Palmer v Commissioner of State Taxation (WA) [1976] HCA 61; (1976) 136 CLR 406 (22 November 1976)

HIGH COURT OF AUSTRALIA

PALMER v. COMMISSIONER OF STATE TAXATION (W.A.) [1976] HCA 61; (1976) 136 CLR 406

Death Duties (W.A.)

High Court of Australia
Gibbs(1), Mason(2) and Murphy(3) JJ.

CATCHWORDS

Death Duties (W.A.) - Notional estate - Gift inter vivos - Transaction entered into without fully adequate consideration so that value of estate of maker may be diminished and value of estate of any other person increased - Administration Act, 1903-1970 (W.A.), s. 74 (1) (b).*

* Section 74 (1) of the Administration Act, 1903-1970 (W.A.) provides: "In this Part of this Act, "gift inter vivos" includes - ... (b) without limiting the effect of the preceding provisions any contract, obligation, engagement or transaction entered into, whether with or without writing, and which is made without fully adequate consideration in money or money's worth so that the value of the estate of the maker may be directly or indirectly diminished, and the value of the estate of any other person increased shall be deemed a gift to the extent of such inadequacy;..."

HEARING

Perth, 1976, September 16;
Sydney, 1976, November 22. 22:11:1976
APPEAL from the Supreme Court of Western Australia.

DECISION

November 22.
The following written judgments were delivered:-
GIBBS J. Although the questions involved in this case are of sufficient opinion that the judgment of Jackson C.J. was correct and that the appeal should be dismissed. I have had the advantage of reading the reasons prepared by Mason J. in support of that conclusion, and am in agreement with them. (at p408)

2. There is only one aspect of the matter on which I would add a few words. It was argued on behalf of the appellant that there was no property to which the gift related within the meaning of s. 74 (2) of the Administration Act, 1903-1970 (W.A.). By that section every "gift inter vivos", if made within the time therein prescribed and applicable to the circumstances, "shall be deemed to have made the property to which such gift relates chargeable, to the extent of the value of the gift at the time it was made, on the death after the commencement of this section of the person making the gift, with the payment of the duty payable under this Act, as though part of the estate of the person making the disposition". The words of that sub-section are not well chosen. The expression "gift inter vivos" is defined in s. 74 (1). Paragraph (a) of that sub-section refers to various kinds of dispositions of property and par. (c) refers to the release, discharge, surrender, forfeiture or abandonment of property. In those cases there will normally be no difficulty in discovering the property to which the gift relates, although the value of the gift will not be the value of the property, but the latter value less the consideration. Paragraph (b), however, deals with transactions entered into with the intention, and with the effect, that the estate (in the sense of the general assets) of one party is diminished and the estate of the other increased. Such a transaction is a gift to the extent of the inadequacy of the consideration for it. In the cases to which par. (b) refers, no specific item of property necessarily passes from one party to the other, and it would write s. 74 (1) (b) out of the Act if, as the appellant contends, there were for that reason no property to which the gift relates. In the present case I consider it sufficient,without finding it necessary to identify any specific item of property to which the gift relates, to say that the value of the gift is represented by the amount ($84,966) by which the one estate was increased and the other diminished. This amount notionally became part of the estate of the deceased and attracted duty accordingly. (at p409)

MASON J. This is an application for special leave to appeal by the executor of the will of John Palmer, deceased, against a judgment of the Chief Justice of the Supreme Court of Western Australia dismissing an appeal against an assessment by the respondent Commissioner of the deceased's estate to death duty under Pt V of the Administration Act, 1903-1970 (W.A.). By his assessment the respondent included in the estate of the deceased for the purposes of duty an item "Gift to widow $84,966". The appellant's objection to the inclusion of this amount being disallowed by the Commissioner, the appellant appealed to the Supreme Court under s. 107 of the Administration Act. (at p409)

