Securities & Management (Nominees) Pty. Limited v. Federal Commissioner of Taxation.
Judges:Meares J
Court:
Supreme Court of New South Wales
Meares J: This is an appeal by Securities & Management (Nominees) Pty. Limited as the trustees of the Milstern Pty. Limited Provident Fund from a decision of a Board of Review which unanimously upheld the respondent's disallowance of an objection against an assessment for tax of some $425,000 on profits of $644,750 from the sale in August and October 1970 of shares and options in International Mining Corporation N.L. The actual amount of the assessment is not in dispute.
Since it has been agreed that the evidence before the Board shall not be treated as evidence before me and that the parties would rely only on affidavit and other evidence adduced aliunde, I have not to consider whether or not the Board's decision was correct on the evidence adduced before it but to consider whether the Board's disallowance of the objection should be upheld on the evidence adduced on this appeal.
ATC 4676
By deed of trust dated 28th June, 1962 and entered into between Consolidated Management Limited and Milstern Pty. Limited, the former company was appointed the trustee of a provident fund of which at all relevant times the only member was a Mrs. Millie Phillips. Under the deed the trustee was authorised, inter alia, to invest any moneys available for investment in the fund in the purchase or taking up of shares in any company other than mining shares (cl. 11(a) (iii)). The trustee was a company established by Ure, Lyneham & Company, a firm of accountants. Each of the five partners in this firm had a private family company and these five companies were directors of the trustee, together with three natural persons until 7th April, 1970 and thereafter two natural persons. I was informed by Mr. Lockhart, Q.C. for the appellant, that one of the functions of Consolidated Management Limited was to act as trustee for superannuation funds established by various clients of the various partners in the firm, and that a given partner who acted for a particular client would, through his private family company which he controlled, from a practical point of view, make the decisions that were required to be made by the trustee of the particular fund, although the necessary formal meetings to comply with the provisions of the Companies Act were duly held.
Until September, 1972 Mr. R.M. Stapleton, a member of the firm, fulfilled that role in relation to the provident fund in question. He had, from at least January 1969, acted as the financial adviser to Mrs. Phillips who was a director of and controlled a number of companies known as the Milstern Group of Companies, including Milstern Pty. Limited and Milstern Holdings Pty. Limited, in relation to her personal affairs and the Milstern Group of Companies. The evidence was that, in relation to the provident fund in question, meetings of the trustee were duly held but that draft minutes in respect of them were either prepared before meetings or resolutions agreed to orally thereat without any debate. During the period from the establishment of the fund until 30th June, 1970, contributions had been made to the fund of $17,513 representing $5,772 being contributions made by Milstern Pty. Limited and accumulated income from investments, together with contributions made by Mrs. Phillips of $11,741.
In 1968 Mrs. Phillips became interested in mining and in July of that year caused to be incorporated Milstern Beecroft Pty. Limited, the name of which was subsequently changed to Milstern Explorations Pty. Limited. A partnership entered into by the company with a Mrs. Crutchley for the purpose of exploiting a tin mine at Torrington was found to be unprofitable and Explorations sold its interest in the partnership; but thereafter Mrs. Phillips approached Professor Voisey, the Foundation Dean of Earth Sciences at Macquarie University, for advice, and he subsequently became consultant of Explorations.
Eventually as a result of investigations carried out by Mrs. Phillips or on her behalf by consultants from Macquarie University, which Mrs. Phillips had become acquainted with through her association with Professor Voisey, a certain area was selected for exploration at Trough Wells in Western Australia. This area was an area which had been relinquished by Western Mining Corporation which had held it for some years; and Dr. Sterling Shaw, one of the consultants to Explorations, was of the view that it held promise as a nickel prospect.
In the course of time Explorations applied for mineral claims, inter alia, in respect of this area at Trough Wells together with three other areas in Western Australia at Perilya, Mt. East and Mt. Weld and three areas in Tasmania. Mrs. Phillips, having formed the view that Explorations lacked sufficient funds to carry out a credible exploration programme on these areas, decided to float International Mining Corporation N.L. which was duly incorporated on 3rd November, 1969, and a prospectus was published for an issue of five million shares of ten cents each at par payable one cent per share on application and nine cents per share as pre-payment of a first and final call to be made immediately following allotment and carrying an entitlement to five million negotiable options to be granted on payment of one cent on the basis of one option for each share allotted. The whole of the issue of the shares and options was underwritten by Peter Hains & Company, a member firm of the Sydney Stock Exchange Limited.
