Macmine Pty. Limited v. Federal Commissioner of Taxation.Judges:
Supreme Court of New South Wales
Sheppard J.: These are three appeals by the appellant (hereinafter called ``the company'') against the inclusion by the Commissioner of Taxation in its assessable income for the years of income ending 30th June, 1968, 1969 and 1970, of profits or gains made by it on the sale of shares or rights to acquire shares in other companies. The shares and rights to acquire them were held by the company in three companies namely, Mineral Securities Australia Limited (hereinafter called ``Minsec''), Petrol Securities Australia Limited (hereinafter called ``Petsec'') and Pexa Oil N.L. (hereinafter called ``Pexa''). The transactions which led to the profits or gains were as follows:
Year ending 30th June, 1968
- Sale of 333 rights to acquire ordinary shares in Minsec.
- Sale of 900 rights to acquire ordinary shares in Petsec.
- Sale of 1,800 ordinary shares in Petsec.
- These transactions resulted in a surplus of $5,989.
Year ending 30th June, 1969
- Sale of 37,000 ordinary shares in Minsec.
- Sale of 42,000 rights to take up cumulative redeemable preference shares in Minsec.
- Sale of 29,100 contributing shares in Pexa.
- These transactions resulted in a surplus of $244,616.
Year ending 30th June, 1970
- Sales of rights to take up preference shares in Minsec.
- These transactions resulted in a surplus of $11,498.
The amounts of $5,989, $244,616 and $11,498 were included by the Commissioner as assessable income of the company for the tax years mentioned. To this end the Commissioner has relied upon the provisions of sec. 25(1) and both limbs of sec. 26(a) of the Income Tax Assessment Act 1936 as amended (hereinafter called ``the Act''). The provisions are relied upon in the alternative, but the Commissioner submits that the amounts are properly included in the assessable income of the company under each of the provisions relied upon. It will be seen that in relation to sec. 25(1) and the second limb of sec. 26(a) he does not put his case in any different way. Precisely the same facts are relied upon in relation to each provision.
There is no issue between the parties that the shares and rights above referred to were sold, and that the transactions of sale did result in the surpluses above stated.
The objective facts in relation to the acquisition of the shares and rights, and their sale, are deposed to in an affidavit sworn by Mr. J.K. Barriskill who is a senior investigation officer in the office of the Commissioner. Mr. Barriskill's evidence is not challenged by the company and I accept it.
The company was incorporated on 4th November, 1964. At all material times its shareholders and directors were Mr. McMahon and his wife. Another company, Kenneth McMahon & Partners Pty. Limited became a subsidiary of it. I shall say more of that company in a moment.
Minsec was incorporated on 4th May, 1965. It was not at first listed on any stock exchange, but became so listed on the Sydney and Melbourne exchanges in January, 1967 when it offered 110,000 ordinary shares for public subscription at a premium of twenty-five cents per share.
Shortly after its incorporation it granted to Kenneth McMahon & Partners Pty. Limited or its nominees or assigns the rights to take up for cash at par ordinary shares in Minsec to the extent of fifteen per cent of its issued capital. The option was to be exercisable from time to time within five years from 10th May, 1965, but any shares taken up pursuant to the exercise of the option so granted were not to be sold for a period of twelve months from the date of allotment. Kenneth McMahon & Partners Pty. Limited exercised its rights under the option agreement as to 150,000 of the maximum number of 250,000 to which it was entitled. Seventy-five thousand of these rights were assigned to the company in August 1965.
On 5th August, 1965, the company purchased 6,000 ordinary shares at par (one dollar per share). In December, 1966, Minsec made an issue of one ordinary share for every two ordinary shares held. In that month the company sold 5,000 of the 6,000 shares which it had purchased and the entirety of the 3,000 rights to which it became entitled as a result of the one for two issue. It was thus left holding 1,000 ordinary shares.
On 10th August, 1967, there was a further issue of one share for every three shares held. The company thus became entitled to 333 rights all of which were sold in September, 1967. These are the rights in Minsec, the surplus from the sale of which, the Commissioner seeks to include in the company's assessable income for the year ending 30th June, 1968.
In March 1968 the company exercised its right pursuant to the option agreement to acquire 42,000 shares in Minsec. At that time Minsec had been listed on the Sydney and Melbourne stock exchanges for a little more than a year. The shares so acquired could not, pursuant to the option agreement, be sold for a period of twelve months from March 1968. On 23rd August, 1968, the company exercised its right to acquire a further 15,000 ordinary shares in Minsec and in March 1969 exercised its right to acquire the balance of its entitlement - 75,000 shares - by taking up a further 18,000 shares. By March 1969 it thus held 76,000 ordinary shares in Minsec, taking into account the 1,000 ordinary shares which it retained after selling 5,000 of its orginal purchase of 6,000 shares.
As a result of its acquisition of the 42,000 shares in March 1968, pursuant to the exercise of its options, and its existing holding of 1,000 shares, the company became entitled, in May
ATC 43541968, to rights to acquire 43,000 redeemable preference shares in Minsec. 42,000 of those rights were sold in August 1968 for $41,236. That sum is included by the Commissioner in the company's assessable income for the year ending 30th June, 1969. No sum was set off against this amount for the cost of acquisition. In my opinion, if the proceeds of sale were assessable income, that course was correct. In May 1969 the company sold 37,000 of its 76,000 shares in Minsec. 20,000 were sold on the Stock Exchange for $126,021 and the remaining 17,000 were sold to Kenneth McMahon & Partners Pty. Limited for $100,000. On the basis that the cost of acquisition was one dollar per share, the Commissioner seeks to include in the company's assessable income for the year ended 30th June, 1969, the sum of $189,021 being the difference between $226,021 and $37,000.
