Commissioner of Taxes (Tas) v Perpetual Trustees Executors & Agency Company of Tasmania Ltd [1969] HCA 9; (1969) 118 CLR 325 (20 March 1969)

HIGH COURT OF AUSTRALIA

COMMISSIONER OF TAXES(TAS.) v. PERPETUAL TRUSTEES EXECUTORS AND AGENCY CO. OF TASMANIA LTD. [1969] HCA 9; (1969) 118 CLR 325

Estate Duty (Tas.)

High Court of Australia
Barwick C.J.(1), McTiernan(1), Kitto(1), Menzies(1) and Windeyer(1) JJ.

CATCHWORDS

Estate Duty (Tas.) - Shares in proprietary company - Valuation - Notional liquidation basis - Income tax on undistributed profits not deductible - Deceased Perso ns' Estates Duties Act 1931 (Tas.), s. 16A (1) (c)*.

HEARING

Hobart, 1969, February 13;
Sydney, 1969, March 20. 20:3:1969
APPEAL from the Supreme Court of Tasmania.

DECISION

March 20.
THE COURT delivered the following written judgment:-
This is an appeal by special leave from an order of the Chief Justice of the respondent against an assessment of duty under the Deceased Persons' Estates Duties Act 1931-1962 (Tas.) upon the estate of T.A. Pitman deceased made by the appellant. The actual order of the Chief Justice was:

" . . . that the assessment by the respondent of the value of
the deceased's shares in Hotel Arthur Pty. Ltd. be reduced
from $49,930.00 to $43,648.00."

The only question with which this Court is concerned relates to a sum of $2,532.00 forming part of the reduction made in the assessment by virtue of the foregoing order. (at p326)

2. In making the assessment the appellant was of the opinion that s. 16A (1) (c) of the Act should be applied in valuing the shares in Hotel Arthur Pty. Ltd. forming part of the estate of the deceased, and against that exercise of discretion there was and is no appeal, although, at a late stage in his argument to this Court, learned counsel for the respondent did indicate that it might well be that his fundamental objection to the assessment was really concerned with the exercise of the Commissioner's discretion to apply the provision. However, that matter was not in issue in the Supreme Court and is not open to this Court. Moreover, there is no material upon which exercise of the discretion could now be challenged. The whole appeal turns, therefore, upon the construction of s. 16A (1) (c) which is in these terms:

"16A - (1) For the purpose of ascertaining the value of the
estate of a deceased person for the purposes of this Act the
following provisions apply in any case where the
Commissioner
is of the opinion that they should so apply, that is
to say: -
. . .
(c) Where the estate includes any shares or stock in a company
the shares of which are not, or the stock of which is not,
quoted on the official list of a stock exchange, the
Commissioner
may, in his discretion, notwithstanding anything
contained in paragraphs (a) and (b) of this subsection,
adopt as the value of any such shares or stock such sum
as the holder thereof would receive in the event of the
company being voluntarily wound up on the death of the
deceased person, notwithstanding that no such winding
up is intended or contemplated." (at p327)

3. Before considering this it is convenient to state shortly the point of difference that has emerged between the parties. (at p327)

4. Had Hotel Arthur Pty. Ltd., in which the deceased was a shareholder, been wound up on the date of his death, so much of the distributions to shareholders as represented income derived by the company would, for the purpose of the Income Tax Assessment Act 1936-1966 (Cth), have been deemed to have been dividends (s.47) and therefore a part of the assessable income of the shareholders. Furthermore, so much of any such dividend received by the appellant as executor of the will of T.A. Pitman deceased would have been taxed in the hands of the appellant pursuant to s. 99 of the Income Tax Assessment Act, and beneficiaries under the will of the said deceased would, in the course of the administration of the estate, have been entitled to the benefit of the distribution, less the amount of tax paid thereon. It was in these circumstances that this question arose:

" . . . whether for the purpose of the calculation under
s. 16A (1) (c) a deduction should be made of income tax to
which the holder of the shares would be liable in respect of that
part of the dividend received by him in the notional liquidation
which is attributable to undistributed profits of the company."

This question the Chief Justice answered affirmatively and accordingly reduced the assessed value of the shares by the sum of $2,532.00. This appeal, as we have said, is concerned with the correctness of that part of his Honour's decision. (at p328)

