct amount should have been $19,009.95.
In my opinion the learned judge was right in concluding that there was an arrangement within the meaning of s. 361. The parties to it were the taxpayer, and the members of his family who were the other shareholders in the Company. It was not the product of the taxpayer’s mind, but it was assented to by him and other shareholders. In my opinion, Williams J. was also right in holding that in addition to estate planning the arrangement had as one of its purposes the avoiding of a liability imposed by the Act within the meaning of s. 361(c). One purpose of the sale of the taxpayer’s shareholding to Rainau and the re-investment of the purchase price upon loan, was thus to ensure that subsequent distributions of profit by the Company would be received by Rainau and not the taxpayer in whose hands it would be taxable, and such sums would be available to the taxpayer as capital sums in repayment of the loan.
In that way the arrangement had as one of its purposes the avoiding of a liability imposed by the Act upon the taxpayer to pay tax, within the meaning of s. 361, and that purpose was not merely incidental or inessential to the arrangement. The arrangement was thus avoided as against the Chief Collector.
The first ground of the cross-appeal therefore fails.
The second ground of the cross-appeal relates to the validity of the dividend. During the hearing it emerged that the meeting on 15th November, 1971, of the directors of the Company, as referred to in the minutes showing that a declaration of dividend was then made, did not take place. It appears that on that date the respondent was absent in Sydney. Upon his return to Rabaul he merely signed the minutes, no meeting of the directors having taken place.
It was contended that in the absence of any decision of the directors to declare a dividend, as a matter of law no dividend was declared. The trial judge held that this point was not covered by the notice of objection. On an appeal the taxpayer is limited under the Act to the ground stated in his objection — s. 250(a). It is true that in the objection there is a general denial that the taxpayer during the year of income derived income of $204,953 as alleged. But an alternative ground of objection was asserted, that the Chief Collector was not entitled to treat any part of the dividend declared by the Company as part of its assessable income.
As the appellant’s counsel submitted, the reality of the dividend is thus stated as a fact. Further, as was said by the trial judge, the matters of fact relied upon were peculiarly within the knowledge of the taxpayer. The Chief Collector had no reason to believe or suspect that the declaration of dividend was, as represented in the Company’s records, not duly made.
I therefore agree with the submission of the appellant’s counsel that the possible invalidity of the dividend is not stated or suggested as a ground for the assessment being excessive and, in my opinion, the trial judge’s decision on this matter was right. However, I agree also with the appellant’s submission that the minute can be supported as a valid resolution under the Company’s Article No. 73a. That Article provides that a resolution in writing signed by the Governing Director shall be valid and effectual as if it had been passed at a meeting of directors duly called and constituted. The respondent was the first Governing Director of the Company under Article 63a. The minutes are wrong in that it is stated that the respondent’s sister and the secretary were present, and also that a meeting was held. The document also was signed by the respondent in his capacity as Chairman. But, as appellant’s counsel submitted, it was signed in fact by the Governing Director intending that it be acted upon, and the books of the Company and Rainau show that it was acted upon as a document effectively declaring a dividend.
There is therefore, in my opinion, after the inaccurate facts are stripped away, no reason why the declaration should not be treated as a valid resolution under Article 73a. Accordingly, in my opinion, this ground also of the cross-appeal fails.
It remains now to consider the Chief Collector’s appeal.
As in the cases decided under the Australian section, the real difficulty in this case is to determine the effects upon the taxpayer’s liability of the arrangement being made void as against the Chief Collector. The question is whether there was some derivation of income by the taxpayer which would have been liable to be taxed if the arrangement had not been made.
The ground upon which Williams J. found against the appellant was that, whilst the arrangement could be ignored whereby the taxpayer’s right to receive a dividend if and when declared was transformed into a right to demand and receive repayments of loan moneys which would not be taxable in his hands, upon the declaration of dividend the sum of $425,000 was merely credited in the books of Rainau and not physically paid to Rainau. What his Honour held to be of significance was that no sum of money was received by the taxpayer. Further it was held that no case could be made of any application of moneys by the taxpayer or practical equivalent of a receipt by him followed by an expenditure by him. (In making these findings his Honour applied proposition (5) stated by Kitto J. in Hancock v. Federal Commissioner of Taxation[dcxlviii]26 which was adopted in Chief Collector of Taxes v. Bailes[dcxlix]27).
So it is clear that his Honour looked for a receipt of money — in the absence of any suggestion of an asset, for example, such as an immediately convertible security — and finding none held that the arrangement as proved did not in the end result avail the Chief Collector.
The Chief Collector’s argument in this Court was directed to show that there was a derivation of income which could only be by Rainau as the new shareholder, and also that in the end result it was in the taxpayer’s hands as a capital loan. There is of course nothing in the evidence to indicate that a distribution of income of the magnitude that the taxpayer declared, acting no doubt on the advice of Mr. Burton, was contemplated under the arrangement at the time it was made. But that does not conclude the matter, for continued and increased distributions of income were certainly contemplated.
