Federal Commissioner of Taxation v Clarke
(1927) 40 CLR 246(1927) 1 ALJ 287
(1927) R and McG 115
[1927] WL 22923
(Judgment by: Higgins J.)
Federal Commissioner of Taxation
v Clarke
Judges:
Isaacs A.C.J.
Higgins J.Rich J.
Judgment date: 24 November 1927.
Sydney
Judgment by:
Higgins J.
The question before us, emerging from this indigestible mass of lengthy, loosely rendered, confused evidence, is as to the right of the Commissioner to treat the moneys derived from the sale of Badak and Bux shares, so far as the moneys were distributed among the taxpayer's wife and children-(distributed with the taxpayer's sanction and in nearly all cases directly through his hands)-as being proceeds derived from his business in his year of income June 1919 to June 1920. In addition to his business of brewing, & c., it is clear that the taxpayer carried on the business of share-jobber and mining speculator from 1892 onwards. As he says himself, he "dabbled" in such speculations (the extent of his dabbling for merely one year appears in a statement forwarded to the Commissioner dated 25th May 1923), although in his first statement for the purpose of assessment he did not mention this particular business. It is now conceded that part of the proceeds of this business, so far as regards the Badak and Bux shares, to the amount of £7,499, must be included in his taxable income; but it is objected by the taxpayer that the remainder of the proceeds, to the amount of £39,915, was "received by or on behalf of" his wife and eight children named. The point which he takes is that the proceeds belonged to them, not to him, because the shares which were sold belonged to them. Roughly speaking, of course, all these huge gains were due ultimately to the skill and efforts of the taxpayer; but we have to confine our minds to the proceeds of these speculations derived in the year 1919 to 1920; and I shall assume, as the parties assume, that any proceeds of such shares as the members of the family owned cannot be treated as proceeds of the father's business, cannot be included in the returns of his taxable income.
We have nothing whatever to do in these proceedings with the doubtful nature of the devices by which the gains were made, or with the exploitation of greedy and credulous persons-a story which may recall the story of the South Sea Bubble of 200 years ago. We have nothing to do with the peculiarities attending the Bux Syndicate, the big sales made of interests although it had no property for mining, or the devices by which registration of the company was obtained. We have simply to find whether the proceeds that went to the family, or any of them, were exceptions from the proceeds of the taxpayer's business. To the external world, to the brokers, to the vendors of shares, to the purchasers, to the officers and members of the syndicate or company, the transactions of the taxpayer as to the shares would appear to be ordinary transactions of his business as a mining speculator. With a very few exceptions due to defined causes, the sale notes were made out in the taxpayer's name, the proceeds went into his account; the brokers applied to him to know whether he had any shares to sell: the taxpayer's will dominated throughout. The arrangements on which the taxpayer relies were arrangements internal to the family. But if any proceeds were the proceeds of shares which the wife or children owned, they are to be treated (I understand) as exceptions; if none are proved to be proceeds of such shares, the Commissioner's assessment must stand. Appropriations in favour of one's family are not allowed by the Income Tax Assessment Act 1915-1918 as deductions from the assessable income of the taxpayer (sec. 18).
It has to be borne in mind that the assessment as made by the Commissioner is prima facie evidence that the amount and all the particulars of the assessment are correct (sec. 35); so that the burden of showing that the assessment is wrong falls upon the taxpayer. The learned Judge of the Supreme Court (Mann J.) had held that this burden has been satisfied; and the Commissioner appeals.
