Grimwade v Federal Commissioner of Taxation
(1949) 78 CLR 19923 ALJ 247
[1949] ALR 609
(Judgment by: Latham CJ, Webb J)
Between: Grimwade
And: Federal Commissioner of Taxation
Judges:
Williams J
Latham CJRich J
Webb J
Subject References:
Gift Duty (Cth)
Judgment date: 4 April 1949
This is an appeal from an order of Williams J. confirming two assessments of the executors of the late Edward Norton Grimwade to duty under the Gift Duty Act 1941. In 1936 (five years before the Gift Duty Act was passed) E. N. Grimwade formed the Batman Exploration Co. Pty. Ltd. The assets of the company consisted of shares in several companies which were transferred to the company by E. N. Grimwade in consideration of shares issued as fully paid to him and by his direction to his four sons. There were two classes of 1 pound shares - A shares and B shares. E. N. Grimwade held nearly all the A shares. During his life the A shares alone had voting rights and dividend rights. E. N. Grimwade had full powers of appointing directors and managing the company. Upon a winding up during his life the holders of the B shares were entitled only to two and one-half per cent of the capital paid or deemed to be paid up on their shares and the A shareholders were entitled to the balance of the assets.
In 1942 and 1943 resolutions were passed providing for a return of capital of 17s. 6d. per share to all the shareholders. The resolutions were carried unanimously, E. N. Grimwade being present. At this time he owned 9,997 A shares and five other persons each owned one A share. Capital was returned in accordance with the resolutions and the other shareholders thereby received a large benefit - 17s. 6d. per share on 180,760 B shares. The commissioner applied the provisions of the Gift Duty Assessment Act 1941-1942 and assessed the executors to gift duty upon what was calculated as being the amount of net benefit received by the shareholders other than E. N. Grimwade himself. (at p214)
The Gift Duty Act 1941 provides in s. 4 that gift duty at the rates set forth in the schedule shall be levied and paid in respect of every gift made on or after the commencement of the Act "(a) by a person... domiciled in Australia... of any property wherever situated." E. N. Grimwade was domiciled in Australia. The commissioner estimated the value of the two gifts alleged to have been made at 154,211 pounds. The schedule provides, inter alia, that where the value of all gifts exceeds 120,000 pounds but is less than 500,000 pounds the rate of duty shall be twenty-six per centum of the value of the gift, increasing according to a specified scale. The term "value of all gifts" is defined in the schedule as meaning "the sum of the value of the gift in question and the value of all other gifts made, whether at the same time or within eighteen months previously... or eighteen months subsequently, by the same donor to the same or any other donee." The Gift Duty Assessment Act 1941-1942 contains in s. 11 the same provision as that already quoted from the Gift Duty Act, except that the rates of duty are to be such as are declared by Parliament. As already stated, rates were so declared in the Gift Duty Act 1941. Accordingly, gift duty is levied in accordance with the schedule mentioned upon the value of the gift. (at p214)
Section 4 of the Gift Duty Assessment Act 1941-1942 defines "gift" as meaning
"any disposition of property which is made otherwise than by will (whether with or without an instrument in writing), without consideration in money or money's worth passing from the disponee to the disponor, or with such consideration so passing if the consideration is not, or, in the opinion of the Commissioner, is not, fully adequate."
Section 4 provides that "'property' includes real property and personal property and every interest in real property or personal property." Section 4 contains the following provision with respect to the term "disposition of property":
"'Disposition of property' means any conveyance, transfer, assignment, settlement, delivery, payment or other alienation of property and, without limiting the generality of the foregoing, includes -
...
- (d)
- the release, discharge, surrender, forfeiture or abandonment, at law or in equity, of any debt, contract or chose in action, or of any interest in property;
- (e)
- ...
- (f)
- any transaction entered into by any person with intent thereby to diminish, directly or indirectly, the value of his own property and to increase the value of the property of any other person."