However, it must first be shown that the dividend constituted a derivation of income. It is clear from both the Company’s accounts and Mr. Burton’s evidence that the dividend was declared out of the accumulated profits of the Company, so that the statutory requirement that it should come out of profits is satisfied — Income Tax Act, s. 48(1)(a). The question is whether the dividend was received pursuant to the Act. The appellant’s counsel submitted that there was both a receipt of dividend within the meaning of the Act, and also by operation of the general law.
It was not questioned that s. 48(1) is to be read with the definition of income contained in s. 4 of the Act. As defined, “dividend” includes any amount credited by a Company to any of its shareholders as shareholders. Actual payment is therefore not necessary. In fact the books of Rainau show that the dividend was received and re-invested on loan with the Company. This treatment of the dividend corresponds with entries in the books of the Company which show that the dividend was credited to Rainau, which could have been only on the basis of a loan. There is thus an amount credited and re-invested within the meaning of s. 19, which, coming from accumulated profits, constitutes the receipt of a dividend within the meaning of the Act. Whilst I am inclined to the view that from the manner in which the dividend was treated in the books of the Company and Rainau there was also payment by operation of law, I do not find it necessary to determine that issue. It does not seem to me to bear upon the real question. That question is whether it has been shown that there has come into the hands of the taxpayer money or money’s worth which the Chief Collector is entitled to treat as income derived by him. At the stage after the dividend of $425,000 was credited to Rainau the loan from the taxpayer to Rainau was worth its face value, having regard to Mr. Burton’s valuations, and the only asset that Rainau had apart from its paid-up share capital of $10,000 was the dividend of $425,000. On that basis, it was submitted on behalf of the Chief Collector that the taxpayer then had an asset of $204,593 being the taxpayer’s proportion of the total dividend, and the only asset Rainau had from which that worth could come was the amount of the total dividend liberated to the taxpayer from the profits of the Company.
It was then submitted that in a real and substantial sense the taxpayer had received in the form of a capital asset, that is the valuable debt, profits which had been diverted to Rainau which, had they come to the taxpayer direct, would have come to him as income, and it is in this form that the income was money’s worth in the hands of the taxpayer.
Now the effect of s. 361 is that the Chief Collector could ignore the transfer of the shares to Rainau, for it was that transaction which gave the character of capital to any payments of money received by the taxpayer from Rainau. The dividend of $425,000 which was declared and later credited to Rainau on the shares is deemed to be held for this purpose by the original shareholders, and so far as the Chief Collector can show that the dividend reached the hands of the taxpayer he is entitled to treat it as income derived by him from the shares. This is not such a case as Newton v. Commissioner of Taxation[dcl]28 in which the shareholders allowed the holding company to retain the money as remuneration for services rendered. It is not such a case as Hancock v. Federal Commissioner of Taxation[dcli]29 in which the point of the arrangement was to effect the liberation of the fund of profits without incurring tax, and at the same time by means of the fund liberated to acquire shares or property. In the present case the point of the arrangement was that the distribution of dividends was to be received from time to time as repayment of capital loans.
It was said by counsel for the appellant that the statutory receipt of the dividend by Rainau was probably sufficient, for the payment was to be regarded as coming to the hands of the original shareholders. This submission was based on the fact that the taxpayer and his sister were in full control of Rainau and were owed sums greater than the amount of the total dividend. But the submission was pressed only on the basis that the taxpayer had in addition received the profits in the form of a capital loan. On the whole I do not consider that the resources of the taxpayer were actually increased by the mere crediting of the dividend to Rainau within the meaning of the Act.
The difficulty in the Chief Collector’s argument, it seems to me, is that, at the date when the loan was made to the Company by the taxpayer, no distribution of income had been made by the Company which would enable it to be said that the taxpayer’s right to payment could be treated as income from the Company. If there had been an actual payment to Rainau of a dividend by the Company, which was thence passed on to the taxpayer in repayment of the loan within its liquid capability, that payment could have been treated as income in the hands of the taxpayer. But it was not because of the changed character of any outstanding portion of the capital sum owing, but merely because of the receipt of the dividend by the taxpayer.
In my opinion the submission of counsel for the taxpayer upon this part of the case is right. Whilst on 5th October, the date of the transfer of the shares, the taxpayer had a capital asset in the form of a loan, at that stage the Company had not distributed any assets or declared any dividend which could have been given the character of income to any portion of the loan. I do not consider that the subsequent declaration of a dividend, even although contemplated under the arrangement, can be held to change the character of the loan into a derivation of income. Further, in the case of a provision which is found in a tax Act there must be some limitation upon the manner in which the requirement is extended that money must be shown to have come into the hands of the taxpayer. The inclusion of an immediately convertible security causes no difficulty. But it seems to me that what led Sir Owen Dixon in Hancock’s case[dclii]30 to hold that shares in a proprietary company satisfied the requirement was that the acquisition of the shares was part of the arrangement. That reasoning cannot assist the Chief Collector in this case. Having regard to the unconditional operation of s. 361 upon an arrangement caught within it, I am not satisfied that so far as the facts were investigated in this case the debt owed to the taxpayer was an asset which the Chief Collector was entitled to treat as money’s worth in the hands of the taxpayer.
