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High Court of Australia |
GORTON v. FEDERAL COMMISSIONER OF TAXATION [1965] HCA 1; (1965) 113 CLR 604
Gift Duty (Cth)
High Court of Australia
McTiernan J.(1)
Barwick C.J.(2), Taylor(2) and Windeyer(3) JJ.
CATCHWORDS
Gift Duty (Cth) - "Disposition of property" - Transaction entered into . . . "with intent to diminish . . . the value of . . . own property and to increase the value of the property of . . . other person" - Gift Duty Assessment Act 1941-1957 (Cth), s. 4*, "disposition of property", "gift".
HEARING
Sydney, 1964, September 14-17;DECISION
1965, Jan. 22.2. Section 4 (1) of the Act defines a gift as "any disposition of property which is made otherwise than by will" without any or any adequate consideration. A disposition of property is defined in the same section as meaning "any conveyance, transfer, assignment, settlement, delivery, payment, or other alienation of property and, without limiting the generality of the foregoing, includes - . . . (f) any transaction entered into by any person with intent thereby to dimish directly or indirectly the value of his own property and to increase the value of property of any other person". The dispute here is whether the arrangements made on 19th May 1960 fall within the meaning of par. (f) of the definition of "disposition of property". The appellants called in evidence, Richard and Thomas Crebbin, Mrs. Abel's accountant and her solicitor. The Commissioner called no witnesses to rebut their evidence. The appellants also called a Mr. Stevens to give expert evidence on whether the Commissioner's valuation of the shares immediately after the transaction was correct. The Commissioner called a Mr. Osborne, the assessor of duty in this case to rebut Mr. Steven's evidence. (at p606)
3. At 19th May 1960 Mrs. Abel was seventy-four years of age. Her husband had been manager of a substantial margarine manufacturing enterprise and had died a wealthy man. He had left Mrs. Abel a life interest in his estate. This, of itself, entitled her to a large income. She also was in her own right the holder of 80,000 1 pound shares in Marrickville Holdings Ltd., a public company which was the main company in the margarine manufacturing enterprise. These shares yeilded substantial dividends. Accordingly her liability for income tax was large. Her first assessment of tax after her husband's death included provisional tax and was approximately 18,000 pounds. (at p606)
4. Mrs. Abel was quite close to her nephews. Both were men of substance. Richard Crebbin had become manager of Marrickville Holdings Ltd. and Thomas Crebbin occupied the position of technical advisor. Richard Crebbin and his family were accustomed to have Sunday dinner with Mrs. Abel, while it was Thomas Crebbin's habit to spend Friday evenings in her company and the two would "play the trots". This involved following the trotting on the wireless and placing bets through an S.P. bookmaker by telephone. Any winnings would be shared equally and Mrs. Abel would bear the losses. The evidence of the two nephews was that right up to her death Mrs. Abel had led an active life. She was an intelligent and determined woman who was in full possession of her faculties. She attended many social functions. To the date of her death she appeared to be in good health and there were no signs of any deterioration in health. They had no knowledge that she was suffering from any illness and did not expect her demise when it came. She never discussed her private financial affiars, her will, or her late husband's estate with her nephews save to occasionally enquire after the fortunes of Marrickville Holdings Ltd. She had also, on occasions, expressed her exasperation at the extent of her liability for income tax but never discussed specific schemes for avoidance with them. (at p607)
5. Early in 1960 Mrs. Abel consulted Mr. Reid, a member of the firm of Parsons Anderson & Company, chartered accountants, and told him that she wished to reduce her liability for income tax, and also to provide support for her sister, Mrs. Gorton, who is one of her executors, to the extent of 2,000 pounds a year. She did not want to pay tax on the 2,000 pounds. Reid suggested that a company could be formed and her personal assets transferred to it, thus separating her personal estate from her life interest in her late husband's estate. Mrs. Gorton could be made an officer of the company and the income from the shares transferred to the company would provide her salary. Thus the income on the shares in Marrickville Holdings Ltd. would no longer be included in Mrs. Abel's income and accordingly the rate of income tax to be paid on the income from her husband's estate would be reduced. As Mrs. Gorton's allowance would be an expense of the company it would be subject neither to income tax nor company tax. Mrs. Gorton would pay income tax on the 2,000 pounds but at a low rate. (at p607)
6. Mrs. Abel agreed with these proposals and instructed Reid to discuss the matter with her solicitor, a Mr. Lovell, of the firm of Manning Riddle & Co. Lovell and Reid then discussed the matter with Mrs. Abel. She again expressed her desire to provide for Mrs. Gorton and to lessen her income tax. Lovell explained the arrangement proposed by Reid and also said that in the scheme an arrangement could be made to minimize death duty. At this stage he did not describe the manner in which liability for death duty would be reduced. Mrs. Abel assented to these proposals but only subject to the assurance that she would be in complete control of the companies and of their assets. After discussing formal matters Lovell was instructed to make the necessary legal arrangements to construct the scheme. On 10th May Mrs. Abel and Reid each subscribed to the memorandum and articles of association of two companies, Leba Pty. Ltd. and Batnors Pty. Ltd. Each applied for one share in each company. On this occasion Mrs. Abel again asked whether she would be in full control of the companies and their assets. Mr. Lovell assured her that this was the case. (at p607)
7. The companies were incorporated on 12th May 1960. The memoranda and articles of association of each company were identical. Clause 4 of each memorandum fixed the capital at 20,000 pounds divided into 20,000 shares of 1 pound each. The capital could be increased. Shares could be divided and could have attached to them any preferential deferred qualified special rights privileges and conditions as may be determined. (at p608)
8. The following articles should be noted:
Article 3 contained the usual provisions found in the articles of a
proprietary company, declaring that the right to transfer shares
was
restricted, limiting the number of members of the company to fifty and
prohibiting invitation to the public to subscribe for
shares and debentures or
to deposit money with the company.
