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High Court of Australia |
ORD FORREST PTY. LTD. v. FEDERAL COMMISSIONER OF TAXATION. (1974) 130 CLR 124
Gift Duty (Cth)
High Court of Australia.
Stephen J.(1)
Barwick C.J.(2), McTiernan(3), Gibbs(4) and Mason(5) JJ.
CATCHWORDS
Gift Duty (Cth) - Gift - Disposition of property - Allotment of shares in a company - Value in excess of allotment price - Inadequacy of consideration - Whether allotment of shares by a company for a consideration less than their value involves gift by company - Gift Duty Assessment Act 1941-1967 (Cth), s. 4 (1).
HEARING
Sydney, 1973, April 2, 3;DECISION
1973, April 27.
2. The Commissioner supports his assessment on the footing that the allotment
was a disposition of property by the company accompanied
by an inadequacy of
consideration and hence a dutiable gift ; the company denies the existence of
any dutiable gift, asserting that
an allotment of shares for cash at par, with
or without a premium, cannot constitute a dutiable gift regardless of the
value of the
shares to the allottees. (at p125)
3. The company was incorporated in March 1969 under the Companies Ordinance
1962 (A.C.T.) ; a few days later it borrowed from one
of its two shareholders,
who was also beneficially entitled to the only other issued share in its
capital, the sum of $1,050,000,
at call free of interest. On the same day it
bought from that shareholder for cash two large parcels of shares in listed
companies
for $1,035,055. On 23rd April 1969 it borrowed from that same
shareholder a further $1,450,000, again at call free of interest, which
it
immediately lent, on the same terms, to two other proprietary companies. Five
minutes after the holding of the board meeting at
which these three
transactions were resolved upon a further meeting was held at which it was
resolved that, that shareholder having
now called for repayment of $2,480,000
of her loan moneys, that sum be repaid to her. At that same meeting she then
applied for 24,800
ordinary shares of $1 each in the company's capital at a
premium of $99 per share, accompanied by a cheque for $2,480,000, and those
shares were then allotted to her and a resolution passed that a general
meeting be convened on short notice to convert all the then
issued capital of
the company into preference shares. This general meeting then followed, only
twenty minutes after the commencement
of the preceding board meeting, and the
appropriate resolutions were carried ; all that need be noted is that the
rights of preference
shares were limited to a fixed preference dividend of
four per cent and to priority as regards capital (not including premium
moneys)
and dividends on a winding up or reduction of capital but with no
right to further participation in profits or assets ; the preference
shares
conferred no voting rights. (at p126)
4. Then, at a further board meeting held twenty minutes after that general
meeting, it was noted that application had been received
by allottees for
eight ordinary shares of $1 each at a premium of $99 per share, accompanied by
cheques for a total of $800, and
it was resolved that the eight shares applied
for should be allotted. These shares thus constituted the only issued shares
having
any voting rights and, because of the very limited other rights
attached to the existing preference shares, would obviously be of
great value
in a company owning such valuable assets. The Commissioner, in applying s. 18
(2) (c) of the Gift Duty Assessment Act
to ascertain their value, has arrived
at a total value of $2,591,280 for these eight shares. (at p126)
5. It is in these circumstances that the Commissioner invokes the provisions
of the Gift Duty Assessment Act as justifying his assess
ment of the company
to duty. The critical question is, of course, whether the allotment of these
eight shares constituted a gift
for the purposes of the Act. If it did then,
no evidence having been called to show that the amount of the assessment, a
default
assessment, is, in point of valuation of the property the subject of
the gift, excessive, this appeal will fail and the assessment
will stand -s.
23 of the Act. (at p126)
6. A "gift" is defined in s. 4 (1) of the Act ; the effect of that
definition, so far as presently relevant, is to make any disposition
of
property a "gift" if the consideration in money or money's worth passing from
the disponee to the disponor is not fully adequate.
(at p126)
7. Two issues arise for determination ; was the allotment a "disposition of
property" and, if so, was the consideration passing
from each allottee, a
disponee, to the company, the disponer, "fully adequate"? (at p126)
8. "Disposition of property" is defined, first by giving it a meaning
encompassing all types of alienations of property and then
by adding six
additional meanings which are to be included within its defined meaning the
first of which is "(a) the allotment of
shares in a company". That phrase
describes accurately enough what took place on 23rd April 1969 when the eight
shares were allotted
; what then occurred was no more and no less than " the
allotment of shares in a company". Paragraph (a) of the definition of
"disposition
of property" has not hitherto been judicially considered and
appears to have no counterpart in any analogous legislation either in
Australia or overseas. However, its words are, I think, clearly applicable to
the present case ; the meaning they convey cannot be
confined, as was
suggested, to the procuring by a third party of the allotment of shares by a
company ; whether or not they would
include such a transaction I need not now
determine. No statutory context has been suggested as requiring any departure
from ordinary
meaning. The fact that reference is made to the allotment of
shares "in", rather than "by", a company seems to me of no significance,
an
allotment of a company's shares will be effected by resolution of a meeting
either of its directors or of its members, depending
upon the terms of its
articles, and in either event is perforce an allotment "by" the company ; in
describing an allotment of shares,
if shares in a company rather than in some
other enterprise are intended to be referred to, the only likely ambiguity
lies in that
which is allotted rather than the entity making the allotment ;
the words "in a company" thus add a useful measure of precision to
what goes
before by making it clear that it is only the allotment of shares in
companies, and not in other joint ventures, that is
being dealt with. (at
p127)
9. It follows that in my view the allotment of eight shares on 23rd April
1969 fell within the meaning of a "disposition of property"
as defined in s. 4
of the Act. (at p127)
10. I pass now to the second issue, concerned with adequacy of consideration.
For the company it was contended that the allotment
of a share at par or at
any premium above par is inherently incapable of constituting a transaction
for other than fully adequate
consideration, at least so long as the par value
is paid in cash by the allottee. Because the payment of par value entitles the
successful
applicant for allotment to have his shares treated as fully paid up
and invests him with all the rights conferred upon a member by
virtue of his
holding of a share it must follow, it is said, that in such a case there can
never be any inadequacy of consideration.
The company has received all that,
as a matter of law, it is entitled to and the proper test of adequacy of
consideration in such
a case is whether or not the shares may properly be
described as fully paid up. (at p128)
11. To my mind this confuses the legal effect of the contract between company
and allottee with the quite distinct question whether
the consideration in
that contract is adequate. The legal effect of the contract is to entitle the
company to receive no more and
no less than the amount per share stipulated
for, be it par or par plus a premium ; in this respect it does not differ from
any other
contract by which a price becomes payable, save for the restraint
imposed by the law upon the issue of shares at a discount except
in accordance
with s. 59 of the various Australian Companies Acts. To regard the full extent
of the actual contractual obligation
of a contracting party as necessarily
constituting a fully adequate consideration is erroneous ; yet this is, in
effect, what the
company's submission amounts to. (at p128)
12. It is, I think, irrelevant to the present question that directors are
not, in all circumstances, obliged to exact from applicants
for shares in a
company the full premium that market demand would make possible. Likewise it
seems to me not to the point to say,
even if it were true, a matter to which I
will return later, that a company suffers no detriment to itself in failing to
demand of
applicants for its shares as great a premium as those shares could
command. The definition of "gift" in s. 4 of the Act does not
concern itself
with detriment to the disponor but rather with whether or not the
consideration passing to it from the disponee is
"fully adequate". (at p128)
13. The test of adequacy of consideration passing from disponee to disponor
required by the definition of "gift" necessitates some
criterion against which
it is to be measured. In the ordinary case of a disposition of property by way
of alienation of property
by the disponor in favour of a disponee the
criterion must, I think, be the value of the property received by the disponee
; the
consideration in money or money's worth passing from the disponee is to
be contrasted with the value of that property, there being
made "a comparison
of the value of what was promised or paid with the value of what was given" -
McGain v. Federal Commissioner of
Taxation [1966] HCA 34; (1966) 116 CLR 172, at p 176 . The
result of that comparison will determine the adequacy of the consideration.
Quite apart
from
the inference arising from the words of the definition of
"gift" that this is the appropriate process for the testing
of adequacy
of
consideration, s. 18 (1) (c) and (2) , s. 31 (4) (a) (i) and s. 33 (8) make
clear the relevance in this regard which
the Act
assigns to the value of the
property comprised in the gift and which is the subject of the disposition of
property in question.
(at
p129)
14. I see no reason for adopting any different view where a disposition is
not by means of an ordinary alienation of property but,
instead, takes the
form of an allotment of shares ; only in this way can effect be given to the
requirement, implicit in the definition
of "gift", that the adequacy of the
consideration, which must be in money or money's worth, is to be determined by
comparing it with
some comparable yardstick. (at p129)
15. It was argued that the fact that it is the act of allotment of shares
which par. (a) designates as the relevant disposition
makes it proper to
disregard the value of the shares allotted when determining the adequacy of
the consideration and, instead, to
adopt, as the standard with which the
consideration from the disponee is to be contrasted, the par value of those
shares. (at p129)
16. I find no justification, either in the Act or as a matter of general
principle, for doing this. There is, I think, to adopt
Sir Cyril Radcliffe's
expression used in argument in Humphrey v. Gold Coast Selection Trust Ltd.