However, I consider that the submission of the Chief Collector is right that, upon the evidence — both oral and written — the reduction out of the loan account for the year of income was $19,009.95 in lieu of $9,334.26. The error seems to have crept in during counsel’s final submission. Accordingly I would substitute in the first declaration made by Williams J. the figure of $19,009.95 for the sum referred to.
I would dismiss the appeal and the cross-appeal and make the substitution referred to.
RAINE J:  I have read the judgment in draft of the Chief Justice. I do not propose to set out the facts, for they are more than adequately stated in the judgment of Williams J. which is appealed from. I also will not set out the issues in the appeal and cross-appeal to any extent, the Chief Justice has done so in the clearest terms.
I think it is logical to deal first with so much of the cross-appeal as complains at the finding of Williams J. that there was an arrangement to avoid income tax caught by s. 361 of the Income Tax Act, the terms of which have been set out by the Chief Justice.
Both the Chief Justice and Williams J. seem to me to have discussed all the leading cases concerning largely similar sections, certainly all those that have come in for close examination elsewhere from time to time, with one exception, in the case of the trial judge, namely the Europa Oil case[dcliii]31. It had not been decided when Williams J. delivered judgment, but is discussed by the Chief Justice, for it was cited to us, being then available.
A consideration of the several authorities was rendered necessary by Williams J.’s finding that there was an arrangement within the meaning of s. 361 such as “to enable distributions to be made from accumulated profits of Theo Thomas & Co. Pty. Ltd. to reach its original shareholders in the form of non-taxable capital sums which sums but for the arrangement would be taxable income”, and because his Honour found that this was only a part, and not the sole part of the arrangement. His Honour, as I read his judgment, believed that there were two aims, the first being the ultimate reduction of estate duty, the second the freeing from income tax of future payment of what might loosely be called capital sums. It seems to me that his Honour was not concerned, as it were, to award points so as to reach a conclusion as to which aim was the more potentially rewarding or important. His Honour really went no further than saying that the tax reduction purpose was an important one.
I cannot see how these findings of the trial judge can be attacked. It is what flows from them that is the question we have to decide. I am quite prepared to accept that the genesis of the whole arrangement was the very real need to reduce the incidence of estate duty. This pressing need triggered off all that subsequently transpired, it motivated Mr. Burton, the family accountant, to put in train his own investigations, and those of Fell & Starkey, the latter being specialists in the income tax field, whom Mr. Burton brought in as consultants.
It might be noted that I used the unattractive word “motivated”. Gibbs J. said in Hollyock v. Federal Commissioner of Taxation[dcliv]32: “It is clear that s. 260 is not concerned with motives, so that it is irrelevant if in the present case the ends which the appellant hoped to achieve did not include the avoidance of tax.” I respectfully agree. However, in looking objectively to see what is the purpose of the arrangement that is under scrutiny I can see no vice, as a fact-finding exercise, in examining motive, if one is apparent. Here I think it is.
Although, as I have said, what eventually transpired came about as a result of earlier preoccupations with and worries about future estate duty, that single object later had tax saving added to it, as a further and significant objective. The tax saving, even if subsidiary, was seen as very real by the trial judge, and I would not differ from him. With respect, I think he approached the problem realistically and correctly.
I cannot see how this finding can be attacked in view of Fell & Starkey’s letter of 4th June, 1971, which reads:
“THEO THOMAS & COMPANY PTY. LIMITED
We refer to our recent discussions concerning the above company and its considerable accumulated profits and reserves. You have asked for our advice on a means of diverting cash from the company to its shareholders without subjecting the latter to income tax in respect of any such cash distributions. The company’s shares are beneficially owned by four individuals, three of whom are residents of the territory for the purposes of Australian and Territory income tax whilst the remaining shareholder is a resident of Australia for the purpose of income tax in both territories. Obviously, any dividend declared by the company to its shareholders will attract territory income tax in their hands, limited to the Territory rate in respect of dividends paid to those shareholders resident in the Territory, but subject overall to the higher Australian rate in respect of dividends paid to the Australian resident shareholder. The Australian shareholder would be subject to Australian income tax in respect of any such dividends with credit granted in Australia for any Territory tax suffered. Further, as you have appreciated, any loans or advances made by the company run the risk of falling foul of the provisions of s. 144 of the Income Tax Ordinance of the Territory of Papua and New Guinea and s. 108 of the Australian Income Tax Assessment Act, this latter section having effect in relation to any loans, advances etc made to the Australian shareholder. Section 144 of the Ordinance and s. 108 of the Act are worded in almost identical terms and, broadly speaking, the sections provide that so much of the amount of value of advances, loans or payments made by a private company to or on behalf of its shareholders as, in the Commissioner’s opinion, represents distributions of income of the company, are deemed to be dividends paid by the company.