5. We do not consider it necessary to examine the provisions of the Deceased Persons' Estates Duties Act, other than s. 16A (1) (c), in detail. It is sufficient to observe that the duty imposed is to be calculated upon the net value of the estate of the deceased person in a manner provided by the Act (s. 4 (2)); that the Commissioner in assessing duty shall do so "upon or with reference to the reasonable market value" of the deceased's property at the date of his death (s. 5 (1A)); and that duty is payable "at the rates and in the cases set forth in the second schedule" (s.4 (1)). The schedule takes the "aggregated value of the estate" and provides for rates of duty differing with the persons to whom the property will pass in accordance with the deceased person's will or upon an intestacy. Thus, what passes to collateral relations is dutiable at a rate higher than what passes to a widow or child, and what passes to strangers is dutiable at a still higher rate of duty. Therefore the amount of duty payable upon the dutiable estate does depend upon the description of the particular beneficiaries to whom property passes. It is to be observed, however, that what is described as "aggregated value of the estate" depends in no way upon the description of the beneficiaries. The "aggregated value of the estate" depends upon an assessment of the value of dutiable property regardless of its destination. The only other comment which may be added before examining s. 16A (1) (c) is that it is clear that s. 5 (1A) relating to reasonable market value is subject to the particular provisions of s. 16A, so that if in a proper case the Commissioner were to apply s. 16A (1) (c) he would do so to determine the value of the shares in question for the purposes of the Act. In such a case "reasonable market value" would not enter into the calculation. This consideration renders inapplicable the New Zealand cases cited to us, viz. New Zealand Insurance Co. Ltd. v. Commissioner of Inland Revenue (1956) NZLR 501 ; Hatrick v. Commissioner of Inland Revenue (1963) NZLR 641, at p 662 . Of course, the exercise by the Commissioner of the discretion given to him to apply the section is reviewable by the Court and if, in a particular case, the Court were of opinion that the value of the shares arrived at by applying s. 16A (1) (c) is not a satisfactory value to attribute to the shares, the Court would not allow the Commissioner's application of the provision to stand. This, we think, was the point of what was said in Commissioner of Stamp Duties (N.S.W.) v. Pearse (1951) 84 CLR 490, at p 519 . (at p329)

6. Section 16A (1) (c) applies "Where the estate includes any shares . . . in a company . . . which are not . . . quoted on the official list of a stock exchange . . . " and is directed to valuing those shares as at the date of the death of the person entitled to them. The value of those shares is "such sum as the holder thereof would receive in the event of the company being voluntarily wound up on the death of the deceased person", that is to say if the distribution to shareholders on the winding up took place on that day. This provision is not in any way concerned with what happens to the shares in the course of the administration of the estate. In that administration the shares might be sold to pay debts, funeral or testamentary expenses, or duties; they might be transferred to a particular legatee, widow, child, brother or stranger; part of the holding may go one way, part another. All this however, has nothing to do with the concept with which we are concerned, viz. "such sum as the holder thereof would receive in the event of the company being voluntarily wound up on the death of the deceased person". Nor does the section direct attention to anything but the sum which such person would receive. It is immaterial whether the sum in the hands of the recipent would or would not constitute part of his assessable income or at what rate such person would be taxed. It would be virtually impossible to bring the considerations we have just mentioned into account in determining the value of shares in accordance with s. 16A (1) (c) and that provision does not require the Commissioner to attempt such an undertaking. It is concerned simply with the sum which the holder of the shares would receive from the liquidator upon a distribution in the hypothetical liquidation. In such a hypothetical liquidation, indeed, the hypothetical holder would, it seems, of necessity, be the personal representative of the deceased person whose estate included the shares. It is the personal representative that would hypothetically "receive" a sum from the hypothetical liquidator. It is, we think, important to emphasize, as we have, that the section is not concerned with an actual liquidation and what would happen to sums received from the liquidator. It proceeds upon a limited hypothesis and it would, we think, be an error to attempt to apply it upon the footing that there had been an actual distribution and that income tax or any other liability has become payable by some person or other by reason of the distribution. Accordingly, there is no weight in the argument presented to us that a construction of the section in accordance with the contention of the respondent would work injustice in that "there are two separate statutes assessing tax upon a gross figure without either of them allowing any deduction for the other" and "it was never the intention of the enactment of s. 16A (1) (c) to impose a double set of taxes in this situation". The effect of s. 16A (1) (c) is exhausted, when it has been determined what the holder would receive from the liquidator in respect of the shares included in the estate of the deceased if a voluntary liquidation had been completed upon the date of the death of the deceased. (at p330)

7. Accordingly, with great respect, we think that the learned Chief Justice drew too much from the provisions of the second schedule to the Act and that it was going beyond s. 16A (1) (c) to endeavour to take into account what beneficiaries would have received from the executor if the executor, as holder, had received a distribution in the hypothetical winding up. (at p330)

8. In the course of his careful argument, Mr. Crawford cited a number of authorities to us but, in our opinion, none of them has any significant bearing upon the construction of s. 16A (1) (c). We have already mentioned some of these authorities to distinguish or explain them and we do not think any discussion of them in detail is necessary. (at p330)

9. For the foregoing reasons the appeal should be allowed and the order of the Chief Justice varied by substituting the figure $46,180.00 for the figure $43,648.00. The appellant is entitled to the costs in the Supreme Court but, in accordance with the undertaking given upon the granting of special leave to appeal, the appellant must pay to the respondent the costs of this appeal. (at p330)

ORDER

Appeal allowed. Order of Supreme Court of Tasmania varied by substituting - (1) for the figure $43,648.00 appearing therein the figure $46,180.00, (2) for the order that the present respondent recover against the present appellant its costs to be taxed an order that the present appellant recover against the present respondent his costs to be taxed. The present appellant to pay to the present respondent its costs of the appeal.