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Federal Commissioner of Taxation v. St. Helens Farm (A.C.T.) Pty. Limited.

Judges: Barwick CJ
Gibbs J
Stephen J

Mason J
Murphy J
Aickin J
Wilson J

Court:
Full High Court

Judgment date: Judgment handed down 11 February 1981.

Mason J. Aickin J. has set out in his reasons for judgment the relevant materials relating to these five appeals. I propose to consider each appeal separately, commencing with St. Helens Farm (A.C.T.) Pty. Ltd. (``St. Helens'').

St. Helens

The respondents by way of cross-appeal raise questions which need to be disposed of at the outset. In particular they challenge the correctness of the decision of this Court in
Ord Forrest Pty. Ltd. v. F.C. of T. 74 ATC 4034 ; (1973-74) 130 C.L.R. 124 . If this challenge can be sustained, the transactions in question involve no element of gift. The consequence then would be that the questions of valuation sought to be raised by the Commissioner's appeals would not arise.

According to
Gorton v. F.C. of T. (1965) 113 C.L.R. 604 no gift was made to the ordinary shareholders by Mrs. Palfreyman. According to Ord Forrest the company made a gift, within the meaning of the Gift Duty Assessment Act 1941 as amended (``the Act'') to each of the ordinary shareholders.

The Court being evenly divided on appeal, the decision of the primary judge ( Stephen J.) prevailed in Ord Forrest . It was a binding decision; other courts were bound to follow it, as Sheppard J. did in these five appeals. The decision does not bind this Court. But this is not because the four members comprising the Court on appeal were evenly divided, but because this Court is not bound by its previous decisions, although it will ordinarily follow these decisions unless there is some special reason for entering upon a reconsideration. Generally speaking the fact that the Court is evenly divided on appeal from a single justice of the Court is not in itself, in my opinion, a sufficient ground to warrant a reconsideration of the decision. To the extent to which Dixon J. expressed a contrary view in
Tasmania v. Victoria (1935) 52 C.L.R. 157 at p. 184 I do not agree with it. The theory which lies behind the Court's practice of sitting a bench of four justices on appeal from a single justice of the Court is that in the ultimate analysis there will be a majority within the Court for the decision, should there be an equal division of opinion on appeal.

It would be a difficult, if not an impossible task, to specify all the grounds which would justify the Court in concluding that a special case has been made out for reconsideration of an earlier decision. There are many factors to be taken into account, of which some only need be mentioned. One is the number of justices who participated in the earlier decision. The Court will be much less disposed to review a majority decision of a court of five justices than a majority decision of a court of three justices. Exceptionally strong grounds will be required to sustain a review of a decision of seven justices. Of course I am speaking in the context of statutory interpretation where Parliament can amend the law. The interpretation of the Constitution raises other considerations which may call for a more liberal approach.

A second factor is the importance which the decision has for future cases. A third factor peculiar to the appeal from a single justice of this Court is the extent to which the reasons of that justice are endorsed by those justices who uphold his decision on appeal. Clearly enough if there be a divergence in reasoning then there may be no majority for a particular point of view among the justices who considered the question.

Reflection on these elements as they arise in the present case has persuaded me they do not justify a review of Ord Forrest . Effectively there was a majority of three of the five justices who considered the case for the view which prevailed. Stephen J. at first instance, Gibbs J. and I agreed on the interpretation to be given to para. (a) of the statutory definition of ``disposition of property'' and the reasons given for that interpretation were similar, being subject to minor qualifications only. The question has no importance for the future because by reason of amendments to the Act there is no longer liability to gift duty on gifts made on and after 1 July 1979.

In any event I consider that Ord Forrest was correct. The attack upon Ord Forrest centred around the statutory definition of ``disposition of property'' contained in sec. 4, in particular para. (a) of the definition

ATC 4055

which includes ``the allotment of shares in a company''. The respondents' argument is that para. (a) refers to a completed allotment of shares in a company constituted by the entry of the allottee's name in the register of members when the allotment of shares otherwise constitutes a disposition of property as, for example, when shares in a company are allotted to a non-shareholder on the direction of a shareholder who would, but for the direction, be entitled to have the shares allotted to him.

The respondents pointed out that in Ord Forrest the Court was not called upon to give a precise meaning to ``a contract to allot shares'', ``an allotment of shares'' or ``an issue of shares''. According to the respondents, para. (a) does not mean the making of an offer by a company of its shares for subscription or the acceptance by the company of an offer to take shares; nor does it mean a binding contract between a company and another person to issue and take shares in that company.