Before Williams J. the commissioner relied upon both par. (d) and par. (f) to support the assessment. The learned judge, for reasons with which we entirely agree, rejected the argument based upon par. (d) and the respondent did not again present that argument upon the appeal. The question therefore which arises upon this appeal is whether par. (f) applies to the facts of the case. (at p215)
The learned judge held that the action of E. N. Grimwade in voting for the resolutions for the reduction of capital - or his failing to vote against them when he had a controlling vote - constituted entering into a transaction of the description set forth in par. (f) of the definition of "disposition of property." (at p215)
Paragraph (f) applies to any transaction entered into with the specified intent. It is evidently intended to include within the scope of the Act transactions which do not consist in an actual transfer of property from a donor to a donee. Such latter transactions are dispositions of property within the meaning of other parts of the definition. Paragraph (f) is intended to cover cases of transactions entered into with the intent to diminish the value, not of some property which is transferred to another person, but of the donor's own property in globo and to increase the value of the property in globo of another person. A transfer of property by A, not directly to another person C, but through an intermediary B, where it was the intention of A that C should obtain the property without giving consideration, would be a transaction falling within par. (f).
A similar result would be attained by contractual arrangements whereby C obtained a benefit without becoming the owner of any property that had belonged to A. Thus if B for some valuable consideration moving from A made a contract with A that he (B) would pay 1,000 pounds to C without receiving any consideration from C, the intent of A would be to diminish the value of his own property by giving consideration to B and by that means to increase the value of C's property by 1,000 pounds, which sum would be paid to C by B. It was suggested in comment upon this illustration that in such a case B would be the person who made a gift to C, because, as between B and C, there would be no consideration for the payment of the 1,000 pounds. The reason why B was content to make such a gift to C would be immaterial in determining whether or not there was a gift to C. But this circumstance would leave unchanged the fact that A had entered into a transaction with B the result of which was to diminish the value of A's property and increase the value of C's property without any consideration being given by C. Such a transaction would therefore (it would seem) fall within par. (f). (a t p216)
Paragraph (f) refers only to the intent of the person who diminishes the value of his own property, and does not in its own terms require that the transaction should actually produce the effect of diminishing the value of the donor's property and increasing the value of another person's property. But s. 11 of the Assessment Act and s. 4 of the Gift Duty Act show that, in order that a disposition of property falling within the description of par. (f) should be a gift resulting in a liability to duty, the transaction must have the effect of diminishing the value of the donor's property and increasing the value of the donee's property, because otherwise it would be impossible to ascertain the value of the property taken under the gift and therefore no duty would be payable in respect of the transaction. Thus par. (f) is aimed at transactions which are entered into with a particular intent and which produce the effect referred to in the description of that intent. If they are entered into without consideration they are gifts the value of which is assessed by the benefit (in the form of increase of value of his property) received by the person who, for the purposes of the Act, is in the position of a donee. It is not necessary, in order that par. (f) should apply, that property should pass from the donor himself directly or indirectly to the donee as long as there are to be found in the transaction the intent and the effect specified. (at p216)
Before considering the application of the Act, it is necessary to state in greater detail the facts of the case. In the year 1936 E. N. Grimwade formed the Batman Exploration Co. Pty. Ltd. with a capital of 250,000 pounds divided into 20,000 A shares of 1 pound each and 230,000 B shares of 1 pound each. 10,002 of the A shares and 180,760 of the B shares had been issued as fully paid up at the time of the reductions of capital hereinafter mentioned. The A shares in 1942 were held as follows: - E. N. Grimwade 9,997 shares, F. N. Grimwade, G. H. Grimwade, R. G. Grimwade (sons of E. N. Grimwade), T. C. Alston and H. M. Mogensen, one share each. F. M. Grimwade, G. H. Grimwade and R. G. Grimwade each held 49,420 B shares, and the executors of the will of L. C. Grimwade held 32,500 B shares. The company was an investment company. It held shares in other companies but, according to the evidence, did no other business. The articles of association provide that during the lifetime of the first governing director the A shares alone should confer voting and dividend rights on the holders, and in the event of the company going into liquidation during the lifetime of the first governing director the assets of the company remaining after the payment of liabilities should be distributed among the shareholders in the following manner: the holders of the B shares to receive two and one-half per cent of the capital paid up or deemed to be paid up on those shares, and the holders of the A shares to receive the balance of the assets (article 4). (at p217)