2. The relevant facts are accurately summarized in the judgment of the Chief Justice. The deceased died of reticulum cell sarcoma on 6th June 1969, aged forty, leaving a widow and five infant children. An interval of nine months elapsed between the onset of the disease and his death. Immediately prior to 24th April 1969 he owned 2,000 ordinary shares in R. & N. Palmer Pty. Ltd. These shares were then worth $90,000. On 23rd April, Clifton Investments Pty. Ltd. ("the company") was incorporated with the object of carrying on "the business of a holding and investment company". The nominal capital of the company was $10,000 divided into 10,000 shares of $1 each. The deceased and his wife were subscribers to the memorandum and articles, each subscribing for one share. The price of $2 was paid by the deceased, and his wife executed a deed of trust acknowledging that she held her subscriber's share in trust for him. (at p410)

3. On the next day, 24th April, the deceased sold to the company for the price of $90,000 his 2,000 ordinary shares in R. & N. Palmer Pty. Ltd. His account with the company was credited with the full amount of the purchase price. On 15th May he applied for 4,998 $1 shares in the company at a premium of $17 a share. On the next day, 16th May, at a meeting of directors which consisted of the deceased and his wife, the shares for which he applied were allotted to him. His account with the company was debited with the price, viz. $89,964. He then became the beneficial owner of the whole of the issued capital of the company, viz. 5,000 $1 shares all fully paid. Later that day, at an extraordinary general meeting of the shareholders of the company (consisting of the deceased and his wife), it was resolved that the 5,000 issued ordinary shares be converted into preference shares carrying a cumulative fixed dividend of 6 per cent, such shares on winding-up to rank in priorty to other shares for repayment of the nominal capital of $1 per share but to have no further right to participate in profits or in distribution of surplus assests. A further special resolution was passed at the meeting to amend the articles to provide for the shares numbered 1 to 5,000 to become preference shares with the limited rights already mentioned. (at p410)

4. Subsequently on the same day Mrs. Palmer on her own behalf and as trustee for each of the five children applied for six $1 shares in the company at a premium of $17 per share. At a directors' meeting which followed, it was resolved to allot to her six ordinary shares of $1 each at a premium of $17 per share. Each of these meetings on 16th May was held at St.John of God Hospital, Belmont. The deceased died three weeks later. (at p410)

5. As the Chief Justice observed in his judgment, the practical result of these events was that the deceased's shares in R. & N. Palmer Pty. Ltd. worth $90,000 became the property of the company; that the deceased held preference shares worth $5,000 in that company, and that Mrs. Palmer for herself and her children held six ordinary shares in that company worth $85,000. (at p411)

6. Under the Administration Act death duty is payable to an executor out of the estate of the deceased at rates declared by Parliament on the final balance of the estate as assessed under the Act - ss. 69 and 70. For the purposes of Pt V, the estate of a deceased person includes not only his real and personal property in Western Australia but also "any property or beneficial interest" that under ss. 73 to 78 "is deemed to be made chargeable with the payment of duty or to form part of the estate of the deceased person" - s. 66a. (at p411)

7. The section which is crucial to the present case is s. 74 which deals with gifts inter vivos. By sub-s. 1 (a), "gift inter vivos" includes "(a) any gift absolute and every non-testamentary disposition of property of any kind" by any of the means enumerated in the paragraph but excluding certain bona fide dispositions for full value also set out in the paragraph. Sub-section 1 (b), the provision on which the respondent relies to support the assessment, provides:

"without limiting the effect of the preceding provisions any
contract, obligation, engagement or transaction entered into,
whether with or without writing, and which is made without
fully adequate consideration in money or money's worth so
that the value of the estate of the maker may be directly or
indirectly diminished, and the value of the estate of any other
person increased shall be deemed a gift to the extent of such
inadequacy."

