Federal Commissioner of Taxation v. St. Helens Farm (A.C.T.) Pty. Limited.
Members: Barwick CJGibbs J
Stephen J
Mason J
Murphy J
Aickin J
Wilson J
Tribunal:
Full High Court
Gibbs J.
The facts and statutory provisions relevant to these five appeals are fully set out in the reasons for judgment of
Aickin
J. In each case the owner of property, often of substantial value, entered into a scheme which was designed to avoid death and estate duties without attracting gift duty. The scheme involved transactions which, briefly stated, were as follows. The owner sold his or her property to a private company and was allotted a number of ordinary shares in that company. Those shares were then converted into preference shares which carried the right to a preference dividend at a fixed rate and on winding up or reduction of capital to a return of capital and to payment of any arrears of dividend, but did not entitle the holders to participate otherwise in profits or assets. It will be convenient to describe the former owner of the property, who thus became the holder of preference shares, as ``the owner''. The company then allotted a small number of ordinary shares to persons (``the relatives'') whom the owner wished to be the objects of his bounty, or to companies in trust for such persons. The allottee, in each case, paid par value plus a premium. These were the only shares which carried unrestricted rights to share in the assets of the company, so that if the company were wound up the persons whom the owner wished to benefit would, subject, in four of the cases, to the possibility about to be mentioned, be entitled to the whole of the property transferred by the owner to the company, less the amount of the face value of the owner's preference shares and of course the costs of realization. The total amount paid for these ordinary shares was very much less than the value of the company's assets. To take an example, in the case of St. Helens Farm (A.C.T.) Pty. Limited (``St. Helens Farm'') shares were allotted to four persons (one being a company which received two shares in trust respectively for different classes of grandchildren) who paid a total of $500 for them, whereas shareholders' funds amounted to $1,206,314. So far, the scheme is no different from that considered in
Ord Forrest Pty. Ltd.
v.
F.C. of T.
74 ATC 4034
;
(1974) 130 C.L.R. 124
. However, in the case of the other four companies, there was a material modification to the Ord Forrest scheme. In those cases, unlike in the case of St. Helens Farm, the preference shares carried ordinary voting rights during the lifetime of the owner, and the articles empowered the shareholders during the life of the owner by special resolution to vary the rights conferred on the holders of any issued shares. In addition, the articles of Ceedon
ATC 4045
Pty. Limited (``Ceedon''), Lucinda Investments Pty. Limited (``Lucinda'') and Q.A.W. Pty. Limited (``Q.A.W.'') gave to the owner the owners of a governing director, and the articles of Lucinda gave to the owner power by notice in writing to elect to convert his preference shares into ordinary shares, but even without these provisions in any of these four cases the owner could, by reason of the size of his shareholding and the provisions enabling rights to be varied by special resolution, cause his preference shares to be converted into ordinary shares. If that were done the allottees of the ordinary shares would, on a winding up, be entitled only to a small share in the assets of the company. There was another departure from the Ord Forrest scheme in the cases of Ceedon and Gwynedd Pty. Limited (``Gwynedd''). In those cases the allottees entered into an agreement, called in argument the escalation agreement, by which each allottee agreed to pay an additional sum for the allotment of the shares in certain specified circumstances. In the case of Ceedon, the material words of the agreement were as follows (79 ATC 4161 at p. 4178):``... the Applicant... agrees with the Company (Ceedon) that if, but for this Agreement, the allotment of the shares at a premium of $99.00 each would constitute a gift within the meaning of the Gift Duties Assessment Act 1941 (as amended) then the Applicant agrees to pay to the Company the quantum of the difference between the true value of the shares as calculated by the Deputy Commissioner of Taxation for the Commonwealth of Australia and the amount of the application moneys to be paid by the Applicant for the allotment of the shares as a debt due and payable by the Applicant to the Company on demand.''
In the case of Gwynedd the escalation clause provided for the payment by each of the allottees of the allotment and premium moneys ``or such if any greater sum as will constitute the consideration passing from'' the allottee to the company ``in respect of the said allotment fully adequate within the meaning of that expression as used in the definition of `gift''' in sec. 4 of the Gift Duty Assessment Act 1941 (Cth.) as amended (``the Act'').