In July and December 1969 Minsec made issues of preference shares on a one for four and one for two basis respectively. The company became entitled to take up preference shares as a result of these issues. In respect of the July issue its entitlement was 13,700 preference shares. The rights to these were sold and resulted in a net gain, according to Mr. Barriskill, of $1,498. After the December issue, rights to 10,000 preference shares were disposed of by private sale to a company, Amad N.L., for $10,000. The two sales were effected in the income tax year ending 30th June, 1970, and the Commissioner claims that the two sums ought properly to be included in the company's assessable income. They make up the total of $11,498 earlier referred to.
Trading in Minsec shares was suspended by the stock exchanges on 1st February, 1971. There had been a bonus issue of ordinary shares in February, 1970. When trading in the shares was suspended the company held 78,170 ordinary shares and 68,170 preference shares in Minsec.
Mr. McMahon had at all material times been the Chairman of Directors of Minsec.
Petsec was incorporated on 7th December, 1967. It was sponsored by Minsec. In December, 1967 Petsec made a par issue of 1,500,000 shares of fifty cents each, of which 765,000 were taken up by Minsec, 600,000 were reserved for subscription by shareholders of Minsec, of which the company was one, and 135,000 were offered for public subscription. The company took up 1,000 of the shares in its capacity as a shareholder of Minsec. It acquired a further 800 shares at par in February 1968. The company's holding in Petsec was then 1,800 shares. In May 1968 Petsec made a one for two issue of ordinary shares. The company thus had the right to take up an additional 900 shares. It did not exercise this right. Instead, in June 1968, it sold the rights and also the 1,800 shares. The surplus resulting from these sales is included by the Commissioner in the company's assessable income for the year ended 30th June, 1968.
Pexa was incorporated on 19th June, 1968. It was sponsored by Minsec and Petsec. In or about October 1968 the company was allotted 29,100 contributing shares of fifty cents each paid to twenty cents at a total cost of $5,820. The shares were all sold by the company in February 1969 for $20,179. The surplus of $14,359 is amongst the amounts included by the Commissioner in the company's assessment of income tax for the year ended 30th June, 1969.
Mr. McMahon gave evidence. He said that he was a geologist. At the end of 1950 he graduated from the University of Sydney in science, majoring in geology. Until 1955 he had mining experience in Australia, Canada and the United States of America. About the end of that year he returned to Australia and commenced work with Commonwealth Mining Investments Limited. He worked for that company in its New England antimony mines at Guyra, ultimately becoming manager of the mine. He then came to Sydney and had executive positions with Commonwealth Mining Investments Limited until it was taken over by Consolidated Gold Fields Limited.
In 1962 Mr. McMahon, together with a Mr. K. Craig and a Mr. R. Hare, set up in business as mining consultants under the name of Kenneth McMahon & Partners. The partnership was incorporated on 21st March, 1962, the company formed being known as Kenneth McMahon & Partners Pty. Limited. Messrs. Craig and Hare were ``sleeping partners''. Shortly after the incorporation of the company Mr. McMahon exercised a right to acquire shares owned by Messrs. Craig and Hare. The effect of this acquisition was that he became the owner of one-third of the issued shares in the company. Messrs. Craig and Hare were each left with one-third of the issued shares therein. A little later Mr.
ATC 4355McMahon purchased Mr. Hare's one-third interest for approximately $7,000.
The shares to which Mr. McMahon was entitled in Kenneth McMahon & Partners Pty. Limited were acquired, upon its incorporation by the company. Since the company owned two-thirds of the issued shares therein, Kenneth McMahon & Partners Pty. Limited was a subsidiary of the company. Mr. Craig died in 1965. Agreement was reached with his executors pursuant to which the company would purchase his shares in Kenneth McMahon & Partners Pty. Limited. The agreement was not completed until 1971. Notwithstanding that fact it would appear that after 1965 the company treated Kenneth McMahon & Partners Pty. Limited as a wholly owned subsidiary.
Kenneth McMahon & Partners Pty. Limited operated in Australia before and during the mining boom with apparent success. It also operated in Malaysia, Thailand, the Philippines, Singapore and Indonesia. According to Mr. McMahon its overseas operations were not successful.
In the middle of 1969 Mr. McMahon decided to ``re-structure McMahon & Partners Pty. Limited to some extent''. He appointed nine persons ``profit-sharing partners''. This did not mean that the persons referred to became shareholders. Kenneth McMahon & Partners Pty. Limited remained, in the words of Mr. McMahon, ``wholly-owned by Macmine Pty. Limited''. The basis of the arrangement was that that company was to be entitled to one-third of the distributable profits of Kenneth McMahon & Partners Pty. Limited, whilst the other two-thirds would be distributed amongst the ten partners (including Mr. McMahon) equally regardless of seniority. At the same time he placed all partners, including himself, on equal salaries. Profits that were shared included dividends from Minsec as well as consulting and management fees earned.