In view of the large accumulated profits in the company, built up because of its conservative dividend policy in relation to profit earned, due mainly to the absence in the Territory of a rate of undistributed profits tax, we consider that loans, advances etc. to shareholders would most likely be deemed dividends by the respective Commissioners and thus attract income tax.
You have suggested incorporating a further company in the Territory which will acquire from the shareholders of Theo Thomas & Company Pty. Limited the shares they hold in that company. The purchase consideration for the shares will reflect the company’s accumulated profits and reserves. The profit arising from the sale will be a capital profit and will not attract income tax in the hands of the shareholders, either in the Territory or in Australia. You intend the purchase price for the shares will remain on loan account, interest free and payable on demand, and that the loan account will be extinguished from cash funds derived from dividends paid by Theo Thomas & Company. These dividends will be much greater in amount than those previously paid, and the new parent company, after paying a dividend equal to that paid previously by Theo Thomas & Company will use the balance for part repayment of the Theo Thomas & Company shareholders’ loan accounts. It was your intention to have the same shareholders, holding shares in some proportion as in Theo Thomas & Company, as the shareholders in the new company. We believe that here again we will be confronted with the hurdle of s. 144 and 108, mentioned previously, when loan repayments are made to the shareholders and to avoid any deemed dividend problems we suggest that the shareholders in the Theo Thomas & Company not be shareholders in the new company, at least until the loans are repaid. You have told us that each of the Theo Thomas & Company shareholders has a family company and we suggest that these companies be the shareholders in the new company.
This procedure should not create any income tax problems in the Territory so far as the existing shareholders in Theo Thomas & Company or the new shareholders in the proposed Territory parent company are concerned. In fact, there could be a saving of income tax in that dividends previously flowing to individuals will now flow through the parent company to the family company where they may be ‘spread’ among the various family company shareholders.
The Australian family company (Mrs. M. E. Marr) will receive its dividends free of Territory income tax and virtually free of Australian company tax. Although dividends paid by resident Territory companies are technically liable to Territory dividend withholding tax, s. 217 of the Territory Ordinance limits withholding tax in respect of Australian resident recipients to the amounts of Australian tax payable on the dividend. In the case of Australian resident companies, generally, any dividends received are rebateable under s. 46 of the Australian Act and, in effect, are free of Australian tax ...”
See also Mr. Burton’s letter to Mr. Thomas, which reads in part:
“Your assumptions were correct in that your mother and your wife would disappear from the share register and would not be shareholders in Rainau Holdings Pty. Limited. All amounts paid to them in the future would be tax free and would be applied in the reduction of their loan accounts.”
These are not the only indications. The Chief Justice has set out others.
Williams J. said, after conceding that estate planning could have originated the whole matter, that “the incidence of income tax loomed very large in the minds of the parties”. I respectfully agree, and can see no reason to disagree with the trial judge.
Williams J. was clearly unimpressed with the rather facile suggestion by Mr. Burton that Fell & Starkey’s Mr. Yates “took the bit between his teeth slightly and took into account matters (meaning income tax) additional to what I discussed with him”. I could not disagree with the trial judge’s attitude. Mr. Bainton of Queen’s Counsel, with his usual ability, sought to give a sort of “couleur de rose” to the whole arrangement, an estate duty “couleur”, with the income tax “couleur” being a mere, incidental blush on an otherwise white rose. I see things differently, as did the trial judge. I think Williams J. was right.
Mr. Bainton’s argument along these lines was persuasive and impressive, and it was not lost on the trial judge, nor on me, I trust. I respectfully agree with Williams J. when he says: “On these findings it appears that avoidance of tax was not the sole purpose or effect of the arrangement”. His Honour went on to say that in his view “tax avoidance was not an incidental feature of the arrangement entered into but was an important part of it”. (The emphasis is mine.) Again I agree.
It was those words that I have emphasized that largely concerned counsel during argument, assuming, of course, that we, or a majority of us, saw no fault in the factual findings made by the trial judge.
I appreciate very well that Lord Donovan, Lord Denning, Sir Garfield Barwick, Sir Harry Gibbs and the trial judge have expressed themselves differently in construing the section. I have been troubled by this, for I believe that there is a real distinction and a real difference in the approaches of Lord Donovan and Sir Garfield on the one hand, and Lord Denning, Sir Harry Gibbs and the trial judge on the other. I do not believe that the distinction I see is one without a difference, and, with great respect to great judges like Lord Donovan and Sir Garfield, I prefer the approach adopted by Lord Denning M.R., Gibbs J. and Williams J.