ATC 4677
I.M.C. acquired from Explorations options on the various applications for mineral claims abovementioned at a cost of $12,175 to purchase the said claims at a total price of $231,325, the exercise price for Trough Wells being $57,000. The prospectus contained a report by I.M.C.'s consulting geologist in relation to the areas in Western Australia. His conclusions were as follows:
``From information available the four prospects appear to have the rock types necessary for nickel sulphide mineralisation, together with evidence of high magnetic values. It is considered that a thorough geological, geo-chemical and geophysical investigation is warranted to delineate targets for subsequent drilling and testing.''
The report in relation to the Tasmanian areas indicated broadly that they had not really been explored and that various surveys and prospecting would need to be undertaken in regard to them. A report by the consulting geologists to the underwriters contained the following paragraph:
``It would appear from the consulting geologist's report that the five areas (i.e. the four nickel prospects in Western Australia and the three prospects in Tasmania) present very real mineral prospects with reasonable chances of commercial establishment. The arguments presented are logical, the areas chosen appear to have some considerable merit and the target minerals are topical and of great economic significance in the immediate future.''
Mrs. Phillips was appointed a director of I.M.C. and the Exploration company which she controlled was granted an option to take up at par 500,000 shares and a corresponding number of options in the company. On or about 25th December, 1969 Mrs. Phillips discussed the taking up of these shares with Mr. Stapleton and he suggested an apportionment of them between the various companies in the Milstern Group and the provident fund. His suggestion, with which she agreed, was that one hundred and seventy thousand shares should be taken up by the provident fund.
It was the profit on the sale of certain of these shares and options sold in August and October, 1970, which was brought to tax and which is the subject of this appeal.
Mr. Lockhart's first submission is that even assuming a trustee can be taxed under Div. 6 of the Income Tax Assessment Act 1936 and by virtue of sec. 99 in respect of sec. 26(a) profits, in this case the respondent has assessed the appellant which in the relevant tax year was not the trustee and which was not appointed as the trustee of the provident fund as successor to Consolidated Management Limited until 6th June, 1974. Any profit arising from the August or October 1970 sales was from the sale not by the appellant but by the former trustee, and any profit-making scheme was a profit-making scheme by the former trustee.
In the first place, the appellant has not, in my opinion, taken this ground in its objection and, accordingly, it cannot, by virtue of sec. 190 of the Act, raise it now:
F.C. of T. v. Western Suburbs Cinemas Ltd., (1952) 86 C.L.R. 102 at pp. 106-7;
H.R. Lancey Shipping Co. Pty. Limited v. F.C. of T., (1951) 9 A.T.D. 267.
Even were the appellant entitled to take the point, it is, in my opinion, not sound. If the trustee, in the tax year in respect of which the estate was assessed, had the relevant purpose, there was assessable income of a trust estate within the meaning of sec. 95 and the appellant, being the trustee as at the date of the assessment, was properly assessed in respect of it.
It is conceded that if the trustee is liable it is by virtue of sec. 99(2)(a) which is in the following terms:
``Where -
- (a) there is no part of the net income of a trust estate that is included in the assessable income of a beneficiary in pursuance of section 97 or in respect of which the trustee is assessed and liable to pay tax in pursuance of the last preceding section;
...
the trustee shall be assessed and is liable to pay tax on that net income or on that part of that net income, as the case may be, as if it were the income of an individual and were not subject to any deduction.''
ATC 4678
But Mr. Lockhart submits that a trustee can never be caught for tax under sec. 26(a) where his liability, if any, is under sec. 99. He relies, in support of the submission, primarily upon a passage from the judgment of Kitto J. in
Union-Fidelity Trustee Company of Australia Ltd. v. F.C. of T., 69 ATC 4084, at p. 4090; (1969) 119 C.L.R. 177, at p. 187. That was a case in which the income of a trust estate was received from sources outside Australia. The trustee was resident in Australia but the deceased in respect of whose estate the trustee was taxed earned the income outside of Australia and was not a resident so that had he lived he would not have been liable under sec. 25.