By sub-s. (2) every gift inter vivos made within three years before death "shall be deemed to have made the property to which such gift relates chargeable, to the extent of the value of the gift at the time it was made, on the death after the commencement of this section of the person making the gift, with the payment of the duty payable under this Act, as though part of the estate of the person making the disposition". (at p411)

8. The respondent's case is that there was a transaction entered into between the deceased and his wife whereby, without fully adequate consideration, the value of the deceased's estate was diminished by $84,966 (this figure not being in contest) and the value of her estate and that of her children was increased by the same amount. Consequently it is asserted that there was a gift of $84,966 and that the property to which the gift related is chargeable with duty. (at p411)

9. Although it was contended in the Supreme Court that the procedures taken between 23rd April and 16th May did not amount to a "transaction" within the meaning of s. 74 (1) (b), no challenge was made in this Court to the Chief Justice's finding that the various steps which were taken and which culminated in the deceased owning 5,000 preference shares worth $5,000 and in Mrs. Palmer holding for herself and her children six ordinary shares worth $85,000 constituted a transaction within the meaning of the sub-section. It is beyond question that his Honour was correct in so deciding. One matter on which all the members of this Court agreed in Gorton v. Federal Commissioner of Taxation [1965] HCA 1; (1965) 113 CLR 604 was that the scheme or arrangement in that case, which is quite indistinguishable from the present case, was a "transaction" within the meaning of par. (f) of the statutory definition of "disposition of property" in s. 4(1) of the Gift Duty Assessment Act 1941-1957 (Cth). There are, as will be seen, some differences between the provisions of the Gift Duty Assessment Act and the Administration Act which affect the outcome of this case but they do not touch the meaning and content of the word "transaction", which is used in the same sense in both statutes. See also Grimwade v. Federal Commissioner of Taxation [1949] HCA 9; (1949) 78 CLR 199, at p 215 ; Birks v. Commissioner of Taxation (1953) 10 ATD 266, at p 270 ; Robertson v. Commissioner of Inland Revenue (1959) NZLR 492, at p 498 . (at p412)

10. Though conceding that Gorton's Case ( [1965] HCA 1; 1965) 113 CLR 604 supports the view that a "transaction" was "entered into", the appellant then invoked the decision in that case to support the submission that the Chief Justice was wrong in holding that the word "estate" in s. 74 (1) (b) means "the whole of a person's property and cannot be taken to refer to any specific item of property". Before I turn to Gorton's Case I should refer to the Gift Duty Assessment Act. For present purposes it differs from the Administration Act in several respects. First, the Commonwealth Act imposes duty in respect of the gift (s. 11) and the gift duty so imposed constitutes "a first charge on all property ... comprised in the gift", whereas by the concluding words of s. 74 (2) of the Administration Act it is the property to which the gift relates which is charged with the payment of duty. Secondly, under the Gift Duty Assessment Act, "(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" becomes, by virtue of its inclusion in the statutory definition of "disposition of property" in s. 4 (1) a disposition of property and by this avenue a gift, provided of course that it answers the statutory definition of "gift" contained in the same sub-section, a definition which commences by referring to "any disposition of property". On the other hand, s. 74 (1) (b) proceeds directly to treat a transaction entered into and made without fully adequate consideration as involving a gift, without taking the intermediate step of constituting the transaction as a disposition of property. Perhaps these differences, though of some significance, are not of vital importance. What is particularly significant is that par. (f) of the Gift Duty Assessment Act definition of "disposition of property" refers to "property", not "estate", the latter being the word selected in s. 74 (1) (b). (at p413)

11. The significance of the difference in language becomes apparent when the joint judgment of Barwick C.J. and Taylor J. in Gorton's Case [1965] HCA 1; (1965) 113 CLR 604 is compared with the dissenting judgment of Windeyer J. in the same case. Barwick C.J. and Taylor J. distinguished a transaction the effect of which was to diminish the value of the property of one person and to increase the value of the property of another person from a transaction the effect of which is to diminish the property of one person and to increase the property of another (1965) 113 CLR, at p 623 . In their Honours' view the former, but not the latter, fell within par. (f) of the statutory definition of "disposition of property" in s. 4 (1). Thus their Honours said (1965) 113 CLR, at pp 623-624 :

"The effect of each transaction was that in return for the
expenditure of 100 pounds each nephew became entitled to 10 shares
of a total value far in excess of the amounts expended by
them. But it cannot be said that the effect of the transaction
was to increase the value of their property; its effect was to
vest in each of them, in return for an expenditure of 100 pounds
each, 10 shares which at the moment of acquisition were of
great value. There was no moment of time when any change
in the value of the shares in the hands of the nephews took
place. All that can be said is that the transaction into which
the deceased entered ensured that when the nephews
acquired the property in the shares, they should have a value
beyond the actual consideration which the nephews would
pay for them."