Mr. McMahon said that it was Kenneth McMahon & Partners Pty. Limited which sponsored the formation of Minsec. He said that the option given it to acquire at par over a five year period 250,000 shares in Minsec was given in return for setting up Minsec. He described the option as ``an inducement''. He also said that it was originally intended that Minsec was to be a non-listed public company for up to five years ``until we had established good results, but when taxation authorities decided it was a private company for taxation purposes it was then decided to seek listing''.
Minsec was managed by the partnership at cost with no written agreement until the question of listing arose. The underwriters then insisted upon a formal management agreement. There were changes in the provisions of this agreement, it ultimately providing for a fee of $50,000 per annum in addition to the actual cost of management.
According to Mr. McMahon, Minsec commenced as a share trader. In November 1965 a wholly-owned subsidiary, Minsec Investments Pty. Limited was formed for the purpose of holding those shares which were to be held as a long term investment. It was not the role of the investment company to trade in shares, and, according to him, it did not do so.
Progressively Minsec acquired control of seven mining operations mining eight different minerals. It controlled the production of over twenty per cent of the world's rutile. Through its subsidiary it became the second largest producer of tin and wolfram in Australia.
Mr. McMahon said that this concentration on shares in controlled mining operations seriously depleted the group's long-term portfolio of ``blue chip'' shares ``where Mineral Securities sought neither control nor a position''. He said that the directors regarded the Minsec group as an important contribution to the idea of Australian control of its own mineral resources. According to him it was this philosophy which led the company to invest heavily in Robe River Limited. In 1970 Minsec acquired approximately forty per cent of the shares in Robe River Limited by contributing a sum of the order of $20,000,000.
A perusal of the balance sheets of the company reveals that at all material times its only fixed asset was a house and furniture at 38 Seaforth Crescent, Seaforth. This was the home in which Mr. and Mrs. McMahon resided. The house was subject to a mortgage of $45,000. The shares which were held by the company from time to time were shown in the balance sheet under the heading ``Investments''.
I have already referred to the transactions pursuant to which the company acquired shares and rights. There were no other
ATC 4356acquisitions of shares or rights to take up shares either in Minsec companies or in others.
As earlier mentioned the Commissioner relies, inter alia, upon the provisions of sec. 25(1) of the Act. Insofar as it is relevant that section provides as follows:
``The assessable income of a taxpayer shall include: -
- (a) Where the taxpayer is a resident - the gross income derived directly or indirectly from all sources whether in or out of Australia;...''
In written submissions lodged with my associate after the hearing had concluded counsel for the Commissioner enumerated a number of facts and circumstances which were relied upon by the Commissioner to indicate that the gains in question were ``made in an operation of business in carrying out a scheme of profit making''. It was submitted that if they were the case would be within sec. 25(1) of the Act. The words which are within the inverted commas come from the judgment of the Lord Justice-Clerk in
Californian Copper Syndicate Limited v. Harris (1904) 5 T.C. 159 at pp. 165-6. The learned judge there said:
``It is quite a well settled principle, in dealing with questions of assessment of income tax, that where the owner of an ordinary investment chooses to realise it, and obtains a greater price for it than he originally acquired it at, the enhanced price is not a profit... assessable to tax. But it is equally well established that enhanced values obtained from realisation or conversion of securities may be so assessable where what is done is not merely a realisation or change of investment, but an act done in what is truly a carrying on or carrying out of a business... What is the line which separates the two classes of cases may be difficult to define and each case must be considered according to its facts; the question to be determined being - is the sum of gain that has been made a mere enhancement of value by realising a security or is it a gain made in an operation of business in carrying out a scheme of profit-making?''
In his written submissions counsel for the Commissioner said that the same facts and circumstances were relied upon to establish that the gains were the result of a profit-making scheme within sec. 26(a) of the Act. I shall come to the facts and circumstances which are relied upon and to the second limb of sec. 26(a) of the Act in a moment. Before I do I indicate that I have reached the firm conclusion that this case is not within sec. 25(1) of the Act. For it to be within that section the company would need to be a share trader. It would need to be shown in the evidence that it was carrying on the business of making profits from the buying and selling of shares. In my opinion that is not what the evidence reveals. The Commissioner's case based upon sec. 25(1) of the Act is therefore rejected.
To support his case based upon the second limb of sec. 26(a) counsel for the Commissioner has relied upon a large number of facts and circumstances specified in some twenty-nine paragraphs of seven pages of written submissions. To a number of the facts and circumstances relied upon I have already referred. I need to refer to some others. I do not find it necessary to refer to them all.
Leaving aside the 1,000 shares in Minsec left over after the sale of the original 6,000 shares acquired by purchase in August 1965, the company acquired its first substantial parcel of 42,000 ordinary shares in Minsec when it exercised its rights pursuant to the option agreement in March 1968. The shares so acquired could not themselves be sold for a period of twelve months after their acquisition. But if further issues of shares were made and the entitlement to take them up was based upon the extent of existing shareholdings, the shares subject to the twelve months embargo would be taken into account for that purpose.