The articles also provide that the company may from time to time, by special resolution, reduce its capital by (inter alia) paying off capital or cancelling unallotted shares or by extinguishing or reducing the liability of any of its shares (article 27). Article 67, which deals with votes of members, provides that during the life-time of the first governing director the holders of the B shares shall have no right to be present or to vote at any general meetings by virtue of their holding of B shares. Article 77 provides that a majority of the subscribers to the memorandum of association may by writing under their hand appoint a person to be the first governing director. E. N. Grimwade was so appointed. Article 77 also provides that the governing director shall have authority to exercise all the powers, authorities and discretions expressed to be vested in the directors generally and that all the other directors, if any, of the company shall be under his control and bound to conform to his directions in regard to the company's business. Article 79 provides that the governing director may appoint other persons to be directors of the company and may remove them. E. N. Grimwade appointed his four sons as directors of the company, and after the death of L. C. Grimwade the other three sons with E. N. Grimwade were the directors of the company. Article 101 provides that the management of the business of the company shall be vested in the directors who can exercise all powers of the company. The effect of these articles was that E. N. Grimwade had complete control of the business of the company. (at p217)
The assets of the company consisted of shares transferred to the company by E. N. Grimwade in consideration of the allotment of shares to him and by his direction to his sons. The balance sheet of the company dated 15th November 1942 showed assets of 203,806 pounds, and there were no external liabilities. In 1942 from August to November the company sold a large number of shares for over 102,000 pounds. On 20th November 1942 an extraordinary general meeting of the company was held. E. N. Grimwade was present and the following special resolution was passed unanimously: -
"That the capital of the Company (which now is 250,000 pounds divided into 20,000 A shares of 1 pound each and 230,000 B shares of 1 pound each of which 10,002 of the said A shares and 180,760 of the said B shares are issued and are fully paid up) be reduced to 47,690 pounds 10s. divided into 10,002 A shares of 5s. each and 180,760 B shares of 5s. each and that such reduction be effected by cancelling 9,998 of the existing A shares and 49,240 of the existing B shares which have not been taken or agreed to be taken by any person and by returning to the holders of the 10,002 A shares and to the holders of the 180,760 B shares that have been issued paid up capital to the extent of 15s. per share (the capital represented thereby being in excess of the wants of the Company) and by reducing the nominal amount of each of the said issued A and B shares from 1 pound to 5s."
On 25th November 1942 a petition was presented to the Supreme Court praying that the reduction of capital to be effected by the special resolution should be confirmed.
At that time the company held about 82,000 pounds in cash and it was considered that other investments of the value of 61,000 pounds would not be required for re-investment by the company. The reduction of capital was confirmed by the Supreme Court. The result was that the A shares and B shares each became 5s. shares, and that the unissued shares were cancelled. The A shareholders and the B shareholders each received 15s. per share as a return of capital. (at p218)
On 31st March 1943 another special resolution was unanimously passed at a meeting, at which E. N. Grimwade was present, further reducing the capital of the company, and this resolution was approved by the Supreme Court. The resolution provided for the reduction of the A and B shares of 5s. each (which at this time were all issued shares) to shares of 2s. 6d. each, and for returning 2s. 6d. per share to the A and B shareholders. The company had, when the second resolution was passed, enough money in hand to pay the full amount of 17s. 6d. per share. The money was paid in accordance with the resolutions. The result was that the shares in the company became fully paid-up shares of 2s. 6d. each, the governing director still had control of the company, the B shareholders as such had no voting rights and if the governing director had wound up the company in his lifetime they would have been entitled only to two and one-half per cent of the remaining assets of the company - which were worth about 73,000 pounds. (at p219)
The first question which arises may be answered without much difficulty:
"Was there a diminution in the value of E. N. Grimwade's property and an increase in the value of the property of his sons by reason of the return of capital?"