Article 5 defined the nominal capital at 20,000 ordinary 1 pounds shares all
ranking equally and subject to no special rights or
conditions.
By virtue of art. 6 the shares were under the control of the directors. They
had the power to allot and dispose of unissued shares
on such terms,
conditions and premiums as they think fit.
Article 7 regulated the modification of the rights and conditions attached
to shares. The conversion of issued shares into shares
with special rights or
restriction attached in regard to dividends, voting, return of share capital
and other matters and the alteration
or extinguishing of such rights must,
during Mrs. Abel's lifetime be brought about by special resolution. After her
death, if the
share capital is divided into classes, the rights attached to
any class could be varied only with the consent of the holders of
three-fourths
of the issued shares of that class or with the sanction of an
extraordinary resolution passed at a separate general meeting of the
holders
of the shares of the class. The directors, by virtue of art. 22, had an
absolute and uncontrolled discretion to refuse to
register any transfer of
shares and cannot be required to assign any reason for such a refusal. Article
40 authorized an increase
of the share capital by special resolution. Article
58 allowed share-holders one vote for every share held. However the article
provided
that after Mrs. Abel's death a shareholder shall have one vote for
every five shares up to one hundred. Voting rights in respect
of any
additional shares held were reduced. Article 69 appointed Mrs. Abel governing
director for life. She was authorized to exercise
all the powers vested in the
directors. All directors were subject to her control and were bound to conform
to her directions in
their conduct of the company's business. She was
empowered by art. 70 to appoint a deputy governing director and by art. 71 to
appoint
or remove directors, to define, or restrict their power and duties, to
fix their salaries and to call general meetings. Articles
75-78 defined the
powers and duties of directors. Subject to the powers vested in the governing
director the business of the company
was to be managed by the directors, who
may exercise all such powers other than those to be exercised by the company
in general meeting
(art. 75). They may determine who shall be entitled to sign
cheques documents and instruments of all kinds on the company's behalf
(art.
76). They could borrow or raise money for the company and arrange for the
provision of security from its assets. The directors
could also appoint a
managing director. (at p609)
9. Between 12th and 19th May, Lovell telephoned Richard Crebbin, and informed him that Mrs. Abel was forming two companies and that she desired him and his brother, Thomas, to take up shares. Richard Crebbin visited Lovell's office and was given two forms of application for ten 1 pounds shares at a premium of 9 pounds per share, one in Batnors Pty. Ltd. and the other in Leba Pty. Ltd. Lovell asked him to sign the application form for shares in Batnors Pty. Ltd., to obtain his brother's signature to the other, and requested that each brother give him their cheque for 100 pounds in respect of the purchase price of the shares. Richard Crebbin agreed. He was further told that his presence at a meeting on 19th May was desired and that he was to be appointed a director of each of the companies but, however, could be dismissed by Mrs. Abel at any time. Richard Crebbin informed his brother of what Lovell had said and obtained his brother's signature and cheque. Thomas Crebbin noted that he was paying 10 pounds for 1 pounds shares but did not know or care to be told of the nature or purpose of the companies and the application. Richard Crebbin produced the two signed forms and the two cheques for 100 pounds at the meeting on 19th May. He complied merely because his aunt had requested him to do so. On 19th May 1960, Richard Crebbin, Lovell and Mrs. Abel met at Mrs. Abel's home. Lovell brought with him all the documents to be used in the meetings and a set of minutes ready for signature. He explained the procedure to be followed. In the proceedings Lovell read out the documents and requested the assent of those present to their contents. Motions were moved by Mrs. Abel and seconded by Richard Crebbin. All documents to be signed were signed as the meetings proceeded. At this stage Mrs. Abel, as the governing director of each company was the sole director. Two series of meetings were held, the first in respect of Leba Pty. Ltd. and the second in respect of Batnors Pty. Ltd. At the commencement of each series her first act was to appoint Richard Crebbin director of the company then in question. Instruments of appointment were produced by Lovell for her signature. (at p610)
10. The first meeting was a meeting of the directors of Leba Pty. Ltd. at 2 p.m. Mrs. Abel and Richard Crebbin were recorded in the minutes as being present. Formal matters incidental to the setting-up of the structure of a new company such as the fixing of a registered office, the adoption of a common seal and the opening of bank accounts were dealt with. As subscribers to the memorandum Mrs. Abel and Reid were each allotted one 1 pound ordinary share. Reid later executed a deed declaring that he held this share on trust for Mrs. Abel. Mrs. Abel then informed the meeting that she was prepared to sell to the company 40,000 fully paid 1 pound stock units in Marrickville Holdings Ltd. for 167,500 pounds, i.e. 4 pounds 3s. 9d. per share, on the basis that the purchase price would be payable on demand. She produced an executed form of transfer in respect of the stock units. The amount of 4 pounds 3s. 9d. was their current market price. The meeting then resolved that the company purchase the stock units and that Mrs. Abel be credited with 167,500 pounds in the company's books of account. The meeting was then concluded. Immediately thereafter at 2.10 p.m. a further meeting of directors of Leba Pty. Ltd. was convened. Mrs. Abel and Richard Crebbin were again recorded as those present. Mrs. Abel produced to the meeting an application for herself for 14,998 ordinary 1 pound shares in Leba Pty. Ltd. and indicated firstly that she was prepared to pay a premium of 9 pounds for each of the shares applied for and secondly that her application authorized the company to debit the amount standing to her credit in the books of account with 149,980 pounds which was the amount payable on the issue and allotment of the shares. A resolution approving of the issue of this number of shares on the terms requested was passed. (at p610)