The resolution to make the issue of cumulative preference shares in Minsec was passed on 8th May, 1968, six weeks after the ordinary shares were taken up. On 13th March, 1968 Mr. McMahon had seen a Mr. Gahan who was a deputy manager at the Sydney office of the Bank of New South Wales, which was the company's banker. Mr. Gahan refreshed his memory from a diary entry. He had no independent recollection of the conversation. I accept his evidence. He said that Mr. McMahon asked him whether the bank would lend the company $50,000 for three months. He told him the purpose of the advance was ``to take up options in Mineral Securities Limited which had accrued to Mr.
ATC 4357McMahon''. He said that the options had to be exercised by 29th March, 1968 and that the shares which would be acquired as a result of the exercise of the options had a restriction ``in that they were not listable on the stock exchange for another twelve months from the time of taking them up''. Mr. McMahon told Mr. Gahan that the overdraft would be cleared in three months ``from dividends and or sale of shares as may be needed''.
Although the resolution that the preference shares be issued was passed on 8th May, 1968, it would appear from Mr. Barriskill's evidence that the rights to take up the shares did not become available until August 1968. They were sold almost immediately. Undoubtedly the proceeds of the sale put the company in funds to pay off a substantial portion of the overdraft which the bank had made available to enable the company to acquire the 42,000 ordinary shares in March 1968. Furthermore, I think, as counsel for the Commissioner submitted was the position, the inference is plain that Mr. McMahon knew when he saw Mr. Gahan on 13th March, 1968, and also when the 42,000 ordinary shares were taken up at the end of that month, that some step would be taken, probably the actual step of issuing preference shares, to issue further shares the rights to which could be sold for the purpose of generating money to pay off the overdraft. It is true that Mr. Gahan says that the overdraft would be cleared by dividends or sales. But I think it unreal not to take the view, bearing in mind Mr. McMahon's position in the Minsec group, that he did know fairly precisely what was proposed. It should, therefore, be inferred that he had, on behalf of the company, conceived a plan whereby it would take up 42,000 of the 75,000 shares in Minsec to which it was entitled under the option agreement, and pay for them within a short time out of the proceeds of the sales of rights to acquire further shares which would accrue shortly afterwards when Minsec decided to issue preference shares.
That is not, however, the profit-making scheme which is primarily relied upon by the Commissioner. What the Commissioner's case really comes down to is this. Mr. McMahon, as Chairman of Directors of Minsec, Petsec and Pexa and the principal partner in Kenneth McMahon Pty. Limited, was in control himself of a vast enterprise. That enterprise had interests in many mining ventures some of which it controlled. Additionally, through Kenneth McMahon & Partners Pty. Limited, it acted as a consultant to leading firms of stockbrokers on matters relating to the mining industry. The enterprise was operated in the context of a buoyant and ever rising share market. Mr. McMahon, in the interests of the taxpayer company, was able to act on its behalf to the maximum advantage, foreseeing the right time to acquire shares and, as necessary, to sell them. Relied upon by the Commissioner also was the fact that each of the companies, Minsec, Petsec and Pexa was itself a share trader. For reasons which are not clear to me it was said that this was an indication that the company also was a share trader. Thus, upon the basis of all that was relied upon by the Commissioner, there is said to have been in existence during each of the tax years in question a profit-making scheme pursuant to which all the shares and rights in question were acquired with a view to their ultimate realisation at a profit.
Before coming to a conclusion about whether or not I accept the Commissioner's case I should say something about Mr. McMahon as a witness. The evidence given by him to which I have already referred is not in contention and I accept it. But counsel for the Commissioner made many criticisms of other evidence given by him in relation to the transactions in question and the reasons for venturing into them. Much of this criticism is well justified. In respect of at least three matters of substantial importance Mr. McMahon's recollection was demonstrated to be plainly wrong. I cannot therefore regard his evidence as reliable. In saying this I do not wish to be thought to have formed the view that his evidence was dishonest. I had the distinct impression that he had not troubled to prepare himself adequately for the witness box. Some of the matters upon which his evidence was unsatisfactory were incorrect upon the basis of the objective facts stated in Mr. Barriskill's affidavit which was available to Mr. McMahon before he gave evidence. A dishonest person, endowed with Mr. McMahon's intellect and knowledge of business and mining affairs, would not have made errors of that kind. Furthermore, I was impressed by Mr. McMahon's demeanour. I am conscious that a clever liar, when found out, may seek to avoid the impression that he
ATC 4358is dishonest by the blandness of his acceptance of the material with which he is confronted. I have taken that matter into account in making my assessment of Mr. McMahon as a witness. But the fact is that he did accept what was put to him as being correct and as vitiating what he himself had said. He did not attempt to offer any alternative explanation for the serious errors in his evidence. His attitude, to my mind, was one of resignation - almost indifference. It seemed as if the case was not of substantial importance to him and that he had more important matters on his mind. As I have said his evidence appeared to be that of a person who had not prepared himself adequately for the witness box. I should add that the fact that he was not so prepared would not appear to me to be a matter for which his legal advisers should bear any criticism.
But the fact that Mr. McMahon's evidence is unreliable makes it impossible for me to place reliance upon it in certain important respects. In particular it is not possible to accept the general tenor of his evidence that there was no plan nor scheme of the kind contended for by the Commissioner.