The questions that fall for decision are whether each allotment of the shares to the relatives and to the companies in trust for them was a gift within the meaning of the Act, and if so how the gifts should be valued.
If the decision of this Court in
Ord Forrest
is to be followed, it must be held that a gift was made in each case when the company allotted the shares to or in trust for the relatives, unless of course the consideration paid for the allotment was fully adequate. However, the companies, by their cross-appeal, seek to persuade the Court to decline to follow
Ord Forrest
. It is convenient to consider immediately whether that decision should be followed, since if it is overruled the present case will be at an end. In
Ord Forrest,
the matter was heard at first instance by
Stephen
J., and, on appeal from his decision, by a Full Court consisting of four Justices, who were equally divided in opinion, with the result that the judgment of
Stephen
J. was affirmed. It was submitted that, in these circumstances, the case is not a binding authority. Of course, this Court is, in one sense, never bound by a previous decision of its own, since it has power to reconsider any earlier decision, although the power is not lightly exercised. However, speaking generally, when this Court is equally divided in opinion the judgment which it pronounces is not a precedent with authority in this Court; the question does not arise whether it is proper to reconsider such a decision, for it is not binding. There does not appear to be any decision of the question whether the same principle applies when the equally divided court sat on appeal from a Justice of this Court, although in
Tasmania
v.
Victoria
(1935) 52 C.L.R. 157
at p. 184
,
Dixon
J. suggested that this was the case. With the greatest respect, I have always understood that the reason why a court comprised of four Justices is as a matter of regular practice convened to hear appeals from a decision of a single Justice of this Court is that, if the Court on appeal is evenly divided, there will be a majority in favour of one view or another and that the decision will be a binding one. If this view is wrong, the practice should be changed. I would treat
Ord Forrest
as a binding authority and I see no reason to reconsider its correctness, particularly since the law has been changed and gift duty is no longer payable in respect of gifts made after a stipulated date.
ATC 4046
Lest it be thought that it is right to reconsider the correctness of Ord Forrest , I should say that having reconsidered the matter, I adhere to the conclusion which I reached in that case. The submission of Mr. Handley, who appeared for the companies, was that an allotment of shares in a company is a ``disposition of property'' within the definition of sec. 4 of the Act only if the allotment is made by the direction of a third party, in which case the third party is the disponor for the purposes of the Act. Mr. Handley relied on the judgment of Barwick C.J. in Ord Forrest . The learned Chief Justice there expressed the view, at ATC p. 4038; C.L.R. p. 143, that the lettered paragraphs of the definition of ``disposition of property'' contain a list of examples of particular kinds of alienation of property which is included to ensure that the nature of a transaction does not preclude its classification as a disposition to the extent that it involves the transfer or movement of property. In other words, the definition only includes an allotment of shares which in truth involves an alienation of property. With the greatest respect I cannot agree. The definition commences, using very wide words, to refer to any sort of alienation of property. It then goes on to include transactions which would not otherwise come within the introductory words. The plain object of the lettered paragraphs of the definition seems to me to be to embrace transactions which have the substantial effect of a gift, in that, without fully adequate consideration, one person gives a pecuniary benefit to another, but which would otherwise escape gift duty because no alienation of property is involved. It seems to me that para. (a) of the definition, which refers to ``the allotment of shares in a company'', is designed to catch just such a case as the present.
Mr. Handley went on to advance an argument which was not put to the Court in
Ord Forrest
. He submitted that the word ``allotment'' in the definition of ``disposition of property'' cannot be used in the sense either of an offer of shares or of a contract arising from the acceptance of an application for shares, since of itself an allotment does not make the allottee a member of the company, and until the share is issued the share (the subject of the gift) has no existence as an article of property:
Re V.G.M. Holdings
(1942) Ch. 235
at pp. 240-1
. Therefore, it was said, ``allotment'' must mean ``complete allotment'', that is, an allotment followed by some act (usually registration) that completes the title of the allottee
-
in other words ``issue''. So far this argument may be accepted. Then Mr. Handley submitted that unless ``allotment'' in the definition were limited to an allotment by direction, difficulties and anomalies would arise, because in many cases (as in fact in some of the present cases) a complete allotment will be made after, and pursuant to, a binding contract of allotment, and in that case, he submitted, will be made for a fully adequate consideration, so that there will be no gift. His submission was based on such cases as
Archibald Howie Pty. Ltd.
