CASE 3/2000

Judges:
J Block SM

Court:
Administrative Appeals Tribunal

MEDIA NEUTRAL CITATION: [2000] AATA 100

Judgment date: 14 February 2000

J Block (Senior Member)

The objection decision under review in this matter is a decision by the Respondent disallowing the Applicant's objection dated 31 May 1999 against a private ruling dated 1 April 1999; it was agreed as between the parties at the outset of the hearing that the objection decision in question relates to the year ending 30 June 2000, and notwithstanding the fact that there are references also, in the T Documents, to the year ending 30 June 1999.

2. Mr RA Dick of Counsel, instructed by Mr G Stein of Gillis Delaney Brown, solicitors, appeared for the Applicant and Messrs P Needham and G Hunt, who are officers of the Respondent, appeared for the Respondent. The Tribunal had before it the T Documents lodged pursuant to section 37 of the Administrative Appeals Tribunal Act 1975.

3. (a) The Applicant applied at the commencement of the hearing for an order that the matter be heard in private, and that application was granted. Accordingly, all extracts from the T Documents contained in these Reasons have been edited in accordance with the following abbreviations:

  • (1) ``The Company'' (which is the Applicant) is an Australian company (referred to in the private ruling as the ``Rulee'') which owns all of the units in Unit Trust 1.
  • (2) ``Unit Trust 1'' (a unit trust referred to in the private ruling as the ``Interposed Unit Trust'') which owns all of the issued units in Unit Trust 2.
  • (3) ``Unit Trust 2'' (a unit trust in respect of which an Australian company is the trustee, and which is referred to in the private ruling and elsewhere as ``the Purchaser'').
  • (4) The ``Vendor'' is an Australian company which entered into the Contract and the Option (both terms as hereinafter defined).
  • (5) The ``Charity'' is an Australian charitable foundation (referred to in the private ruling as the ``Charity'').

(b) Put in broad terms, the corporate structure which is relevant for the purposes of this matter is that the Applicant, through Unit Trust 1, is the owner of all of the issued units in Unit Trust 2; in loose terms, the Company owns Unit Trust 2. It was agreed that (at least for the purposes of this matter) the Applicant and the Purchaser are associates within section 78A(1) of the Income Tax Assessment Act 1936 (the ``1936 Act''). For the purposes of section 30-15 of the Income Tax Assessment Act 1997 (the ``1997 Act'') there is only one relevant question and that is as to whether the proposed payment to be made to the Charity (referred to in these Reasons as the ``relevant payment'') is a gift. There is no suggestion that the Charity is in any way relevantly connected with the Purchaser or the Applicant.

(c) It was also agreed between the parties that the only issues before the Tribunal are:

  • (1) Whether or not the relevant payment would be a gift; and
  • (2) If the relevant payment would be a gift, whether it is denied deductibility pursuant to section 78A(2)(c) of the 1936 Act.

It is thus unnecessary for the Tribunal to consider whether Part IVA of the 1936 Act applies or the amount of the Purchaser's cost base for capital gains tax purposes if it acquires the land referred to in the Contract.

(d) It is common cause that the area of the land referred to in the Contract is such that the aggregate amount which would be payable under Special Condition 3 of the Contract (and being the relevant payment) would be $2.7 million.

(e) No evidence was called and the matter was argued entirely on the papers.

4. To set the scene in brief, although it will be fleshed out in more detail later in these Reasons, the essential facts are:

(a) The Vendor and the Purchaser entered into the Contract on 27 November 1998. Under the Contract the price for the land payable by the Purchaser to the Vendor is $8.1 million. However, Special Condition 3 of the Contract obliges the Purchaser (subject to certain conditions) to make or alternatively to procure that the Applicant makes the relevant payment to the Charity (T5 at pages 69-70). This latter payment is described as an essential term. The Applicant is named in Special Condition 3, but is not a party to the Contract.

(b) On the same date (ie 27 November 1998) the parties and in addition the Applicant entered into the Option. Put in brief terms the Option provides for a put and a call option over the land as between the Vendor and the Purchaser at a price of $10.8 million. The option will become operative if the Purchaser elects to rescind the Contract because a favourable private ruling cannot be obtained.


ATC 134

(c) The Purchaser has not as yet rescinded the Contract despite a favourable private ruling not yet having been obtained.

(d) The Contract and the Option are unquestionably linked to each other. The Option in colloquial terms ``stands behind'' the Contract. However they are not inextricably linked to each other in that the Purchaser may elect not to rescind the Contract even if a favourable private binding ruling cannot be obtained. Given that the relevant payment to the Charity is an essential term, the Vendor too would presumably be entitled to refuse to complete the Contract if payment is not made. Nor, even assuming that the Contract is rescinded, does it necessarily follow that the Option will be exercised, although it is perhaps relevant that it is both a put and a call option.

(e) Although in respect of the Contract the Purchaser can itself make the relevant payment to the Charity or procure that the Applicant (which is in effect the Purchaser's ``parent'') does so, the private ruling was sought on the basis that the Applicant would do so. There was nothing before the Tribunal which would indicate how that payment would be treated as between the Applicant and the Purchaser. But it is reasonable to infer that if the Applicant does make the relevant payment, it would do so at the request of the Purchaser who is entitled as an alternative to payment by itself, to procure payment by the Applicant.