11. Thus at this stage Mrs. Abel controlled the 15,000 ordinary shares issued by the company. The company was the owner of stock units valued at 167,500 pounds and owed Mrs. Abel 17,520 pounds. No other shares had been issued. Mrs. Abel then informed the meeting that it was proposed to convene an extraordinary general meeting of shareholders of the company to pass a special resolution to convert the 15,000 ordinary shares held by Mrs. Abel and Reid into cumulative preference shares and to make the necessary amendments to the articles of association. The shares would be converted into cumulative preference shares with the following conditions attached: firstly the right to receive out of the profits of the company a dividend of 6% per annum which would rank in regard to dividend and return of capital in priority to all other shares; secondly, the right to receive notices and reports, and to attend and vote at general meetings during Mrs. Abel's lifetime, and after her death only on certain conditions; thirdly, the right, upon a winding-up of the company, to payment of all capital paid up on the shares and of all arrears of dividends in priority to all other shares; however the holders of the shares shall not be entitled to any participation in the profits and assets of the company on a winding-up other than this and the payment of any dividends falling due; and fourthly, that except with the consent of the holders of not less than three-quarters of the shares, no further shares shall be issued by the company prior to or pari passu with the shares, nor shall the capital of the company be reduced, nor shall the rights and privileges of the holders of the shares be altered. The meeting then ended. (at p611)
12. Immediately thereafter notice was given of an extraordinary general meeting of shareholders of Leba Pty. Ltd. to be held at Mrs. Abel's home at 2.15 p.m. on that day for the purpose of considering and passing a special resolution putting into effect the conversion of the ordinary shares to cumulative preference shares as aforesaid and to make such amendments to the articles of association as may be necessary to give effect to the conversion. Reid and Mrs. Abel being the shareholders had signed a form in which they consented to the abridgment of the time necessary after the giving of the notice for the holding of the meeting and waiving all further or other notices. (at p611)
13. The extraordinary general meeting of the shareholders of Leba Pty. Ltd. was then held at 2.15 p.m. Mrs. Abel and Richard Crebbin were recorded as being present. The special resolution was passed unanimously. (at p611)
14. At 2.20 p.m. a further meeting of the two directors of Leba Pty. Ltd. was held. The form of application for 10 ordinary 1 pound shares in the company to be bought at a premium of 9 pounds per share signed by Richard Crebbin and his cheque for 100 pounds was produced. The meeting resolved that the shares be issued and allotted to Richard Crebbin in accordance with the application. These 10 shares were ordinary shares and were not affected by the special resolution which only converted the first 15,000 ordinary shares issued by the company. (at p611)
15. This meeting was the final meeting in the series. Immediately afterwards exactly the same procedure was adopted in respect of Batnors Pty. Ltd. save that the 10 ordinary shares issued and allotted in pursuance of the final meeting were allotted to Thomas Crebbin. (at p612)
16. Before the meetings commenced Mrs. Abel had again enquired of Lovell whether she had full control of the capital and assets of the companies. He assured her that she had, showed her the provisions relating to the conversion and reconversion of the 15,000 shares and pointed out that she controlled 15,000 which was a secure majority and which gave her full power over the activities of the company and to reconvert them to ordinary shares whenever she wished. Those present on the occasion noted that Mrs. Abel seemed in good health, that she was alert and attentive to the proceedings and appeared to be fully aware of the effect of the transaction. After the meetings Richard Crebbin left and Lovell's brother arrived. Mrs. Abel then executed a new will which had been prepared. In its terms Mrs. Abel included a provision that her shares in Leba Pty. Ltd. were to be held on trust to pay the income arising therefrom to her sister Mrs. Gorton for life and after her death to transfer them absolutely to Richard Crebbin. Her shares in Batnors Pty. Ltd. were made subject to a similar provision save that they were to be transferred to Thomas Crebbin after Mrs. Gorton's death. During Mrs. Gorton's lifetime her trustees and executors were prohibited from realizing the shares in the two companies. It is worth noting at this point that after the conversion of the shares in both companies from ordinary to cumulative preference shares they would yield to the beneficial owner an income of 1,800 pounds per annum. Early on the morning of 21st May 1960, two days after the meetings, Mrs. Abel died. There was no evidence of the cause of death. She had spent the evening before in the company of Thomas Crebbin. They had dined, talked, and "played the trots". She had seemed in good health. There was no evidence that she was afflicted with any illness or disorder or that her death was expected. She herself had spoken of travelling overseas. (at p612)
17. On 25th August 1960 meetings of directors of the two companies were held. Mrs. Gorton was appointed manager of each at a salary of 1,100 pounds in each case. This action resulted in Mrs. Gorton becoming entitled to a total annual income of 4,000 pounds, 1,800 pounds from her life interest in Mrs. Abel's shares in the two companies under the will, and 2,200 pounds salary from the companies. (at p612)
18. Two questions now arise for decision. The first is whether the series of meetings on 19th May fell within the description of a "disposition of property" as defined in par. (f), and second whether Mrs. Abel in taking part did so with the requisite intention? I think that it cannot be doubted that Mrs. Abel entered into a "transaction" within the meaning of par. (f) of the definition of "disposition of property". The proceedings of 19th May 1960 were not mere unilateral acts on the part of Mrs. Abel and the companies but involved dealings between herself and the companies and between the companies and her nephews. In the course of the proceedings money and shares changed hands. Agreement and co-operation between Mrs. Abel and her nephews were necessary to the success of the scheme. (at p613)