(1946) 30 Tax Cas 209, at p 223
, no "lawyers' mystery" which requires that
the par value of shares should be taken to be their actual value - and see
Murphy v.
Australian Machinery and Investment Co. Ltd. per Atkinson J. (1947)
30 Tax Cas 244, at p 255 who earlier (1947) 30 Tax Cas, at p
253 had said of
Humphrey's Case (1946) 30 Tax Cas 209 that that whole case negatived any
suggestion that the shares there in question
had to be taken at their par
value; instead their value was a question of evidence. Those two cases each
involved the ascertainment
of the cost to promoters of mining companies of
shares allotted to them so that on the subsequent sale of those shares their
profits
and gains might be computed for income tax purposes ; the problem for
the court was therefore different from the present but the
rejection of par
value as indicative of actual value is noteworthy. (at p129)
17. Although no occasion has arisen in the past for any judicial
consideration of s. 4 (1) (a) of the Gift Duty Assessment Act there
are to be
found dicta treating the allotment of shares at less than market value as
involving inadequacy of consideration on the
allottee's part. (at p129)
18. In Mendes v. Commissioner of Probate Duties (Vict.) [1967] HCA 23; (1967) 122 CLR 152 ,
Kitto J. with whose reasons and conclusions
Taylor
J. agreed, in describing
the circumstances of that case,
spoke of the allotment by a company of certain
shares to the appellant,
the son of the deceased, and said of them [1967] HCA 23; (1967) 122
CLR 152, at p 156 :
"The 'B' shares were worth at all material times 1 19s. 4d.Again, his Honour said (1967) 122 CLR, at p 159 :
each but the son paid for them only 1 per share, so that they
were all issued to him otherwise than for a full consideration
in money or money's worth."
"In the first place, it is a case in which an issue of sharesIn the first of these passages his Honour saw nothing inappropriate in describing an allotment at par of shares worth more than par as involving an absence of full consideration. In the second his Honour was concerned to explain the way in which what he earlier had called "a share transaction in circumstances which gave it a practical resemblance to a gift by" the person controlling the company in question was, by the Victorian probate duty legislation, assimilated to an actual gift by that person and thus included in that person's notional estate for purposes of assessment of probate duty; he clearly regarded the issue of shares at an issue price less than their value as involving an absence of full consideration and as being in the nature of a gift to the allottee. (at p130)
by a company otherwise than for full consideration in money
or money's worth, and therefore wholly or partly in the nature
of a gift to the person who takes them up, may be assimilated
to a gift inter vivos by the deceased for the reason that the
deceased held shares in the company at the time of the issue,
so that the issue for less than full value necessarily reduced
the value of the deceased's property at that time."
19. In Gorton v. Federal Commissioner of Taxation [1965] HCA 1; (1965) 113 CLR 604 , gift
duty was not sought to be assessed against
the companies
whose shares were
allotted to nephews of the
deceased, she having procured those allotments ;
instead her estate was
assessed, reliance
being placed upon par. (f) of the
definition
of "disposition of property". In rejecting this approach the Chief
Justice and Taylor
J., in a joint judgment, said (1965) 113 CLR,
at p 624 :
"There was no moment of time when any change in the valueTheir Honours thus recognized that the allottees of shares thereby acquired assets worth more than the consideration which they had paid for them, namely par value plus a set premium. In his dissenting judgment, Windeyer J. (1965) 113 CLR, at p 627 said that the views of the majority appeared to leave open the very question now before me, whether there were gifts made by the allotting companies to the nephews. (at p131)
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."
20. In Lowry v. Consolidated African Selection Trust Ltd. (1940) AC 648 , the
respondent sought to treat as an outgoing deductible
from its profits and
gains the premium foregone by it when it allotted shares to its employees at
par, those shares having a much
higher market value ; it failed because the
foregoing of a premium on the issue did not involve it in any expense for the
purpose
of its trade. In arriving at that conclusion Viscount Maugham
described what the company had done, saying that it "has made a present
to its
employees" (1940) AC, at p 666 . (at p131)
21. In the absence of authority to the contrary I would conclude that there
was here a gift by the company to each of the allottees.
But it is said that
there are decisions of this Court to the contrary ; counsel for the company
relies principally upon Archibald
Howie Pty. Ltd. v. Commissioner of Stamp
Duties (N.S.W.) [1948] HCA 28; (1948) 77 CLR 143 . In that case the appellant company,
following confirmation
of a resolution for reduction of capital and
distribution
of surplus assets, transferred to two shareholders,
who together
held all
but one of the issued shares in its capital, certain shares
of other
companies by way of a distribution in
specie. The question was
whether those
transfers were dutiable as on a conveyance
without consideration, with
inadequate consideration
or with a bona fide
consideration of not less than
unencumbered value of the
property conveyed. Dixon J. was able to discern two
aspects of the transaction,
which he described as "perhaps two sides of the
same
thing", whereby an adequate consideration might
be seen. First, the
reduction
of capital and the distribution in specie was an effectuation
of a
provision of the contract of membership
of the company ; allotment
and payment
up of shares conferred upon their holder a right
to have the company's assets
dealt with in
accordance with the various
ways required or authorized by the
articles ; the distribution
in specie was one such way ; it was a
realization
of the rights obtained
by the acquisition of shares and the consideration
given
was "the payment up of the share capital
in satisfaction of the
liability
for the amount of the share received on allotment" (1948)
77 CLR, at
p 153 . Secondly a member's
contribution of the amount of his
share measured
his right to any return of capital which
the company might make and determined
the
proportion in which he shared with
others in a distribution of excess
assets. A return
of capital in cash would be a discharge pro
tanto of the
shareholder's claim
upon the company's assets and where, instead, a
shareholder
took, on a reduction of capital, an
aliquot part of the company's
assets,
in which he had had an interest consisting of a congeries
of rights in
personam, the consequent
reduction in amount and value of
his share afforded
an adequate consideration in money and
money's worth. (at p132)
22. I do not regard any part of the reasoning of his Honour as touching upon
the present case. The stated case recited that the
shares in question had been
paid up in full and his Honour referred to and relied upon this fact in the
course of his reasoning.
However neither the reasoning nor the case itself
raised any question concerning the transaction involved in the original
allotment
of shares or the consideration therefor. It was enough that the
shares were fully paid shares, as such they entitled the holder to
a
proportionate "interest" in the company's assets ; that "interest" might come
to represent in value far more than the original
capital which had been
contributed but its distribution involved no element of gift, no inadequacy of
consideration. However because
fully paid shares confer such rights it by no
means follows that for an allottee to pay up in full the shares allotted to
him excludes
the possibility that the consideration passing from the allottee
to the company may not be fully adequate when the purposes of gift
duty fall
for consideration. (at p132)
23. The arbitrarily fixed par value of a share, if paid up, must, under our
system of shares having a par value, confer upon the
holder his "interest" in
the company's assets but that system says nothing about the adequacy of par
value as consideration in the
contract of allotment ; it does no more, for
presently relevant purposes, than, first, to assure those who deal with a
company, if
the shares be fully paid up, that at the time of allotment there
was a contribution in cash to the company's capital of the par value
of the
share or a contribution otherwise than cash, details of which are available to
the public for inspection ; if the shares are
only partly paid it ensures that
the members may be made liable for the balance payable on their shares.
Secondly it defines the
extent of the allottee's total liability as a member
of a limited liability company. It seems to me to have no legitimate function
as a criterion of the adequacy of consideration passing from the allottee to
the company ; the very fact that shares may be allotted,
as in the present
case, at a large premium over par value in itself denies to par value the
character of conclusive arbiter of adequacy
of consideration unless it be
said, contrary to reality, that whenever a premium is paid the allottee is
paying in excess of an adequate
consideration for the allotment to him of his
shares. (at p133)
24. If, as Dixon J. says in Howie's Case (1948) 77 CLR, at p 154 , it be
proper to regard a shareholder's "interest" in a company's
assets as a
congeries of rights in personam having "an equivalence not only from a logical
but from a realistic point of view" with
an aliquot part of those assets it
must, I think, follow that, because the value of his share will depend upon
the value of that
aliquot part, it will not bear any relationship to par
value, nor will par value necessarily represent adequate consideration for
the
allotment of that share. (at p133)
25. The judgment of Williams J. in Howie's Case contains the following
passage much relied upon by the company on this appeal (1948)
77 CLR, at p 157
:
"When the person to whom the shares are allotted paysLater in the judgment reference is again made to this aspect when his Honour says (1948) 77 CLR, at p 159 :
or assumes the liability to pay for the shares in money or
money's worth, full consideration in money or money's worth
moves from him to the company for all the rights which he
acquires under the memorandum and articles of association."