In his judgment on the page abovementioned, Kitto J. said:
``Since the fact is that the trustee derived the income, the hypothesis that it was derived by `a person' must be that it was derived not by the trustee but by a hypothetical person as to whom none of the facts is postulated which would make him `a resident' within the definition of that word in sec. 6(1).''
Mr. Lockhart submits that this passage and others from the judgment of the other members of the Court establish that in considering the liability to tax under sec. 99, a trustee should be regarded as a hypothetical person as far as the derivation of income is concerned and not as a taxpayer possessing personal characteristics.
In my opinion, the case is not authority for the wide proposition submitted by Mr. Lockhart and the views expressed by Kitto J. are limited to problems that arise relating to the residence of a trustee in considering the liability to tax under sec. 99. Moreover,
Official Receiver v. F.C. of T. (Fox's case), (1956) 96 C.L.R. 370, at p. 384 does not support such a view and cf.
F.C. of T. v. Belford, (1952) 88 C.L.R. 589.
Section 26(a) provides:
``The assessable income of a taxpayer shall include: -
- (a) profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale, or from the carrying on or carrying out of any profit-making undertaking or scheme.''
Mr. Lockhart submits that in considering ``purpose'' under the first arm of the subsection, one must look to the relevant state of mind only of Mr. R.M. Stapleton and that the only relevance of Mrs. Phillips' state of mind is the effect it might have had to have produced a state of mind of Mr. Stapleton.
Mr. Priestley Q.C., for the respondent, submits on the other hand that in considering the acquisition and sale of the shares, Mr. Stapleton was not, in any sense, the trustee and that Mrs. Phillips must be regarded as the trustee for the purpose of both their acquisition and sale. In support of this submission he relies on what is termed the ``organic'' theory in relation to corporations. In
Smorgon v. Australia and New Zealand Banking Group Ltd., 76 ATC 4364 at p. 4368; (1976) 134 C.L.R. 475, Stephen J. at p. 482 said:
``... I have not disregarded those important areas of the law in which mental states have come to be attributed to corporations, the state of mind of an individual being treated as that of the corporation. This the law achieves, where personal fault or a guilty mind must be sought for, by recourse to the so-called organic theory, as in
Lennard's Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd. (1915) A.C. 705) and
The Lady Gwendolen ((1965) P. 294), where ship-owning companies were held liable for `actual fault or privity'.''
In
Tesco Supermarkets Ltd. v. Nattrass, (1972) A.C. 153, Lord Reid at p. 170 said:
``I must start by considering the nature of the personality which by a fiction the law attributes to a corporation. A living person has a mind which can have knowledge or intention or be negligent and he has hands to carry out his intentions. A corporation has none of these: it must act through living persons, though not always one or the same person. Then the person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his acts is the mind of the company. There is no question of the company being vicariously liable. He is acting as the company and his mind which directs his acts is the mind of the company. There is no question of the
ATC 4679
company being vicariously liable. He is not acting as a servant, representative, agent or delegate. He is an embodiment of the company or, one could say, he hears and speaks through the persona of the company, within his appropriate sphere, and his mind is the mind of the company. If it is a guilty mind then that guilt is the guilt of the company. It must be a question of law whether, once the facts have been ascertained, a person in doing particular things is to be regarded as the company or merely as the company's servant or agent. In that case any liability of the company can only be a statutory or vicarious liability.In
Lennard's Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd. (1915) A.C. 705 the question was whether damage had occurred without the `actual fault or privity' of the owner of a ship. The owners were a company. The fault was that of the registered managing owner who managed the ship on behalf of the owners and it was held that the company could not dissociate itself from him so as to say that there was no actual fault or privity on the part of the company. Viscount Haldane L.C. said, at pp. 713, 714:
- `For if Mr. Lennard was the directing mind of the company, then his action must, unless a corporation is not to be liable at all, have been an action which was the action of the company itself within the meaning of sec. 502... It must be upon the true construction of that section in such a case as the present one that the fault or privity is the fault or privity of somebody who is not merely a servant or superior, but somebody for whom the company is liable upon the footing respondeat superior, but somebody for whom the company is liable because his action is the very action of the company itself'.''