5. It is also relevant, by way of preface, to note, having regard to the decision in
FC of T v McMahon & Anor 97 ATC 4986; (1997) 79 FCR 127, that the Tribunal is limited to a consideration of the facts identified in the relevant private ruling. In this regard:

(a) The notice of private ruling is document T4 of the T Documents; under the heading of ``The Subject of the Ruling'' the Respondent stated (at pages 29 and 30):

``Rulee is [the Applicant]

Purchaser is the [Unit Trust 2], a unit trust

Interposed Unit Trust is the [Unit Trust 1]

Charity is the [Charity]

Vendor is [the Vendor]

The facts on which this ruling is based are the facts set out in the ruling application, including the attachments to the application.

Briefly, (without modifying or excluding any fact described in the ruling application and attachments) those facts are-

All units in Purchaser are owned by Interposed Unit Trust.

All units in Interposed Unit Trust are owned by Rulee.

Purchaser proposes to purchase land from Vendor. The consideration to be provided by Purchaser for the land consists of the payment of approximately $8,100,000 to Vendor.

It is a condition of sale that, in addition to the payment of approximately $8,100,000 by Purchaser to Vendor, Rulee also pay approximately $2,700,000 to Charity.

If the consideration provided by Purchaser were to consist only of payment to Vendor, Purchaser would have to pay approximately $8,100,000 plus $2,700,000, ie, a total of approximately $10,800,000, to Vendor.''

(b) The Respondent referred specifically to the facts set out in the ruling application and including the attachments to the application; a letter dated 6 January 1999 (which is referred to as the ``private ruling letter''), which accompanied the application for a private ruling, provides under the head of ``Q9 - Full Description of the Facts'' as follows (T5, p 36):

``Enclosures

1. Copy of contact for sale of land dated 27 November 1998 (the `Contract') comprising [ land] in the State of New South Wales (the `Land') between [the Vendor]... and the Purchaser (excluding annexures which are the documents required pursuant to the Conveyancing Act).

2. Copy of deed of put and call option dated 27 November 1998 (the `Option') between the Vendor and the Purchaser, together with a copy of the contract annexed to the Option (excluding annexures which are the documents required pursuant to the Conveyancing Act).

3. Copy of letter from the Australian Taxation Office (`ATO')... dated 27 March 1998 in relation to the [Charity]...

Facts

1. The trustee of the [Unit Trust 1], acting in such capacity, owns all of the issued units in the [Unit Trust 2].

2. The Donor owns all of the issued units in the [Unit Trust 1].


ATC 135

3. Each of the Purchaser and the Donor:

  • (a) have no interest, and cannot ever have any interest in the Charity; and
  • (b) have no power whatsoever to control or otherwise influence the Charity or the appointment of the trustee of the Charity.

4. On 27 November 1998 the Purchaser and the Vendor entered into the Contract.

5. On 27 November 1998 the Purchaser and the Vendor entered into the Option.

6. Prior to entry into the Contract, the Vendor informed the representatives of the Donor that:

  • (a) the Vendor intended to donate the entire net proceeds of sale of the Land to charity; and
  • (b) the Vendor was prepared to sell the Land for a price equivalent to $90.00 per square metre of the area of the Land, provided the Donor made a donation to a charity to be nominated by the Vendor, of an amount equivalent to $30.00 per square metre of the area of the Land.

7. Special condition 3 of the Contract provides that it is an essential term of the Contract that the Purchaser pay or procure the payment by the Donor to the Charity of an amount equivalent to $30.00 per square metre of the area of the Land (approximately $2,700,000) (the `Donation') on or prior to completion of the sale.

8. Assuming all the conditions precedent set out in the contract are satisfied, on completion of the Contract, the Purchaser must pay as the purchase price for the Land an amount equivalent to $90.00 per square metre of the area of the Land (approximately $8,100,000) (the `Purchase Price').

9. The Purchaser intends to develop the Land to construct a freight distribution terminal and associated offices, which facility is intended to be the subject of a lease from the Purchaser to the Donor.

10. The Purchaser and the Donor believed that completion of the Contract on the terms and conditions proposed by the Vendor could result in very substantial stamp duty savings for the Purchaser.''

(The Tribunal notes that the reference to the ``Donor'' should be construed as a reference to the Applicant.)

(c) The Contract was, as indicated at page 36 of the T Documents, a contract for sale of land dated 27 November 1998 between the Vendor and the Purchaser. The price payable under the Contract by the Purchaser to the Vendor is $8,100,000; however, Special Conditions 3 and 4 of the Contract read as follows (T5, p 54):

``3. a. Subject to satisfaction of Special Conditions 4, 5, 6, and 7 hereof the Purchaser shall, on or prior to completion, pay or procure the payment by [the Applicant] to the [Charity] by bank cheque an amount equivalent to $30.00 per square metre of the area of the property hereby sold.

b. Delivery of the aforesaid bank cheque to the Vendor on or prior to completion shall be a sufficient discharge of the Purchaser's obligation to pay or procure the payment of such monies to the [Charity].

c. Payment of the said amount to the [ Charity] is an essential term of the within contract.