Correctly construed, the section does not, in my view, require one to tot up a sort of points score, which seems to be what one would have to do if the approach I do not favour prevails. I believe that a subsidiary purpose can attract the section, if the purpose is a real one, aimed at the saving of tax. Aliter where the major purpose, e.g. estate planning, incidentally, even inevitably, produces tax advantages.
I believe that one looks at the whole arrangement, that one makes no apportionment of the several objects that may be apparent, but evaluates whether they are real objects seeking gain or relief, as opposed to gains or relief flowing incidentally from the primary plan put into effect. In many cases I imagine that income tax will be substantially reduced, and sometimes inevitably so, as a result of an estate planning scheme, even though the taxpayer is quite disinterested in his tax situation and only concerned with his future beneficiaries. But, as I have said, if the tax saving is a mere incident of the estate planning scheme then, regardless of the amount of tax saving, s. 361 is not attracted. But where the object of the exercise is two-fold, and the tax saving object is significant and important, even though subsidiary to the estate duty object, then, in my view, is caught by s. 361.
As to the second ground of the cross-appeal, the validity of the crucial minute, the basis for which is fully set out by both the Chief Justice and the trial judge, while I appreciate the point taken by Mr. Bainton as to the form of the objection, which was a general denial as to the alleged income derived, I think that the reality of the situation is that the Collector would not have had a clue that the possible invalidity of the minute was relied upon. It reminds me of the bad old days in my home State of New South Wales where the result brought about by the previous system of common law pleadings, prior to the present Judicature Act style, was described by Sir Gordon Wallace as leading to “trial by ambush”. Unfortunately this was, to some extent, quite true, although I must say that pre-Judicature Act pleadings were much more disciplined, and pleaders were forced to formulate issues.
I respectfully agree with the trial judge when he says that the suggested invalidity of the minute was peculiarly within the knowledge of the taxpayer, and, of course, his accountant. I might add that had the Collector not sought to invoke s. 361 not a word would have been uttered about the irregularly recorded minute. It was intended that it be regarded, forever and a day, as a regular minute.
I am not so sure that Article 73a, to which the Chief Justice refers, can be taken as far as the appellant’s counsel would wish. However, I believe it might take him far enough. The respondent did not sign the minute inadvertently, or with a desire to trick or defraud shareholders, or other interested people. Had his sister been present at the meeting, as wrongly represented in the minute, she would have assented to the resolution, had it been moved. She was a party to the scheme designed by the accountants. It is true that she apparently found it difficult to grasp the whole scheme in the intellectual sense, but she was made fully aware of the object of the exercise.
So far as the appellant Collector’s appeal is concerned I agree with the Chief Justice that it should be dismissed and I agree with his Honour’s reasons. I had written a deal on the subject, but vastly prefer the reasons given by my brother, which I have read in draft, and respectfully adopt as if they were mine own. Like Williams J. I found this branch of the case very difficult. I believe that the root of my difficulties was that I had an uneasy feeling that whichever party succeeded an apparently illogical result was produced. Possibly my difficulties stemmed from the fact that the scheme is only annihilated “qua” the Collector but remains alive so far as all those others affected by it are concerned.
I also agree that the sum of $19,009.95 should be substituted for that of $9,334.26. It is difficult to see how the mistake occurred, but a mistake it was in my view. It is fairly clearly not a mere typographical error, otherwise one would expect to see $9,009.95 instead of $9,334.26. I think the Chief Justice is probably right in saying the error “crept in during counsel’s final submission”. The learned trial judge is exempt from criticism; senior and able counsel appearing before him, preoccupied with much more important matters, let this one go through the slips, or so it seems to me.
Thus it is that I agree with the variation and orders proposed by the Chief Justice.
SALDANHA J:  I have had the advantage of reading in draft the judgment of the Chief Justice. He has set out the facts in full. So has Williams J., from whose judgment this is an appeal. I will therefore refer to the facts no more than is necessary for the purposes of my judgment.
Tax on undistributed profits having been abolished there was no compulsion on Theo Thomas & Co. Pty. Ltd. (the “company”) to distribute annually all the profits made. As a result of declaring small dividends the company had accumulated about $425,000.00 in undistributed profits. This had the effect of increasing enormously the value of the equity of the company.
Mr. Burton, an accountant, who handled the affairs of the company and those of the respondent and his mother, Grace Thomas, was concerned that if the company continued to make profits the value of its shares and consequently the value of the shareholders’ equity would increase and there might not be sufficient liquid funds to pay probate duties in the event of any of the shareholders dying. Mr. Burton was particularly concerned about Grace Thomas who was in her eighties. In addition to her interest in the company she had shares in other companies. The total value of her assets was in the region of $180,000.00 and upon her death duties amounting to approximately $70,000.00 would have had to be paid.