Now we are to a great extent relieved of the burden of determining whether the taxpayer is to be believed or not, by an express finding of the primary Judge who saw and heard the witnesses. The finding is that the Judge was "satisfied of the substantial truth of the" taxpayer's "story as regards his dealings with his family. Prolonged observation of the" taxpayer "in the witness-box has chiefly led me to that conclusion." For my part I think it is our duty (and on this point I agree with my brother Rich)-it certainly is my intention-to accept this important finding implicitly. Not that this concludes the matter; but, as I understand the practice of the Courts and the rules of the game, we ought to treat the taxpayer as a truthful witness in his evidence in these proceedings, however inconsistent we find his evidence in the proceedings in 1926 before another Judge (Starke J.), when the Commissioner sought to assess the eldest son; and however inconsistent we think his statements in the cases laid before counsel for advice. In the proceedings before Starke J., the present taxpayer took the attitude that his sons A. S. Clarke and L. V. Clarke did not pay him anything for the cost of the Bux shares; in these proceedings he says that he "thinks" that they did pay him but not at the time:-
"I think there was a contra account. I think they said they would. I think that is correct."
That is a serious discrepancy, and all the more serious as his attitude in each set of proceedings favoured his immediate purpose. But it may be that Mr. Clarke, after further reflection, was giving honestly his more matured opinion on the second occasion; and, as we are not precluded by the finding from drawing our own inferences from the facts, I think it the safer course to accept loyally that finding (Dominion Trust Co. v. New York Life Insurance Co.; Cooper v. General Accident, Fire and Life Assurance Corporation Ltd.). My view is that, even accepting Clarke's evidence as that of a truthful man throughout this present case, there was no valid gift or trust of the shares, at all events to or in favour of Mrs. Clarke or any of the six children other than A. S. Clarke and L. V. Clarke.
I propose to deal first with the alleged gift of shares to Mrs. Clarke and the six children, as the position is clearer. Clarke describes the conversation thus:-
"It would be early in 1919, I think about February or March. The substance of it was that I had bought four shares pretty cheap, in January or February I think" (I shall assume that he mentioned the name of the Badak Syndicate), "and I said to the wife 'You can have two of them and I will get the others a share when they come along.' I think either in January or February of 1919 I took up four shares-not through the Exchange-through Savage, I think. I promised two of these to my wife. I told her I took up a few cheap shares, and was going to give her two, and I would get some more for other members of the family. I think I got two more in May. ... I told other members of the family I had taken the last two shares of Orton's, and put them in Edgar's name" (Edgar was the second son). "... They were in Edgar's name like a pool for the whole family, the wife and the other six children. I acquired shares for my children. I think I had eight" children. "Question.-Did you give any more to your wife and family? Answer.-From time to time I had one or two. In the second issue they received a good few-if I remember rightly. Taking up to May there were four-two to the wife and two to Edgar. Well, these four would be entitled to four more. And then A. S. and L. V. would be entitled to four, and that would make it twelve. Question.-What do you mean by that? Answer.-The second issue. I say, A. S. and L. V. being entitled to four, that they stood back and left the others to have them."
On evidence so loose and hesitating as this we are asked to find a definite, complete gift of shares to the wife and six children, not a mere promise to give. I turn to the evidence of Mrs. Clarke, and her memory is not clearer: "As far as I can remember my husband came home and told me he had bought me two Badak Syndicate shares and was going to pick up more for other members of the family from time to time, which he did." I turn to the evidence of the eldest daughter, Miss Elsie Clarke; and she says:-
"Father just told me that he had bought a Badak Syndicate share. That was in the year 1919. I heard him say he had promised the other members of the family one each. I think my mother got two syndicate shares. ... Asked whether I have any recollection of further transactions in Badak Syndicate shares, I say no, I do not remember any more conversations. About shares in Bux Syndicate, father said I had an interest in the Bux Syndicate. I cannot say that he said what interest I had. ... He just said I had an interest. With regard to any of the family I do not remember what interest he said they had. I remember the sale of the shares. Later on I received a sum of money" (£350 from the father, by banker's cheque, she thinks) "... I do not know what shares were sold for that £350. I received some bonds also, namely, £2,000 worth. I lodged them in the bank later on. I have always received the interest on these bonds. I have used the £350 and the bonds for my own benefit."
