Leary v. Federal Commissioner of Taxation.Judges:
Supreme Court of Western Australia
The appellant taxpayer appeals to this Court under sec. 187(1)(b) of the Income Tax Assessment Act against a decision of the Commissioner (respondent) disallowing a claim by the taxpayer for a deduction of a payment of $10,000 as a gift to the Order of St. John in Australia during the appellant's year of income ending 30 June 1977.
The deduction from the taxpayer's assessable income was claimed under the provisions of sec. 78(1)(a) of the Act which, relevantly to this case, allows a deduction of a gift of the value of $2.00 and upwards of money made by the taxpayer in the year of income to specified funds, authorities or institutions in Australia of which, it is agreed, the Order of St. John in Australia is one.
The appellant's objection is dated 6 December 1977 and it was disallowed by notice dated 20 January 1978. The reason for the disallowance was that the Commissioner was not satisfied that the payment made was a gift within the meaning of the section.
There is no doubt that the payment was made and that no consideration passed from the disponee to the disponor in respect of it.
A set of documents called a ``Charity Plan'', the property of a company called Metropolitan Taxation Service Pty. Ltd. and dated June 1977, was tendered in evidence by the respondent and objected to by counsel for the appellant. I reserved my decision on the objection but I now admit these documents in evidence. There are two sets and they become exhibits 4 and 5. I admit these documents not because in the view that I take of the case they are of any assistance to me, but because if my view should be wrong they could be relevant on another view that could arguably be taken of it. That view is that whether a transaction falls within the connotation of the word ``gift'' as used in sec. 78 of the Act depends upon all of the circumstances of the case including knowledge, motive, purpose, intent and consequences relative not only to the disponor or the disponee but also to third parties. This would be a ``man in the street'' type of test and be in accordance with one view as to meaning, expressed by twentieth century experts in linguistics which asserts that the meaning of a word (not defined by arbitrary definition) is the manner in which it is conventionally used. If ``the man in the street'' knowing all the facts including the genesis and background of this transaction was to say ``of course, that is not a gift, it is only a tax dodge'', then that might be an arguable way of supporting the respondent's case. For myself I do not think that that is legally a permissible approach and I therefore leave that matter having admitted the documents in case others should think to the contrary.
It is nevertheless necessary to state broadly the genesis of the disposition.
The company referred to (M.T.S.), as disclosed by a letter dated 20 June 1977 from its solicitors to the Order of St. John, was in communication with a number of persons interested in making donations to the Order. As consideration for this service the Order was to pay a fee to M.T.S. of 98.8% of the amount of any gifts. The appellant was one such proposed donor in the sum of $10,000.
Under the terms of a loan agreement dated 29 June 1977 the appellant as borrower borrowed, from a company known as Sadar Finance Pty. Ltd. as lender, the principal sum of $8,500. By the terms of the agreement the borrower was to repay the principal sum at the expiration of forty years with simple interest at 5% payable at the end of the term, with power to pay off at any time during the term.
By cl. 4 of the agreement the lender had the option to call up the whole of the principal sum together with interest at 14%. By cl. 5 should the borrower make a gift of $10,000 to the Order of St. John, the lender's option to call was to cease, and the borrower was to have the right to purchase the lender's rights under the agreement at a price equal to the current commercial value of the principal and interest outstanding at the time. Over the first five years of the loan that price was precalculated by an actuary as not exceeding the percentages set out in the schedule to the agreement.
As, in the event of the borrower making the gift referred to, the loan was necessarily at the long term of 40 years and the low rate of interest at 5% simple payable at the end of the 40 years, the discounted value of the loan over the first five years was very small, being
ATC 4014less than ½ of 1% of it. I do not understand the idea of the borrower buying the subject matter of the loan and thereby becoming his own creditor but the effect of the agreement is that the loan could be retired by payment of merely a nominal amount ranging between about $17 in the first year to $35 in the fifth year. Effectively, therefore, upon making the disposition of $10,000 the disponor would be $1,500 out-of-pocket but could retire the debt of $8,500 by a nominal payment. On the other hand he would have the tax advantage of $10,000 allowable deduction from his assessable income. As the disponee had to pay 98.8% of the amount of the disposition to M.T.S., for securing it, the Order of St. John would receive a net benefit of $120. It is also apparent from the evidence that the whole of the $9,880 payable as remuneration by the Order of St. John to M.T.S. was to be immediately paid by the latter to the original lender Sadar Finance Pty. Ltd. which company would thus make a gain of $1,380 plus the few dollars for the retirement of the loan. There is no evidence as to what, if any, remuneration M.T.S. was to receive upon its own account.
No admission was made by the appellant as to the relevance of the documents placed before me, nor of the background facts, but what happened in this case is the subject of an agreed statement of facts as follows:
``2. The Order of St. John in Australia is a public benevolent institution within sec. 78(1)(a)(ii) of the Income Tax Assessment Act 1936.
3. On 29 June 1977 the Appellant (`the taxpayer') executed the loan agreement, a copy of which is contained in folios 20-24 of document 1(a), supra.
4. Between 22 June 1977 and 30 June 1977 current trading accounts for -
- (a) the Order of St. John (authority to operate which has been at all times possessed by St. John), being the Order of St. John account,
- (b) M.T.S. as trustee for the W.F. Clemens Family Trust, being the M.T.S. account, and
- (c) Sadar Finance Pty. Ltd.
were kept at the C.B.A.