4. a. Completion of the within contract is conditional upon the Purchaser and [the Applicant] each obtaining from the Commissioner of Taxation (or other authorised representative of the Australian Taxation Office) a binding private ruling that the aforesaid payment to the Charity will be an allowable deduction to [the Applicant] and that the cost base to the Purchaser of the property hereby sold will be $90.00 per square metre.

b. The Purchaser shall pursue such ruling with all expedition.

c. The Purchaser shall provide to the Vendor a copy of the letter to the Commissioner of Taxation seeking such ruling, and a copy of the responses thereto.

d. Should such ruling not be obtained by 30 June 1999, the Purchaser shall be entitled to rescind the within contract.''

(d) The relevant payment is, as set out previously, referable to the amount of $30 per square metre, and provided for in Special Condition 3(a).

(e) The Option was made on the same date (ie 27 November 1998) between the Vendor (described as the ``Grantor''), the Purchaser (described as the ``Grantee'') and the Applicant (described as the ``Guarantor''). The Option was linked to the Contract having regard in


ATC 136

particular to the definition of ``Condition Precedent'' contained in clause 1.1(16) of the Option and the definition of ``Exchanged Contracts'' contained in clause 1.1(8) of the Option and reading as follows (T5, p 68):

```Exchanged Contract' means a contract for the sale of land by the Grantor to the Grantee, and for the purchase of the Land by the Grantee from the Grantor, dated 27.11.98.

`Condition Precedent' means the rescission of the Exchanged Contract by the Purchaser pursuant to the right of rescission granted by Special Condition 4 of the Exchanged Contract.''

Clause 2 of the Option which is entitled ``Condition Precedent'' is set out in full as follows (T5, p 69):

``2.1 The Grantor and the Grantee confirm that neither the Call Option nor the Put Option can be exercised unless and until the Condition Precedent occurs.

2.2 The Grantor and the Grantee confirm that neither the Call Option nor the Put Option can be exercised:

  • (a) if completion of the Exchanged Contract occurs;
  • (b) if the Exchanged Contract is terminated;
  • (c) if the purchaser in the Exchanged Contract exercises a right of rescission pursuant to the Exchanged Contract, other than the right of rescission granted pursuant to Special Condition 4 of the Exchanged Contract.''

The Option provided for a Call Option Period (14 days from the occurrence of the Condition Precedent) and a Put Option Period (7 days from the occurrence of the Condition Precedent).

(f) The Option refers to Annexure A and being a contract for sale of land; that Contract provided for a purchase price for the land of $10.8 million.

(g) The relevant documents thus indicate that under the Contract the price is $8.1 million; however, and in addition, the Purchaser must make or must procure that the Applicant makes the relevant payment to the Charity. The sum of the relevant payment and the purchase price referred to in subclause (f) amounts to $10.8 million. If the Contract is rescinded and the Option is exercised (and reference is made in this connection to either of the Put Option or the Call Option) then the price payable is equal to the sum of the two payments under the Contract and being $10.8 million.

6. The Applicant contends that if it were to make the relevant payment it would be a gift within section 30-15 of the 1997 Act and thus deductible, and moreover that deductibility is not denied by virtue of section 78A(2)(c) of the 1936 Act.

7. Although this aspect is perhaps of marginal relevance only, the Tribunal notes that it is doubtful whether clause 10 of the private ruling letter can be correct (T5, p 37). Stamp duty in New South Wales is payable on the higher of the consideration and the market value. If one considers the Contract in conjunction with the Option, it is likely that the stamp duty authority would take the view that the market value is $10.8 million. In any event the consideration for stamp duty purposes would also, having regard to the terms of the Contract, appear to be $10.8 million; this is so because the Purchaser is obliged thereunder to pay the price and also to make or procure that the Applicant makes the relevant payment to the Charity. The relevant payment would appear to be additional consideration for the purchase notwithstanding that it may be paid to someone other than the Vendor and notwithstanding that payment is made, at the request of the Purchaser, by the Applicant.

8. The Respondent has, in its Statement of Issues identified the issues as being:

(a) Whether the payment would in fact be a gift; and

(b) Whether deductibility would be denied under section 78A(2)(c) of the 1936 Act.

Curiously enough, the T Documents deal at length with the issue set out in clause 8(b) while in contrast comment in the T Documents on the issue set out in clause 8(a) is sparse.

9. The legislation which is relevant for the purposes of this matter is:

(a) Section 30-15 of the 1997 Act (which I need not set it out in full since it is necessary only to determine whether the relevant payment would be a gift).

(b) Section 78A(2) of the 1936 Act which reads as follows:

``Subject to this section, a gift of money, or of property other than money, made by a person (in this section referred to as the


ATC 137

`donor'
) to a fund, authority or institution is not an allowable deduction under Division 30 of the Income Tax Assessment Act 1997 where-
  • (a) by reason of any act, transaction or circumstance that has occurred, will occur, or may reasonably be expected to occur, being an act, transaction or circumstance occurring as part of, in connexion with or as a result of-
    • (i) the making or receipt of the gift; or
    • (ii) any agreement or scheme entered into in association with the making or receipt of the gift,

    the amount or value of the benefit derived by the fund, authority or institution as a consequence of the gift is, will be, or may reasonably be expected to be, less than the amount or value at the time when the gift was made of the property comprising the gift;

  • (b) by reason of any act, transaction or circumstance of a kind referred to in paragraph (a), any fund, authority or institution other than the fund, authority or institution to which the gift was made, makes, becomes liable to make, or may reasonably be expected to make or to become liable to make, a payment, or transfers, becomes liable to transfer, or may reasonably be expected to transfer or to become liable to transfer, any property, to any person or incurs, becomes liable to incur, or may reasonably be expected to incur or to become liable to incur, any other detriment, disadvantage, liability or obligation;