And finally in
H.L. Bolton (Engineering) Co. Limited v. T.J. Graham & Sons Limited, (1957) 1 Q.B. 159, Denning L.J., said, at p. 172:
``A company may in many ways be likened to a human body. It has a brain and nerve centre which controls what it does. It also has hands which hold the tools and act in accordance with directions from the centre. Some of the people in the company are mere servants and agents who are nothing more than hands to do the work and cannot be said to represent the mind or will. Others are directors and managers who represent the directing mind and will of the company, and control what it does. The state of mind of these managers is the state of mind of the company and is treated by the law as such.''
In my opinion if Mrs. Phillips' mind was the directing mind which resulted in the decisions taken to acquire and sell the shares then her intentions were, applying the so-called ``organic theory'', the intentions of the trustee.
I turn now to the relevant evidence on this issue.
In Mr. Stapleton's evidence before the Board, which was tendered in evidence before me, he was asked this question:
``Who made the decision to make these investments on behalf of the fund?''
The answer was:
``The decision was taken by Mrs. Phillips.''
And later on:
``Q. In other words, you are just the administrator of the fund? A. I think that is substantially so, yes.''
And, in his oral evidence before me, he agreed that in the making of the decision to take up the shares by the provident fund he acted as Mrs. Phillips' adviser and that although he may have been acting partially in the capacity of trustee or administrator of the trust overall, he was acting as her adviser in relation to her right to take up the shares.
Mrs. Phillips, I find, was a most capable and successful business woman and one possessing a dominant personality. I am satisfied on the evidence that it was her decision and her decision alone to take up, through her companies and/or the provident fund, the whole of the 500,000 shares allotted. The only part that Mr. Stapleton played in relation to the acquisition of these shares was to suggest how they should be
ATC 4680
split up between Mrs. Phillips' various interests. As already indicated, it was he that suggested that 170,000 be taken up by the provident fund and this recommendation was accepted by Mrs. Phillips.The resolution to take up the 170,000 shares and the options was recorded in the minutes of a meeting of the trustee of 2nd January, 1970. Although there is some doubt as to the date on which the shares were applied for, the probabilities are that it was 19th January, 1970.
On 14th August, 1970, two days after the release of a favourable geologist's report to the Stock Exchange, a minute of the trustee records that it resolved that 80,000 shares in the company be sold through Peter Hains & Company, brokers. Their sale, which was evidenced by a contract note of the same date, realised $186,835.20 net. Further sales of shares and options took place in October although no resolution to sell is minuted in the trustee's minute book in respect of them. In that month a total of 54,050 shares and 12,050 options were sold so that of the 170,000 shares and options acquired all but 35,950 of the shares were sold and all but 157,950 of the options, which means that something less than 50% of the total number of shares and options were disposed of in these two months. The market ``peaked'' in August and again in October and it was then that the sales were effected.
I find that Mrs. Phillips placed the order for the sale of the 80,000 shares in August, 1970 without the knowledge or authority of Mr. Stapleton, that after she placed the order Mr. Stapleton, in answer to an enquiry from her as to whose name the shares should be sold in, informed her that the best idea would be to sell the superannuation fund shares and Mrs. Phillips agreed with this. As far as the October sales were concerned, I find that it was Mrs. Phillips who gave the selling order, and Mr. Stapleton had no discussion with her in relation to the sales prior to them. The sale was neither as a result of his decision nor advice; nor did he advise it and he could not even express an opinion as to the reason they were sold. The only part that he played in relation to these sales was to suggest to Mrs. Phillips that the trustee should be shown as the vendor of the shares, and with this Mrs. Phillips agreed.
Mr. Stapleton agreed that he complied with all requests made of Mrs. Phillips in relation to the provident fund in 1969 and 1970 and he pointed out in explanation that Mrs. Phillips was a valued client of his firm and the only beneficiary in the fund and a business woman of acumen. He admitted that the investment was in breach of the trust, but was under the impression that the trust deed had been altered as some other trust deeds for clients of the firm had been altered some few years previously.