19. The key inquiry now to be made in this case is to discover the effect of the transaction on the property of Mrs. Abel and her nephews. Before it commenced she was possessed of 80,000 1 pound shares in a public company, Marrickville Holdings Ltd., worth 335,000 pounds and her nephews of 100 pounds each. At the conclusion of the transaction she had 15,000 1 pound cumulative preference shares in Batnors Pty. Ltd., 15,000 1 pound cumulative preference shares in Leba Pty. Ltd., and a credit in the books of each company for 17,520 pounds. On the other hand, Richard Crebbin had 10 1 pound ordinary shares in Batnors Pty. Ltd. and his brother Thomas, 10 1 pound ordinary shares in Leba Pty. Ltd. Thus it is clear that before it can be ascertained whether a disposition of property to Mrs. Abel's nephews within par. (f) has been effected, the shares must be valued. It was submitted by the appellants that the shares should be valued on the basis that a sale of the shares would be attempted and a willing purchaser would be found in preference to a valuation on the basis that the companies would be wound up and the assets distributed amongst the shareholders. It is my view that the most appropriate method of valuation in this case is one on a liquidation basis. These two companies are private "estate" companies set up not for the purposes of production, commerce or industry but as a means of holding certain assets, the shares in Marrickville Holdings Ltd., for the benefit of Mrs. Abel, her nephews and her sister by avoiding income tax and death duty. This was the declared intention of Mrs. Abel. The shares in the two companies were never intended to be sold and their value does not lie in the price they would fetch on the market. The assets of the companies are shares which can be freely bought on the stock exchange so a purchaser would gain no real advantage by buying into this company structure at a price reflecting the value of the assets. Rather the real value of the shares in the companies to Mrs. Abel and her nephews lies in the interest in the assets given to them by their ownership. The company structure was designed merely to enable Mrs. Abel to use the income arising from the assets and to provide for its succession whilst avoiding to a large extent the incidence of income tax and death duty. It is my view that a valuation based on a fictitious sale does not reflect the reality of the situation. The value of the shares in the companies is tied to the assets and is thus best assessed on a liquidation basis. If the companies were wound up immediately after the transaction on 19th May 1960 the cumulative preference shareholders pursuant to cl. 5 (iii) of the articles of association would be entitled to a return of capital equal to the amount paid up on each share, which was 1 pound, and no more. Thus the value of Mrs. Abel's shares in each company, for which she had paid 149,982 pounds, would be 15,000 pounds . In addition to this as each company owed her 17,520 pounds , the value of her "property" in respect of each company would then total 32,520 pounds. As the value of the 40,000 shares in Marrickville Holdings Ltd. sold to each company was 167,500 pounds it would appear that the transaction had decreased the value of her "property" by 134,980 pounds in each case. At this stage the undistributed assets of the company total 135,080 pounds . This is calculated by adding to the value of the shares in Marrickville Holdings Ltd. the 100 pounds cash paid in consideration for the allotment of the 10 ordinary shares and the 2 pounds paid for the subscribers shares and subtracting from this total the 32,520 pounds to be distributed to Mrs. Abel. The whole of this sum is attributable to the 10 ordinary shares. There are no limitations imposed on a return of capital to this shareholder and accordingly he would be entitled to receive the whole sum less the costs of the winding-up and the sale of the assets (unless they were distributed in specie) which would not be significant. Thus each share would be valued at 13,508 pounds 4s. Od. The increase in the value of the property of the ordinary shareholder would be 135,082 pounds less 100 pounds, which is 134,982 pounds. This would be the value of the gift. (at p614)
20. The appellant says that this is an erroneous method of calculating the value of the shares because it does not take into account the possibility that, on a winding-up or a sale, Mrs. Abel (or her successor) would exercise her overwhelming voting power to reconvert her cumulative preference shares to ordinary shares in order to preserve the value of her investment. All the issued shares would then rank equally in respect of a return of capital. Each share would be worth just under 10 pounds and Mrs. Abel's interest would return her just under 150,000 pounds. Whether or not this possibility can be taken into account in valuing the shares depends on whether it is a "contingency" within the meaning of s. 18 (1) (a) of the Gift Duty Assessment Act which provides that "For the purpose of computing the value of a gift - (a) no allowance shall be made in respect of any contingency affecting the interests of the donees or any of them . . .". It is said that as Mrs. Abel's power to effect a reconversion is contained in the articles of association it, and the possibility of its exercise, should be regarded as something in the nature of an encumbrance, inherent in the shares which reduces their value rather than as a contingency. I cannot accept this view. While the power of reconversion is always there, the mode of distribution of the assets and thus the amounts to be distributed can only be altered by an actual exercise of the power. Mrs. Abel may or may not choose to exercise her power. Thus whether or not the mode of distribution of capital on a winding-up is changed depends on an uncertain occurrence. It was something contemplated by Mrs. Abel as affecting or modifying the value of the shares and the effect is dependent on an event which may or may not happen in the future. Therefore I would regard it as a contingency falling within the subsection which I cannot take into account in computing the value of the shares. I hold that the transaction has reduced the value of Mrs. Abel's property from 167,500 pounds to 32,520 pounds in respect of each company, and that the value of the 10 ordinary shares in each case was 135,080 pounds. I am not prepared to make an allowance for the costs of winding-up the companies as relatively they would not be significant. (at p615)
21. Paragraph (f) of the definition of "disposition of property" in s. 4 (1) of the Gift Duty Assessment Act requires that there must be an increase in the value of the property of the donee. It was submitted for the appellant that there must be property, the value of which is augmented by the transaction, in the hands of the donee before the transaction and that in the present matter this was not the case. I think it is correct to say that the transaction must operate to increase the value of an asset already in the hands of the donee. It is not enough to establish that the donee is made a richer man. However, I do think that the transaction in question satisfies this requirement. The scheme contemplated that each nephew pay 100 pounds for the shares allotted to him. This sum was in their hands before the transaction and was converted by the transaction into shares of a much greater value. Thus I am of the opinion that there was an increase in the value of property in the hands of each nephew. (at p615)