"The capital of a successful company is usually representedHis Honour goes on to refer to he wide repercussion which would result were this not so, referring specifically to the Gift Duty Assessment Act ; I take his Honour to have in mind that the Act would otherwise render dutiable as a gift any distribution by a company of cash or assets of a value in excess of the paid up value of shares. (at p133)
by assets which, after providing for the claims of creditors,
exceed in value the amount of the paid up capital. But as
I have said the amount payable to a company for a share is
limited. Unless the share is issued at a premium it is the
nominal amount of the share. The payment of that amount
or the assumption of liability to pay it must therefore provide,
in the absence of some special provision like that in the
English Finance Act, full consideration for the right to receive
any distributions of money or assets which the shareholder
subsequently received from the company."
26. The first of these observations occurs as part of a train of reasoning by
means of which his Honour supports the proposition
which he states at the
outset, that upon the taking effect of a special resolution for payment off of
capital in excess of a company's
wants the company becomes indebted to its
members to the extent of their respective rights under that resolution. Having
stated that
proposition his Honour then goes on to say (1948) 77 CLR, at p 157
:
"A company obtains capital by the issue of its shares.Then follows the first passage set out above, followed in turn by the conclusion that a debt is created because members have, for valuable consideration, acquired the legal right to be paid. (at p134)
These shares cannot be issued at a discount but may be issued
subject to the payment of their nominal amount or at a
premium. The amount payable may be satisfied by the
payment of money or by some other proper consideration."
27. It followed, in his Honour's view, that although in the case of a
successful company its assets would probably be worth more
than the total
paid-up capital, nevertheless fully paid shares entitled their holders to
participate in a distribution of those valuable
assets of the company, the
payment up of the shares providing full consideration for any distribution
received from the company.
(at p134)
28. If applied literally and taken out of the context of the facts in Howie's
Case [1948] HCA 28; (1948) 77 CLR 143 and of the
question raised
for decision in that case
the passages from the judgment of Williams J. relied upon
do support the
company's submissions.
To so understand
them is, I think, to disregard what it
was with which his Honour was there
concerned. His Honour's concern was with
the adequacy
of consideration for a transfer of shares upon a distribution in
specie and
his Honour held that by paying up a share
in full, or
assuming
liability therefor, full consideration was given for the right which
found its
consummation in the distribution.
If so understood
the references made to full
consideration do not, I think, bear upon
the present question. What I have
already said
concerning the
judgment of Dixon J. in Howie's Case [1948] HCA 28; (1948) 77 CLR
143 does, I think, apply equally to that of Williams
J. (at p134)
29. Davis Investments Pty. Ltd. v. Commissioner of Stamp Duties (N.S.W.)
[1958] HCA 22; (1958) 100 CLR 392 was also relied upon
in so far as the
judgments in that
case applied or explained Howie's Case [1948] HCA 28; (1948) 77 CLR 143 . For present
purposes
they take the matter no further,
I think, than does Howie's Case
[1948] HCA 28; (1948) 77 CLR 143 , being wholly concerned, like
it, with the search for
adequacy of consideration
on the occasion of the transfer
by a company to its
shareholders of assets in the
form of shares. (at p134)
30. It is not irrelevant to see how the courts have, for other purposes,
regarded the allottees of shares having a value greater
than the price paid on
their allotment. Those cases in which employees of companies have been
rewarded by this means have, in the
United Kingdom, turned upon questions of
whether, and if so when, the financial advantage to the employee of such a
transaction is
taxable in his hands as an emolument of office and in some
cases the question has been complicated by the introduction into the
transaction
of an option granted to the employee to take up, in the future,
shares at a presently specified allotment price. The courts have
spoken of
such an allottee as having derived a gift or extra remuneration for his
services - Abbott v. Philbin (1960) 39 Tax Cas
82, at p 130 ; as having made
a profit - Weight v. Salmon (1935) 19 Tax Cas 174, at p 194 , Abbott v.
Philbin (1960) 39 Tax Cas,
at p 96 ; as having received something valuable
beyond the par price at which the allottee was privileged to obtain the shares
-
Weight v. Salmon (1935) 19 Tax Cas, at p 190 ; the allotting company has
been described as a donor - Abbott v. Philbin (1960) 39
Tax Cas, at p 113 .
(at p135)
31. The company's contentions appear to me to involve two misconceptions,
each associated with what is said to be a leading case
establishing a
presently relevant proposition. The first is that payment of par value
necessarily imports payment of fully adequate
consideration for the allotment
of a share ; because that is the full price demanded for those rights and
because by its payment
the share thereby becomes fully paid up it must be a
fully adequate price, payment of par value conferring upon the allottee all
the rights which he is capable of acquiring as a shareholder. This proposition
relies upon the reasoning of this Court in Howie's
Case [1948] HCA 28; (1948) 77 CLR 143 ; I
have already sought to show that that decision does not in fact justify the
proposition.
Indeed the relevance
of par value is, I think, quite limited. Its
significance is confined to questions which may arise as between
a shareholder
and a
company or its liquidator once he attains the status of shareholder ; by
payment of par value he satisfies his
liability in respect
of his share so
that thenceforth neither the company nor its liquidator can require further
payment from him
; his liability is limited
to par value and that liability he
has paid. However par value has no part to play in the measurement
of the
adequacy of the consideration
passing from allottee to company in that
particular instance of a disposition of property which
is described in s. 4
(1) of the Gift
Duty Assessment Act as "the allotment of shares in a company".
(at p135)
32. The second misconception is involved in the proposition that a company
which allots at par shares having a value greater than
par does not thereby
suffer any financial detriment. This proposition is said to be based upon
Hilder v. Dexter (1902) AC 474 , but
that case is, in fact, no authority for
it. Their Lordships were there considering the terms of s. 8 (2) of the
Companies Act 1900
(U.K.); which was concerned with transactions made at the
expense of a company's shares or capital money. The Earl of Halsbury and
Lord
Robertson agreed in the judgment of Lord Davey and his Lordship does say
(1902) AC, at p 480 that where shares of greater than
face value are allotted
at par the benefit to the allottee "is not obtained by him at the expense of
the company's capital". However,
the emphasis here lies upon the reference to
"capital"; his Lordship had earlier said that such an allotment "may or may
not be at
the expense of the company". He recognized that, in the absence of
good reason dictating an issue of such shares at par, their issue
at that
price would be at the company's expense, although not at the expense of its
capital. (at p136)
33. If these two misconceptions be put aside there remains, in my view, no
reason to view the transaction here in question as other
than one falling
within the terms of the Act and as properly involving the company in liability
to gift duty. The appeal will be
dismissed with costs. There will be the usual
order as to exhibits. (at p136)
From this decision the appellant appealed to the Full Court.
M.H. Byers Q.C. (with him J.S. Lockhart Q.C. and J.P. Bryson), for the appellant. If the decision of Stephen J. was correct there would be no way in which the company could have issued shares, no matter how great the consideration paid might have been, without attracting a liability to gift duty. The expression "allotment of shares" used in par. (a) of the definition of "disposition of property" is a company law expression and its meaning must be established from company law principles and decisions : Fadden v. Federal Commissioner of Taxation [1945] HCA 8; (1945) 70 CLR 555 ; McGain v. Federal Commissioner of Taxation [1966] HCA 34; (1966) 116 CLR 172 . Paragraph (a) applies only to allotments that otherwise constitute dispositions of property, such as when a person with rights to take up shares pays the allotment price but directs that the allotment should be to some other person. By an allotment in the company law sense is meant the act of allotment coupled with an acceptance if that is necessary ; see Gower, Principles of Modern Company Law, 3rd ed. (1969), p. 375 ; Companies Act, 1961 (N.S.W.), ss. 48, 49, 50, 54, 63 ; Central Piggery Co. Ltd. v. McNicoll (1949) 78 CLR 594 and In re V.G.M. Holdings Ltd. (1942) Ch 235 . An allotment amounts to the creation of an interest, not a disposal of an interest. Paragraph (a) applies only where the allotment is the means by which a disposition by way of gift is effected ; and the preposition "in" as opposed to "by" in the definition supports the view that what is contemplated is not ordinarily a gift by a company, but a gift by some other person by means of an allotment. Perhaps there are special situations where a company itself effects a gift under par. (a), such as where shares are issued in consideration of rights having an unreal or fictitious value ; or in some jurisdictions it is possible, e.g. to issue shares at a discount, and in such a case par. (a) might apply. The Act requires a valuation of what is received by the allottee of shares, and for this purpose it must be recalled that an allottee has no interest at all in the assets of the company : Grimwade v. Federal Commissioner of Taxation [1949] HCA 9; (1949) 78 CLR 199 ; Macaura v. Northern Assurance Co. Ltd. (1925) AC 619 . The power of allotting shares cannot itself be regarded as an asset that is diminished by an allotment : Lowry v. Consolidated African Selection Trust Ltd. (1940) AC 648 ; and the allotted shares cannot be regarded as ever having been the property of the company : Bradbury v. English Sewing Cotton Co. Ltd. (1923) AC 744 . In this case the allottees received, in consideration of $800, rights to participate in distributions by the company, to vote, and so on ; but no property otherwise became theirs, and there was no disposition in their favour, and for the fresh rights created the allotment price always constitutes full consideration : see generally Archibald Howie Pty. Ltd. v. Commissioner of Stamp Duties (N.S.W.) [1948] HCA 28; (1948) 77 CLR 143 and Davis Investments Pty. Ltd. v. Commissioner of Stamp Duties (N.S.W.) [1958] HCA 22; (1958) 100 CLR 392 . A company does not suffer a detriment by allotting shares, and in any event the suffering of a detriment would not affect the passing of consideration between the parties. Ordinarily a liability to a tax or duty should not be taken to have been imposed unless an intention of this kind is clearly expressed : Anderson v. Commissioner of Taxes (Vict.) (1937) 57 CLR 233 .
