Case G47
Judges: FE Dubout ChG Thompson M
N Dempsey M
Court:
No. 3 Board of Review
N. Dempsey (Member): This taxpayer is a Pharmaceutical Chemist and his appeal is in respect to amended assessments for the years ended 30th June, 1964, 1965, 1966, 1967 and 1968 and an original assessment for the year ended 30th June, 1969.
2. The amended assessments for the years ended 30th June, 1964 to 1968 both inclusive are to increase the taxable income in each year by the inclusion of certain additional dividends from two companies and also to include in the amended assessment for the year ended 30th June, 1967 of a profit from the sale of shares in one of these companies. The appeal for the year ended 30th June, 1969 is against the inclusion in the original assessment of that year of additional dividends from two companies, the same companies involved in the prior years. There is also an appeal for each year against the inclusion in the assessments of additional tax in respect to what it is claimed was omitted income.
3. Taxpayer has for each of the years involved submitted returns and included therein what he considered was his assessable income.
4. About June, 1962 acting on advice from his Accountants and Legal Advisers he had a private company incorporated, he and his wife being the subscribers to the Memorandum and Articles of Association and the original shareholders. The purpose behind the formation of the company was to implement a programme of estate planning and also to reduce the amount of income tax payable. There is nothing of a sinister nature in the arrangement. He and his wife severally and jointly owned certain freehold properties and these were sold to the newly incorporated company. Shares in a number of public companies, which were also owned jointly or by the taxpayer were also sold to the newly formed company. The purchases of these assets by the private family company was carried into effect by cheques being drawn by the company and loans to cover the cheques being made by taxpayer and his wife.
5. In addition to the properties and shares already referred to taxpayer personally owned shares in two companies each of which by their Memorandum and Articles of Association required that the shareholders could only be Pharmaceutical Chemists and the Memorandum of Articles of Association also contained clauses restricting the right of the holder of shares, a pharmaceutical chemist, to transfer such shares to any person not being a pharmaceutical chemist. The articles were silent in relation to sales of shares. Taxpayer was, in fact, a Director of each of these companies and well aware of the restriction on the transfer of their shares.
6. However, notwithstanding his awareness of these restrictions he entered into an agreement on the 10th September, 1962 to sell to the family investment company 6,918 shares registered in his name in one company, A Ltd. and 4,372 shares registered in his name in the second company B Ltd. The consideration in each case was slightly below what might be regarded as the true value but this is of no importance. The total consideration was provided by way of loan from him to the company.
7. At the time that he entered into the agreement he also executed a Deed of Trust which was registered and stamped and which recited that the sales had taken place, that he as Trustee named therein had agreed to hold the shares for the investment company and to transfer pay and deal with the said shares and the dividends and interest payable thereon in such manner as the beneficiary, the investment company, may from time to time direct. There was also a clause in the trust deed dealing with rights which might arise, by virtue of a shareholding in the companies, in respect to future issues of shares. Finally there was a clause in the Trust Deed which provided that should the Trustee, this taxpayer, retire or die during the continuance of the trust then his daughter, who was also a pharmaceutical chemist should assume the role of Trustee under the Deed and she agreed to do so and executed the Deed to signify her agreement.
8. The 4,372 shares sold in B Ltd. were part of a total holding of 4,688 held by taxpayer. His holding in A Ltd., at the 10th September, 1962 was 8,734 and on the 25th September, 1962, 50 shares were transferred to a chemist employee thus reducing the holding in his name to 8,684. Of this holding of 8,684
ATC 310
shares, 6,918 were actually acquired by him up to the 30th May, 1960 and the balance 1,766 were with 50 shares transferred to the chemist employee on the 25th September, 1962 on allotment received in April-May, 1962. The 6,918 shares sold to the investment company thus comprised all the shares acquired up to 31st May, 1960.9. No transfers were at any stage signed in relation to these transactions and lodged for registration and as a consequence neither company was aware of the sales. However, it does seem that the relevant share certificates for the shares in each company were held for safe keeping on behalf of the family investment company by its bankers who also held with the shares, two transfers in blank signed by taxpayer.