22. The final requirement of par. (f) is that the donor must have intended the transaction to have the effect prescribed by the paragraph. It is well established that the intention to be established is a subjective intention. It is not to be presumed that the donor had the necessary intention merely because the other requirements of par. (f) are satisfied. However if there is no evidence of what is in the donor's mind a court is entitled to draw references from his conduct and from the circumstances of the case. Mrs. Abel had instructed her solicitors to prepare a scheme which inter alia would lessen the incidence of death duty in respect of her shares in Marrickville Holdings Limited as well as providing for Mrs. Gorton and avoiding income tax. The provisions of the scheme were fully explained to her at the meeting on 19th May 1960 and she appeared to fully understand their operation. The conversion of the shares from ordinary to cumulative preferential shares was not necessary to provide for Mrs. Gorton or to avoid income tax. It would seem that the only purpose of the conversion could be to avoid death duty and that this would necessarily entail the transfer of some of Mrs. Abel's property out of her estate before her death. In my view the only purpose of the conversion was to achieve this end by increasing the value of the ordinary shares allotted to the nephews and by decreasing the value of the shares retained by Mrs. Abel. Thus the effect prescribed by par. (f) was within the contemplation of the designers of the scheme and, therefore, can be said to have been intended by Mrs. Abel. It is true that she retained the power to reverse the effect by either reconverting the cumulative preferential to ordinary shares or by bringing about a further issue of ordinary shares. However the fact that she could alter the value of the shares in the future does not mean that their present value on a liquidation basis is altered. The evidence points to the fact that she did not intend to reconvert the shares. She was on good terms with her nephews. To do so would frustrate her intention to avoid death duty. She may have wished to retain this power in order to deal with any major change in the family relationships or with the death of her nephews. However, there is no evidence that she intended to exercise it. I think that I can draw the inference that Mrs. Abel intended the transaction to have the effect on the values of the shares that it did have and that, therefore, she had the necessary intention to satisfy par. (f). (at p616)
23. For these reasons I think the appeal should be dismissed. (at p616)
24. From this decision the appellants appealed to the Full Court. (at p616)
25. M. H. Byers Q.C. (with him D. L. Mahoney Q.C. and C. V. Cullinan), for the appellants. Paragraph (f) of the definition of "disposition of property" only applies where specific existing property of the donee is increased in value by the transaction. The word "property" used in the paragraph does not mean gross assets. If a person acquires additional assets that does not mean that the value of his property has increased; it means his assets have increased. Paragraph (f) is concerned with matters which cannot fall within pars. (a)-(e) of the definition. If inadequate consideration has been provided, that may be a disposition of property by the company to nephews but even if Mrs. Abel participated in the activities that led to that result that does not mean she made the gift within par. (f). (He referred to Grimwade v. Federal Commissioner of Taxation [1949] HCA 9; (1949) 78 CLR 199, at p 208 ; Commissioner for Probate Duties (Vict.) v. Mitchell [1960] HCA 54; (1960) 105 CLR 126, at p 147 ; Commissioner of Stamp Duties v. Gale [1958] HCA 42; [1958] HCA 42; (1958) 101 CLR 96, at pp 106, 107 .) Paragraph (f) also involves a transfer of the donor's property to the donee. (at p617)
26. A. B. Kerrigan Q.C. (with him J. S. Lockhart), for the respondent. The word "transaction" contemplates a number of actions. (He referred to Grimwade v. Federal Commissioner of Taxation [1949] HCA 9; (1949) 78 CLR 199 ; Robertson v. Inland Revenue Commissioner (1959) NZLR 492 ; Birks v. Federal Commissioner of Taxation (1953) 10 ATD 266 .) The elements in the transactions included the events that took place on 19th May 1960; the subsequent allotments to the nephews together with the incorporation of the companies which can be regarded as a preliminary step. Property used in par. (f) means all that a man owns; his property in globo : Grimwade v. Federal Commissioner of Taxation (1949) 78 CLR, at p 215 . The paragraph is satisfied even though the transfer of property is not by a transfer from the donor. It is immaterial that the shares are issued before or after the conversion of the ordinary shares into preference shares if they were always intended to be issued by the donor. The interest of the donee is not critical. Before the transaction was completed Mr. Crebbin had a debt owing to him by his bank, and he used that money to acquire shares the value of which far exceeded that property. If it is necessary to find some property in the donees which increases in value, there is evidence that Mr. Crebbin had an equitable right to the shares which had been promised him. (at p617)
27. M. H. Byers Q.C., in reply. There is no evidence that Mr. Crebbin had an
equitable right to the shares which had been promised;
there was no binding
contract, but a family relationship. There was no transaction as there was no
participation by Mr. R. C. Crebbin.
All he did was to apply for shares and to
be present at the meeting. Mr. T. G. Crebbin only signed the application for
shares and
signed his cheque. (He referred to Finch v. Commissioner of Stamp
Duties (1927) NZLR 807 .) There is no evidence that Mrs. Abel intended
to
diminish the value of her property and increase the value of her nephews'
property. Mrs. Abel had an unrestricted power of conversion
of her shares from
preference shares to ordinary shares. (He referred to Finch v. Commissioner of
Stamp Duties (1929) AC 427 .)
Cur. adv. vult. (at p618)
December 16.
The following written judgments were delivered: - (at p618)
2. BARWICK C.J. AND TAYLOR J. The principal question in this case is whether Frances Beatrice Eliza Abel, in her lifetime, made gifts to her two nephews, R. C. Crebbin and T. G. Crebbin, within the meaning of the Gift Duty Assessment Act 1941-1957 (Cth). If it be held that she did, a further question will arise as to the value of the gift. (at p618)
3. The main question argued before us was whether upon the evidence each of two series of events, to use a neutral term, which occurred within a short period in May 1960, constituted, within the meaning of par. (f) of the definition of "disposition of property", a transaction entered into by the deceased with intent thereby to diminish, directly or indirectly, the value of her own property and to increase the value of the property of any other person. McTiernan J., who dealt with the matter in the first instance, thought that they did and he dismissed the appellants' appeal against the respondent's assessment. (at p618)
4. The facts of the case are fully set out in the reasons given by McTiernan
J. in reaching his conclusion and it is unnecessary
that they should again be
fully canvassed. It is desirable, however, that we should set out in their
chronological sequence the events
which took place in May 1960 in relation to
the affairs of the two companies in question, Leba Pty. Limited and Batnors
Pty. Limited.