The Commissioner's approach, on the basis that that would be my view of the evidence, was to submit that, by reason of the provisions of sec. 190(b) of the Act, the onus was upon the company to show that the assessments in question were excessive, and that my rejection of Mr. McMahon's evidence must lead to a finding in the Commissioner's favour because the onus resting upon the company had not been discharged.
Gauci v. F.C. of T. 75 ATC 4257 the Court was concerned with the first, and not the second, limb of sec. 26(a) of the Act. But what was there said by Barwick C.J., seems to me to have at least equal relevance here. His Honour, with the agreement of Jacobs J., said at p. 4260:
``Thus, in the present case, assuming that the appellants had offered no evidence at all, there would, in my opinion, have been no basis for an assessment of any part of the compensation paid for the resumption of the land as income of the appellants by reason of the provisions of sec. 26(a). There is no presumption that property is acquired for re-sale at a profit. No doubt sec. 190 of the Act requires the appellant to show that the assessment is excessive. But the relevant facts being known, if there is no material upon which it may properly be concluded that the property was acquired with the relevant purpose, the assessment is thereby shown to be excessive. As I have said, there is no presumption of purpose to aid the assessment. In particular sec. 190 does not raise any such presumption.''
At p. 4262 Jacobs J. said:
``I agree that the appeals should be allowed. I agree with Barwick C.J. that sec. 190 did not assist the Commissioner in the particular circumstances of this case. All the facts were known except the state of mind of the appellants when they purchased the respective lands. They also denied having the requisite intention and even if this was not accepted before sec. 190 could operate there must have been something in the evidence from which an inference could have been drawn of an intention on their part to re-sell at a profit. As the disposition of the lands was compulsory, the commonly found evidence by inference from an actual re-sale was lacking.''
Mason J. dissented.
So far as I am aware what was said by the majority of the High Court in Gauci is the most recent pronouncement of that court in relation to the onus of proof borne by a taxpayer when assessed in respect of a gain pursuant to the provisions of sec. 26(a) of the Act. The Commissioner made a lengthy submission that I should not follow it. This submission was based upon a consideration of a large number of judicial dicta contained in earlier decisions of the High Court which, so it was submitted, were to a different effect from that arrived at in Gauci. I was, in effect, asked to resolve what was said to be a conflict of view between a number of judges of the High Court. It was said that, along with the other dicta relied upon, what had been said in the dissenting judgment of Mason J. was properly to be taken into account.
In my opinion the submission so made by the Commissioner fails at the outset. It seems to me that I should adopt the view that I am bound by the most recent pronouncement of the High Court. The matters relied upon by the Commissioner may be available to him if he were to seek to persuade a full court of the
ATC 4359High Court to change the view which has been expressed. But they have no place before me. Accordingly I propose to approach the resolution of this problem by endeavouring to apply the views which have been expressed by Barwick C.J. and Jacobs J. in Gauci.
Of course, dealing as they were with the first limb of sec. 26(a), they were concerned with intention; I am concerned with whether there was a profit-making undertaking or scheme. The determination of the existence or non-existence of an intention will usually involve a more subjective enquiry than will be involved in the determination of whether there was or was not a profit-making scheme. The enquiry I have to make is accordingly a more objective one. Such distinction as there is between the two situations, however, does not assist the Commissioner. If anything the approach of the court in Gauci is of more assistance to the taxpayer in this case than it was in that one. There is no presumption in favour of the existence of a scheme, any more than there is a presumption that a taxpayer acquired property with a particular intention. In this connection I consider it relevant to have regard to what was said by Gibbs J. in
Steinberg v. F.C. of T. 75 ATC 4221 at pp. 4231-2 where his Honour said:
``The question that then arises, however, is whether it was right to conclude, as his Honour did, that the shares in the company were bought to enable the purchasers to acquire the land for the main or dominant purpose of profit-making by sale. The fact that a witness is disbelieved does not prove the opposite of what he asserted:
Scott Fell v. Lloyd 13 C.L.R. 230 at p. 241;
Hobbs v. Tinling (C.T.) and Co. Ltd., (1929) 2 K.B. 1 at p. 21. It has sometimes been said that where the story of a witness is disbelieved, the result is simply that there is no evidence on the subject (
Jack v. Smail 2 C.L.R. 684 at p. 698;
Malzy v. Eichholz (1916) 2 K.B. 308 at p. 321;
ex parte Bear; re Jones 46 S.R. (N.S.W.) 126 at p. 128), but although this is no doubt true in many cases it is not correct as a universal proposition. There may be circumstances in which an inference can be drawn from the fact that the witness has told a false story, for example, that the truth would be harmful to him; and it is no doubt for this reason that false statements by an accused person may sometimes be regarded as corroboration of other evidence given in a criminal case:
Eade v. The King, 34 C.L.R. 154 at p. 158;
Tripoli v. The queen 104 C.L.R. 1. Moreover, if the truth must lie between two alternative states of facts, disbelief in evidence that one of the state of facts exists may support the existence of the alternative state of facts:
Lee v. Russell (1961) W.A.R. 103 at p. 109. In the present case, Morris Steinberg had, between 1956 and 1969, been a member of no less than thirteen syndicates which had been formed for the purpose of acquiring land and re-selling it at a profit. The Wanneroo land, when purchased, was not put to any use; it is true that the owners were virtually compelled to sell some of it quite soon after it was acquired, but over three hundred acres were, at the date of trial, still retained, and no suggestion was made of any intention to use them for any purpose except letting as ten-acre lots. In these circumstances, the fact that Morris Steinberg told a false story as to the purpose for which the land was intended to be used assisted the conclusion, to which the other evidence pointed, that the true purpose of acquiring it - a purpose which Morris Steinberg did not wish to reveal because it would harm his case - was to resell it at a profit. The conclusion which Mason J. reached on this issue was, in my opinion, correct.''