10. Dividends were declared by each company in each of the years with which the Board is concerned and naturally the companies having no advice of the sale of the shares paid the dividends to this taxpayer. On receipt of the dividend cheques he made calculations apportioning the cheques to himself and to the investment company in the ratio of the shares considered to be owned by each and then prepared separate bank deposit slips for each and presented these with the dividend cheque at the bank for credit to the respective accounts.
11. Income tax returns were lodged each year on behalf of the taxpayer and on behalf of the investment company and each return disclosed the amount of dividend from each company which had been banked to the respective accounts. Assessments based on these returns were issued each year. However, the Commissioner was not aware of the sales of shares in the companies A Ltd. and B Ltd. nor of the existence of the Trust Deed.
12. On becoming aware of the situation amended assessments were issued to this taxpayer for each of the years ended 30th June, 1964 to 1968 inclusive, together with an original assessment for the year ended 30th June, 1969 and these assessments included the total amounts of the dividends paid to this taxpayer each year by each company.
13. The additional dividends included each year were as follows -
Financial Year Company A Ltd. Company B Ltd. Total
1963/1964 $2,766 $546 $3,312
1964/1965 $2,766 $654 $3,420
1965/1966 $2,767 $655 $3,422
1966/1967 $2,767 $612 $3,379
1967/1968 $2,767 $437 $3,204
1968/1969 $3,459 $524 $3,983
14. Objections have been lodged against each of the amended assessments and also against the original assessment for the year ended 30th June, 1969 claiming, shortly stated, in relation to these matters that additional amounts are not assessable to the taxpayer because of the sales of the shares and the trust deed as by virtue of the sales and the deed the income is not the income of the taxpayer but of the family investment company which in fact has returned the income and been assessed thereon.
15. Additional tax for omitted income has been imposed in each year and objection is also taken against this. A further ground of objection is that the amended assessments are not authorised by law as a full and true disclosure has been made each year.
16. In respect to the amended assessment for the year ended 30th June, 1967 there is an additional objection and this relates to the inclusion in this assessment of a profit of $3,000 which the Commissioner claims the taxpayer made in that year on the sale of shares in Company A Ltd. He supports the inclusion of this amount by reason of the provisions of sec. 26(a).
17. The circumstances relating to the acquisition and the sale of the 2,000 shares in A
ATC 311
Ltd. are as follows. As has been set out supra prior to the sale of the 6,918 shares, the total number of shares held in this taxpayer's name was 8,684. At this point of time the maximum number of shares which could be held by any one shareholder was 10,000.18. Taxpayer as has been stated was a director of the company and by reason of this position no doubt well aware of future plans of the company. The Commissioner submits that it was this knowledge which motivated the transfer on the 25th February, 1965 of 684 shares to his daughter, a pharmaceutical chemist, and as such a person to whom a transfer could be openly made. He suggests that it was done to reduce the holding in his name to 8,000 knowing that there was an issue of 1 share for each 4 held to be made which would then entitle him to 2,000 and increase his holding to 10,000, the maximum he could hold.
19. Be that as it may, I do not consider that any great significance can be attached to this move, a step which, if I may say so, was one which a prudent man in his place would have taken.
20. On the 4th October, 1965, eight months after the transfer of the 684 shares to his daughter, an allotment of 2,000 shares was made to taxpayer, who incidentally from his own funds provided the amount to be paid for these shares. It seems that when this took place he did not, as he should have done, in accordance with cl. 4 of the Trust Deed refer the matter to the family investment company for their instructions. Quite probably at the time and as he was taking up the full allotment applicable to the total holding which was at all times registered in his name, he did not concern himself with the matter. This is borne out by the fact that it was only after discussion with the Department in relation to the matter generally, that he endeavoured to rectify the position. This rectification was attempted on the 17th May, 1969, and I use, attempted, because for reasons I will later state I do not consider that what was done was correct.