It will be noticed there is a promise on the part of the father to give one share to each member of the family-a promise which implies individual gifts not a collective gift.
Now, a mere benevolent intention of a husband and father towards his wife and family, even if confined to the limits of a specific speculation, does not operate as a gift which can be recognized at law or in equity. Not only must the gift be definite as to subject and object, but there must be words of present gift; and the transfer of the property must be as complete as the donor can make it, considering the nature of the property. I start from the principle, laid down in Milroy v. Lord, which applies to shares in a company. There M. executed a voluntary deed purporting to assign 50 shares in a bank to L., as trustee for the plaintiff. The shares were transferable only by entry in the books of the bank (as here by registration), but no such transfer was made. It was held by the Court of appeal that, although the dividends had after the deed been remitted to the plaintiff, there was no valid gift. Turner L.J. said:-
"In order to render a voluntary settlement valid and effectual, the settlor must have done everything which, according to the nature of the property comprised in the settlement, was necessary to be done in order to transfer the property and render the settlement binding upon him. He may of course do this by actually transferring the property to the persons for whom he intends to provide, and the provision will then be effectual, and it will be equally effectual if he transfers the property to a trustee for the purposes of the settlement, or declares that he himself holds it in trust for those purposes; and if the property be personal, the trust may ... be declared either in writing or by parol; but, in order to render the settlement binding, one or other of these modes must ... be resorted to, for there is no equity in this Court to perfect an imperfect gift."
It was plain, the Lord Justice said, that it was not the intention of the settlor to constitute himself a trustee of the shares: "If it is intended to take effect by transfer, the Court will not hold the intended transfer to operate as a declaration of trust." In accordance with this case Jessel M.R. put the position with his usual lucidity, in Richards v. Delbridge:-
"A man may transfer his property, without valuable consideration, in one of two ways: he may either do such acts as amount in law to a conveyance or assignment of the property, and thus completely divest himself of the legal ownership, ... or the legal owner of the property may, by ... declaration of trust, constitute himself a trustee, and, without an actual transfer of the legal title, may ... deprive himself of its beneficial ownership. ... It is true he need not use the words, 'I declare myself a trustee,' but he must do something equivalent to it, and use expressions which have that meaning; ... for a man to make himself a trustee, there must be an expression of intention to become a trustee, whereas words of present gift show an intention to give over property to another, and not retain it in the donor's own hands for any purpose, fiduciary or otherwise."
In these cases, no difficulty arose as to the subject of the alleged gift-in Milroy v. Lord there was a definite certificate bearing a definite certificate number for the 50 shares; and in Richards v. Delbridge the subject of the alleged gift was a definite lease and the business stock in the leased premises. But there was no completed gift, and there was no declaration of trust constituting the donor a trustee of the legal title. These cases are perfectly consistent with Kekewich v. Manning, where a voluntary gift was upheld; for the voluntary donor had there done everything which was in her power to make the gift complete. Funds were there held by trustees in trust for a mother for life, and afterwards for her daughter absolutely. The daughter made a voluntary settlement of her interest on her marriage; and it was treated as a valid assignment, enforceable, because the daughter could not, during her mother's life, transfer the legal title or compel the trustees to transfer it. This case affirmed the principle of the universal assignability of property, whether by voluntary gift or otherwise; and also the principle that a mere promise without valuable consideration will not bind legally or equitably (and see Williams on Personal Property, 15th ed., p. 381).