Mr. Burton consulted Mr. Yates, the senior tax consultant of Messrs. Fell and Starkey, a firm of Chartered Accountants from Sydney. No doubt it all started as an exercise in estate planning for the purpose of avoiding high probate duties. The arrangement which was ultimately put into effect with the approval of all the shareholders of the company was one suggested by Mr. Yates in his letter to Mr. Burton dated 4th June 1971. This arrangement has been described both by Williams J., and by the Chief Justice.
Williams J., found that the arrangement in question came within s. 361 of the Income Tax Act. He held, however, that the declaration of the dividend by the company merely resulted in the sum of $425,000.00 being credited in the books of Rainau Holdings Pty. Limited (“Rainau”), that there was no physical transfer of cash from the company to Rainau and that in the year of income under consideration the respondent received nothing except for a small sum of $9,334.26 which he held was not assessable for tax because the respondent was entitled to a deduction of $14,757.00 in respect of a loss incurred in his Australian activities. He held that the sum of $204,593.00, being respondent’s share of the dividend declared, was not assessable for tax. He found that the arrangement had two purposes, (1) to freeze the assets of the original shareholders in the company for estate duty purposes and (2) to enable distributions to be made from accumulated profits of the company to reach its original shareholders in the form of non-taxable capital sums which but for the arrangement would be taxable income. The appeal and cross-appeal arise from these findings.
The principles applicable in determining whether an arrangement can be brought within s. 361 of the Income Tax Act are laid down by Lord Denning in Newton v. Commissioner of Taxation[dclv]33 in the following passage from his judgment at p. 465:
“... the section is not concerned with the motives of individuals. It is not concerned with their desire to avoid tax, but only with the means which they employ to do it. It affects every ‘contract, agreement, or arrangement’ (which their Lordships will henceforth refer to compendiously as ‘arrangement’) which has the purpose or effect of avoiding tax. In applying the section you must, by the very words of it, look at the arrangement itself and see which is its effect — which it does — irrespective of the motives of the persons who made it. Williams J. put in well when he said ‘The purpose of a contract, agreement or arrangement must be what it is intended to effect and that intention must be ascertained from its terms. These terms may be oral or written or may have to be inferred from the circumstances, but, when they have been ascertained, their purpose must be what they effect.’ In order to bring the arrangement within the section you must be able to predicate — by looking at the overt acts by which it was  implemented — that it was implemented in that particular way so as to avoid tax. If you cannot so predicate, but have to acknowledge that the transactions are capable of explanation by reference to ordinary business or family dealing, without necessarily being labelled as a means to avoid tax, then the arrangement does not come within the section.”
Newton’s case[dclvi]34 appears to be in conflict with the decision in Mangin v. Inland Revenue Commissioner (N.Z.)[dclvii]35 which was an appeal to the Privy Council from a decision of the New Zealand Court of Appeal. Lord Donovan in delivering the judgment of the majority adopted the words used by Turner J. (one of the judges of the New Zealand Court of Appeal) and expressed the opinion that an arrangement came within the section if it was:
“a scheme ... devised for the sole purpose, or at least the principal purpose of bringing it about that this taxpayer should escape liability on tax for a substantial part of the income which, without it, he would have derived.”
In Hollyock v. Federal Commissioner of Taxation[dclviii]36 Gibbs J. was critical of this test on the ground that:
“To say that the section applies only to arrangements whose sole purpose is tax avoidance would be contrary to the decisions in Newton’s case and Hancock v. Federal Commissioner of Taxation. To hold that tax avoidance should be the principal purpose of the arrangement would seem to me to be opposed to the reasoning on which those decisions rest, and would introduce into s. 260 a refinement which is not suggested by the words of the section itself, and which would tend to increase, rather than remove, the difficulties to which the section gives rise, by requiring the courts to weigh one purpose against another and to decide which was predominant. An arrangement may, for example, be designed to secure both the avoidance of income tax and the avoidance of death duties — each purpose may be equally important — and in such a case the arrangement does not in my opinion escape from s. 260 simply because it cannot be held that the avoidance of tax is the principal purpose of the scheme. On the other hand, if tax avoidance is an inessential or incidental feature of the arrangement, that may well serve to show that the arrangement cannot necessarily be labelled as a means to avoid tax.”
In Chief Collector of Taxes v. Bailes[dclix]37 Minogue C.J. used the adjective “dominant” in describing the purpose which a scheme must be found to have before it could be avoided by the Chief Collector.
In Europa Oil (N.Z.) Ltd. v. Inland Revenue Commissioner (N.Z.)[dclx]38, a decision of the Privy Council given after Williams J. delivered his judgment, the transactions that can be struck down are described as those where “the main purpose or one of the main purposes” is tax avoidance.