The present case is quite different from Steinberg. I have concluded that, although Mr. McMahon's evidence is unreliable, it was not deliberately false. In those circumstances it does not seem at all appropriate to treat my rejection of his evidence as tending to establish the positive existence of the scheme contended for by the Commissioner.
I think the question I must ask myself is whether, upon the basis of the whole of the evidence, there is to be found the indicia of the profit-making scheme submitted by the Commissioner to have existed. I recognise that it is not an essential element of a profit-making scheme that every step which culminates in the making of a profit should be planned or foreseen before the scheme is put into operation and that schemes may be vague as well as precise; Steinberg at p. 4234. No doubt Mr. McMahon, by reason of his position as Chairman of Minsec, Petsec and Pexa and his leading role in the work done by Kenneth McMahon & Partners Pty. Limited,
ATC 4360was able, if he chose, to contrive and carry out a scheme by which shares in the three listed companies could be acquired by the company and sold to advantage. But I do not find that that is what the objective facts disclose. Apart from the sale in May, 1969 of the 37,000 shares in Minsec for a total sum of $226,021 and the sale in August 1968 of 42,000 rights to take up redeemable preference shares in Minsec for $41,236 the transactions are not, comparatively speaking, ones which involved either substantial sums or substantial numbers of shares. The transactions are, when looked at in the context of the period 1965 to 1971, when trading in shares in Minsec on the stock exchanges was suspended, isolated. There is not to be discerned from what occurred that concerted course of conduct which would readily suggest that some preconceived plan or scheme was being carried into effect. I think the evidence reveals a rather haphazard course in which options to acquire shares were taken, assigned and ultimately exercised. Shares and rights were acquired. Some were sold. Many were retained. The evidence does not suggest, subject to what I have earlier said about the March-August 1968 period, that such sales as took place were pursuant to some design which had been formulated either as early as 1965 or at some later point of time closer to the exercise of the options and the subsequent sale of shares. It is true that the retention of a large number of shares, particularly in Minsec, may be explained upon the basis that Minsec's downfall and the subsequent suspension of its shares from trading on the stock exchanges was not foreseen. But that is speculation and no more. Finally I should say that I cannot regard the fact that Minsec, Petsec and Pexa were share traders as any indication also that the company was a share trader.
My conclusion therefore is that the second limb of sec. 26(a) of the Act is not available to the Commissioner as a basis for supporting his inclusion of each of the surpluses in question in the company's assessable income for the relevant tax years.
But although I have thus rejected the Commissioner's primary case based upon the second limb of sec. 26(a) of the Act I should consider whether there is not established the existence of a profit-making scheme pursuant to which the 42,000 ordinary shares in Minsec were acquired in March 1968. I have already expressed the view that it should be inferred that before that acquisition Mr. McMahon had, on the company's behalf, formed the intention to pay for the shares out of the proceeds to arise upon the sale of rights to acquire further shares which he knew the company would issue soon after the acquisition. Such a scheme would be much more confined and involve only a fraction of the ramifications which are involved in that primarily contended for by the Commissioner. My findings lead to the conclusion that there was in fact a scheme whereby the 42,000 ordinary shares were to be paid for out of the sales of rights to acquire new shares which would be issued by the company a few weeks later. But the question is whether that scheme is a profit-making undertaking or scheme within the second limb of sec. 26(a). In Steinberg (p. 4234) Gibbs J. said:
``A profit-making scheme within sec. 26(a) is a plan, design or programme of action devised and put into effect for the purpose of making a profit. It must be a scheme carried out by the taxpayer himself or on his behalf. It appears that it should - at least where the transaction is one of acquisition and re-sale - exhibit features which give it the character of a business deal. The mere realisation of a capital asset, albeit in an enterprising way, would not amount to the carrying out of a profit-making scheme.''
``The undertaking or scheme, if it is to fall within sec. 26(a), must be a scheme producing assessable income, not a capital gain. What criterion is to be applied to determine whether a single transaction produces assessable income rather than a capital accretion? It seems to their Lordships that an `undertaking or scheme' to produce this result must - at any rate where the transaction is one of acquisition and re-sale - exhibit features which give it the character of a business deal. It is true that the word `business' does not appear in the section; but given the premise that the profit produced has to be income in its
ATC 4361character their Lordships think the notion of business is implicit in the words `undertaking or scheme'.''
A.L. Hamblin Equipment Pty. Limited v. F.C. of T. 74 ATC 4310 at p. 4314.