P.J. Jeffrey Q.C. (with him J.R. Gibson), for the respondent. The specific paragraphs in the definition of "disposition of property" are more concerned with acts creating rights of property than the disposal of rights of property, and par. (a) is not alone in requiring a construction of this kind. Paragraph (a) thus contemplates a disposition by the allotting company, and it is not necessary to find some other person making a disposition by virtue of or through the act of the company. The word "dispose" is of very wide application, and is not limited to cases where existing property or rights are transferred. No significance can be placed upon the preposition "in" in par. (a) ; that preposition simply indicates that it is company shares that are being referred to. But not in every case of an allotment of shares for which pecuniary consideration is small is there a dutiable gift. Thus s. 14 (f) provides general exemptions where a gift is made in order to obtain a commercial benefit. If an allotment is made to existing shareholders it will ordinarily be found to have been made in satisfaction of existing rights. A renunciation of rights to an issue will sometimes fall under par. (f) : see Birks v. Federal Commissioner of Taxation (1953) 10 ATD 266 . As to the purpose of the various paragraphs in the definition, see Grimwade v. Federal Commissioner of Taxation [1949] HCA 9; (1949) 78 CLR 199 . Since par. (a) is complete in itself it is sufficient to find that the company is the donor, and it is not necessary to identify any other donor. The words of the Act are plain.
M.H. Byers Q.C., in reply.
Cur. adv. vult.
Solicitors for the appellant, Dibbs, Crowther & Osborne.
Solicitor for the respondent, R. B. Hutchison, Crown Solicitor for the
Commonwealth.
I.C.F.S.
1974, March 7.
The following written judgments were delivered :-Australian Capital Territory with a share capital, allotted to eight applicants eight ordinary shares in its capital at a premium of $99 a share, receiving against the allotment $800. At the time of that allotment, its nominal capital was $30,000 divided into 30,000 shares, of which 24,802 were first preference shares carrying only the right to a fixed preference dividend at the rate of four per cent per annum on the capital paid up thereon but not including any premium paid in respect thereof. The activities of the appellant and its principal shareholders antecedent to the allotment of the eight shares is set out in the narrative of events in the reasons for judgment of my brother Stephen against whose judgment this appeal is brought. The overall purpose of those activities along with the allotment of the eight shares is apparent enough but, in my opinion, irrelevant to the precise question which arises for decision in this case. (at p138)
BARWICK C.J. The appellant, a limited liability company registered in the
2. According to the respondent's calculations, based on the balance sheet of
the appellant, the allottees of the eight shares would
have received $323,910
per share if there had been a realization and distribution of the appellant's
assets immediately upon the
allotment. This sum was said by the respondent to
be the "value" of the shares. The respondent's calculations are not challenged
by the appellant. The value of the shares thus calculated was compared by the
respondent with the sum paid by the allottees on allotment.
The conclusion
proposed by him is that this comparison shows that the consideration paid for
the allotment of the shares was inadequate
in the sense required by the
definition of "gift" in s. 4 (1) of the Gift Duty Assessment Act 1941-1967
(Cth) (the Act). (at p139)
3. The respondent, exercising his power under s. 23 of the Act, assessed the
appellant, who had made no return under s. 19 of the
Act, for gift duty on the
amount of the "inadequacy of consideration" thus calculated. The assessment
was made on the footing that
the allotment of the shares by the appellant was
a "disposition of property" within the meaning of the Act, that the appellant
was
the donor and the allottees were the donees. Upon appeal to this Court
against the assessment, it was upheld by my brother Stephen
and the
appellant's appeal was dismissed. (at p139)
4. The appeal to this Court raises the sole question whether the allotment by
the appellant of the eight ordinary shares at a premium
of $99 each was a gift
by the appellant within the scope of the Act. It is as well for the discussion
of the question that I set
out the relevant parts of the Act : Section 11 -
"Subject to this Act, gift duty at rates declared by theSection 17 -
Parliament, shall be levied and paid in respect of every gift
made on or after the date of the commencement of this Act -
(a) by a person (not being a body corporate) who is domiciled
in Australia, or by a body corporate which is incorporated
under the law of any State or Territory which is part of
the Commonwealth - of any property wherever situated ;
or
(b) by any other person - of any property which is situated
in Australia at the time when the gift is made."
"Where any disposition of property is made andSection 4 (1) -
consideration in money or money's worth passes from disponee to
the disponor but the disposition constitutes a gift for the
purposes of this Act by reason of the consideration not being, or,
in the opinion of the Commissioner, not being, fully adequate,
the value of the gift shall, for the purposes of this Act, be the
extent of that inadequacy."
"'disposition of property' means any conveyance, transfer,
assignment, settlement, delivery, payment or other alienation
of property and, without limiting the generality of the
foregoing, includes -
(a) the allotment of shares in a company ;
(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
abandonment, at law or in equity, of any debt, contract or chose
in action, or of any interest in property ;
(e) the exercise of a general power of appointment of property
in favour of any person other than the donee of the power ;
and
(f) any transaction 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 ;
'donee' means any person who acquires any interest in
property under a gift, and, where a gift is made to a trustee
for the benefit of another person, includes both the trustee and
beneficiary ;
'donor' means any person who makes a gift ;
'gift' means any disposition of property which is made
otherwise than by will (whether with or without an instrument
in writing), without consideration in money or money's worth
passing from the disponee to the disponor, or with such
consideration so passing if the consideration is not, or, in the
opinion of the Commissioner, is not, fully adequate ;
'property' includes real property and personal property
and every interest in real property or personal property." (at p140)
5. The assignment of a money sum to the shares in the capital of a company
incorporated with limited liability under the company
legislation performs
several functions in the structure and operation of the company. The amount at
which the share is rated in the
capital of such a company sets the upward
limit of the amount the shareholder can be called upon to contribute to the
company's financial
affairs : it also operates, along with the number of
shares respectively held by shareholders, to fix their relative participation
in the assets and income of the company so far as they are at any time
distributed by the company. But, in my opinion, that sum,
though spoken of as
the "par value" of the share, is not in any presently relevant sense the value
of the share, nor in any proper
sense is the amount paid on allotment a price
paid for the share. The amount is the contribution to the capital of the
company which
the company requires for the possession of a share in that
capital. The amount paid on allotment is a liability of the company, so
shown
in its balance-sheet. (at p140)
6. Thus, at the outset, I cannot accept an argument proposed on behalf of the
appellant that the amount paid on allotment represented
the full
"consideration" for the acquisition of the shares. Reliance for this
proposition was placed on the remarks of Williams J.
in Archibald Howie Pty.
Ltd. v. Commissioner of Stamp Duties (N.S.W.) [1948] HCA 28; (1948) 77 CLR 143, at p 157 ,
where his Honour
said, "A company
obtains capital by the issue of its shares.
These shares cannot
be issued at a discount but may be issued subject
to the
payment
of their nominal amount or at a premium. The amount payable may
be
satisfied by the payment of money or by some other
proper consideration.
But
all shares must be paid for in full by money or money's
worth. When the person
to whom the shares are allotted
pays or assumes
the liability to pay for the
shares in money or money's worth,
full consideration in money or money's worth
moves
from him to the
company for all the rights which he acquires under the
memorandum
and articles of association." But his Honour was
not there
adverting
to such a problem as is presently raised and, in my opinion,
was
intending no more than that to pay or provide
in money's worth the
amount
required by the company for the allotment of the share
or shares is to fully
pay for them so that they
are properly called
fully paid and carry the rights
of a fully paid share. If more
had been intended, with due respect, I could
not
agree with his Honour's
remarks. (at p141)
7. There is, in my opinion, no necessary relationship between the amount paid
for or paid up upon a share in a company and the value
of that share. There
may be no exclusive method of determining that value but at any rate it is not
to be ascertained by finding
the "par value" or the amount paid on allotment
for a fully paid up share. (at p141)
8. The commencing point in the consideration of the problem in this case
whether an allotment by a company of a share in its capital
attracts liability
to gift duty under the Act is, in my opinion, s. 11. So far as presently
relevant, gift duty is payable in respect
of every gift by a body corporate
incorporated under the law of a Territory of any property wherever situated. A
share in the capital
of a company is property - see definition of "property",
s. 4 (1). But was there a gift by the appellant of a share in its capital?