But this conclusion derived from the underlying view that "property" in the Gift Duty Assessment Act statutory definition meant a specific item of property, not the totality of a person's estate. Had it not been for this underlying view the majority would in my opinion have been compelled to reach a different conclusion. (at p413)

12. On the other hand, Windeyer J. said (1965) 113 CLR, at pp 625-626 :

"I do not read par. (f) of the definition of 'disposition of
property' in the Act as confined to cases in which there has
been a diminution of the value of some specific item of
property belonging to one person and an increase in the value
of some specific item of property belongiing to another ....
The word 'property', to describe collectively a man's worldly
wealth, his substance, is one of the oldest senses of the word
in the English language. And it can bear that sense in the
language of the law ... The word 'property' in par. (f), with
which we are here concerned, has in my opinion much the
same meaning as the word 'estate' in the corresponding
provision of the Death Duties Act 1921 of New Zealand,
whence par. (f) was apparently derived. The view that I take
accords, I think, with the statement in the judgment of
Latham C.J. and Webb J. in Grimwade's Case
[1949] HCA 9; (1949) 78 CLR 199, at p 215 , that:
'Paragraph (f) is intended to cover cases of transactions
entered into with the intent to diminish the value ... of the
donor's own property in globo and to increase the value of the
property in globo of another person' ... If as the result of a
transaction one person is worse off and another person better
off than they would have been if the transaction had not
occurred, and if the transaction was entered into with intent
to produce this result, then I consider the statutory
description is satisfied." (at p414)

13. It is unnecessary to embark on a discussion of the conflict of opinion between the majority and Windeyer J. in Gorton's Case. It will suffice for me to say that the use of the word "estate" in s. 74 (1) (b) in lieu of "property", taken in conjuction with the other differences in language which I have noted, enables us to distinguish the decision in Gorton's Case. The majority judgment turns in my opinion, as I have said, largely, if not wholly, on the presence of the word "property" and the significance which their Honours appear to have attributed to it. The presence of the word "estate" in the statute now under consideration deprives that judgment of persuasive influence in this case and makes the judgment of Windeyer J. so much more apposite. In this respect it is to be noticed that s. 74 itself appears to draw a distinction between "estate" and "property". The former expression appears in s. 74 (1) (b), whereas it is the latter expression that is used in s. 74 (2). The appellant's first submission must therefore be rejected. (at p414)

14. The appellant's second submission was that the transaction in question did not involve a disposition or deemed disposition of property and that a consequence was that there was no property upon which the duty imposed by s. 74 (2) can be levied. I shall assume in considering this submission, without so deciding, that there was no disposition of property by the deceased. None the less, the argument misconceives the thrust of s. 74 (1) (b) and s. 74 (2). Section 74 (2) does not presuppose the existence of a disposition of property or the deemed disposition of property. It contemplates no more than the existence of a gift as defined by s. 74 (1) (a), (b) and (c) and the existence of property to which that gift relates. Once it is established that there was a gift in terms of s. 74 (1) we are concerned only to identify the property to which the gift relates, whether the property was the subject of a disposition or not. (at p415)

15. In this case the property to which the gift related was, viewed from the standpoint of the deceased, the 2,000 shares in R. & N. Palmer Pty. Ltd. with which he parted, or, viewed from the standpoint of the donee, the six ordinary shares in the company which Mrs. Palmer received as trustee. Each may be described with some accuracy as the property to which the gift related. In this case it is unnecessary to decide which of the two forms of property s. 74 looks to, the property as it was in the hands of the donor or the property as it was received by the donee. Here no question arises as to the value of the gift. The figure of $84,966, though its mode of computation is not readily apparent, was not contested. (at p415)