  • (c) by reason of any act, transaction or circumstance of a kind referred to in paragraph (a), the donor or an associate of the donor has obtained, will obtain or may reasonably be expected to obtain any benefit, advantage, right or privilege other than the benefit of any deduction that, but for this section, would be allowable from the assessable income of the donor under Division 30 of the Income Tax Assessment Act 1997; or
  • (d) by reason of any agreement or scheme entered into as part of or in association with the making of the gift, any property, other than property comprising the gift, has been acquired or will be acquired, whether directly or indirectly, from the donor or an associate of the donor by that fund, authority or institution or by another fund, authority or institution.''

(c) Section 78A(3) of the 1936 Act which reads as follows:

``Without limiting the application of subsection (2), where the terms and conditions on which a gift of property other than money is made are such that the fund, authority or institution to which the gift is made does not receive immediate custody and control the property, does not have the unconditional right to retain custody and control of the property in perpetuity to the exclusion of the donor or an associate of the donor or does not obtain an immediate, indefeasible and unencumbered legal and equitable title to the property, paragraph (2)(c) shall be deemed to apply in relation to that gift.''

10. (a) I refer in the first instance to the question of whether the relevant payment would be a gift. The decision of the High Court in
FC of T v McPhail (1968) 15 ATD 16; (1968) 117 CLR 111 is a good starting point; Owen J stated as follows (at ATD 19-20; CLR 115-117):

``There is nothing in the Act which defines the word `gift' or which extends its ordinary meaning to cover a disposition of property in circumstances in which the disponor receives a benefit in return for the transfer of the property. The Act contains no such provision as was to be found in the Customs and Inland Revenue Act, 1889, the effect of which was to include in the word `gift' as used in the Customs and Inland Revenue Act, 1881 ``property taken under any gift of which property bona fide possession and enjoyment shall not have been assumed by the donee immediately upon the gift and thenceforth retained to the entire exclusion of the donor, or of any benefit to him by contract or otherwise''. Referring to the words which I have put in italics, Vaughan Williams L.J. in Attorney-General v Johnson said: `We come to the conclusion that the Legislature intends that property shall be treated as taken under a `gift', although such gift may have been made under a contract by which the donor takes a benefit': see also Attorney-General v Worrall, where Lord Esher M.R. drew a


ATC 138

distinction between what he described as `a pure and simple gift' and a `gift' within the meaning of the statute. The word as used in s 78(1) is, I think, used in the sense in which it is understood in ordinary parlance. In that sense Viscount Radcliffe in Rennell v Inland Revenue Commissioners described it as being `a present made without return of any kind'. The words `of any kind' are perhaps too wide and should I think be read as referring to a return of something of material advantage to the disponor. The Shorter Oxford Dictionary defines the act of giving as `a transfer of property in a thing voluntarily and without any valuable consideration' and the thing given as being `something the property in which is voluntarily transferred to another without expectation or receipt of any equivalent'. This last definition is, I think, too narrow. A disposition of property would not be regarded as a `gift' in the ordinary sense of the word if what is received in return for it is not equal in value to the value of the property the subject of the disposition.

But it is, I think, clear that to constitute a `gift', it must appear that the property transferred was transferred voluntarily and not as the result of a contractual obligation to transfer it and that no advantage of a material character was received by the transferor by way of return . In my opinion, neither of these conditions was fulfilled in the present case. The taxpayer gave an undertaking to the School Council to contribute £15 per term to the Fund and coupled with that undertaking a request to be charged fees at the rates set out in schedule G. The School Council granted his application and charged him accordingly. In the result, it seems to me, there came into existence a contractual obligation on the taxpayer's part to pay those fees and to contribute to the Fund and on the part of the School Council an obligation to provide education facilities for the taxpayer's son for the appropriate fee set out in schedule G. The payment of £15 was not a voluntary payment. In the events that happened it was a payment made pursuant to a contract between the taxpayer and the School Council. If, however, the payment should be regarded as a voluntary payment, the taxpayer made it in the expectation that in return he would receive, and he did in fact receive, a substantial concession in the fees charged for the education of his son. In neither event did he make a `gift' within the meaning of s 78(1).''

(Emphasis added by the Tribunal)

(b) It would seem then that a gift requires the presence of two factors; the first factor requires that the payment be voluntary and not in consequence of a contractual obligation; the second factor requires that there be no advantage to the transferor by way of a return.

(c) In
Cyprus Mines Corporation v FC of T 78 ATC 4468, Smith J said (at 4481-4482):

``The conclusion that the appellant's donation to the Library Board of W.A. was the appellant's aliquot share of the joint venturers' liability pursuant to cl. 33(5)(a) of the supplemental agreement is, I think, fatal to the first ground of objection. I will now deal with that question. Counsel for both parties accepted that the test to be applied in determining whether or not the payment was a gift within the meaning of sec. 78(1)(a) of the Act, was that referred to by Owen J. in
F.C. of T. v. McPhail (1968) 117 C.L.R. 111 at p. 116. The test, which has become known as the McPhail Rule (see article `Charity Begins at Home' - Taxation in Australia December 1977 issue p. 377) was expressed by Owen J. in these terms:

`But it is I think, clear that to constitute a ``gift'' it must appear that the property transferred was transferred voluntarily and not as the result of a contractual obligation to transfer it and that no advantage of a material character was received by the transferor by way of return.'

The submission of counsel for the appellant, as I understood him, was that cl. 33(5)(a) of the supplemental agreement did not impose any obligation on the joint venturers to make a donation to the Library Board and therefore the first limb of this rule was satisfied. As to the second limb of the rule, it was said by counsel that the phrase `by way of return' required not only that the quid pro quo be connected to the gift, but that it flow from the recipient of the gift. Counsel said that there was no evidence in the instant case to support an inference that there was any return to the plaintiff from the Library Board and therefore the second limb was satisfied.


ATC 139

To my mind, the submission in relation to the operation of the first limb of the rule ignores the proper construction of cl. 33(5)(a) and overlooks the fact that there are two aspects to that first limb - that the payment must not only be free from contractual obligation but must also take place voluntarily. To my mind it must appear, if this limb of the rule is not to be infringed, that the payment was voluntary in that it was the act and will of the disponor and there was nothing to interfere with or control the exercise of that will. Clause 33(5)(a) in express terms, does not impose on the joint venturers an obligation to pay to the Library Board the sum of $500,000 but it binds them within the time specified herein to make a payment of that sum and affords to them alternate means of discharging the obligation. The will of the joint venturers was free to operate upon the question of to whom that payment was to be made but not upon whether a payment of that amount be made. In such circumstances, in my view, it cannot be said that the payment was either free from contractual obligation or voluntary. It also seems to me that the transaction infringed the second limb of the rule. In formulating the rule, Owen J. adopted Viscount Radcliffe's description of a gift in
Rennell v. Inland Revenue Commissioners (1964) A.C. 173 at p. 193, `a present made without return of any kind'. Owen J. went on to say at p. 116:

`The words ``of any kind'' are perhaps too wide and should I think be read as referring to a return of something of material advantage to the disponor.'

Counsel for the appellant seeks to further limit Lord Radcliffe's description of a gift by restricting `return of any kind' to a benefit which emanates from the transferee of the property. To my mind there is no warrant for such a restricted interpretation. In the transaction under consideration, a direct outcome of the payment made by the appellant was the elimination of its liability to the State. In such circumstances I do not think it can be said that no advantage of a material character was received by the appellant. The first ground of appeal in relation to the payment to the Library Board of Western Australia therefore fails.''

(d) Each of the parties referred at some length to the decision of the Full Federal Court in
Leary v FC of T 80 ATC 4438; (1980) 47 FLR 414. The following passages in particular were cited to me:

  • (1) Bowen CJ as follows (at ATC 4439; FLR 415):
    • ``The first question is whether such a payment to qualify as a gift must be voluntary. In
      FC of T v McPhail (1968) 117 CLR 111, Owen J. (at p 116) said:
      • `But it is, I think, clear that to constitute a ``gift'', it must appear that the property transferred was transferred voluntarily and not as the result of a contractual obligation to transfer it and that no advantage of a material character was received by the transferor by way of return.'
    • In this statement his Honour was mentioning what was appropriate to the facts before him. He was not putting forward a test to be used as a substitute for the words of the section. It seems that a payment may be regarded as voluntary though made under a sense of moral obligation, but will not generally be regarded as voluntary if made under an obligation imposed by law, whether under contract or otherwise. Where the payment is made in pursuance of a contract but is not gratuitous, the person making the payment may fail to obtain the deduction under para 78(1)(a) in any event. However, it is possible there may be circumstances where the taxpayer would not lose the deduction simply because he had contracted to make the payment. Thus, where A and B agreed to make gifts to C, an institution within subpara 78(1)(a)(ii), or A agreed with B to match any gift made by him to C, there would seem to be no reason why either A or B should be deprived of his deduction. It seems it will depend upon the circumstances whether the fact that a payment is made in accordance with the provisions of a contract will render that payment incapable of being described as voluntary and incapable of entitling the payer to a deduction.''
  • (2) Deane J as follows (at ATC 4455; FLR 438):

    ATC 140

    • ``If a transfer of property is in return for valuable consideration received by the transferor from the transferee, it will not be a gift by the transferor. If the relevant property is not, for that reason, precluded from being properly regarded as a gift, the abovementioned considerations indicate usual attributes of a gift, namely, that a gift will ordinarily be by way of benefaction, that a gift will usually be not made in pursuance of a contractual obligation and that a gift will ordinarily be without any advantage of a material character being received in return. I would add, to those usual attributes of a gift, the attribute that a gift ordinarily `proceeds from a ``detached and disinterested generosity''
      Commissioner of Internal Revenue v LoBue 351 US 243, 246; ``out of affection, respect, admiration, charity or like impulses'',
      Robertson v United States 343 US 711, 714'. (
      Commissioner of Internal Revenue v Duberstein et ux (1960) 363 US 278 at p 285. See also