To
answer this question, the definition of gift must be examined. According to
the exclusive definition given by s. 4 (1) it is "any
disposition of property
which is made otherwise than by will (whether with or without an instrument in
writing), without consideration
in money or money's worth passing from the
disponee to the disponor, or with such consideration so passing if the
consideration is
not, or, in the opinion of the Commissioner, is not, fully
adequate". There must therefore be a disponor and a disponee with a
consideration
for the disposition moving from the one to the other.
Consideration here, in my opinion, carries the significance of price, the
payment
of money or money's worth for the transfer of property, not being
limited, of course, to contractual arrangements. (at p142)
9. A company in allotting a share in its capital does not sell or transfer
the share. Having its capital divided into shares of
a nominal or par "value",
it allots a share to an applicant therefor on payment of a sum of money. In no
sense, in my opinion, is
there a transfer or alienation of property by the
allotment : nor is the allotment money what it purports to be - a contribution
to the capital of the company. It is not in any relevant sense a
consideration. The company does not part with any property, though
by the
allotment it diminishes its capacity to continue to allot shares : i.e. it
reduces the amount of its unissued capital. But,
of course, taking suitable
steps, it may increase that capital. When it does so, it does not increase its
property any more than
it diminishes its property when it allots a share. (at
p142)
10. But the respondent Commissioner's argument is that the inclusion of "the
allotment of shares in a company" in the definition
of "disposition of
property" has the effect of necessarily making the allotment of shares in the
course of raising capital a relevant
disposition of property, the company a
disponor and the amount paid on allotment the consideration for the
disposition. Of course,
if this submission is accepted, every time a company
allots a share in increasing its capital without charging the premium which
an
examination of its financial position would justify, it makes a gift. The
company and the allottee would be liable for gift duty.
(at p142)
11. Some attempt was made to escape this conclusion by resort to the
exemptions contained in s. 14 (f). But the company does not
make allotments of
shares in its capital in the course of carrying on its business, whatever that
might be, nor is the allotment
made for the purpose of obtaining any
commercial benefit. I would not regard the acquisition of share capital as the
obtaining of
a commercial benefit within the meaning of par. (f). Further, the
gift is constituted according to the argument by the failure to
demand an
adequate premium. It can scarcely be said that this is done for the purpose of
obtaining a commercial benefit for the company.
(at p142)
12. But not only does the argument result in a commercial absurdity: it
fails, in my opinion, because of the words of the definitions
themselves. I
have already pointed out the elements in the definition of gift - disponor,
disponee and consideration. Disposition
is exclusively defined as a
"conveyance, transfer, assignment, settlement, delivery, payment or other
alienation of property". So
far, undoubtedly, the definition calls for a
transaction which transfers property (including, of course, money) from one
party to
another. The list which follows, as "included", are, in my opinion,
but examples of various means by which in particular circumstances
an
alienation of property, using that term in its widest import to include a
transfer of value, may be effected. Thus, every grant
of a licence or power
does not involve the alienation of property. The "inclusion" of these
transactions in the definition of "disposition
of property" indicates, in my
opinion, that the grant or creation of a licence or a power is a disposition
in so far as it involves
the alienation of property. It may very well be that
most of the other instances in pars (b) to (e) inclusive would, without
specific
mention, have been comprehended by the general words of the
definition of "disposition of property" in an Act such as the Gift Duty
Assessment Act. Perhaps the same cannot be said of par. (f) as value is not
ordinarily thought of as itself property, divorced as
it were from the thing
valued. The definition of property in s. 4 (1) is not large enough to embrace
the concept in par. (f). But
the essence of par. (f) is the alienation, the
transfer or movement of value from the property of one person to the property
of another.
(at p143)
13. There are circumstances in which, in association with other transactions,
an allotment of shares may effect an alienation of
property from one person to
another, neither being the company of whose capital the shares form part. But,
as indicated, every allotment
does not involve an alienation or transfer of
property. (at p143)
14. I therefore construe the inclusion in the definition of "disposition of
property" of the various transactions as not departing
from the basic concept
of an alienation of property, and as doing no more than ensuring that the
particular nature of the described
transactions does not preclude their
classification as dispositions to the extent to which they involve the
transfer or movement
of property or value from one person as his property to
another as his property. Most necessarily will do so : some only in particular
circumstances. (at p143)
15. An allotment of shares, as I have pointed out, does not transfer any
property from one person to another although by the allotment
rights are
created in the allottee which are themselves, when created, property. Thus, it
seems to me that the allotment in this
case was not a gift by the appellant to
the allottees. (at p144)
16. No attempt was made in this case to rely on par. (f). It was correctly
understood that no question of a change in value of the
eight shares could
arise. Gorton v. Federal Commissioner of Taxation [1965] HCA 1; (1965) 113 CLR 604 settles
that point. (at p144)
17. Accordingly, in my opinion, the assessment should be set aside. Being of
this opinion, no question arises in this case of adequacy
or inadequacy of
consideration. But it should be observed that the applicant for a share pays
or agrees to pay for a share in the
company's capital such sum as the company
resolves to demand or require for the allotment of that share. There is no sum
with which
to make a comparison in order to determine adequacy or inadequacy
of that sum in any relevant sense. Even in the relationship of
the directors
to the company, they are not bound to demand on allotment such amount by way
of premium as could be justified by the
financial situation of the company.
(at p144)
18. The appeal should be allowed. (at p144)
McTIERNAN J. I agree in the reasons of the Chief Justice. Accordingly I
would allow this appeal. (at p144)
GIBBS J. This is an appeal from a judgment of Stephen J. confirming an
assessment of the appellant to gift duty under the Gift Duty
Act 1941 (Cth)
(as amended). The facts strictly relevant to the decision of the appeal could
be stated in a sentence but it is perhaps
convenient to recount the
circumstances of the case in a little greater detail. The appellant was
incorporated as a company on 17th
March 1969 under the law of the Australian
Capital Territory. Its situation at 11.30 a.m. on 23rd April 1969 was as
follows. Its
capital then was $30,000 divided into 30,000 shares of $1 each.
The only two shares which had been issued were held respectively
by Mrs.
Palfreyman and her husband, and he held his share as trustee for her. Mrs.
Palfreyman had lent the appellant a total sum
of $2,500,000 at call and free
of interest. At 11.35 a.m. on 23rd April 1969 the directors of the appellant
held a meeting at which
it was reported that Mrs. Palfreyman had called for
repayment of $2,480,000 of the moneys lent and it was resolved that a cheque
for that amount should be drawn in her favour in part repayment of her debt.
At the same meeting there was tabled an application
by Mrs. Palfreyman to be
allotted 24,800 ordinary shares of $1 at a premium of $99 per share,
accompanied by a cheque for $2,480,000.
It was resolved that Mrs. Palfreyman
be allotted 24,800 ordinary shares of $1 each at a premium of $99 per share
and that a share
certificate should issue forthwith. At 11.55 a.m. on the same
day, at an extraordinary general meeting of the appellant called on
short
notice, a special resolution was passed converting each of the 24,802 shares
of $1 already issued into preference shares of
$1 each and amending the
articles so as to provide that the capital of the company should be $30,000
divided into 25,000 preference
shares of $1 each and 5,000 ordinary shares of
$1 each, and that the preference shares should confer on the holders thereof
the following
rights and privileges and should be subject to the following
conditions :
"(a) the said shares shall not confer any right to vote at anyFinally, at 12.15 p.m. on 23rd April 1969 at a further meeting of directors it was noted that applications had been received for eight ordinary shares of $1 each at a premium of $99 per share. These applications had in fact been made respectively by four children of Mrs. Palfreyman and by a trustee company as trustee for certain of her grandchildren. The directors resolved to allot eight shares in accordance with the applications, and these shares were allotted and cheques totalling $800 were received in payment for them. (at p145)
general meeting of the company. The holders thereof
shall be entitled to notice of and to attend any general
meeting of the company.
(b) the said shares shall carry the right to a fixed preference
dividend at the rate of 4% per annum on the capital paid
up thereon respectively but not including any premium
in respect thereof.
(c) the said shares shall rank in a winding up and on a
reduction of capital both as regards capital and dividend
up to the commencement of the winding up in priority
to all other shares in the capital of the company.
(d) the said shares shall not carry the right to any further
participation in the profits or assets of the company or
in any amount paid by way of premium upon any share
subscribed for in the company."