&
Anor.
v.
Commr. of Stamp Duties (N.S.W.)
(1948) 77 C.L.R. 143
at pp. 152-3 and 156-8
and
F.C. of T.v.
McPhail
(1968) 117 C.L.R. 111
at p. 116
and was that a disposition made in discharge of a legally binding contract cannot be a gift, even if the contract was entered into for an inadequate consideration. It is unnecessary to consider to what extent this proposition might be correct for other purposes, because the matter is dealt with by sec. 12(1) of the Act, which provides that a disposition of property made in pursuance of a contract or agreement entered into without adequate consideration in money or money's worth shall, for the purposes of the Act, ``be deemed to be a gift so soon and so far as the disposition has affected the property or any of the property to which the contract or agreement relates''. It was submitted on behalf of the companies, and accepted by the learned primary judge, that this section could have no application to a disposition of property constituted by an allotment of shares, because the property would not be in existence before the disposition took place. However, sec. 12(1) does not require that the property should be in existence before the disposition is made. An agreement to allot shares relates to the shares when they are issued and come into existence as choses in action. The allotment (that is, the complete allotment) of the shares affects, as well as creates, those choses in action
-
it affects them by giving the title in them to the allottee. There is thus no difficulty in applying sec. 12(1) to the case of an allotment; under sec. 12, the allotment is
ATC 4047
deemed to be a gift as soon as it takes effect. The argument that the words of para. (a) of the definition of ``disposition of property'' should be given a restricted meaning for the reason suggested should be rejected.Mr. Handley then submitted that if an allotment of shares is to be treated as a gift by the company, the gift duty payable by the company, being a liability of the company, must enter into the value of the gift, and that this situation, which arises in no other class of case, is so anomalous as to lead to the conclusion that the definition of ``disposition of property'' only refers to an allotment when the donor is someone other than the company. Even if it were right, in valuing the shares the subject of the alleged gift, to have regard to the gift duty payable by the company, that would not mean that the Act cannot apply to such a case. It would not be anomalous to take gift duty into account in valuing a gift in one class of case only, if it was only in that class of case that the duty properly entered into the value of the gift. However, in my opinion, it is not right, when valuing a gift constituted by an allotment, to have regard to the gift duty payable. Mr. Handley sought to find an analogy in
Robertson
v.
F.C. of T.
(1952) 86 C.L.R.463
, a case in which the Articles of Association of a company provided that on the death of the deceased the shares would be divided into two classes, the incidents of which would have the result that the shares held by the deceased at his death would have a much lower value than the other shares. The Commissioner, in assessing the value for estate duty purposes of the shares held by the deceased, sought to apply sec. 16A(1) of the
Estate Duty Assessment Act
1914 (Cth.) as amended. He failed, because at the date of the death there was nothing in the articles of association that rendered it necessary to apply that section.
Kitto
J. said, at p. 486, that ``the estate must be valued at the date of death, but on the hypothesis that the deceased has died''. Mr. Handley contended that those words could appropriately be adapted so that in the present case the shares should be valued at the time of the gift but on the hypothesis that the gift had taken place. However, an examination of the judgment of
Kitto
J. (at pp. 485-6) shows that the opposite conclusion would be reached if his reasoning were applied to the present case.
Kitto
J. made it clear that he accepted that although the death and the passing of the property took place at one moment, the former in law preceded the latter; the application of the
Estate Duty Assessment Act,
he said, ``is a consequence of, and therefore is logically to be treated as subsequent to, the death of the deceased. It is not until there is an estate of a deceased person that the Act speaks.'' It followed that when that Act required the shares to be valued there was nothing in the articles that called for the application of sec. 16A(1). Similarly, in the present case, although the gift is to be valued at the time of its making (sec. 18(1)(b) of the Act) and the duty is also payable on the making of the gift (sec. 25(1) of the Act) the making of the gift must logically precede the liability to the duty. Therefore the duty payable in consequence of the gift, being a liability which logically arises after the gift is made, should not be taken into account in determining its value.