It would appear from these authorities that the correct test is this: that whatever may be the epithet used in describing the purpose which a scheme must have before it can be struck down as being obnoxious, whether “principal”, “dominant”, “main” or whatever, the important thing is that it must be seen as being not an inessential or incidental feature of the scheme. Lord Denning in Newton’s case[dclxi]39 has eschewed the use of epithets in describing purpose but has nevertheless defined lucidly and precisely the test to be applied, and, this test was adopted by Gibbs J. in Hollyock’s case[dclxii]40.
As Lord Denning pointed out in Newton’s case[dclxiii]41 motive is irrelevant. One must look at the scheme itself in order to ascertain its purpose and effect. But if it can be shown that there was first a plan in which the intention of avoiding tax was stated in clear and unambiguous terms, that the scheme that was put into effect was a faithful implementation of this plan, and an independent examination of the scheme itself shows that tax avoidance is its main or one of its main purposes, one is reinforced in one’s conviction that as tax avoidance was intended all along it is not just an incidental feature of the scheme.
The intention of avoiding tax is clearly expressed in Messrs. Fell and Starkey’s letter to Mr. Burton. This letter is set out in full in the judgment of Raine J., which I have had the benefit of reading in draft. It is sufficient to cite the opening words, which are as follows:
“We refer to our recent discussions concerning the above company and its considerable accumulated profits and reserves. You have asked for our advice on means of diverting cash from the company to its shareholders without subjecting the latter to income tax in respect of any such cash distributions.”
It is clear from Mr. Burton’s letter to the respondent dated 15th June, 1971, that he was fully aware that the scheme was designed to avoid tax. In this letter he says:
“Your assumptions were correct in that your mother and your wife would disappear from the share register and would not be shareholders in Rainau Holdings Pty. Limited. All amounts paid to them in the future would be tax free and would be applied in the reduction of their loan accounts.”
In the light of the authorities referred to above the present arrangement undoubtedly came within s. 361 of the Income Tax Act and the Chief Collector was entitled to avoid it. Any part of the accumulated profits distributed to the shareholders in the normal way as dividends would have been assessable for tax. The arrangement was designed to avoid the payment of this tax and to enable the profits to reach the shareholders as non-taxable capital sums. Although the shareholders of the company transferred shares worth thousands of dollars to Rainau, no money passed from the bank to Rainau when overdraft facilities were arranged, or from Rainau to the shareholders as purchase price for the shares, or from the shareholders to Rainau as loans. Cheques were written for huge amounts and entries made in the books of the bank and Rainau. These cheques were not negotiated in the normal way. The bank manager held the cheques all along, so that, in granting overdraft facilities the bank ran no risk. The so-called overdraft facilities lasted only a few minutes, just long enough to enable entries to be made in books of account. The overdraft started when the bank debited Rainau with the amounts Rainau drew in favour of the transferors and was cleared a little later when cheques drawn by the transferors in favour of Rainau were credited to Rainau’s account. It is interesting to note that bank accounts were opened in the names of respondent’s wife and sister specifically for this purpose and closed immediately after the relevant entries had been made.
At the end of this charade by a kind of financial sleight of hand Rainau without spending a cent acquired the total shareholding of the company. The transferors, again, without disbursing a single cent from their pockets became creditors in the books of account of Rainau and created the illusion that they had loaned money to Rainau. This elaborate scheme was designed to enable the profits of the company to be paid to Rainau as dividends and the money so paid distributed to the transferors in reduction of fictitious loan accounts. It was an arrangement whose main purpose and effect was the avoidance of tax, and, tax avoidance was not just an incidental feature.
It is true that the arrangement had another purpose, to freeze the assets of the company for estate duty purposes. But in order to enable an arrangement to be caught by s. 361 of the Income Tax Act it is not necessary that tax avoidance should be the sole purpose (per Lord Denning in Newton’s case[dclxiv]42. In Newton’s case[dclxv]43 the raising of new capital was an associated purpose.
Williams J. came to the following conclusion:
“In my view tax avoidance was not an incidental feature of the arrangement entered into but an important part of it.”
With respect, that was the right conclusion and his Honour was right in holding that the arrangement was caught by s. 361 of the Income Tax Act.
One of the grounds of respondent’s cross-appeal is that Williams J. would not allow him to take the point that the declaration of dividend by the company was invalid. With respect, his Honour was right. As the point had not been taken by the respondent in his objection to the Chief Collector he was precluded from taking it in the appeal before Williams J. “The taxpayer is limited to the grounds stated in his objection”: s. 250(a) of the Income Tax Act. I agree with the Chief Justice that in any event there is no merit in this point, because, when the minutes, which recorded the declaration of dividend, are shorn of the false statements there is sufficient power in the Articles of Association to render the declaration of dividend valid.