2. The Commissioner, by his assessment (which was a default assessment made
pursuant to s. 23 of the Gift Duty Assessment Act 1941
(Cth) (as amended)
("the Act")), has treated the allotment of the eight shares made on 23rd April
1969 as a gift whose value was
$2,590,480, being, in his opinion, the value of
the shares less the consideration paid for them. He arrived at the value of
the shares
by determining the value of the net assets of the company as at
23rd April 1969, and by deducting an amount of $24,802 which in his
opinion
was the amount required for repayment of 24,802 four per cent preference
shares. No evidence as to the value of the shares,
or of the appellant's
assets, was led by the appellant and if there was a gift the value attributed
to it by the Commissioner must
be taken as correct since it has not been
"shown to be excessive" as required by s. 23. (at p146)
3. The effect of the above transactions was that $2,500,000 was lent by Mrs.
Palfreyman to a company which she controlled, the resulting
debt of the
company to Mrs. Palfreyman was largely extinguished when she was allotted
further shares, all her shares were converted
from ordinary into preference
shares with limited rights and eight ordinary shares were then allotted to her
relatives, or to a trustee
company on their behalf, none of whom had, prior to
the allotment, been a shareholder in the company, and each of whom paid an
amount
of $100, being par value plus a premium, for each share, although, on a
winding up, an ordinary shareholder could have expected to
receive about
$323,910. By these transactions the value of Mrs. Palfreyman's property was
diminished and her relatives became entitled
to shares worth very much more
than they had paid for them. No gift within the meaning of the Act was made by
Mrs. Palfreyman : Gorton
v. Federal Commissioner of Taxation [1965] HCA 1; (1965) 113 CLR
604 . The question for decision, however, is whether the allotment
made in
these
circumstances was a gift by the
appellant within the meaning of the Act.
(at p146)
4. By s. 11 of the Act (as by s. 4 of the Gift Duty Act 1941 (Cth) (as
amended)) gift duty shall be levied and paid in respect of
every gift made,
inter alia, by a body corporate incorporated under the law of any Territory of
the Commonwealth. The duty, which
is due and payable on the making of the gift
(s. 25 (1) of the Act), is a debt jointly and severally due by the donor and
the donee
to the Queen on behalf of the Commonwealth (s. 25 (2) ). The
questions what is a "gift" and who is a "donee" or a "donor", may be
answered
for present purposes by a consideration of the definitions of those
expressions contained in s. 4 (1) of the Act, which
are as follows :
"'donee' means any person who acquires any interest inThe words "disposition of property" are defined by s. 4 (1) as follows :
property under a gift, and, where a gift is made to a trustee
for the benefit of another person, includes both the trustee
and beneficiary;
'donor' means any person who makes a gift;
'gift' means any disposition of property which is made
otherwise than by will (whether with or without an instrument
in writing), without consideration in money or money's worth
passing from the disponee to the disponor, or with such
consideration so passing if the consideration is not, or, in the
opinion of the Commissioner, is not, fully adequate."
" 'disposition of property' means any conveyance, transfer,(at p147)
assignment, settlement, delivery, payment or other alienation
of property and, without limiting the generality of the
foregoing, includes,
(a) the allotment of shares in a company;
(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
abandonment, at law or in equity, of any debt, contract or chose
in action, or of any interest in property;
(e) the exercise of a general power of appointment of property
in favour of any person other than the donee of the
power; and
(f) any transaction 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."
5. It is apparent from these provisions that in determining whether there was
a gift which attracted gift duty two questions arise,
namely, was there a
disposition of property within the extended definition contained in s. 4 (1)
and, if so, did fully adequate consideration,
in money or money's worth, pass
from the disponee to the disponor? The words "disponee" and "disponor" are not
defined. In their
ordinary meanings (if one assumes that "disponor" is the
same word as "disponer") they refer to the person to whom property is conveyed
and the person who conveys it. However, it is impossible to regard these words
in s. 4 (1) as applying only to a "disposition of
property" which is a
disposition or conveyance in the ordinary sense. The Act proceeds on the
assumption that if there is a disposition
of property there must be a disponor
and a disponee ; in the context of s. 4 (1) the disponee must mean the person
to whom a disposition,
as defined in the sub-section, is made, and the
disponor must be the person who makes it. Similarly, the words "donor" and
"donee"
do not assist in determining whether a transaction attracts gift duty
: in the present case, if the allotment of shares was a gift,
the appellant,
which made the allotment, is, by definition, the donor, and the allottees
(including the grandchildren as well as
the trustee company), having acquired
an interest in property under the gift, are donees. (at p147)
6. The question then is, was the allotment a disposition of property? An
allotment of shares cannot be described as a disposition
of property in the
ordinary meaning of that expression. When a share is allotted, nothing is
transferred or conveyed from the company
to the shareholder. The person who
becomes a shareholder by the allotment and issue of the share does not acquire
any property in
the assets of the company : Macaura v. Northern Assurance Co.
Ltd. (1925) AC 619, at p 633 ; Archibald Howie Pty. Ltd. v. Commissioner
of
Stamp Duties (N.S.W.) [1948] HCA 28; (1948) 77 CLR 143, at p 152 . What he acquires is the
share, which is a separate right of
property : Bradbury
v. English Sewing
Cotton Co. Ltd. (1923) AC 744, at p 767 . Moreover, the share does not pass
from the company
; before allotment
the share does not
exist as a piece of
property ; it is only when it is allotted and issued that the rights which
it
confers are
created : In re V.G.M.
Holdings Ltd. (1942) Ch 235, at pp 240-241
. However, the definition of "disposition of property"
extends
to transactions
which are
not dispositions in the ordinary sense. In Grimwade v. Federal
Commissioner of Taxation [1949]
HCA 9; [1949] HCA 9; (1949) 78 CLR 199,
at p 208 , Williams J. said:
"It appears to me that pars.(a) to (f) were included in theAn appeal was allowed from the judgment of Williams J. in that case but not on grounds that affect the correctness of those remarks, which in my opinion were correct. They are supported by the form of the definition itself. Further, it may now be taken as settled that par. (f) of the definition is intended to include transactions which would not fall within the other parts of the definition -Grimwade v. Federal Commissioner of Taxation (1949) 78 CLR, at p 215 ; Gorton v. Federal Commissioner of Taxation [1965] HCA 1; (1965) 113 CLR 604, at p 622 - and the fact that par. (f) is complete in itself strongly supports the view that it was intended by the legislature that each of the lettered paragraphs of the definition should be self-contained. In my opinion, the allotment of shares in a company is a "disposition of property" within the meaning of the definition, notwithstanding that the allotment could not be described as a "conveyance, transfer, assignment, settlement, delivery, payment or other alienation of property", or as a "disposition of property" in the ordinary sense of those words. (at p148)
definition of disposition of property for the purpose of
including in the definition transactions which might otherwise
not be held to fall within the ordinary meaning of a disposition
or other alienation of property and that each paragraph is
complete in itself."
7. If an allotment of shares in a company is a disposition of property it
must follow, in my opinion, that the disponor, for the
purpose of that
disposition, is the company which made the allotment and the disponees are the
persons to whom the allotment was
made. It must further follow that any
allotment of shares in a company which is made without fully adequate
consideration passing
from the allottee to the company is a gift. The value of
the gift will be the extent of the inadequacy of the consideration - s.
17 of
the Act. In deciding whether consideration is fully adequate it is, as a
general rule, necessary to compare "the value of what
was promised or paid
with the value of what was given": McGain v. Federal Commissioner of Taxation
[1966] HCA 34; (1966) 116 CLR
172, at p 176 .
Where the relevant disposition of property is
an allotment of shares, there will be a gift if the
value of the shares
exceeds the
amount paid or promised to be paid for them. (at p149)
8. In the present case there was an allotment of shares in a company, and
therefore a disposition of property. The amount paid for
the shares ($800) was
less than their real value ($2,591,280), and the consideration passing from
the disponee to the disponor was
therefore not fully adequate. It must
therefore be held that there was a gift to the extent of the inadequacy,
unless, for some reason,
as a matter of construction, the words of the statute
should be understood to be subject to some reservation or qualification which
they do not themselves express. (at p149)
9. In support of the view that there was no gift a number of arguments were
advanced on behalf of the appellant. In the first place
it was said that the
payment of the nominal value of shares in a company must as a matter of law
amount to adequate consideration
for their allotment; alternatively it was
submitted that if this were not so, it would never be possible for an allottee
to pay a
consideration that was fully adequate, and indeed that any increase
in the amount of premium that might be paid would serve only
to increase the
value of the gift. Secondly it was submitted that if every allotment of
shares, at less than their real value, attracted
gift duty, the consequences
would be so startling, and would cause such inconvenience to the commercial
community, that they could
not possibly have been intended by Parliament. It
was therefore submitted that the words of par. (a) of the definition of
"disposition
of property" should be given a restricted meaning and that it
should be held that they were intended only to apply to the case in
which a
person intending to make a benefaction has paid the allotment moneys to a
company and requested the company to allot the
shares to another. (at p149)
10. It is convenient to turn immediately to the second argument of the
appellant. I would agree that it would be a striking departure
from existing
notions if, for example, a bonus issue of shares in a public company were held
to be a gift. In my opinion, however,
it does not follow from the decision of
Stephen J. that every allotment of shares in a company, at a price lower than
the real value
of the shares, is a gift. The allotment will be a disposition
of property, but whether the consideration will be fully adequate will
not
depend simply upon how much the allottee pays or promises to pay. Where a
company makes a bonus issue, or a new issue at a price
below the real value of
the shares, to persons who are already shareholders, there will ordinarily be
no want of full consideration.