Finally it is convenient to mention the argument submitted in Ord Forrest, and repeated before us, that the amount payable by the allottee to the company as the consideration for the allotment is an asset of the company to which regard must be had in valuing the gift, and that it would never be possible to arrive at a price that would represent the full value for the shares, since every increase in the premium payable for the shares would increase their value, and to pay full value it would be necessary to pay an infinitely large sum. The suggestion that the word ``allotment'' in para. (a) of the definition should therefore be given a restricted meaning which would avoid such a result was rejected in Ord Forrest : see at ATC pp. 4045, 4048; C.L.R. pp. 154, 158. The suggested impossibility ever to pay a fully adequate consideration only arises if the shares are valued on a liquidation or net assets basis, but if the shares have a market value, or if their value can be determined on some other basis (for example on the basis of maintainable earnings), that value will not necessarily be materially affected by the amount paid as the consideration, which may be so comparatively small that it will not affect the market value or the capacity of the company to earn at a particular rate. In some cases at least it is clearly possible to say whether, and to what extent, the
ATC 4048
consideration for the allotment was inadequate. In the present case the learned primary judge did not value the shares on a liquidation or assets basis, and the amount paid for the consideration was comparatively small, and it was not shown that the value of any of the shares would be materially altered if the consideration payable for the allotment were treated as an asset of the company at the time of the gift.The learned primary judge accepted the argument that the escalation clauses were void, both because the calculation would produce infinity for the reasons just mentioned, and because, in the case of Ceedon, the Commissioner was not bound to make the valuation. However, he held that the clauses were severable and did not affect either the contracts of allotment or the allotments themselves. Before us, Mr. Handley accepted that the clauses were void but disputed that they were severable. He said however that he had no interest in pursuing this matter if the Commissioner's appeals on value failed - in the case of Gwynedd the learned primary judge found no gift because the consideration for the shares was not less than their true value, and in the case of Ceedon the amount of duty payable was small. Since, for reasons which I shall give, I consider that the Commissioner's appeals should fail, I need not discuss this matter further. However, I do not wish it to be thought that I agree with the conclusions of the learned primary judge on these matters; I regard both questions as open ones.
For these reasons, I consider that Ord Forrest was correctly decided, and that the cross appeals by the companies should be dismissed.
The question which is crucial in the appeals by the Commissioner in all cases except that of St. Helens Farm is whether in computing the value of the shares an allowance should be made for the possibility that the owner might, by exercising his powers under the articles of association, convert his preference shares into ordinary shares. Section 18(1)(a) of the Act provides that for the purpose of computing the value of a gift ``no allowance shall be made in respect of any contingency affecting the interests of the donees or any of them''. The possibility that the owner might use his powers in this way is a ``contingency'', but the question is whether it is a contingency which affects the interests of the donees. On behalf of the Commissioner it was submitted that ``interest'' is a word of wide and uncertain meaning and that it can include something that can be described as an interest in a popular or commercial sense even if it is not a legal or equitable interest. Speaking generally, this submission is no doubt correct: see for example
Craig
v.
F.C. of T.
(1945) 70 C.L.R. 441
at p. 446
. But of course the meaning of ``interest'' in a particular statutory provision depends on the context. I adhere to the view which I expressed in
Bray
v.
F.C. of T. (No. 2)
71 ATC 4060
at p. 4065;
(1971) 123 C.L.R. 348
at p. 357 that the phrase ``the interests of the donees'' in sec. 18(1)(a) must refer to their interests in the property the subject of the gift. The paragraph could not sensibly refer to any other interest, for it is dealing with the valuation of the gift, i.e. with the valuation of the interest in property acquired by the donee under the gift less the consideration. In each of the present cases the subject of the gift was the ordinary shares, and the interest of each of the allottees in those shares was that of an ordinary shareholder. Plainly that interest would not be affected if the owner exercised his power under the articles of association to convert his preference shares to ordinary shares. If that occurred, the allottees would not be deprived of the interest in the shares which they had acquired as a result of the allotment, and each share would carry the same rights as before, although those rights would be less valuable than before, because there would be new ordinary shareholders with competing rights. In other words, notwithstanding the occurrence of the contingency, the interests of the allottees would be the same, but the value of their interests would be less.