As further evidence of the fact that Mrs. Phillips was the directing mind of the trustee, Mr. Stapleton admitted that he would have sold any of the shares at any time had she indicated that she wished for them to be sold.
Under these circumstances, in determining whether or not the taxpayer is caught by the first arm of sec. 26(a), one must look at the purpose that Mrs. Phillips had; she was, in my view, the directing mind of the trustee and, in accordance with the organic theory, in truth the trustee as far as the relevant share transactions were concerned. I am satisfied that at all relevant times she was well aware of sec. 26(a) of the Income Tax Assessment Act and of the taxation problems associated with the sale of mining shares within a reasonably short time of their purchase. The holding company was trading in mining shares in 1969 and 1970 and in its income tax return for the year ended 30th June, 1971 showed some 28 share transactions in mining companies and Mrs. Phillips explained in evidence that she dealt with a substantial number of brokers at this time rather than one in the hope of being able to acquire shares in mining company floats.
I do not agree with Mr. Lockhart's submission that considerable reliance must be placed upon the undisputed fact that apart from the sales of the shares of the provident fund in August and October of 1970, there were no sales of the substantial holdings of the group until 1972 and that the group had exercised all its options. I think it probable that Mrs. Phillips was conscious of the risk of being assessed in respect of profits from sales in 1970 in the absence of a compelling reason therefor, and one recalls the oft-quoted passage of the Chief Justice in
Gauci & Ors. v. F.C. of T., 75 ATC 4257 at p. 4260:
ATC 4681
``If, on the other hand, the acquired property is resold 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.''
and his judgment in
Steinberg v. F.C. of T., 75 ATC 4221 at pp. 4227-8.
Section 190, of course, provides in subsec. (b) that on an appeal against an assessment the burden of proving that the assessment is excessive shall lie upon the taxpayer.
I now proceed to examine Mrs. Phillips' assertion that she did not acquire any of the shares for the purpose of profit-making by sale and that the sale in August was because of bank pressures.
During the calendar years 1969 and 1970 the group banked with the Bank of New South Wales at its Oxford Street, City branch. The manager of that branch until some time in February of 1970 was a Mr. J.C. Bray; thereafter a Mr. MacKellar was the manager until July or August, 1970, when a Mr. Hearn became the relieving manager, a position which it would seem he occupied until late September or early October.
There was tendered in evidence extracts from the diaries of the three bank managers mentioned from 2nd January, 1970 up to and including 12th October, 1970. Prior to 17th August, 1970, which was after the date of the August sale, only one letter was written from the bank to Mrs. Phillips. This letter was dated 1st April. It refers to the agreement to a temporary overdraft limit of $150,000 on account of the holding company being reduced by $100,000 by 30th April, when the position was to be further reviewed. In the letter information is sought as to her and the group's financial position. This letter from banker to customer was written in mild terms and by no stretch of the imagination could one read into it real pressure from the bank. Notwithstanding this agreement to reduce the overdraft to $50,000 it appears from the diary entries that this was neither done nor did the bank insist upon its being done. In the diary entries for May and June and July of Mr. MacKellar, the overdraft limit is shown at $150,000 and according to those entries the debit balance of the holding company was some $197,000 on the 8th June, $204,000 on the 18th June and $226,000 on the 1st July and on the 7th August it is shown in Mr. Hearn's diary entry as being $111,000. In none of the diary entries, moreover, is there contained any record that either Mr. MacKellar or Mr. Hearn either suggested or demanded that the limit be reduced by the sale of I.M.C. shares.
In her evidence before the Board, which was tendered before me, Mrs. Phillips initially maintained that Mr. MacKellar many times told her to sell I.M.C. shares but later she corrected this and said it was not Mr. MacKellar but Mr. Hearn. The following questions and answers are not without importance:
``Q. I thought you said Mr. MacKellar told you to sell these shares? A. No, it was the bank manager.