21. This leads me to the sale of the shares which has resulted in the taxpayer being assessed on the profit of $5,000. However, before pursuing this matter to its conclusion, I think it advisable to deal with the question of assessability of the dividends. This matter has to be considered in the light of the sale of the shares to the investment company and the trust deed. A decision on this aspect of the matter will have to be taken into account in deciding the issue in relation to the sale of the shares as it seems to me that the question of ownership of the shares sold is involved, a matter which could also affect the apportionment of dividends received.
22. It is not disputed that taxpayer in accordance with a minute of a meeting of directors of the family investment company signed by him as Chairman of such meeting and the duly executed Trust Deed both of the 10th September, 1962 sold to the family investment company 4,372 fully paid shares in B Ltd., and 6,918 fully paid shares in A Ltd., and received payment for same.
23. It is also not disputed that each of these companies had restrictions on the right of shareholders to transfer their shares and that unless the transfer was to a person who was a pharmaceutical chemist the transfer would not be approved. However, there were no restrictions in the Articles on the sale of shares. Further it is conceded that no transfers in respect to these shares were at any time lodged and that at all times this taxpayer remained the owner of the shares insofar as the companies were aware. The Commissioner submits that for this reason as taxpayer is registered as the owner of the shares the family company is in the position of a donee and cannot force taxpayer to pay dividends to it because it has no rights and it is not registered as the shareholder and equity will not assist. The decision in Hunter v. Hunter (1936) A.C. 222 is relied on.
24. The Board has been referred to a number of other cases which might assist in deciding the matter and I have endeavoured to follow these cases and having done so. I consider that the case which is most to the point is the case of Hawks v. McArthur & ors. (1951) 1 All E.R. 22. This case did not follow Hunter v. Hunter supra and distinguished it on the basis that the circumstances were quite different as in Hunter v. Hunter a sale by a mortgagee was involved.
25. The case of Hawks v. McArthur supra concerned the sale of shares in a company the articles of which contained restrictions on the right to transfer shares. Two sales of shares were made and no transfers in respect to the sales were lodged. Admittedly transfers in respect to the sales were executed. However, as
ATC 312
in this case, a consideration passed for the shares and it was said in Hawks v. McArthur at p. 27 -``I cannot bring myself to suppose that they got nothing by their bargain and that the whole of the property in the shares remained in Mr. McArthur notwithstanding the transfers which had been executed and the money which he received.''
Later in the decision, also at p.27, it was said -
- ``Admittedly Mr. McArthur is still the legal owner of the shares.'' and,
- ``Admittedly, the rights of Mr. Roberts and Mr. Fraser, if they have any rights, are also equitable rights. As I have come to the conclusion that Mr. Roberts and Mr. Fraser have some rights and that what they did was not a complete nullity, the question is whose rights should prevail.''
It was ultimately decided that their rights i.e. equitable rights of the purchaser must prevail.
26. It therefore seems to me that the taxpayer, whilst still the registered owner of the shares and therefore, so far as the companies were concerned, their legal owner had none the less, by virtue of the consideration paid to him and the trust deed executed, parted with the equitable rights which would include the right to receive the dividends. This view is, I consider, supported by the decision of
Kitto
J. in the case of
Glynn
&
ors
v.
F.C. of T.
(1964) 111 C.L.R. 169
. This case concerned estate duty and was an appeal against amounts included in an estate as the value of shares held in trust and, further, a claim that a debt should be allowed in the estate in respect of dividends paid on these shares over many years and not accounted for by the trustee to the beneficiaries.