In such a case, speaking generally (for of
course there may be special circumstances that make a difference), the making
of the new
issue of shares is no more than "a fulfilment or satisfaction of
the rights of the shareholder as such" (Davis Investments Pty. Ltd.
v.
Commissioner of Stamp Duties (N.S.W.) [1958] HCA 22; (1958) 100 CLR 392, at p 409 ), and the
payment up of the share capital
when the original
shareholding was allotted
provided the
consideration for the acquisition of the rights which the shares
conveyed,
and therefore for
any subsequent distribution of capital
or profits
in satisfaction pro tanto of those rights. The relevant principles
are
discussed
in Archibald Howie Pty. Ltd. v. Commissioner
of Stamp Duties
(N.S.W.) [1948] HCA 28; (1948) 77 CLR 143 . The facts
of that case were that a company,
pursuant to a resolution for reduction of capital, returned capital
to the
shareholders by distributing
in specie, at the values
in the company's books,
certain paid-up shares in other companies. The
actual values of those shares
were
greater than the book values.
It was held that the transfers to the
shareholders were made upon
a bona fide consideration in money
or money's
worth of not less
than the unencumbered value of the property conveyed, within
the
meaning of s. 66 (3B) of the Stamp
Duties Act, 1920-1940 (N.S.W.).
Dixon
J. said (1948) 77 CLR, at p 152 that there were "two aspects
of the
transaction in which an
adequate consideration in money
or money's worth may
be seen". As to the first of these aspects -
that the reduction and
distribution
was "an effectuation of a provision
of the contract of
membership" - Dixon J. said (1948) 77
CLR, at pp 152-153 :
"The allotment of the share and the payment up of theSecondly Dixon J. said (1948) 77 CLR, at p 153 that the contribution by a shareholder to the capital of the company "measures his right to any return of capital which the company may make either as a going concern or in a winding up". Williams J. (1948) 77 CLR, at pp 156-157 expressed similar views, and pointed out that when a dividend is declared, or a special resolution to return capital takes effect, the moneys payable to the shareholders are not gifts, but the shareholders have the legal right to sue for them (1948) 77 CLR, at p 157 . The reasoning of the members of the Court in that case is in my opinion entirely apposite to the situation where a company uses undistributed profits to pay up bonus shares which are allotted to existing shareholders in proportion to their holdings, or offers rights which contain an element of bonus to its shareholders in proportion to their holdings. (at p151)
liability thereon conferred upon the holder for the time being
of the share a right to have the assets of the company used and
applied in the various ways in which the articles expressly or
impliedly require or authorize and this is one of them. It is
an effectuation or realization of the rights obtained by the
acquisition of the share in the same way as is the distribution
of a dividend. The consideration given is the payment up of
the share capital in satisfaction of the liability for the
amount of the share incurred on allotment."
11. Of course, what has just been said is only applicable where the issue is
made to existing shareholders, and would not apply,
for example, where a
company issued shares to its employees, or placed shares with particular
buyers, not already members of the
company, at a price less than their full
value. A transaction of that kind would, however, in appropriate circumstances
be exempt
from gift duty under s. 14 (f) of the Act as being a "gift which is
made in the course of carrying on a business, for the purpose
of obtaining any
commercial benefit . . . " (at p151)
12. For these reasons it appears to me that the gravely inconvenient
consequences suggested will not result if the words of s. 4
(1) are given the
effect which they appear to have if construed in accordance with ordinary
principles. In any case, those words
are in my opinion unambiguous, and there
is no other provision of the Act that would require some special or limited
meaning to be
placed upon them. (at p151)
13. The argument that the payment of the par value of a share must
necessarily provide full consideration for its allotment is in
my opinion
impossible to accept. It would be contrary to common commercial experience,
and indeed to common sense, to suggest that
a share is necessarily worth no
more than its nominal value. It is established by many decisions, including a
number in this Court,
and constantly acted upon in practice, that the value of
a share, for purposes of duty, is its real and not its nominal value. Although
a company, on making an allotment of shares, is not legally bound to require
the payment of more than their nominal value, it does
not follow that to pay
the amount of the nominal value is to provide fully adequate consideration -
if the shares are worth more,
the consideration will be inadequate to the
extent of the difference. In support of their argument on this point (which
understandably
was not very strongly pressed) counsel for the appellant placed
some reliance on some passages from the judgment of Williams J. in
Archibald
Howie Pty. Ltd. v. Commissioner of Stamp Duties (N.S.W.), [1948] HCA 28; (1948) 77 CLR 143 .
Williams J. said (1948) 77
CLR, at p 157
:
"A company obtains capital by the issue of its shares.Later, his Honour went on (1948) 77 CLR, at p 159 :
These shares cannot be issued at a discount but may be issued
subject to the payment of their nominal amount or at a
premium. The amount payable may be satisfied by the
payment of money or by some other proper consideration.
But all shares must be paid for in full by money or money's
worth. When the person to whom the shares are allotted
pays or assumes the liability to pay for the shares in money
or money's worth, full consideration in money or money's
worth moves from him to the company for all the rights
which he acquires under the memorandum and articles of
association."
"The capital of a successful company is usually representedTo understand these passages it is of course necessary to remember the context in which they were spoken. I have already referred to the circumstances of that case and to the reasons by which the decision was supported. Williams J. was not there concerned with the adequacy of the consideration for the issue of the shares, but with the question whether there was consideration for the distribution to the shareholders. He probably intended to say no more than that the consideration for the issue of the share (which it may be assumed was then adequate) also provided full consideration for any subsequent distribution of money or assets which the shareholder might receive in satisfaction of the rights which he obtained when the share was issued to him. He did not in my opinion intend to say that the payment of the nominal value of a share is necessarily fully adequate consideration for its allotment, and I could not in any case accept such a proposition. (at p153)
by assets which, after providing for the claims of creditors,
exceed in value the amount of the paid up capital. But as I
have said the amount payable to a company for a share is
limited. Unless the share is issued at a premium it is the
nominal amount of the share. The payment of that amount
or the assumption of liability to pay it must therefore provide,
in the absence of some special provision like that in the
English Finance Act, full consideration for the right to
receive any distributions of money or assets which the
shareholder subsequently receives from the company."
14. The further submission of the appellant was that since any premium paid
on the issue of a share becomes an addition to the assets
of the company, it
would never be possible for a person to whom shares are issued to pay full
value for them. Any increase in the
amount of the premium would simply
increase the value of the assets of the company, and therefore the value of
the share, so that
an attempted calculation of the amount of full
consideration would result in infinity. This submission, if correct, would
support
the view that notwithstanding the apparently clear words of par. (a)
of the definition of "disposition of property", the legislature
could not have
intended that an allotment of shares could amount to a gift by the company
making the allotment. The submission proceeds
on the assumption that the
shares should be valued by reference to the amount which the assets of the
company would realize upon
a liquidation, and on that assumption has some
plausibility when directed to a case in which, under the articles of the
company,
the shareholder who has paid the premium is in a specially favourable
position when assets are distributed. However, this argument
would obviously
be untenable when applied to the case of a public company whose shares are
listed on a stock exchange. In such a
case the value of a share in the company
is normally its market value, which is readily ascertainable. The problem of
determining
the value of a gift of such a share seems to me no different in
principle from that which arose in Salmon v. Weight (Inspector of
Taxes)
(1935) 51 TLR 333 . In that case, a director was, by reason of services
rendered to his company, authorized to purchase a
number of the company's
shares at par, and, on his application, shares were allotted accordingly. It
was held by the House of Lords
that the difference between the amount paid for
the shares and the amount for which they could have been sold on the market
was a
taxable profit. In a similar case arising under the Act, that difference
would also represent the value of a gift made by the company
to the director
(although the gift might be exempt under s. 14(f)). However, it hardly
requires a reference to authority to establish
that in the case of an
allotment of a share which is listed on the stock exchange, full consideration
will be provided if the market
value is paid. It is therefore not right to say
that it is never possible for an allottee to pay full consideration for the
shares
allotted - that statement is plainly not true where the shares are
listed on the stock exchange. The provisions of the Act can apply
sensibly to
such an allotment at least. (at p154)
15. Once this conclusion is reached it is difficult to discern any
justification for placing on the words of the Act an unnatural
meaning that
would prevent them from applying to an allotment of shares in a private
company. In my opinion the Act, properly construed,
has the effect that an
allotment of shares in a company is a gift by the company if the consideration
for the allotment is less than
the true value of the shares. It follows that,
in asking whether there was a gift, it is necessary to determine, on the one
hand,
the value of the shares, and, on the other, the value of the
consideration. These values must be found at the time of the gift, i.e.