To my mind there appear to be three considerations at least, which are fatal to the contention of the taxpayer that these shares belonged to the wife or to the children or any of them:-(I.) There was a mere voluntary promise; the taxpayer did not do all in his power to make the transfer of shares perfect; and equity will not order the gift to be completed (see, in addition to the authorities already cited, the following, among numerous cases: Ellison v. Ellison; Antrobus v. Smith; Edwards v. Jones; Nanney v. Morgan; Ex parte Todd; In re Ashcroft; In re Richardson; Shillito v. Hobson; In re Earl of Lucan; Hardinge v. Cobden; In re Patrick; Bills v. Tatham; In re Griffin; Griffin v. Griffin. (II.) Equity will not treat an imperfect gift as if it were a declaration of trust-as if the giver intended to retain his rights but to impose on himself an onerous obligation (see Richards v. Delbridge and Heartley v. Nicholson ). (III.) The subject of the promise-the things intended to be given, the specific shares-was neither identified nor identifiable (see Malim v. Keighley; per Selborne L.C. in Citizens' Bank of Louisiana v. First National Bank of New Orleans; per Rigby L.J. in In re Williams; Williams v. Williams; In re Wait).
The position is, substantially, that the taxpayer kept a number of certificates in Badak and in Bux in his office safe, most of them in the name of the legal manager, Murchie, in trust, but having a blank transfer endorsed. They had been put into the safe from time to time by Clarke, but there was no earmarking of the certificates as for Orton or for Scarborough, or for Clarke himself or for any of the family. The safe, as the Judge states, contained scrip which the appellant held on behalf of himself, one Orton and one Scarborough, most if not all of it in the name of Murchie the secretary of the company. This practice of having shares in the name of the manager is due to the Victorian provision as to mining companies (see Companies Act 1915, sec. 304). Under sec. 319 of that Act, no share shall be deemed to be transferred unless and until the name of the transferee is entered as such transferee in the register (and see sec. 29). Each share must be numbered and identifiable by its number or otherwise (secs. 325, 320). It is clear that the taxpayer had power to transfer the legal title to any specific share-from his own name, if it was in his own name, from Murchie, if Murchie held for him; and this transfer was not made.
Mann J. says: "All scrip remained in his hands with blank endorsements and could therefore be treated as bearer securities." I confess that I do not understand this statement of law, as to transfers of shares, in the face of sec. 319 of the Companies Act 1915 and of Tayler v. Great Indian Peninsula Railway Co. (and see Lindley on Companies, 6th ed., vol. I., p. 655). Shares cannot be treated as negotiable securities in this way. But the judgment proceeds:-
"Directly sales began to be made and the scrip to be used indiscriminately the register ceased to have any relation to the real interests of the persons concerned. It therefore became necessary for the" taxpayer "to make up his mind from time to time on whose behalf he was selling, whether on behalf of his family or himself or Orton or Scarborough. This he determined and noted for his own guidance and for the information of Orton and Scarborough merely by making memoranda on the brokers' sold notes as they came into his hands."
I thoroughly accept this clear statement; but it shows that the taxpayer determined the destiny of the proceeds not at the alleged giving of the shares but when the shares had been sold. The sales occurred from time to time, and at different prices; and each specific shareowner should be in a position to say "that is my share, I want the proceeds" (not the proceeds of the shares of others). So there was no gift of shares, as recognized by law, whatever the benevolent intentions of the taxpayer towards his family may have been.
It is true that certain shares in both the Badak and the Bux companies were registered in the names of members of the family; but, as the Judge says:-The "distribution was quite arbitrary and seems to have been made by the secretary when making a record of the total shares which were in Clarke's hands. As between members of the family it meant nothing and was merely pro forma. The" taxpayer "continued to realize for the benefit of himself and family, distributing the proceeds among the latter on what he considered an equitable basis." As the taxpayer says: "I claimed the right that having given them I should distribute them as I thought fit." Such a right to distribute is absolutely inconsistent with distinctive rights to distinctive shares given. Moreover, the shares which were actually put in the names of beneficiaries in the register were not put there in completion of the promises or alleged gifts made to the beneficiaries.
But there is a concise statement in the judgment which, to my mind, is perfectly correct, and which also relieves me from a more detailed exposition of the facts:-
"In no case can the sum received" (by members of the family) "be connected with the sale of a share or shares of which the person receiving the money was at the time of sale the registered holder. In the case of the Bux as in the case of the Badak Company the state of the register was regarded as of no importance."