      The Overseers Etc of The Savoy v The Art Union of London (1896) AC 296 at pp 308 and 312; Collector of Imposts (Vic) v Cuming Campbell Investments Pty Limited, supra, at p 641). In the clear case, one will be able to determine from overall impression of the circumstances whether the relevant transfer can properly be described as a gift. In a borderline case involving dispute as to whether a particular transaction constitutes a gift for the purposes of sec 78(1)(a) of the Act, the presence or otherwise of these usual attributes of a gift will provide the reference point for answering the essential question. That essential question remains, however, the question which sec 78(1)(a) itself poses, namely, whether the transfer in question can, as a matter of ordinary language, properly be described as a gift.''

(e) The first passage in particular was cited to me in support of the proposition that the reference in McPhail's case to a contractual payment may not apply to every payment simply because it is made pursuant to a contract. Mr Dick referred me in particular to the notional contract between A and B referred to in the quoted passage from Leary, and in which Bowen CJ doubted whether such a payment would be denied deduction.

(f) Mr Dick contended also that if the relevant payment is made by the Applicant, it cannot be a contractual payment of the nature referred to in McPhail simply because the Applicant is not a party to the Contract (even though named in it); this is, so he argued, because there is no privity of contract between the Applicant on the one hand and the parties to the Contract (or the Charity) on the other hand. Mr Dick contended furthermore that, as a matter of contract law, the relevant payment when made by a person who is not a party to the Contract would not relevantly constitute consideration.

(g) In my view Mr Dick's contentions as set out in subclause (f) are not correct. They ignore the fact that although the Applicant is not a party to the Contract itself, it is named in it, and it is a party to the Option. It is clear that the Contract and the Option are linked in such a manner that they must be considered in conjunction with each other. Moreover in making the relevant payment, the Applicant would of necessity do so at the request of the Purchaser; the obligation is primarily that of the Purchaser who is entitled if it so chooses to procure that the payment is made by the Applicant. The Contract indicates in clear terms that the Applicant would make the relevant payment in discharge of the contractual obligations of the Purchaser (which the Applicant owns), and so that it cannot be correct to say that the relevant payment is not contractual merely because the payer (having been requested to do so by a party obliged to do so) is not an actual party to that particular contract. His contention as to consideration (or the absence of it) is entirely without foundation.

(h) The question of whether a payment was a gift was considered by Nicholson J in
Klopper v DFC of T 97 ATC 4179. In that case a payment to the Australian Sports Aid Foundation was denied deductibility as a gift due to its connection with certain assistance provided to Mr Klopper. Nicholson J stated as follows (at 4187-4188):

``It is also contended that the second applicant, having no contractual obligation with either the ASAF, the AYF or ORCA, can be shown on objective examination to have had intentions showing the necessary elements of benefaction. In my opinion, that


ATC 141

was the implied position which the tribunal took in concluding it was unable to affirm the decisions in relation to her without regard to the impact of s 78A.

In further support of this ground it is submitted the facts in the present matter are not the same as those in either McPhail (supra) or Leary (supra). This is the case, it is submitted, because here the total amount paid was in no way reduced from that which would have been payable. No benefit was received by the first applicant apart from the deductibility of the payments. There was, it is said, no benefit which passed from the ASAF to the applicants. Expressed another way, it is submitted the facts here do not establish any direct link between payments by the first applicant to the ASAF and any liability of the applicant to ORCA.

In my opinion these submissions overlook that there is an express link between the ORCA agreement and the making of donations to the ASAF and the AYF. Clause 13(v) of the ORCA Agreement, whereby the first applicant agreed to ORCA and the AYF deducting certain commission from all donations, leads to an inference that donations by the applicants to the ASAF were to pass to ORCA and/or the AYF. How else would ORCA and AYF be linked to the applicant or the applicant's consent be required for deductions by either of them?

The contentions for the applicants then turn to
Cyprus Mines Corporation v FC of T 78 ATC 4468 where it is said that such link does not establish a direct outcome and lacks the necessary causality. In Cyprus Mines (supra) at 4481 reference was made by Smith J to the statement by Owen J in McPhail at ATD 20; CLR 116, known as `the McPhail Rule' namely:

`But it is, I think, clear that to constitute a ``gift'' it must appear that the property transferred was transferred voluntarily and not as the result of a contractual obligation to transfer it and that no advantage of a material character was received by the transferor by way of return.'

In Cyprus Mines the clause at issue required the joint venturers to pay the State a royalty amounting to $500,000, excepting where it elected to make a gift of not less than that amount to a fund prescribed by s 78(1)(a) of the Act and situate[d] or resident in Western Australia. In Cyprus Mines the appellant's counsel submitted these provisions did not impose any obligation on the joint venturers to make a donation to the recipient body and therefore the first limb of this rule was satisfied. As to the second limb of the rule, it was said by counsel in that case the phrase `by way of return' required not only that the quid pro quo be connected to the gift, but that it flow from the recipient of the gift. It was disputed there was evidence to support an inference of any return to the plaintiff from the recipient body, so it was submitted the second limb was satisfied.

Smith J at 4481 said in relation to the submissions concerning the first limb that they overlooked that the payment must not only be free from contractual obligation but also take place voluntarily. He said that while the clause in question did not in express terms impose an obligation on the joint venturers to pay to the recipient body the monies, it nevertheless bound them to make a payment of the same sum and afford to them alternative means of discharging the obligation. The result, he said, was that the will of the joint venturers was free to operate upon the question of to whom that payment was to be made but not upon whether a payment of that amount be made. He concluded that in those circumstances it could not be said the payment was either free from contractual obligation or voluntary.