Q. Who was that? A. It was Mr. Hearn then.
Q. Mr. Hearn told you this, did he? A. Yes.
Q. When did he tell you this? A. I do not think it was a question of him telling me. I think it is a matter of a client bank relationship and if he discusses means of reducing borrowings and you say `well, yes, I have a business which is being sold and I really and truly cannot hurry up the sale as my purchaser has no funds', and he says `have you anything else to sell quickly?' and I say `No' and he says `What is wrong with the I.M.C. shares?'''
to which a member of the Board said ``Is this a reconstruction, is that what you recall actually occurred?'' and Mrs. Phillips answered ``Yes'' and went on to claim that she was certain that Mr. Hearn had discussed the problem with her before a letter from the bank of 17th August, with which I shall deal later, was sent.
When asked when it was that Mr. Hearn suggested that the shares be sold, she said, ``I think it is associated with the letter of August 17th''. When counsel said ``You say he must have said that to you?'' she replied ``He did
ATC 4682
say that. I do not know the exact words but that was the implication''.I do not accept this evidence.
On 17th August, the following entry appears from Mr. Hearn's diary:
``Mrs. Phillips phoned advising that she was in a difficult situation in that she would like to sell some International Mining Corporation shares and would like us to write to her asking her to sell shares to reduce debt in the company's account. We told her that we were certainly willing to write asking her to reduce the debt, but we did not feel that the Bank could possible (sic) say from what source clearance was to come we therefore couldn't specifically state that she should sell the shares. We agreed to write a general letter seeking clarification and reduction of debt which she said would suit. Letter was subsequently sent.''
A letter dated 17th August was, I find, sent by Mr. Hearn to Mrs. Phillips pursuant to this telephone conversation in the following terms, omitting formal parts:
``You will recall that the arrangement for overdraft of $150,000 on this account was to have been temporary and the debt therein should have been reduced by $100,000 by 30th April last, the position then to be reviewed for further reductions. The debt at present stands at $92,716.54 and whilst we appreciate the various reasons why reduction has not taken place to date, the Bank now considers it timely that steps should be taken to clear this debt.
We would also point out that the debt in account Milstern Sydney Pty. Limit (sic) at $13,983.63 is without arrangements and that in (sic) account of Milstern (Beecroft) Pty. Limited of $20,045.32 was due for clearance on 30th June last in terms of arrangements made.
We would appreciate your early advices as to when reductions in these debts can be expected and your proposal for the future conduct of the accounts.''
Mrs. Phillips admitted in cross-examination before me that she requested Mr. Hearn to write to her saying the bank wanted to sell the I.M.C. shares but stated that she had forgotten this in her evidence before the Board of Review. She said that the reason she wrote this letter was that it would have assisted her if the Stock Exchange had queried the need for the sale.
On 2nd January, 1970, there appears the following diary entry of Mr. Bray:
``Milstern Holdings Pty. Limited
Limit $20,000 Debt $113,000 Secy $20,000 G'tee.¼.
Phoned Mrs. Phillips. Public Company International Mining is being listed on 14/1/70 and on that date she will stage sufficient of her scrip to place accounts in credit. Also advises that she has sold Hilton Motel at Darling Point for some $350,000 and early settlement will return her $150,000 in cash.''
To ``stag'' scrip is to sell it, I understand, within the first few days of the shares coming on the market.
The following entry on 4th February, 1970 also is not without significance:
``MILSTERN HOLDINGS PTY LIMITED
Limit $20,000 debt $114,669 Secy $20,000 G'tee.
Milstern Pty. Ltd.
The company have forwarded us 90,000 shares and 90,000 option in International Mining Corporation to be held on their behalf - present market value $81,000. Debt in this account and in the other accounts in the Milstern Group is expected to clear shortly from sale of scrip in International Mining which is considerably (sic) and sale of Hilton Motel in Darling Point for $380,000 which will return the Company $180,000 in cash.''