27. Kitto J. upheld the appeal on both grounds and at p. 174 of his decision he said: ``If there were nothing more in the case, the conclusion, in my opinion, would be irresistible that in 1920 the deceased effectually declared as binding and irrevocable the trusts which the administrators assert.'' The Trust Deed in the case of this taxpayer speaks for itself, and the fact that its existence was not communicated to the companies is, in no way against the taxpayer as in accordance with the decision of Kitto J. in Glynn's case supra , equity would require him to account to the beneficiary under the trust for dividends paid to him on the shares, and any other benefits which might arise.
28. I therefore uphold the objection of the taxpayer that the additional dividends from the shares in A Ltd., and B Ltd., included in the amended assessments for the years ended 30th June, 1964 to 30th June, 1968 both inclusive and in the original assessment for the year ended 30th June, 1969 should be deleted. If taxpayer has, as it seems likely, incorrectly included in his returns dividends the income of the investment company his objection does not allow the Board to assist to rectify this position.
29. There remains now to consider the final matter and that is the objection to the inclusion in the amended assessment for the year ended 30th June, 1967 of $3,000 profit from the sale of shares in A Ltd.
30. I have set out, I hope, in sufficient detail what shares were registered in the name of this taxpayer at October, 1965 and shortly stated, there were 8,000 shares so registered 6,918 of which he was holding under the deed of trust and the balance 1,082 were held in his own right. At this point the issue of 1 share for each 4 held was made and taken up by him. One share certificate only was issued for this allotment. However in terms of the trust deed he would be obliged to account to the family investment company for 1,730 of these shares and the balance would be his own property.
31. Late in 1966, and I do not feel it necessary to go into great detail relating to how the matter arose, taxpayer became aware that a firm of pharmaceutical chemists who were big customers of A Ltd. let it be known that they were desirous of obtaining a further 1,000 shares in the company. They could only do so by an existing shareholder agreeing to sell shares. Taxpayer sold to this firm in January, 1967, 1,000 shares at $4 per share, a surplus of $3,000 resulting which has been treated as assessable to him under sec. 26(a). In making the transfer he used the certificate for the 2,000 shares allotted in his name in October, 1965 and after the transfer was approved he was issued with a fresh certificate for 1,000 shares and the certificate for the 2,000 shares was cancelled.
32. In support of his action in assessing the taxpayer, the Commissioner points to the transfer of the shares to the daughter in
ATC 313
February, 1965 to reduce the holding in his name to 8,000 so that he could avail himself in full of the 1 for 4 issue. He then submits that it can then be construed that taxpayer, in taking up shares to the maximum, had in mind the subsequent sale of the whole or part of these shares, so that he would be in a position to take up any future entitlement to par issues. This assumes that 10,000 shares would remain the maximum holding. Certainly taxpayer by reason of his close association with the company would have advance information as to what might happen in the future.33. However, I do not think that this can be construed so that it might be said that his dominant purpose in taking up these particular shares was to sell them at a profit. He has no history of dealing in shares and so far as the shares in this particular company are concerned he has over a very lengthy period only made, apart from this sale, minor sales for which reasonable explanations have been given. Certainly after October, 1965, he had a maximum holding but to say that because of this he intended to take up future issues to sell them wholly or in part is to impute a motive which might never arise. It could just as easily be said he might consider that in the future the company would increase the maximum holding, an event which did subsequently occur.
34. I therefore do not consider that it can be held on the evidence before the Board that taxpayer in taking up the allotment in October, 1965 did so with a dominant purpose of selling either the whole or part of this allotment. In any case he could not, in view of my previous findings in relation to the equitable rights of the family investment company, have been assessed on the whole of the surplus. It would seem that he was only personally entitled to 270 of the 2,000 shares subscribed for and therefore could not have personally sold any more than that number out of this particular parcel of 2,000 shares.
35. My decision therefore is that the amended assessments for the years ended 30th June, 1964 to 30th June, 1968 should be withdrawn and that the original assessment for the year ended 30th June, 1969 should be amended to delete the additional dividends against the inclusion of which objection has been taken. As there have been no omissions of income all additional taxes imposed on this account must be remitted.
Claim allowed
This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.