Smith J continued (4482):

`... It also seems to me that the transaction infringed the second limb of the rule. In formulating the rule, Owen J adopted Viscount Radcliffe's description of a gift in Rennell v Inland Revenue Commissioners (1964) AC 173 at p 193, ``a present made without return of any kind''. Owen J went on to say at p 116:

``The words `of any kind' are perhaps too wide and should I think be read as referring to a return of something of material advantage to the disponor.''

Counsel for the appellant seeks to further limit Lord Radcliffe's description of a gift by restricting ``return of any kind'' to a benefit which emanates from the transferee of the property. To my mind there is no warrant for such a restricted


ATC 142

interpretation. In the transaction under consideration, a direct outcome of the payment made by the appellant was the elimination of its liability to the State. In such circumstances I do not think it can be said that no advantage of a material character was received by the appellant.'''

(i) In
Hodges v DFC of T 97 ATC 2158, Deputy President McMahon dealt with a donation to the Apex Overseas Relief Fund which was linked to the provision of flight tickets of commensurate value. Again deductibility was denied. The Tribunal found that the relevant payment was not a gift, but even if it was, deductibility was denied pursuant to section 78A(2) of the 1936 Act.

(j) The decision in Hodges is relevant in particular because it refers to the link, and indeed the overlap, between what Deputy President McMahon referred to as the positive qualification (as to gift) and the negative qualification (section 78A(2)(c)). See in this respect clause 9 of his decision as follows (at 2161):

``9. In order to qualify for a deduction under the gift provisions of the Act, a payment must have both negative and positive characteristics. It must positively fall within the terms of subsection 78(4). This provides relevantly that a `gift' by a taxpayer to a fund mentioned in the tables forming part of the subsection is an allowable deduction for the year of income in which the gift was made, if certain other conditions (here irrelevant) are met. It was conceded that the donee fell within the terms of item 9.1.1 of the table accompanying that subsection. It was a public fund in respect of which there was in force at the time when the `gift' was made, a declaration under subsection (21) that the fund was an eligible fund for the purposes of that item. The positive qualification which the payment must meet, therefore, is that it is a `gift'. The negative qualification is that the payment is not caught by the terms of subsection 78A(2). To a large extent, these qualifications overlap. Subsection 78A(2) does not appear to alter the law so much as to restate necessary concomitants of payments that are to be characterised as gifts.''

(k) It is my view then that the relevant payment if made by the Applicant would be a contractual payment (and distinguishable from the type of contractual payment involving ``A'' and ``B'' considered in Leary by Bowen CJ) and thus not a gift.

11. (a) The Applicant (in the T Documents) argued at some considerable length that the words in paragraph (c) of section 78A(2), namely, ``by reason of any act, transaction or circumstance of a kind referred to in paragraph (a)'' must be construed so as to incorporate the whole of paragraph (a).

(b) Paragraph (a) operates in broad terms where a charity receives a payment but its value is diminished in consequence of ``any act, transaction or circumstance''. That concept was referred to in the hearing and is referred to in these Reasons as the ``diminution aspect''.

(c) Paragraph (b) operates, again put in broad terms, where the recipient of a gift is obliged to incur a liability by reason of an ``act, transaction or circumstance'' of the nature referred to in paragraph (a).

(d) Paragraph (c) applies where the donor obtains a benefit by reason of an ``act, transaction or circumstance'' of the nature referred to in paragraph (a). The Applicant contended both at the hearing and at length in the T Documents, that each of paragraphs (b) and (c) apply, because of the reference in each of them to paragraph (a), only where there is a diminution aspect. That this cannot be correct is clear in particular from the wording of paragraph (b) which caters in its terms for a liability incurred by the charity. It cannot have been intended that paragraph (b) will apply only where the recipient suffers a diminution aspect and in addition incurs a liability. And similarly, paragraph (c) cannot have been intended to operate only where there is a diminution aspect and in addition the donor obtains a benefit.

It is true that relevant second reading speeches cited to me and referable to the section appear to have focused on diminution aspect cases. But the explanatory memorandum makes it clear that a separate function was intended for each of paragraphs (a), (b) and (c). In relation to paragraph (c), the explanatory memorandum states:

``By paragraph (c) of sub-section (2), a deduction for a gift is to be denied if the donor or an associate of the donor has obtained, will obtain or may reasonably be expected to obtain any benefit, advantage, right or privilege by reason of any act,


ATC 143

transaction or circumstance that occurs as part of, in connexion with or as a result of the making or receipt of the gift or as a result of any scheme or agreement associated with the gift. Paragraph (c) will not, however, operate to deny a deduction by reason only that the donor would be entitled to the benefit of an income tax deduction in respect of the gift.''

(e) Mr Dick accepted that section 78A(2) must be construed disjunctively; this arises in particular from the word ``or'' at the end of paragraph (c). But in my view the strongest argument weighing against Mr Dick's contention is that, if it were correct, paragraphs (b) and (c) would be entirely otiose. Any transaction involving a diminution aspect would fail, without any additional requirement as referred to in each or either of paragraph (b) or paragraph (c). It follows in my view that to construe paragraph (c) in the manner for which the Applicant contends is altogether untenable; this is so notwithstanding the reference to paragraph (2)(c) in section 78A(3); section 78A(3) is in its terms applicable to cases where custody is withheld; the reference in it to paragraph (2)(c) appears to do no more than ensure that the withholding of custody is deemed to be a benefit within paragraph (2)(c). It may be that the reference to paragraph (2)(c) was not strictly necessary and that it was inserted out of an abundance of caution, but that is not to the point.