In each case the procedure followed was identical and it is
sufficient, if in referring to these events, we mention only those which
relate to the affairs of the firstnamed company:
(1) Leba Pty. Limited was incorporated on 12th May 1960.(2) The first director's meeting, at which Mrs. Abel and R. C. Crebbin were present, was held at Mrs. Abel's residence at 2 p.m. on 19th May 1960. At this meeting the two subscribers' shares, of which the deceased was the beneficial owner, were allotted.
5. Precisely identical steps were taken in the case of Batnors Pty. Limited except that the person to whom 10 ordinary shares in the capital of that company were ultimately allotted was T. G. Crebbin. (at p619)
6. There is no question that prior to these two series of events Mrs. Abel had had discussions with financial and legal advisers with a view to some re-arrangement of her affairs. The discussions were initiated by Mrs. Abel who wished to reduce the extent of her liability for income tax and at the same time make some suitable financial provision for her sister. Proposals were made with a view to achieving these objects and during the course of the discussions she was told that the plan proposed would also diminish the liability of her estate to death duty. At this time Mrs. Abel was seventy-four years of age but according to the learned judge of first instance "she was an intelligent and determined woman who was in full possession of her faculties" (1965) 113 CLR, at p 606 . In fact Mrs. Abel died suddenly on 21st May 1960, that is to say, two days after the series of events to which reference has been made, but "to the date of her death she appeared to be in good health and there were no signs of any deterioration in health" (1965) 113 CLR, at p 606 . (at p620)
7. Upon the evidence in the case McTiernan J., in effect, found that the series of steps taken in relation to each company constituted, in each case, a transaction entered into by Mrs. Abel having the effect of diminishing the value of her property and of increasing the value of her nephew's property. Further, he found that each transaction was entered into by Mrs. Abel with intent to produce this result. After dealing fully with the evidence in the case his Honour observed that : "The key inquiry now to be made in this case is to discover the effect of the transaction on the property of Mrs. Abel and her nephews. Before it commenced she was possessed of 80,000 1 pounds shares in a public company, Marrickville Holdings Ltd., worth 335,000 pounds and her nephews of 100 pounds each. At the conclusion of the transaction she had 15,000 1 pound cumulative preference shares in Batnors Pty. Ltd., 15,000 1 pound cumulative preference shares in Leba Pty. Ltd., and a credit in the books of each company for 17,520 pounds. On the other hand, Richard Crebbin had 10 1 pound ordinary shares in Batnors Pty. Ltd. and his brother Thomas, 10 1 pound ordinary shares in Leba Pty. Ltd. Thus it is clear that before it can be ascertained whether a disposition of property to Mrs. Abel's nephews within par. (f) has been effected, the shares must be valued" (1965) 113 CLR, at p 613 . (at p620)
8. Thereafter his Honour adopted an assets basis for the purpose of valuing the shares and proceeded: "Thus the value of Mrs. Abel's shares in each company, for which she had paid 149,982 pounds, would be 15,000 pounds. In addition to this as each company owed her 17,520 pounds, the value of her 'property' in respect of each company would then total 32,520 pounds. As the value of the 40,000 shares in Marrickville Holdings Ltd. sold to each company was 167,500 pounds it would appear that the transaction had decreased the value of her 'property' by 134,980 pounds in each case. At this stage the undistributed assets of the company total 135,080 pounds. This is calculated by adding to the value of the shares in Marrickville Holdings Ltd. the 100 pounds cash paid in consideration for the allotment of the 10 ordinary shares and the 2 pounds paid for the subscribers' shares and subtracting from this total the 32,520 pounds to be distributed to Mrs. Abel. The whole of this sum is attributable to the 10 ordinary shares. There are no limitations imposed on a return of capital to this shareholder and accordingly he would be entitled to receive the whole sum less the costs of the winding-up and the sale of the assets (unless they were distributed in specie) which would not be significant. Thus each share would be valued at 13,508 pounds 4s. 0d. The increase in the value of the property of the ordinary shareholder would be 135,082 pounds less 100 pounds, which is 134,982 pounds. This would be the value of the gift" (1965) 113 CLR, at p 614 . (at p621)
9. It may be said at once that it is beyond doubt that each series of events took place pursuant to and according to a predetermined plan and it may be that, in the end, each nephew acquired 10 ordinary shares for an amount which represented a mere fraction of their value. Further it is, in our view, incontestable that the end result was intended by the deceased. However, these conclusions do not dispose of the matter. The critical question remains whether the deceased made a gift within the meaning of the definition of that term in the Act to each of her nephews so that she as donor became liable to pay gift duty. The answer to this question, as we see it, depends primarily upon the meaning and effect of par. (f) of the definition of the expression "disposition of property". We say "primarily" because if this question is answered favourably to the respondent it will still be necessary for us to consider other matters which were argued in relation to the basis upon which the learned judge of first instance proceeded to ascertain the value of the gift. (at p621)
10. The expression "disposition of property" is defined by the Act in the
widest possible terms. It means "any conveyance, transfer,
assignment,
settlement, delivery, payment or other alienation of property" and "without
limiting the generality of the foregoing,
(it) includes -
(a) the allotment of shares in a company;abandonment, at law or in equity, of any debt, contract or chose
(b) the creation of a trust in property;
(c) the grant or creation of any lease, mortgage, charge,
servitude, licence, power, partnership or interest in
property;
(d) the release, discharge, surrender, forfeiture or
in action, or of any interest in property;It is impossible to conceive any type of transaction by which property is transferred from one person to another which would not be comprehended by these provisions. But the definition goes further. By the ultimate paragraph - (f) - transactions which do not involve a disposition of property are also included within the meaning of that term. In other words, transactions which are not in any sense dispositions of property are deemed by par. (f) to fall within the meaning of that expression. Such transactions are those "entered into by any person with intent thereby to diminish, directly or indirectly, the value of his own property and to increase the value of the property of any other person" and, to that extent, the meaning of the expression "disposition of property" is extended beyond the general words and pars. (a) to (e) of the definition. As Williams J. said in Grimwade v. Federal Commissioner of Taxation [1949] HCA 9; (1949) 78 CLR 199 : "The whole emphasis of par. (f) is upon a transaction entered into by one person, which seems to me to mean that where there is an act done by one person with the requisite intent, and as a result there is a transfer of value from any property of that person to the property of another person, the conditions of liability are satisfied" (1949) 78 CLR, at p 208 . (at p622)
(e) the exercise of a general power of appointment of property
in favour of any person other than the donee of the power."