But it is of the very essence of property that the subject of the property should be indentified or identifiable. Even if what is claimed be merely an undivided interest in a mass of assets, the mass of assets must be identified or identifiable; the boundary of that in which the interest is alleged has to be defined. It is admitted in the judgment that specific shares were not appropriated to specific children:-
"To have made a specific gift of specific shares to each child would have defeated his whole purpose of conferring equal benefits since the shares would have to be realized gradually at different prices. The scrip for these shares was in his hands for disposal along with a quantity of other scrip also for disposal in other interests."
I may add on my own account that the same absence of specific appropriation of shares is evident also as between the family and the "other interests."
As to the wife and family in relation to the proceeds of the Bux enterprise, the taxpayer says that a syndicate was formed in 16 shares, and he paid for 4: "I told the wife I would give her one, and that the others in the family" (the six) "could have an interest with her." There was no scrip issued in the syndicate. But when the company was formed, and each syndicate share was to carry 108 shares in the company, he told the wife and family; and they said "All right." Later on, says Mrs. Clarke, "he said he would sell them on our behalf, and he did sell them," and he gave the proceeds-cheque for £5,085 and bonds for £4,000-to Mrs. Clarke alone; and she spent these proceeds for her personal use, not for the benefit of herself and family. The gift, to the wife and family, therefore, was not completed-the 108 shares were not put in the names of the wife and family; and the whole of the proceeds were given to the wife. The taxpayer did as he chose with the proceeds; he did not give the shares to his wife and children as promised. The promised gift of shares was not completed.
The position with regard to the sons, A. S. and L. V. Clarke is much more difficult. First, as to Badak shares. The taxpayer, having four certificates for shares (the Badak Syndicate No Liability was registered May 1918), said to these two sons who were employed in the brewery business: "Here you are, boys. I got these for you, you can have one each." A. S. Clarke put the certificate in the safe; they were in the name of Murchie, the legal manager in trust, with a blank transfer signed by Murchie. There were other shares in a new issue, and A. S. Clarke was registered in all for 4, 2 for himself and 2 for L. V. Clarke. According to the judgment: -
"In November 1919 two Badak Syndicate shares were sold upon the authority of A. S. and L. V. Clarke, and the proceeds were paid to them or credited in account. The scrip handed to the broker to complete this sale was not scrip for the shares actually standing in A. S. Clarke's name in the register."
According to A. S. Clarke:-
"In November of 1919 I instructed my father to sell a share for me, and that was sold for £148 10s. Father brought the cheque home for me, and I paid it into my State Savings Bank account."
According to L. V. Clarke the father received the broker's cheque "on my behalf." "I was paid really in the end. It was credited to me in the business. £148 10s. was credited to me." Taking these statements at their face value, the registration of the shares in the name of A. S. and L. V. Clarke would seem at first sight to be a completion of the gift intended by the father for these two sons. But the point as to identity is serious, in view of the finding that the scrip handed to the broker to complete the sale was not scrip for the shares actually standing in A. S. Clarke's name in the register. For the shares of which the sons got the proceeds were shares which did not belong to them; and they may have fetched prices which the shares registered in the name of A. S. Clarke did not fetch. The judgment deals with this difficulty as follows:-
"Great importance has been attached in argument to the fact that the scrip delivered to complete the sale was not in fact the scrip for the actual shares in respect of which the sons were, or rather A. S. Clarke was, registered. To my mind this circumstance is not material when once the bona fides of the transaction has been clearly established. Upon a strict analysis, the technical result of exchanging scrip I should suppose was an exchange of equities, and the sons sold on the market the equity to 2 shares resulting from the exchange. From the point of view of the father and sons, the number of shares sold for each account was the only question."