Mrs. Phillips, in her affidavit, swore that her purpose in acquiring the maximum number of shares was to retain control of I.M.C., that she had faith in the mineralisation of the areas, and wanted control of I.M.C. and that at no time did she intend that possession of any of the shares acquired by her or by companies under her control in the flotation of I.M.C. would be parted with. She stated that at all times it was
ATC 4683
her intention that the entities to which these shares were allotted would hold all the shares that they acquired. I am unable to accept her evidence in this regard. It is inconsistent with Mr. Bray's diary entries of 2nd January, 1970 and of the 4th February, 1970. These entries and particularly the former, strongly suggest that Mrs. Phillips adverted to profit-making by sale at or about the date of acquisition. Accepting as I do that, in general, disbelief of the evidence of a witness does not amount to positive evidence of the opposite of what the witness has asserted, the shares the subject of the appeal were, in my opinion, resold in what may fairly be described as a time proximate to their acquisition and, accordingly, the requisite purpose may be inferred and thereafter the taxpayer must overcome the prima facie inference then drawn.I am satisfied on a close consideration of Mrs. Phillips' relationship with her banker up to the date of the August sale as evidenced by the diary entries of the various managers, and of the only letter written by the banker to her and having observed her demeanour in the witness box in a lengthy cross-examination on this aspect, that the reason for the August sale was not that maintained by her, and that the so-called bank pressure provided the excuse from which it was hoped that a substantial profit could be taken without it being liable for tax.
As for the October sales, Mrs. Phillips swore in her affidavit that by October the shares in I.M.C. were very high on the stock market and she deposed ``I recall in this period (the emphasis is my own) at least one conversation with Mr. Stapleton in which he said to me `The I.M.C. price is very high. I think the provident fund shares should all be sold. We will look very stupid if profits are not taken when I.M.C. shares are selling at this sort of price'.''
But Mr. Stapleton in his evidence stated that he only discussed the possibility of the sale of I.M.C. shares or the options very briefly prior to the listing and after the listing when the shares were running at about $1.00 in the early days. He had had, he said, no conversation with Mrs. Phillips that she should have sold the shares when they were at a reasonable price prior to October 1970 and that sales of the shares in I.M.C. were effected by Mrs. Phillips in October without any consultation with him at all. When asked why the shares were sold in October, he said ``I think they were sold then because it was a high price on the market'' but in answer to a question as to whether he recalled any discussion with Mrs. Phillips concerning the sale of the shares in October, he had no recollection of any such conversation having taken place before their sale and claimed, as I have already indicated, that he had nothing to do with that sale and that it was not effected on his advice. He stated that he had made no attempt to convince Mrs. Phillips at any time that the shares ought to be sold.
Under further cross-examination, Mr. Stapleton recalled having discussed the wisdom or otherwise of selling the shares with Mrs. Phillips on one occasion shortly after the float and on another occasion some time prior to August of 1970. But he had no recollection of ever having discussed this with her between August and October of that year.
In addition to dealing with the matter in her affidavit, Mrs. Phillips, when asked whether the sales in August following the sudden rise and in October at the peak of the market, were purely coincidental, commented in regard to the October sale that it was very much Mr. Stapleton's feeling that the stock was just over-priced but she was not prepared to swear that she specifically sought Mr. Stapleton's advice as to whether or not she should sell any shares in October.
She stated, in cross-examination, that she sold the shares in that month because she felt they were over-priced and added that Mr. Stapleton certainly felt uncomfortable about the fact that he as trustee was not disposing of assets that had appreciated so much in value but this was not corroborated by Mr. Stapleton.
She advanced in cross-examination a second reason as to the sale, namely, that it was to put funds into the Milstern Group. But this reason is neither supported by the evidence as to the state of the finances of the Milstern Group at the relevant time nor as to what she did with the proceeds of the sale of the shares when she received them.
In relation to the October sale of the shares, I substantially accept Mr. Stapleton's evidence as to the part he played and reject the evidence of Mrs. Phillips.
ATC 4684
In the end result, I do not accept Mrs. Phillips' evidence as to the purpose for which the shares, which she, in effect admitted, were of a speculative nature, were acquired. The shares were sold at a substantial profit less than 12 months from their acquisition and I am unable to accept the reasons advanced for the sales. The decision to sell in August and October is inconsistent with the stated purpose and is inexplicable other than as a sec. 26(a) purpose. In my opinion the shares were not acquired for the purpose of investment and they were not sold in August as a result of bank pressure or in October for the reasons advanced by Mrs. Phillips.