11. In Grimwade's Case [1949] HCA 9; (1949) 78 CLR 199 the taxpayer ultimately succeeded because in the view of the Full Court he had not entered into "a transaction" but, in our view, on the facts of the present case it should be held that the deceased did enter into a transaction. However, in the course of disposing of that case Latham C.J. and Webb J. joined in observations concerning the meaning and effect of par. (f) upon which the respondent in this case placed some reliance. After observing that par. (f) applies to any transaction entered into with the specified intent they said: "It is evidently intended to include within the scope of the Act transactions which do not consist in an actual transfer of property from a donor to a donee. Such latter transactions are dispositions of property within the meaning of other parts of the definition" (1949) 78 CLR, at p 215 . (at p622)
12. With these observations we respectfully agree but they added that: "A transfer of property by A, not directly to another person C, but through an intermediary B, where it was the intention of A that C should obtain the property without giving consideration, would be a transaction falling within par. (f). . . . Thus if B for some valuable consideration moving from A made a contract with A that he (B) would pay 1,000 pounds to C without receiving any consideration from C, the intent of A would be to diminish the value of his own property by giving consideration to B and by that means to increase the value of C's property by 1,000 pounds, which sum would be paid to C by B" (1949) 78 CLR, at pp 215, 216 . These latter observations were unnecessary for the decision in that case and with respect to those learned Justices we find ourselves in disagreement with them. We do not think that the effect of the transaction in the illustration given by them would be to diminish the value of the property of A and to increase the value of the property of C; its effect would be to diminish the property of A and to increase the property of C but that is not, in our respectful view, the type of transaction which par. (f) can be fairly said to describe. Of course, it may well be that such a transaction would be caught by the earlier paragraphs of the definition as a payment made by B on behalf of A to C. The emphasis on par. (f) is, however, as Williams J. pointed out, upon transactions having the intended effect of transferring value from the property of one person to the property of another and, no doubt, it was framed to cover cases where this result is achieved by "transactions" involving the modification, pursuant to an agreed plan, of the rights of different classes of shareholders. (at p623)
13. Assuming, as we think was the case, that the evidence shows that the deceased did enter into "transactions" the question to be resolved is whether in each case its intended effect was to diminish the value of the deceased's property and to increase the value of her nephew's property. That the result of the steps which were taken in relation to the shares of each company was to diminish the value of the deceased's 15,000 shares is not open to question and it is immaterial to inquire whether this diminution occurred when her shares - the only shares which had then been issued - were converted into cumulative preference shares or whether it occurred upon the allotment of 10 ordinary shares to her nephew. But it is, we think, impossible to say that the value of either nephew's property was increased as the result of the transactions. The effect of each transaction was that in return for the expenditure of 100 pounds each nephew became entitled to 10 shares of a total value far in excess of the amounts expended by them. But it cannot be said that the effect of the transaction was to increase the value of their property; its effect was to vest in each of them, in return for an expenditure of 100 pounds each, 10 shares which at the moment of acquisition were of great value. There was no moment of time when any change in the value of the shares in the hands of the nephews took place. All that can be said is that the transaction into which the deceased entered ensured that when the nephews acquired the property in the shares, they should have a value beyond the actual consideration which the nephews would pay for them. (at p624)
14. For these reasons we are of the opinion that the transactions did not fall within par. (f). It is not to the point to say that if, as she might have done, the deceased had procured the issue of each parcel of 10 shares to herself and had, thereafter, transferred a parcel to each of her nephews in return for the sum of 100 pounds, there would have been clear evidence of a gift by her, or, that if each parcel of 10 shares had been allotted to her nephews before the conversion of her ordinary shares to cumulative preference shares the series of steps which we have detailed would have been caught by par. (f). The question is not whether the substance of the transactions is within what may be said to be "the policy of the Act" or within its spirit and intendment (see per Lord Cairns in Partington v. The Attorney-General (1869) LR 4 HL 100, at p 122 ; Potts' Executors v. Inland Revenue Commissioners (1951) AC 443, at pp 454-456 ; and per Harman L.J. in Grosvenor Place Estates Ltd. v. Roberts (1961) 1 Ch 148, at p 167 ), but whether the transactions themselves can be said to fall fairly within the terms of that paragraph, that is to say, whether they had the intended effect of diminishing the value of the property of the deceased and of increasing the value of the property of her nephews. Holding the view, as we do, that the transactions did not have the latter effect we are of the opinion that the transactions were not caught by par. (f). That being so, it is unnecessary to consider whether the learned judge of first instance adopted a correct basis for the valuation which he was constrained to make or whether the attack upon the use he made of s. 18 (1) (a) of the Act in making his valuation can be sustained. (at p624)
15. It was not contended by the respondent that there was a disposition of property by the deceased within the meaning of any part of the definition of that term other than par. (f). But we have considered whether it is possible, in the circumstances of the case, to hold upon the principles discussed in Smith, Stone and Knight Ltd. v. Birmingham Corporation (1939) 4 All ER 116 and In re F. G. (Films) Ltd. (1953) 1 WLR 483 that in the transaction, and particularly with respect to the issue of the shares to the nephews of the deceased, each company could be said to be acting as the agent of the deceased, or whether upon any other basis it can be said that the shares in question were given by the deceased to her nephews merely through the company as an intermediary. The principles to which we have referred are discussed at some length in chap. 10 of Gower's Modern Company Law 2nd ed. (1957) but after full consideration we are satisfied that it is not possible to reach such a conclusion. No doubt the respondent's advisers reached the same conclusion and it may well be that for that reason these propositions were not advanced. In spite of the fact that the moment before the shares were allotted the deceased was the owner of all the shares in the company, it is not possible to regard the company as her agent for that purpose. (at p625)