I regret that I am unable to take this view: for surely the point of view of Orton and of Scarborough and the others has also to be considered. Suppose Orton came back and claimed his certificates -the certificates held in trust for him by Murchie; suppose he is told: "Oh, that certificate has been sold for £500 as for A. S. Clarke, who has got the money; but you can have another certificate -take this." The market having fallen, Orton objects, and wants to follow his own certificate and its proceeds. I can find no evidence of "exchanging scrip" on the part of the owners of the certificates. An exchange implies mutual consent of the owners, and there was none here. "The fruit follows the tree and goes the same way"; and the proceeds of the sale of a share, the certificate for which was put in the safe for Orton, ought to go to Orton. Under the circumstances, I cannot say that the Commissioner was wrong in refusing to treat these proceeds of these 2 shares as being the proceeds of shares that had been given to A. S. and L. V. Clarke. The taxpayer has not satisfied the burden of proof which is on him.
Secondly, as to the proceeds of the Bux shares of A. S. and L. V. Clarke; the position seems to me to be ultimately the same as that of the Badak shares. I do not think it necessary to examine critically the history of the acquisition of these shares; for I am going to assume that they came to the two sons by purchase for valuable consideration. It is true that the father speaks, in these proceedings, most hesitatingly as to these sons repaying him by contra account; and no books or documents have been produced in confirmation. The books which contained the sons' accounts were destroyed when the brewery business was abandoned; and the broker's sale notes have been destroyed. Perhaps, as the father merely "thinks" that he was repaid, we are merely bound by the finding of the learned Judge as to the father's veracity to believe that he did think so; we are not bound by any such finding as to the veracity of the sons. But I propose to give the taxpayer the benefit of the doubt, as the learned Judge has found that the two original shares of these sons in Bux belonged to the sons by purchase. These 2 shares were each "floated" (that is the expression) into 54 shares paid up and 54 contributing shares-216 in all. Trembath, the broker, sold 162 shares in Bux, as for A. S. Clarke and L. V. Clarke, and other brokers sold other shares, and the proceeds went into the account of L. V. Clarke, for himself and A. S. Clarke, under the instructions of the taxpayer, and were, as to part, invested in war bonds which were deposited in the same all-embracing safe. But there is still the missing link-it is not proved that the shares sold were the shares for which A. S. and L. V. Clarke were registered. If they were not, the taxpayer has no ground for saying that the proceeds of the shares sold were proceeds of the shares which these sons owned; and the Commissioner's assessment must be accepted as correct on this subject also.
Perhaps I ought to express my view with regard to an objection which is based on the second proviso to sec. 2 of the Income Tax Assessment Act 1922-1925. This provides that "no alteration or addition shall be made in or to any assessment made under any such Act" (inter alia, the Act 1915-1918, repealed) "after the expiration of three years from the date when the tax payable on the assessment was originally due and payable, unless the Commissioner has reason to believe that there has been an avoidance of tax owing to fraud or attempted evasion." The tax to be paid was originally due and payable under the first assessment (if that is the assessment referred to) in February or March 1921; but the assessment with which we have to deal is dated 16th April 1926, more than five years after. But whether the section means that the Commissioner believes with reason, or simply that he has a reason which would justify belief (a point which it is unnecessary here to decide), I am of opinion that the reassessment of 16th April 1926 comes within the exception. It is unnecessary to state all the facts which justify such a belief; for my present purpose it is sufficient to refer to the glaring omission of all stock-jobbing profits from the original return, the conversations of the taxpayers with the Commissioner's officers, the acquiescence of the taxpayer in the reassessment of 11th May 1923, the evidence which the taxpayer gave before Starke J. as to the assessment of A. S. Clarke, and the statements made in the cases for opinion submitted to counsel for the taxpayer. But it is for Parliament to consider whether the Commissioner ought not to be required, in making reassessment after three years, to state definitely that he has reason to believe that there has been an avoidance of the tax owing to fraud or attempted evasion.
In my opinion this appeal ought to be allowed.