5. On 29 June 1977 the principal sum of the loan of $8,500 referred to in the first schedule of the loan agreement (at folio 23 in document 1(a) supra) was paid to the taxpayer by Sadar Finance Pty. Ltd. drawing a cheque for $8,500 on its account at the C.B.A. and by the C.B.A. remitting by telegraphic transfer $8,500 to a branch of The Commercial Bank of Australia Limited at Perth (`C.B.A. Perth') which on 29 June 1977 issued a bank cheque to the taxpayer which was then duly deposited to the credit of a bank account of the taxpayer at the National Bank of Australasia Ltd. at St. George's Terrace, Perth.
6. On 30 June 1977 (and during the year of income ended on 30 June 1977) the taxpayer paid $10,000 to the Order of St. John. The payment of $10,000 was effected by the C.B.A. Perth remitting by telegraphic transfer on account of the taxpayer $10,000 to the C.B.A. to the credited by it to the Order of St. John, the said amount being credited by the C.B.A. to the Order of St. John account pursuant to the authority contained in document 1(e). Pursuant to the arrangement between M.T.S. and the Order of St. John constituted by the documents referred to in 1(c) and 1(d), supra, $9,880, being 98.8 per cent of the said amount of $10,000, was on 30 June 1977 transferred from the Order of St. John account to the account of M.T.S. as Trustee of the W.F. Clemens Family Trust. The transfer was effected pursuant to the authority contained in document 1(f), supra.
7. On 30 June and 1 July 1977 the moneys that stood to the credit of the account of M.T.S. as trustee as aforesaid during 30 June 1977, including the said sum of $9,880, were transferred by the C.B.A. to the credit of the account of Sadar Finance Pty. Ltd. at the C.B.A. in accordance with the authority contained in document 1(j), supra.''
The word ``gifts'' is not defined in the Assessment Act. In sec. 78, it refers to a relationship between the disponor and the disponee and the subject matter of the disposition. The word ``gift'' has relational qualities: see Stebbing, A Modern Introduction to Logic, 7th Ed. p. 139 et seq.
ATC 4015The qualities in the relationship which distinguish the relationship of gift from some other relationship, are voluntariness and the absence of consideration for the disposition, i.e. negative attributes widening connotation. Mr. Webb Q.C. submitted on behalf of the appellant, that the expression ``gift'' in English law means the disposition of property without consideration moving from a disponee to the disponor and that that is the meaning which is to be given to the expression in sec. 78.
I think there is much to be said for this view if the quality of voluntariness is added. It is roughly the dictionary meaning of the word and it is a meaning which would be placed upon it in ordinary parlance by the ordinary person. It is clear, simple and workable. The temptation to place glosses on plain language and to introduce subtleties in order to make a statutory revenue provision work in a way in which revenue authorities think it ought to work, should be resisted. If the law is not working to the satisfaction of the Parliament then it can be amended, as indeed it has been in this case.
In the absence of authority, that is how I would have decided the matter but the reasons of Smith J. in
Cyprus Mines Corporation v. F.C. of T. 78 ATC 4468 at p. 4,469, yield a contrary view. His Honour based that view on his interpretation of what was said by Owen J. in
F.C. of T. v. McPhail (1968) 117 C.L.R. 111 at p. 116 where his Honour said that to constitute a gift it must appear that the property transferred was transferred voluntarily and not as the result of a contractual obligation to transfer it and that no advantage of a material character was received by the transferor by way of return. Smith J. took the view that the phrase ``by way of return'' was not limited to something by way of return from the transferee but that it would include an advantage of a material character to the disponor emanating from a third party. I am not bound by this view and if I thought it plainly untenable I would not follow it. But although I doubt whether I would have reached the same conclusion myself, I think that in general a Judge of the same court or of a court of coordinate jurisdiction should apply persuasive authority unless he is convinced that it is wrong. I am told that the Cyprus Mines case is pending on appeal before the Federal Court of Australia and I think that I should follow it in the relevant respect.
One course would be to postpone my decision in this case until that appeal has been decided. But I think it better to dispose of each case as it arises as promptly as possible. If the decision should later turn out to be wrong then it can be corrected in the usual way.
Confining myself simply to the construction of the loan agreement and without regard to other facts. I think it plain that by the making of the disposition of the $10,000 to the Order of St. John, the appellant received substantial and material financial benefits from Sadar Finance Pty. Ltd. Those benefits included the right to retire a loan of $8,500 (at the option of the lender otherwise repayable in full on demand with 14% interest) by making a payment to the lender of a nominal amount of about $25. This case is not precisely the same as Cyprus Mines but the principle is the same. The question is simply whether if because of an enforceable and valuable promise by A to B, B makes a disposition voluntarily and without consideration to C, that that disposition from B to C is a gift. In the absence of authority I would have thought that it is but on the authority of the Cyprus Mines case, I think that it is not.
I acknowledge the many references to judicial dicta relating to the meaning of the word ``gift'' in various contexts, by counsel, but I do not find myself able to advance the matter further by a detailed discussion of all the cases and what has been said by others in differing situations.
I would dismiss the appeal.