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Federal Commissioner of Taxation v. Westraders PTY LTD

Published online by Cambridge University Press:  24 January 2025

Christopher Erskine
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Abstract

Taxation law — Principles of interpretation of tax Acts — Form and substance — Partnerships — Change in ownership — Disposals other than in the ordinary course of business — Election by partnership to value trading stock at cost price — Dividend stripping — Income Tax Assessment Act 1936 (Cth) — Ss. 36, 36A

Type
Case Notes
Information
Federal Law Review , Volume 11 , Issue 4 , December 1980 , pp. 422 - 431
Copyright
Copyright © 1980 The Australian National University

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References

1 (1980) 30 A.L.R. 353; (1980) 54 A.L.J.R. 460; (1980) 80 A.T.C. 4,357; (1980)11 A.T.R. 24. High Court of Australia; Barwick C.J., Mason, Murphy, Aickin and Wilson JJ.

2 At its simplest, dividend stripping can be described as follows. Over the years a company puts its profits into reserve, instead of distributing them as dividends. The company is then sold to a dividend stripper. The price that the stripper pays for the shares in the company reflects not only the profitability of the company business, but also the amount of profits lying in reserve. The stripper then distributes the reserves to himself as a dividend. Having done this, he sells the company. The price he gets for the shares is less than the price he originally paid, because there are no longer any reserves. But as long as he is a share trader, this loss is deductible. The loss is about the same as the dividends he received. Thus the loss and the dividend cancel each other out, and the stripper receives the profits of the company tax free.

3 (1951) 84 C.L.R. 118.

4 S. 36A is not actually confined to partnerships. It covers a change “in the ownership of, or in the interests of persons in, property”. However, changes in the composition of partnerships is the most common application of s. 36A. By s. 36A(l)(a) and (b) they are specifically included in the operation of s. 36A.

5 This is the effect of s. 36A(2). The wording of the sub-section relates to the various methods of valuing trading stock. S. 31(1 ) allows a taxpayer to value trading stock in one of three ways: its cost price, market value or replacement value.

6 Westraders Pty Ltd v. Federal Commissioner of Taxation (1977) 17 A.L.R.232.

7 Federal Commissioner of Taxation v. Westraders Pty Ltd (1979) 38 F.L.R.306.

8 (1980) 30 A.L.R. 353, 366.

9 Id. 372.

10 Id. 356.

11 (1949) 78 C.LR. 504.

12 (1980) 30 A.LR. 353, 367.

13 Id. 366-368.

14 Act No. 57 of 1977, s. 6.

15 Act No. 146 of 1979, s. 5.

16 (1980) 30 A.LR. 353, 372.

17 (1977) 139 C.L.R. 362.

18 This does not include the special effect of s. 82, which prevents double deductions. In effect s. 82 allows the Commissioner to make some sections relating to deductions dominant over others. This prevents a deduction being claimed under more than one section. But the effect of the decision of Wilson J. is not related to this.

19 (1980) 30 A.L.R. 353, 354.

20 Id. 355.

21 Ibid. ((1978) 38 F.L.R. 306, 319-320.)

22 S. 51AB(l) contains another problematical definition. Would a floating casino be “essential to the efficient conduct of that business"? A fishing boat would be essential to the efficient conduct of the business of fishing; but a casino does not have to be afloat. A similar problem arose in relation to a floating restaurant in the United Kingdom: Benson (Inspector of Taxes) v. Yard Arm Club Ltd [1978] 2 All E.R. 958.

23 A further illustration of the problems of inclusion and exclusion is the definition of a lobster. The Oxford Dictionary defines it as a “ten-footed crustacean”. If you cut a leg off a lobster, does it cease to be a lobster?

24 (1980) 30 A.L.R. 353, 371.

25 Ibid.

26 (1935) 293 U.S. 465, 469.

27 (1980) 30 A.L.R. 353, 371.

28 Ibid.

29 Ryan, , “Curbing the Commissioner's Discretionary Powers” (1979) 1 Tax Essays 1Google Scholar.

30 Spry, , “Bad Faith And The Commissioner” (1979) 8 Australian Tax Review 127, 128Google Scholar.

31 Ibid.

32 (1980) 30 A.L.R. 353, 355.

33 That is, the common law partnership. A partnership for taxation purposes is a much wider concept (s. 6(1)).

34 Adam v. Newbigging (1888) 13 App. Cas. 308, 315.

35 Beckingham v. The Port Jackson and Manly Steamship Company (1956) 57 S.R. (N.S.W.) 403, 409-410.

36 (1970) 120 C.L.R. 177.

37 Id. 187.

38 (1971) 125 C.L.R. 249.

39 Id. 267.

40 (1980) 30 A.L.R. 353, 369-370.

41 Id.369.

42 (1976) 10 A.L.R. 407.

43 (1980) 30 A.L.R. 353, 370.

44 Ibid.

45 Ibid.

46 Michie, , Federal Tax Handbook (34th ed. 1971) 2 volumesGoogle Scholar.

47 Id. ii, 923.

48 Gregory v. Helvering (1935) 293 U.S. 465, 469.

49 Michie, op. cit. i, 119.

50 Stericker v. Commissioner of Taxation (N.S.W.) (1935) 3 A.T.D. 160, 161 per Jordan C.J.

51 Inland Revenue Commissioners v. Duke of Westminster [1936] A.C. 1, 19 per

52 The possibility of referring to Hansard to discover Parliament's intention was rejected by the House of Lords in Black-Clawson International Ltd v. Papierwerke Waldhof-Aschafjenburg A.G. [1975] A.C. 591. However, it is still open to the High Court to take a different view.