WINDEYER J. I regret that I am unable to concur in the judgment of the Chief Justice and my brother Taylor. In the circumstances I shall state only briefly the reasons that lead me to conclude that there was a transaction amounting to a "disposition of property" within the definition of that term in the Act. I need say nothing as to the amount of duty that on my view of the matter would be exigible. That aspect of the matter was not fully argued, and having regard to the view of the majority of the Court it would be purposeless for me to consider it. (at p625)
2. At two o'clock on 19th May 1960, Mrs. Abel was a woman of considerable wealth. Fifty minutes later she was not as well off as she had been, and each of her nephews was better off than he had been. That means, it seems to me, that the value of Mrs. Abel's property had been diminished and the value of the property of her nephews had been increased. I do not read par. (f) of the definition of "disposition of property" in the Act as confined to cases in which there has been a diminution of the value of some specific item of property belonging to one person and an increase in the value of some specific item of property belonging to another. Doubtless it would catch such a case, if one can be imagined that would not be caught by the earlier paragraphs of the definition. But it seems to me that it would do so because it deals with the value of a person's property in the sense of the value of all that is his. The word "property", to describe collectively a man's worldly wealth, his substance, is one of the oldest senses of the word in the English language. And it can bear that sense in the language of the law, for example when the property of the bankrupt is spoken of in bankruptcy legislation. The word "property" in par. (f), with which we are here concerned, has in my opinion much the same meaning as the word "estate" in the corresponding provision of the Death Duties Act 1921 of New Zealand, whence par. (f) was apparently derived. The view that I take accords, I think, with the statement in the judgment of Latham C.J. and Webb J. in Grimwade's Case [1949] HCA 9; (1949) 78 CLR 199, at p 215 that: "Paragraph (f) is intended to cover cases of transactions entered into with the intent to diminish the value. . . of the donor's own property in globo and to increase the value of the property in globo of another person". But I do not wish to be taken as founding my opinion simply on that judgment in that case. Indeed I am inclined to doubt the validity of some of the observations in it. I found my conclusion simply on the words of the Act. To read them as restricted in their application to a determination of the value of a specific item of property and the increase in the value of another item seems to me, with respect to those who think otherwise, to involve reading par. (f) as if the words were not "his own property" etc. but "some part of his own property" etc. or "any of his own property" or some such phrase. If as the result of a transaction one person is worse off and another person better off than they would have been if the transaction had not occurred, and if the transaction was entered into with intent to produce this result, then I consider the statutory description is satisfied. (at p626)
3. The immediate result of what was done was, I think, to diminish the value of Mrs. Abel's property - that is to say, to make her property as a whole less valuable than it would have been if what was done had not been done. I appreciate that, by her control of the companies' affairs, she might later recover value for herself or restore value to her property. Her power to do so would have to be reckoned in any estimation of the diminution in value of her property. Nevertheless, in a case such as this a power to get something by taking certain actions is not, I think, the equivalent of presently having that thing. (at p626)
4. As I see the matter, the transaction that diminished Mrs. Abel's property also increased the value of the properties of her nephews. The Act does not require that the diminution of the one and the increase of the other must necessarily correspond in amount. (at p626)
5. I agree that the evidence shows that what was done by Mrs. Abel, and by those who participated in the transaction entered into, was done with the intent thereby to produce the consequences that in fact were produced. (at p626)
6. For these reasons I consider that McTiernan J. was right in thinking that the facts satisfied the description in par. (f). (at p627)
7. I have not thought it necessary to state the various steps by which, from the time when the two companies were formed, the transaction was carried through. What occurred on the afternoon of 19th May shows up the unreality and formalism into which the decision in Solomon's Case (1897) AC 22 has led the law. The utterance of the right ritualistic phrases in their proper sequence, the signing of documents prepared in advance to record that this was done was, if one ignores the transient transmutations theoretically involved, merely an elaborately occult means of making a gift. There is an increasing tendency of courts in England, and perhaps more markedly in the United States, to retreat from the position where they must refuse to look behind the legal personality which the law has given to a private corporation, and to examine the purpose of its creation and the manner of its control. Moreover I am by no means sure that the companies that were created to carry out what Mrs. Abel should direct ought not, if their separate legal personality be insisted upon, to be regarded as her agents, or as intermediaries, in the present transaction. However, this was not argued; and in the view I take it is not necessary to consider it. (at p627)
8. It seems that the view of the facts of this case taken by the other members of the Court leaves open the question whether, there being no disposition of property by Mrs. Abel to her nephews, there were not gifts by the companies to her nephews. But that question does not arise on this appeal. (at p627)
9. I would dismiss the appeal from the decision of McTiernan J. so far as it relates to liability to gift duty: I express no opinion as to the amount of the duty payable. (at p627)
ORDER
Appeal allowed with costs. Order of 22nd January 1965 set aside. In lieu thereof order that the appeal be allowed and the assessment set aside. Respondent to pay the costs of the appeal in the first instance.
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