If, however, it is incorrect to so regard Mrs. Phillips' intentions, one can then only look to Mr. Stapleton as the trustee. In considering Mr. Stapleton's intentions, he was an experienced accountant, not unused to acting as the director of a trustee company. As to the acquisition of the shares by Consolidated Management Limited, he conceded that something of the order of $4,000 had to be borrowed by that company in order to take up the shares. He stated in cross-examination that he was convinced at the time of the decision to take the shares up that I.M.C. had very good prospects and he was therefore looking to take up as many shares as possible in the fund. When asked as to what those good prospects were, he said ``Of eventually having a producing mine''. He formed that opinion, he said, from discussions with Mrs. Phillips but the only information he had from her was the geologist's reports and the only other information he had was the prospectus, and he admitted that Mrs. Phillips told him nothing which did not appear in the prospectus. When he was asked where the prospectus shows promise, he made the somewhat equivocal answer ``In the light of these days''. The Trough Wells prospect, he said, was the most likely one of all the company's prospective holdings. He expressed the view that the Trough Wells area was the most promising but conceded that the geologist's report concluded that those areas were simply worthy of an exploration programme and that the underwriters' geologists were not prepared to say that there was any nickel in any of the four Western Australian areas.
On being cross-examined as to the underwriters' geological report, he conceded that that report did not suggest that there was any nickel in any of the four nickel prospects in Western Australia. When he was asked as to why he believed there was a reasonable chance of a mine, he said ``I was relying more so, I think, on the fact that I had known Mrs. Phillips for a long time and that she had on several occasions expressed confidence in the likelihood of a mine and from my knowledge of Mrs. Phillips I felt that if anyone could produce a mine she could''.
The substantial activity of her group of companies at that time was in the running of geriatric hospitals, apart from her mining ventures beforementioned which were a failure and he conceded that he had nothing to justify his confidence in Mrs. Phillips' ability to find a mine, but expressed the opinion that the company's prospects were ``as good as any company floating at that time'' but such a view does not impress. When he was pressed as to his hopes as to Mrs. Phillips' ability to find a mine he said ``Yes. It may be irrational and naive but it is the belief I had at the time that Mrs. Phillips would produce real minerals'' but he admitted that he would have been surprised if there were dividends say within the next two or three years. He, it was, who suggested to Mrs. Phillips that some of the shares should be acquired by the trustee but he is totally unable to suggest any reason why the assets of the provident fund should be committed to subscribe for shares in a mining company and he agreed that purchase was a purchase in a speculative mining venture and in breach of the trust deed which, he claimed, he only discovered later.
He claimed in cross-examination that he believed that the shares were a long-term investment at the time of his recommendations, but finally admitted that they were speculative and the question as to whether the mines would ever come into operation in the areas referred to in the prospectus was dubious.
I am unable to accept Mr. Stapleton's evidence as to his beliefs in relation to the investment. I am satisfied, with the experience that he undoubtedly possessed,
ATC 4685
that he was completely aware at all relevant times that these shares were of a highly speculative nature, that he never recommended their purchase as a long-term investment and that he agreed to, and in fact, suggested the investment with the dominant purpose of making a profit. It follows, in my opinion, that if one is too look at the purposes of Mr. Stapleton and not Mrs. Phillips, the trustee is caught under the first arm of sec. 26(a).Testing the evidence of the stated intention against the whole of the facts, I am satisfied that both Mrs. Phillips and Mr. Stapleton acquired the shares for the purpose of profit-making by sale within the meaning of sec. 26(a) (supra) and whether one looks at Mrs. Phillips as being in effect the trustee on the one hand, or Mr. Stapleton on the other, or both of them, their several and joint purpose was that of profit-making by sale.
Under these circumstances I find it unnecessary to consider the somewhat vexed question, in the light of the authorities, as to whether the profits arose from the carrying out for profit-making undertaking or scheme within the meaning of the second arm of the subsection:
XCO Pty. Ltd. v. F.C. of T. 71 ATC 4152; (1971) 124 C.L.R. 343; cf.
F.C. of T. v. Bidencope 78 ATC 4222; 52 A.L.J. 579.
The appeal, accordingly, is dismissed with costs.
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