at the
very moment of allotment, and before the consideration paid for the shares is
brought in as an accretion to the company's
assets. If the shares allotted
were listed on the stock exchange, their value would be determined by finding
the market price, and
not by inquiring what in fact the allottees paid, and
similarly, where the shares are in a private company, the amount paid as
consideration
for the allotment should not be taken into account in
determining the value of the shares. In the present case, as I have said, it
must be accepted that each share was worth $323,910, and, in those
circumstances, it is manifest that a consideration of $100 per
share was not
fully adequate. (at p154)
16. In my opinion the decision of Stephen J. was correct, and the appeal
should be dismissed. (at p154)
MASON J. The circumstances in which this appeal has been brought and the
elements of the transaction which gives rise to the issue
for consideration
have been set forth in the reasons for judgment prepared by Gibbs J. and I
need not recount them. (at p154)
2. The initial and principal question is whether the allotment to eight
applicants of one ordinary share each in the capital of
the appellant company
on 23rd April 1969 was a "disposition of property" within the meaning of that
expression as it is defined by
s. 4 (1) of the Gift Duty Assessment Act
1941-1967 (Cth). If this question is to be answered in the affirmative, there
is the further
question whether the Commissioner could properly form the
opinion that the allotment was a disposition of property made without full
consideration passing from the disponee to the disponor and that it therefore
constituted a gift. (at p154)
3. An unissued share in the capital of a company is not property ; it is no
more than a unit or fraction of the company's nominal
capital which may be
issued in accordance with the provisions of the memorandum and articles of
association. When allotted, but not
before, it bears the character of a
proprietary right, a chose in action that is vested in the shareholder. (at
p155)
4. The allotment of shares in a company is certainly not a disposition of the
company's property ; nor, for the reasons already
stated, can it be described
with accuracy as a "disposition of property" in the ordinary sense of that
expression. (at p155)
5. This conclusion is, however, of little assistance to the appellant, for s.
4 (1) defines the expression as meaning
"any conveyance, transfer, assignment, settlement, delivery,The definition goes on to include other transactions each of which for the purposes of the statute constitutes a disposition of property. (at p155)
payment or other alienation of property and, without limiting
the generality of the foregoing, includes,
(a) the allotment of shares in a company;
. . . "
6. It might be thought that the specific inclusion in the statutory
definition of the allotment of shares in a company itself provides
a
convincing answer to the appellant's contention. However, the appellant
submitted that full effect should not be given to the statutory
definition and
that it should be read as applying only to the allotment of shares brought
about at the instance of a third party
so that there could be attributed to
the third party a disposition of property in circumstances where, but for the
statutory definition,
that consequence would not obtain. The basis of the
submission was that the statutory definition would, unless so restricted in
its
construction, be productive of far-reaching consequences of such gravity
that they could not reasonably be attributed to the legislature.
(at p155)
7. It was said that if every allotment of shares is held to be a disposition
of property the gift is made whenever a share is allotted
for a consideration
less than its true value. The issue of bonus shares and the allotment of
shares at par when their value is greater
are common instances in which the
company making the issue or allotment is necessarily making a gift, so the
argument runs. The argument
loses much of its force once it is recalled that
no element of gift can be involved in an allotment of shares, whether bonus
shares
or shares allotted for a cash consideration, to shareholders of a
company in proportion to their existing shareholding. In such cases,
notwithstanding the absence of any payment or the existence of a discrepancy
between the value of the shares and the price paid for
them, the allotment is
made to a member in satisfaction of the rights which he enjoys as a
shareholder of the company under its memorandum
and articles of association.
In Archibald Howie Pty. Ltd. v. Commissioner of Stamp Duties (N.S.W.) [1948] HCA 28; (1948)
77 CLR
143 , it was acknowledged
that a payment to shareholders by way of
reduction of capital, in the words of Dixon J.
(1948) 77 CLR,
at p 154 ,
"means that the
shareholder in satisfaction of his proportionate 'interest' in
the assets, an interest
consisting of a
congeries of rights in personam,
takes
an aliquot part of the assets". (at p156)
8. Where the articles of association entrust to the directors power to issue
the unissued capital of the company, the power is a
fiduciary power to be
exercised bona fide in the interests of the corporators as a whole (Ngurli
Ltd. v. McCann [1953] HCA 39; (1953)
90 CLR 425,
at p 445 ). When issuing shares which have a
value greater than the consideration payable for them the directors
must
give
close
consideration to the rights of the shareholders under the memorandum and
articles, including the right of a shareholder
to participate
in the
distribution of the company's assets on a winding up or on a reduction of
capital, for an issue of shares made
otherwise than
on the footing that
shareholders will participate proportionately may significantly affect the
value of the rights
of existing shareholders.
An issue of bonus shares, or of
shares having a value greater than the consideration payable for them,
to
shareholders in proportion
to their existing holdings, is therefore in a very
real sense a satisfaction of their existing rights.
(at p156)
9. A comparison of the situation of a shareholder before and after a new
issue is made indicates that no gift to a shareholder arises
when a company
allots to shareholders bonus shares or for a cash consideration shares having
a greater value than the amount payable
for them in the course of making a new
issue to shareholders in proportion to their existing holdings. In the case of
a bonus issue
there is no accretion to the assets of the company. The
shareholders' proportionate right to participate in the distribution of the
assets on a winding up or on a return of capital remains unaffected. In the
case of the issue of shares for cash the assets of the
company are increased
only by the total value of the consideration payable in respect of the
allotment. Consequently the amount which
the shareholder can expect to receive
on a distribution of the assets of the company is increased, but it is
increased only by the
amount of the consideration which he has provided for
the allotment of the new shares which he acquires. (at p156)
10. Nor is any difficulty occasioned when a company makes an offer to
shareholders of renounceable rights to take up new shares
in proportion to
their existing holdings. The shareholder is then at liberty to sell his rights
to take up new shares. The difference
between the value of the new share when
allotted and the amount payable to the company for it reflects the value of
the right to
take up the share which is itself a satisfaction of the existing
shareholder's rights under the memorandum and articles of association.
The
company receives full consideration in the form of the amount payable by the
allottee and in the satisfaction of the rights of
the existing shareholder.
There is therefore no element of gift in the offer which the company makes to
its shareholders. The situation
is not altered when an existing shareholder
alienates for a consideration his right to take up a new share ; the company
in allotting
the new shares satisfies what has become the allottee's right to
participate in the new issue and it receives from him the amount
payable in
respect of the allotment of the new share. (at p157)
11. The appellant's argument finds some foothold where a company makes an
issue of shares, not to its existing shareholders in proportion
to their
holdings, but by way of placement to persons who may or may not be
shareholders. Here, if full effect is to be given to
the statutory definition,
there is a gift once it appears that the value of the shares exceeds the
consideration payable for them.
A like result ensues when a company makes an
issue of employees' shares for a cash consideration less than the true value
of the
shares. Mr. Jeffrey for the Commissioner sought to find an answer to
these and other difficulties in the provisions of s. 14 (f)
of the Gift Duty
Assessment Act. Whether that provision exempts from gift duty an inadequacy of
consideration payable in respect
of a placement of shares or an issue of
employees' shares is a difficult question upon which I express no opinion. For
present purposes
I am willing to assume that gift duty is payable in such
cases. This possibility does not strike me as a remarkable consequence or
at
any rate one so extraordinary that the Court should be deflected from giving
effect to the language in which the statutory definition
of a "disposition of
property" is expressed. (at p157)
12. One further argument was advanced by the appellant with the same end in
view. It was said that it is impossible in the case
of a company whose assets
exceed its liabilities to charge a premium on the issue of a share which will
bring the value of the share
and the amount payable in consideration of its
allotment into equilibrium. The higher the premium the more it will swell the
assets
of the company and increase the value of the share. (at p157)
13. The argument overlooks several considerations. First, the valuation of a
share by reference to its "assets backing" is not the
normal mode of valuing a
share in a company. Where resort properly can be had to market valuation or
valuation on an income basis,
a company making a new issue may be able to
exact a premium which will dispel any suggestion of a gift. Secondly, so long
as the
new shares are not given preferred rights to participate in a
distribution on a winding up, the accretion to the company's assets
brought
about by a premium will go to augment the value of the existing shares. It
follows that if the premium is fixed at a sufficient
high level the
consideration payable for the share can be equated to the amount that it would
bring on a winding up. (at p158)
14. There will be some cases in which it is difficult or impossible to
estimate the amount of a premium which will accurately reflect,
when taken
together with the nominal value of the share to be allotted,the value of that
share. But I am unable to discern in this
circumstance any sufficient ground
for confining the statutory definition. (at p158)
15. I am in agreement with what Gibbs J. has said with reference to the
submission that, even if there is a disposition of property,
there is no gift
because the payment of par value is necessarily full consideration for the
allotment of a share. The submission
should be rejected for the reasons given
by Gibbs J. (at p158)
16. In my opinion the appeal should be dismissed. (at p158)
ORDER
Appeal dismissed with costs.
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