In my opinion the circumstances surrounding the acquisition of the shares in March 1968 do disclose that the scheme did have the character of a business deal. In reaching that conclusion I have kept in mind the fact that the company was in truth a family company and that, if that fact alone were considered, there might be room for the view that the transaction reflected no more than enterprise on the company's part. But I have to take into account also the fact that the 42,000 ordinary shares, which were to be taken up and paid for out of the sales of rights to the preference shares later to be issued, were themselves acquired by the exercise of rights conferred upon the promoters of Minsec, in Mr. McMahon's words, as ``an inducement''. What was done by Mr. McMahon on behalf of the company in utilising the new shares in the way that he did was a step in turning that inducement to account.
Accordingly I find that there was a profit-making scheme pursuant to which the initial parcel of 42,000 shares in Minsec were acquired and paid for out of the proceeds of the sale of rights to acquire preference shares. In the result therefore the Commissioner's assessment for the year ending 30th June, 1969 properly included the sum of $41,236 which was the amount received by the company in August 1968 when the rights were sold. It may be that it follows that the surplus arising upon the sale of the 37,000 shares in Minsec in May 1969 should also be regarded as a consequence of the same profit-making scheme. I do not need to decide this question because, as will shortly be seen, I take the view that the surplus so arising is properly part of the company's assessable income for the year ending 30th June, 1969 by reason of the operation of the first limb of sec. 26(a) of the Act.
I turn next to consider the Commissioner's case based upon that provision.
I should first dispose of surpluses or gains resulting from the sale of rights to acquire shares. Since this matter was argued Rath J. has delivered judgment in
F.C. of T. v. Miranda 76 ATC 4180. His Honour held that rights to take up new shares to which a shareholder became entitled as a result of an existing holding of shares were not acquired by him for the purpose of profit-making by sale, notwithstanding the fact that the shares which he held, and which gave rise to his entitlement, were themselves acquired for that purpose. That submission was made to me by counsel for the company. It was not, however, fully developed, nor was the submission of counsel for the Commissioner in opposition to it. The reason for that course was that it was known that the question had been fully argued before Rath J. in Miranda. Having read his Honour's judgment, I have reached the conclusion that I should follow it. I do so especially because of the desirability of certainty in the law and because of the absence of a full argument before me on the point. That being my view, it follows that the surpluses upon the sale of all rights to take up new shares, except that arising upon the sale of the 42,000 preference shares in Minsec, should be excluded from the company's assessable income. The transactions in question are:
Year ending 30th June, 1968.
- Sale of 333 rights to acquire ordinary shares in Minsec.
- Sale of 900 rights to acquire ordinary shares in Petsec.
Year ending 30th June, 1970.
- Sales of rights to take up 23,700 preference shares in Minsec.
Of the remaining transactions the most substantial is the sale during the year ended 30th June, 1969 of 37,000 shares in Minsec. The sale took place in May, 1969. I go to that transaction first. An essential question to be determined is the date when the shares were acquired. At the time of the sale the company's holding was 76,000 shares, 1,000 of which had been acquired by purchase in August 1965. The balance were acquired by the exercise of options in March and August 1968 and in March 1969. The shares so acquired could not, by reason of the provisions of the option agreement, be sold for a period of twelve months after the date of the exercise of the options. It must follow that the 37,000 shares which were sold in May 1969 came from those acquired in March 1968. The 33,000 acquired in August 1968 and March 1969 had not been held for twelve months at the time of the sale.
ATC 4362In reaching this conclusion I have left out of account the 1,000 shares remaining of the 6,000 purchased in August, 1965. No evidence was led on behalf of the company to suggest that those shares were included amongst the 37,000 shares sold in May 1969.
The rights or options to acquire the 75,000 shares, of which the 42,000 acquired in March 1968, were part, were acquired in May 1965. Is that to be regarded as the date when the shares themselves were acquired? It may be thought that support for the view that it is to be found in the judgment of Gibbs J. in
Laybutt v. Amoco Australia Pty. Limited, 132 C.L.R. 57. Gibbs J. was the only member of the court who dealt with the matter in question. He expressed the view, after considering a number of divergent judicial dicta, that an option is a contract to sell property upon condition that the grantee gives the notice and does the other things stipulated in the option (p. 76). It would not seem that his view was limited to cases where the property in question was land or otherwise of a kind which would, in the event of there being a breach of contract in relation to it, attract the court's jurisdiction to order specific performance. That conclusion arises from his Honour's treatment of the decision of the House of Lords in
Helby v. Matthews (1895) A.C. 471 which concerned what was regarded as an option to purchase a piano (p. 474). In any event at the time that the options were granted and assigned - May 1965 - Minsec was not listed on any stock exchange. I say at once that if the relevant date were May 1965, I would reject the Commissioner's case. In expressing that view I have taken into account my assessment of Mr. McMahon's evidence. That having been done, there does not appear to me to be disclosed by the whole of the evidence a dominant purpose on the part of the company of profit-making by sale in its 1965 acquisition.
But I consider that the judgment of Gibbs J. was directed to a different situation from that with which I am here concerned. I do not understand him to say that a person who exercises an option does not, whatever the nature of that option may be, acquire property upon its exercise. I am therefore of opinion that the material date to which I should have regard for the purpose of determining whether or not the company acquired the shares with the dominant purpose of profit-making by sale is March 1968 when the relevant options were exercised. That is when the shares which were sold some fourteen months later were acquired. The exercise of the options in March 1968 involved the company in making a conscious decision to take up the shares. Was the principal intention of the company in taking them up profit-making by sale of those shares? In reaching the conclusion that this is the proper way to approach the matter I have obtained assistance from the judgment of Kitto J. in
Executor, Trustee and Agency Company of South Australia Limited v. F.C. of T. (Bristowe's case) (1962) 12 A.T.D. 520. That case has many similarities to the present.