Following the declaration of dividend by the company the sum of $425,000.00 was credited in the books of Rainau but there was no physical transfer of cash from the company to Rainau for the simple reason that the company had very little in the way of liquid funds. In all the decided cases once an obnoxious arrangement had been struck down by the Chief Collector cash or its equivalent, which was held to be assessable for tax, was found to have actually come into the hands of the taxpayer. There appears to be no case — certainly none has been cited to us — where it has been held that the mere declaration of dividend amounts to derivation of income.
The sum of $19,009.95 (not $9,334.26 as mentioned by Williams J.) which the respondent actually received is assessable for tax.
I would substitute the sum of $19,009.95 for $9,334.26 in the first declaration made by Williams J., and I would dismiss both the appeal and the cross-appeal.
Order that declaration by the National Court of Justice that of the dividend paid by Theo Thomas & Co. Pty. Limited to Rainau Holdings Pty. Limited in the year ended 30th June, 1972, the sum of $9,334.26 constitutes part of the assessable income of the appellant for that year, be varied by substituting for the sum of $9,334.26 the sum of $19,009.95.
Appeal otherwise dismissed; cross-appeal dismissed, liberty to apply as to form of orders.
Solicitor for the appellant: B. W. Kidu, State Solicitor
Solicitors for the respondent: McCubbery Train Love and Thomas

[dcxxiii] Section 361 of the Income Tax Act 1959 provides:
“361. A contract, agreement or arrangement made or entered into, orally or in writing, whether before or after the commencement of this Act, is, so far as it has or purports to have the purpose or effect of in any way, directly or indirectly —
(a) altering the 
(b) relieving any make any return;
(c) defeating, evading, or avoiding any duty or liability imposed on any person by this Act; or
(d)                   preventing the operation of this Act in any respect,
absolutely void, as against the Chief Collector, or in regard to any proceeding under this Act, but without prejudice to such validity as it may have in any other respect or for any other purpose.”
[dcxxiv] Section 361 of the Income Tax Act 1959 provides:
“361. A contract, agreement or arrangement made or entered into, orally or in writing, whether before or after the commencement of this Act, is, so far as it has or purports to have the purpose or effect of in any way, directly or indirectly —
(a) altering the 
(b) relieving any make any return;
(c) defeating, evading, or avoiding any duty or liability imposed on any person by this Act; or
(d) preventing the operation of this Act in any respect, absolutely void, as against the Chief Collector, or in regard to any proceeding under this Act, but without prejudice to such validity as it may have in any other respect or for any other purpose.”
[dcxxv] (1961) 108 C.L.R. 258 at p. 281.
[dcxxvi] [1958] A.C. 450.
[dcxxvii] [1973] P.N.G.L.R. 411.
[dcxxviii] (1953) 87 C.L.R. 548.
[dcxxix] (1961) 108 C.L.R. 303.
[dcxxx] (1961) 108 C.L.R. 323.
[dcxxxi] (1963) 111 C.L.R. 106.
[dcxxxii] [1971] A.C. 739.
[dcxxxiii] (1971) 125 C.L.R. 647.
[dcxxxiv] (1969) 44 A.L.J.R. 1.
[dcxxxv] (1975) 1 W.L.R. 1615.
[dcxxxvi] 76 A.T.C. 4019.
[dcxxxvii] [1976] 1 W.L.R. 464.
[dcxxxviii] [1958] A.C. 450 at p. 467.
[dcxxxix] (1971) 125 C.L.R. 647 at p. 657.
[dcxl] [1976] 1 W.L.R. 464.
[dcxli] [1975] 1 W.L.R. 1615.
[dcxlii] (1971) 125 C.L.R. 647 at p. 657.
[dcxliii] [1976] 1 W.L.R. 464.
[dcxliv] [1958] A.C. 450 at p. 467.
[dcxlv] [1958] A.C. 450 at p. 467.
[dcxlvi] (1961) 108 C.L.R. 258 at p. 280.
[dcxlvii] [1976] 1 W.L.R. 464 at p. 475.
[dcxlviii] (1961) 108 C.L.R. 258.
[dcxlix] [1973] P.N.G.L.R. 411 at pp. 419-420.
[dcl] [1958] A.C. 450.
[dcli] (1961) 108 C.L.R. 258.
[dclii] (1961) 108 C.L.R. 258.
[dcliii] [1976] 1 W.L.R. 464.
[dcliv] (1971) 125 C.L.R. 647 at p. 655.
[dclv] [1958] A.C. 450 at p. 465.
[dclvi] [1958] A.C. 450.
[dclvii] [1971] A.C. 739.
[dclviii] (1971) 125 C.L.R. 647 at p. 657.
[dclix] [1973] P.N.G.L.R. 411.
[dclx] [1976] 1 W.L.R. 464.
[dclxi] [1958] A.C. 450.
[dclxii] (1971) 125 C.L.R. 647.
[dclxiii] [1958] A.C. 450.
[dclxiv] [1958] A.C. 450.
[dclxv] [1958] A.C. 450.