16. It matters not that the property given differs in form from the property received. Section 74 (1) (b) looks only to a diminution in the value of the donor's estate and an increase in the value of the donee's estate; par. (b) does not require that the decrease in value on the one hand and the increase in value on the other hand should have its origin in a disposition by the donor of a specific item of property which retains its identity in the hands of the donee. This view of the paragraph is strengthened by the presence of the words "directly or indirectly diminished". They serve to emphasize that the reach of the sub-section travels beyond a disposition of a specific item of property which continues to retain its precise identity in the hands of the donee. They serve also to indicate that it is enough that the diminution in value of the donor's estate is an indirect consequence of the transaction itself. It follows that the reference to "property" in sub-s. (2), even though it has a more limited meaning than "estate", is to be understood in the light of these considerations. (at p415)

17. In the result, for the reasons already expressed, I would grant special leave to appeal and dismiss the appeal. (at p415)

MURPHY J. The appellant contended that the word "estate" in s. 74 (1) (6) of the Administration Act, 1903-1970 (W.A.) has much the same meaning as "property" in s. 4 (f) of the Gift Duty Assessment Act 1941-1957 and relied upon the observations of Windeyer J. in Gorton v. Federal Commissioner of Taxation [1965] HCA 1; (1965) 113 CLR 604 . Windeyer J. said (1965) 113 CLR, at pp 625-626 :

"I do not read par. (f) of the definition of 'disposition of
property' in the Act as confined to cases in which there has
been a diminution of the value of some specific item of
property belonging to one person and an increase in the value
of some specific item of property belonging to another.
Doubtless it would catch such a case, if one can be imagined
that would not be caught by the earlier paragraphs of the
definition. But it seems to me that it would do so because it
deals with the value of a person's property in the sense of the
value of all that is his. The word 'property', to describe
collectively a man's worldly wealth, his substance, is one of
the oldest senses of the word in the English language. And it
can bear that sense in the language of the law, for example
when the property of the bankrupt is spoken of in bankruptcy
legislation. The word 'property' in par. (f), with which we are
here concerned, has in my opinion much the same meaning
as the word 'estate' in the corresponding provision of the
Death Duties Act 1921 of New Zealand, whence par. (f) was
apparently derived. The view that I take accords, I think,
with the statement in the judgment of Latham C.J. and Webb
J. in Grimwade's Case (1949) 78 CLR, at p 215
that: 'Paragraph (f) is intended to
cover cases of transactions entered into with the intent to
diminish the value ... of the donor's own property in globo
and to increase the value of the property in globo of another
person'."

and further

"If as the result of a transaction one person is worse off
and another person better off than they would have been if
the transaction had not occurred, and if the transaction was
entered into with intent to produce this result, then I consider
the statutory description is satisfied." (at p416)

2. The appellant then sought to apply the view of the majority in Gorton's Case rather than that of Windeyer J. This process of reasoning is unacceptable. Windeyer J. dissented because he considered "property" was equivalent to "estate". The logical conclusion to the appellant's argument is that the view of Windeyer J. should be preferred to that of the majority. McTiernan J. in Gorton's Case and Kitto J. in Birks v. Federal Commissioner of Taxation (1953) 10 ATD 266 expressed similar views, and in my opinion they were correct. (at p416)

3. I do not see any relevant distinction between the use of the word "property" in the gift duty case and the use of the word "estate" in the Administration Act. The majority decision in Gorton's Case [1965] HCA 1; (1965) 113 CLR 604; was founded upon the view that "property" referred to specific items. Even if this were correct, it could not benefit this appellant, for this is not the meaning of "estate". (at p417)

4. It was conceded (correctly) that there was a "transaction", and so the case comes within s. 74 of the Act. (at p417)

5. On the second point, I agree with Mason J. The appellant conceded that to construe s. 74 (2) as he submitted, would deprive it of all effect. (at p417)

6. The appeal should be dismissed. (at p417)

ORDER

Special leave to appeal granted. Appeal dismissed with costs.