In Gauci in a paragraph immediately following that already set out above Barwick C.J. said (p. 4260):
``If, on the other hand, the acquired property is re-sold within what may fairly be described as a time proximate to its acquisition, the requisite purpose may be inferred. Thereafter, the taxpayer must overcome the prima facie inference there drawn. Unless he does so, sec. 190 will require the confirmation of the assessment.''
In my opinion the sale of the shares, bearing in mind the twelve months embargo against their sale after acquisition, bore such proximity to their acquisition that it ought to be inferred that Mr. McMahon's dominant purpose in acquiring the shares on behalf of the company was profit-making by sale. In reaching this conclusion I have taken into account the fact that Mr. McMahon in his evidence suggested that decisions of importance in relation to the acquisition of rights and shares were made by a Mr. Swift and a Mr. Dickins. Neither of those gentleman was called. If, as was suggested in Mr. McMahon's evidence, they could shed light upon what the purposes of the company were in acquiring any of the securities in question one can only take the view, in the absence of evidence from them, that their evidence would not have been of assistance to the company.
One matter that has caused me some anxiety in reaching my conclusion is the fact that 17,000 of the 37,000 shares in question were sold to Kenneth McMahon & Partners Pty. Limited, a subsidiary of the company. In Mr. McMahon's view it was, at the relevant time, a wholly-owned subsidiary because the
ATC 4363acquisition of Mr. Craig's shares was only a formality. No special submission was made about this matter by counsel for the company. It has occurred to me that the transaction may have involved no more than a transfer of shares from the parent to the subsidiary and a transfer of cash or a liability from the subsidiary to the parent. On this basis I have asked myself whether it is appropriate to say that transaction resulted in any gain or surplus in favour of the company. On reflection I suppose the answer to that question is that the shares were acquired in March 1968 at one figure and sold in May 1969 at another, albeit to a subsidiary, and that the fact that the purchaser was a subsidiary is irrelevant provided there was a gain or surplus and the dominant purpose in acquiring the shares was profit-making by sale.
There remains a further problem. In Bristowe's case Kitto J. thought that the Commissioner's assessments in treating profits arising from the sales of some of the shares in question as assessable income were correct in principle but were excessive ``to the extent that they failed to recognise as part of the cost of acquisition of those shares the value of Bristowe's rights in respect of the new issues as at the respective dates of exercise'' (p. 527). I see no distinction between Bristowe's case and the present. Whilst therefore the gain or surplus upon the sale of the 37,000 shares in Minsec in May 1969 should be treated as assessable income the company is entitled to have taken into account the value of the company's rights to take up the shares at the date of the exercise of the relevant options, namely March 1968.
In relation to the 37,000 shares in Minsec, therefore, I have reached the conclusion that the surplus or gain made upon their sale is assessable income pursuant to the first limb of sec. 26(a) of the Act, but that there must be taken into account as part of the cost of acquisition the value of the company's rights at the time of acquisition, that is March 1968.
It was contended by the Commissioner that the company had not objected to the assessment upon this ground and was, by reason of the provisions of sec. 190(a), precluded from relying upon it. Having considered the terms of the notice of objection I am satisfied that it is wide enough to enable the company to take the point. The Commissioner's submission in this regard is therefore rejected.
It remains to consider the gains made on the sale of 1,800 ordinary shares in Petsec and 29,100 contributing shares in Pexa. The shares in Petsec were acquired in December 1967 and February 1968. They were sold in June 1968. In my opinion the gain so made is properly included, pursuant to the first limb of sec. 26(a) of the Act, in the company's assessable income for the year ended 30th June, 1968.
The shares in Pexa were acquired in October 1968 and sold in February 1969. Again I am of the view that the surplus is properly included in the company's assessable income for the year ended 30th June, 1968.
In summary my conclusions are as follows -
- (1) The Commissioner is not entitled to rely upon the provisions of sec. 25(1).
- (2) The Commissioner is entitled to rely upon the second limb of sec. 26(a) of the Act for the purpose of bringing to tax the surplus made in the income tax year ended 30th June 1969 upon the sale of 42,000 rights to take up preference shares in Minsec.
- (3) The Commissioner is not entitled to rely upon the first limb of sec. 26(a) of the Act for the purpose of bringing the surpluses or gains made upon the sale of any rights to acquire shares to tax.
- (4) He is entitled to rely upon the first limb of that section for the purpose of bringing to tax the gains or surpluses made upon the sale of 1,800 ordinary shares in Petsec in the income tax year ended 30th June 1968 and the sales of 37,000 ordinary shares in Minsec, and 29,100 shares in Pexa in the income tax year ended 30th June 1969, but, as regards the 37,000 shares in Minsec, he must bring to account in the company's favour as part of the cost of the acquisition thereof the value of the company's rights to take up the shares in March 1968, that being the date of acquisition.
I direct counsel for the Commissioner to bring in short minutes of order to give effect to my decision. I stand over the question of costs to be argued upon the return of the short minutes.