The question then is whether, in these circumstances, the contingency can be said to be one ``affecting the interests of the donees''. In ordinary language a contingency does not affect the interest of a particular person in property simply because it affects the value of that interest. For example, the contingency that the price of gold may fall may well affect the value of shares in a gold mining company, but it will not affect the
ATC 4049
interest of a shareholder in that company. Similarly it has been held that a proposed issue of new capital does not ``affect'' the rights of existing shareholders although it may affect the enjoyment of those rights:White v. Bristol Aeroplane Co. Ltd. (1953) Ch. 65 ; in
Re John Smith's Tadcaster Brewery Co. Ltd. (1953) Ch. 308 . There is no justification for giving to the words of sec. 18(1)(a) an extended meaning which would have the effect of artificially increasing the value of the interest on which gift duty may be exigible. It is not necessary to depart from the ordinary meaning of the words of the paragraph in order to render it operative. Its provisions clearly apply so that in valuing a gift it is necessary to ignore the possibility that the interest of the donees would be divested on the happening of a condition subsequent, or by the exercise of a power to which the interest was subject, such as a power of revocation or a power of appointment. The words of the paragraph, if given their ordinary meaning, indicate that its provisions can only apply if the interest itself is affected by the contingency. The contingency postulated in the present case does not affect the interests of the allottees; its effect is on the value of the shares, not on the interests of the allottees in the shares.
Counsel for the Commissioner sought to bring the case within sec. 18(1)(a) by arguing that the allottees have an interest in the assets of the companies, and that that interest is affected by the contingency that the preference shares may be converted to ordinary shares. It was submitted that it is natural to say that shareholders have an interest in the assets of the companies in which they hold shares, and that this usage is supported by the words of
Dixon
J. in
Archibald Howie Pty. Ltd.
v.
Commr. of Stamp Duties (N.S.W.)
(1948) 77 C.L.R. 143
at p. 154
. In that case
Dixon
J., speaking of a distribution in specie made by a company on a reduction of capital, said, at p. 154:
``But that means that the shareholder in satisfaction of his proportionate `interest' in the assets, an interest consisting of a congeries of rights in personam, takes an aliquot part of the assets.''
These words indicate that Dixon J. regarded it as an extended use of the term to say that a shareholder has an ``interest'' in the assets and make it clear that such an ``interest'' consists in rights in personam and not in rights to the assets themselves. An interest of that kind is the same as the shareholder's interest in the share and is equally unaffected by the contingency now under consideration.
For these reasons I have reached the conclusion that the learned primary judge was right in refusing to apply the provisions of sec. 18(1)(a) in making his valuation of the shares. It should perhaps be observed that the refusal to apply sec. 18(1)(a) does not have the result that duty properly payable on the gift is avoided. A true valuation of a gift consisting of an allotment of shares must take into account the contingency that the powers under the articles of association of the company in which the shares are held might be exercised with the result that the shares the subject of the gift would become of little value. Whether or not this conclusion means that death or estate duty can be successfully avoided by an arrangement of this kind is not a question that falls for consideration in the present case. However, it cannot be said that gift duty is avoided if the shares the subject of the gift are given their true value.
The second question of principle that arises is whether it was proper to apply the provisions of sec. 18(2)(c) and to adopt as the value of the shares such sum as the holder thereof would receive in the event of the company being voluntarily wound up on the date when the allotment was made. Provisions similar to sec. 18(2)(c) have been considered in many cases. The Commissioner is not entitled to adopt a liquidation value simply because its adoption would benefit the revenue (
Jekyll
&
Anor.
v.
Commr. of Stamp Duties (Qld.)
(1962) 106 C.L.R. 353
at p. 365
); he should choose the method which in his opinion is most calculated to place a fair value on the shares:
F.C. of T.
v.
Sagar
(1946) 71 C.L.R. 421
at p. 428
;
Gregory
v.
F.C. of T.