12. (a) Section 78A(2)(c) of the 1936 Act can apply only where there is a benefit to the donor or an associate. In this case, and if the relevant payment is made by the Applicant, the Purchaser (which is its associate) is relieved of the obligation to make that payment. This is clearly then a benefit to the Purchaser; there is, in my view, likely to be a further benefit to the Purchaser in that the price payable is in such event $8.1 million whereas the market value would appear, having regard to the entire contractual matrix (consisting of the Contract and the Option), to be $10.8 million. The Purchaser and the Applicant are, of course, separate entities; the Applicant is a company while the Purchaser is a company in its capacity as the trustee of Unit Trust 2. If one were to treat the Applicant and the Purchaser as part of a group then arguably there is no real benefit in economic terms, since in either case the group as a whole pays out $10.8 million. But there is no legislative warrant which entitles the Applicant to argue that the Applicant and the Purchaser should be treated as one entity, and indeed I did not understand Mr Dick to have put forward any such proposition.

(b) Mr Dick pointed out that the Contract and the Option are not inextricably linked to each other. It is conceivable that the Purchaser will not, even if the special condition is not satisfied, rescind the Contract. For that matter the Vendor may choose not to enforce the payment of the relevant amount even though it is so entitled, because it is expressed to be an essential condition, to refuse to complete without payment of it. Again, and even if the Contract is rescinded, the Option (Put Option or Call Option) may not be exercised. There is thus the possibility that the Contract will fail without exercise of the Option or that the Vendor will be content to complete the Contract even if the relevant payment is not made. The Applicant argued that all of these possibilities should lead me to conclude that there is no relevant benefit to the Purchaser or an associate. In my view conjecture of this type is just that - conjecture only; moreover it omits the possibility that the Contract itself is couched in terms which might perhaps allow a court to spell out a trust and thus permit the Charity to enforce payment of the relevant amount as a beneficiary. The fact that the Contract is not contained in a deed would not necessarily result in a finding that there is no trust. I need not speculate on this aspect; it is however relevant to note that the terms of the Contract and the Option, when read in conjunction with each other, must lead to an inference that this is not what the parties intend. The Tribunal noted during the hearing that it could think of no reason why the Vendor and the Purchaser could not have contracted with the Vendor for a sale of the land for $8.1 million, while separately and independently the Applicant could have made a donation to the Charity of $2.7 million. If this had occurred the donation would presumably have been deductible, and the stamp duty saving which was alleged to have been sought might well have been achieved. Why then was the transaction as a whole organised in this rather complex fashion? Why was it necessary to back the Contract with an Option, and where under each of them the aggregate amount payable is $10.1 million? This Tribunal must, as set out previously, consider the facts on which the primary ruling is based, and so that these


ATC 144

questions too are entirely speculative. But the Tribunal is entitled, I think, to take the view that documents of this nature are drawn for a reason, even though that reason is not clear to the Tribunal.

13. (a) Section 78A(2)(c) was also considered Klopper's case. Nicholson J dismissed this aspect in very brief terms (at 4189):

``Whether section 78A(2)(c) precludes deductibility

The same arguments advanced on behalf of the first applicant in respect of the question of characterisation as a `gift' were redirected to the conclusions of the Tribunal made in respect of the second applicant that, because the payments conferred a benefit on the first applicant, s 78A(2)(c) operates to deny deductibility to the second applicant. Those contentions having been found not to support the premise cannot support the dependent proposition.''

Section 78A(2)(c) was considered also in Hodges. In neither of these cases does it appear that the taxpayer argued that section 78A(2)(c) cannot apply unless there is a diminution aspect. Mr Dick accepted that so far as he is aware this argument is novel; for the reasons set out previously it is without foundation.

(b) In summary then I hold that the relevant payment would not qualify as a gift under section 30-15 of the 1997 Act; furthermore and even if the relevant payment could, despite my views to the contrary, be categorised as a gift, deductibility would be denied by section 78A(2)(c) of the 1936 Act.

14. This hearing was concluded on Monday 7 February 2000; the Applicant did not seek permission to file any further or additional submissions in reply. Nevertheless and on 8 February 2000, I received additional submissions in reply on behalf of the Applicant; the covering facsimile indicates that the additional submissions were also served on the Respondent. As to whether I should or can consider those additional submissions is not clear to me; however I note that it does not in any way affect my decision as set out previously in these Reasons. It is important to remember that the relevant payment would be contractual because it would be made pursuant to the Contract and in discharge of the obligations of the Purchaser, in accordance with Special Condition 3, to make that payment. The fact that it is intended that the relevant payment will be made by the Applicant having been procured to do so by the Purchaser cannot have the effect that it is thereby not contractual.

15. Accordingly, and in all the circumstances, the objection decision under review is affirmed.


This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.