It is plain that the value of E. N. Grimwade's A shares, which gave him full control of the company with a right to wind up at any time, and therefore to obtain for himself ninety-seven and one-half per cent of the assets of the company, was greatly diminished by the reduction of capital. It is equally obvious that the value of the property of the sons was increased by the 17s. 6d. per share which they received. After the return of capital they were much better off - with 17s. 6d. received in respect of all their shares and still owning the single A shares and all the B shares (reduced to 2s. 6d.) - than they had been as owners of the same shares as 1 pound shares subject to the over-riding rights of their father. The amount of the increase in value may be matter for argument, but there can be no doubt that there was a very substantial increase. (at p219)
Paragraph (f) of the definition of "disposition of property" requires that a transaction should be entered into by a person with intent to diminish the value of his own property and to increase the value of the property of some other person. This intent must be a real intent: Finch v. Commissioner of Stamp Duties [1929] AC 427 . It was found by the learned trial judge that there was such an intent. This finding was based on an inference from all the facts of the case. We agree that this inference should be drawn. There was no evidence of any other intent. The diminution of the value of E. N. Grimwade's property and the increase in the value of the property of his sons was the obvious and necessary result of what was done. It is true that the intent was to reduce the value of both A and B shares, but it is still the case that the value of the property of the sons was increased because they each received 17s. 6d. per share and that E. N. Grimwade intended this result. (at p219)
But did E. N. Grimwade "enter into a transaction" when he voted for the resolutions reducing capital? (at p219)
There may be a "transaction" with respect to the casting of a vote. It may be an illegal transaction as when an elector takes a bribe in return for his vote at a parliamentary election. It may be a legal transaction, as when a shareholder (who as such has no fiduciary obligation in respect of the manner in which he exercises his right to vote on the affairs of a company) agrees to vote in a particular way for a consideration, e.g. if other shareholders will exercise their votes in a particular way. Such an agreement is an ordinary business matter when a re-adjustment of rights between ordinary and preference shareholders takes place. The commissioner did not allege that there was any agreement between E. N. Grimwade and his sons as to voting for the resolutions. But when a shareholder makes up his mind to vote in a particular way and casts his vote accordingly he cannot be said to be "entering into a transaction." A transaction by a person must be a transaction with some other person. In the circumstances mentioned there is no transaction with any person. (at p220)
If a preference shareholder in a company voted in favour of reducing the rate of dividend upon preference shares in order to allow the company to pay some dividends to ordinary shareholders it would be an unreal description of what took place to say that that fact showed that the preference shareholder had "entered into a transaction." The result of a contrary view would be that each of the preference shareholders or at least all who voted for the resolution, would (if the intent of improving the value of ordinary shares were found to exist) be regarded as making a gift within the meaning of the Gift Duty Act to each of the ordinary shareholders. Presumably a dissenting minority would not be held to be engaged in a transaction of making a gift. If so, the majority of voting shareholders would be regarded as making the whole of the gift - which would be a remarkable result. It was suggested that even to abstain from voting against a resolution beneficial to a class of shareholders amounted to entering into a transaction within par. (f). All these contentions interpret the words "enter into a transaction" as if they had the same meaning as "do an act or abstain from doing an act." Such an interpretation gives no real effect to the words "enter" and "transaction." (at p220)
We are therefore of opinion that E. N. Grimwade did not enter into a transaction constituting a disposition of property within the meaning of par. (f) in s. 4 and that therefore there was no gift upon which duty became chargeable. This conclusion renders it unnecessary for us to consider various questions which were raised with respect to the value of the alleged gift. In our opinion the appeal should be allowed and the assessment should be set aside. (at p220)