71 ATC 4034
at p. 4045;
(1971) 123 C.L.R. 547
at p. 569
. Moreover, by sec. 18(3) of the Act, the Court hearing the appeal from the Commissioner is entitled to substitute its own opinion for, and to use its own discretion in lieu of, the opinion or discretion of the Commissioner. The Court is not limited to considering whether the Commissioner erred in the exercise of his
ATC 4050
discretion but may consider whether the discretion was soundly exercised, and if it forms the opinion that the value of the shares arrived at by applying sec. 18(2)(c) is not a satisfactory value, it will not allow the Commissioner's application of the provision to stand: see such cases as Jekyll v. Commr. of Stamp Duties (Qld.) at p. 363, andCommr. of Taxes (Tas.) v. Perpetual Trustees Executors & Agency Co. of Tasmania Ltd. (1969) 118 C.L.R. 325 at pp. 328-9 . Once it has been decided that sec. 18(1)(a) has no application, it is clear that it will not appropriate to apply sec. 18(2)(c) and to value on a liquidation basis the shares in the four companies other than St. Helens Farm. The possibility that the preference shares may be converted to ordinary shares has such a depreciating effect on the value of the ordinary shares the subject of the gift that a fair value would not be placed on the shares by applying sec. 18(2)(c). In argument there was some discussion of the question whether the powers given by the articles could be exercised once the company had been put into liquidation, but in my opinion that question does not arise for consideration. Section 18(2)(c) contemplates a hypothetical winding up which took place at the date of the gift, and not an actual liquidation. The power to convert the preference shares to ordinary shares had not in fact been exercised by the date of the gift, and on the hypothesis that a liquidation occurred on that date the existence of the power would have to be ignored. But the possibility that the power might be exercised has such a depreciating effect on the shares that a fair value would not be reached by applying a liquidation basis.
In the case of St. Helens Farm the holder of the preference shares had no power to convert them to ordinary shares. However, for other reasons it is inappropriate to apply sec. 18(2)(c). There were five separate gifts and it was conceded that each gift (constituted by the allotment to a shareholder) should be valued separately. None of the individual allottees had the power, acting alone, to bring about a liquidation. It cannot be assumed that the allottees would use their combined power to achieve that result; they were different persons with interests which were not necessarily the same. The case is not one in which the donee had it in his power to bring about a liquidation. Moreover, although the yield from the assets was extremely low, there was no intention of selling the assets. The learned primary judge correctly pointed out that the application of sec. 18(2)(c) would bring about a situation in which the interest of each of the minority shareholders would be regarded as being worth precisely the same as proportionate part of the interest of the company in its assets as at the date of the allotment. In view of the circumstances that the allottees had no power individually to bring about a liquidation and did not intend to do so, and in view of the further circumstance that the shares in the Broken Hill Proprietary Company Limited that formed the most valuable asset of St. Helens Farm were being traded at an exceptionally high price on the date of the allotment, I consider that the learned primary judge was justified in concluding that the application of sec. 18(2)(c) was not calculated to produce a fair valuation of the shares.
Finally, it was submitted on behalf of the Commissioner that the learned primary judge should have adopted the evidence of the valuers called in support of his case, Mr. Robinson, who valued the shares on the basis of a valuation of the assets of the company less a discount of 20 per cent. This, it was submitted, produced a fair and realistic valuation. However, the learned primary judge, who carefully considered the evidence of the various valuers who gave evidence, rejected this method of valuation. He said that it was not strongly supported by the evidence and was not adopted in any of the cases to which he was referred. He preferred the approaches of valuers who valued on an earnings basis. His Honour committed no error in principle in taking this course. It was submitted in support of the respondent's cross appeal that in the case of St. Helens Farm the learned primary judge was not justified in adopting a lower rate of capitalization than was adopted by any of the valuers. The learned primary judge adopted a capitalization rate of four per cent whereas none of the valuers suggested a rate of lower than five per cent. However the low earning rate in fact produced by the assets supported this approach. The principles on which the appellate court will interfere with the
ATC 4051
decision of a primary judge on a question of valuation were stated by Dixon J. inCommonwealth v. Reeve (1949) 78 C.L.R. 410 at p. 423 , in a passage recently cited in this Court in
Emerald Quarry Industries Pty. Ltd. v. Commr. of Highways (1979) 24 A.L.R. 37 at pp. 41 and 56 . It has been shown that the learned primary judge committed any error of principle that affected his valuation of the shares, or that the values he reached in these difficult cases were wholly erroneous.
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