The respondents do not dispute that in a particular context ``allotment'' may bear a meaning different from that for which they contend (see
Nicol's case (1885) 29 Ch. D. 421 at p. 426 ; in
Re Scottish Petroleum Company (1883) 23 Ch. D 413 at p. 430 ). But the respondents fail to acknowledge what in my opinion is well established, that ``allotment'' ordinarily signifies an appropriation to some person of a certain number of shares, but not necessarily of any specific shares ( Halsbury 4th ed. Vol. 7 p. 202), usually pursuant to a binding contract, not necessarily an allotment constituted by entry on the register. The judgments of Latham C.J. and Dixon J. in
Central Piggery Co. Ltd. v. McNicoll and Hurst (1949) 78 C.L.R. 594 are instructive. There the statute provided that ``no company... shall proceed to the issue to any of its employees [of] any shares in the company'' without the consent of the Court. It was held that as the shares were issued on communication to the employees of the acceptance of their applications, the company had infringed the prohibition. Latham C.J. observed (at p. 597) that ``an application for shares is an offer which may be accepted by allotment notified to the applicant''. His Honour pointed out (at p. 598) that ``The issue of the shares is the act which ends the transaction and ends in the issue of the shares to a specific person, an employee''. Dixon J. (at pp. 599-600) said:

``Speaking generally the word `issue' used in relation to shares means, where an allotment has taken place, that the shareholder is put in control of the shares allotted. A step amounts to issuing shares if it involves the investing of the shareholder with complete control over the shares. In
re Ambrose Lake Tin and Copper Co. (Clarke's Case) (1878) 8 Ch. D. 635 makes that quite clear. Cockburn L.C.J. said (at p. 638): - `inasmuch as the term `issue' is used, it must be taken as meaning something distinct from allotment, and as importing that some subsequent act has been done whereby the title of the allottee becomes complete, either by the holder of the shares receiving some certificate, or being placed on the register of shareholders, or by some other step by which the title derived from the allotment may be made entire and complete.''

His Honour referred to
Spitzel v. Chinese Corporation (1899) 80 L.T. 347 . Where Stirling J. spoke of ``allotment'' as ``an appropriation by the directors... of shares to a particular person'', and went on to say, ``an allotment does not necessarily create the status of membership'' (at p. 351).

The respondents then urged that to construe para. (a) as applying to an executory contract would be to create an anomaly because all the other transactions which are included in the statutory definition by the general words or by the words of extension are executed transactions under which property rights are finally created, transferred or destroyed. This submission ignores para. (f) of the statutory definition which includes within a ``disposition of property'' the class of transactions described there, a class which obviously embraces contracts not necessarily amounting to dispositions of property in the ordinary sense of that expression. As Gibbs J. observed in Ord Forrest (ATC at pp. 4041-42; C.L.R. at p. 148), Williams J. held in
Grimwade v. F.C. of T. (1949) 78 C.L.R. 199 at p. 208 , that the purpose of para. (a) to (f) was to comprehend transactions which might not otherwise be held to be dispositions of

ATC 4056

property and that each paragraph is self-contained or ``complete in itself''.

True it is that some of the paragraphs are designed to extend to transactions which involve the creation or destruction of proprietary rights and interests in addition to the alienation of such rights and interests. But in my opinion this does not provide support for the respondents' argument. Once the shares are allotted, at least when allotment takes place pursuant to a binding contract, the allottee is entitled to have his name entered in the register of members in respect of the shares. A binding contract to allot shares creates a proprietary right in the form of a chose in action and a binding contract to allot shares in many instances is capable of specific performance, e.g. in a proprietary company.

Underlying the respondents' argument is the assumption that if ``the allotment of shares in a company'' does not mean an allotment completed by registration, the expression must refer to an executory contract. I do not agree. An allotment may give effect to an antecedent contract; it may even constitute a contract; but it is not as such a contract executory or otherwise.

The respondents rely heavily on sec. 12(1). It provides that a disposition of property in performance of a contract without adequate consideration in money or money's worth shall 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 relates. I assume, as the respondents argue, that in general it is the conveyance of Blackacre by the vendor pursuant to an antecedent contract of sale, not the contract itself, that constitutes the disposition of property for gift duty purposes. As will appear later, I do not accept that, as a consequence of this proposition, a conveyance is for full consideration, albeit inadequate, moves from the purchaser to the vendor under the contract.

What is important for present purposes is that sec. 12 is designed to fix the time when the gift is deemed to be made in a situation where there is a contract and a subsequent disposition of property. As this is the purpose of the section, I am unable to distil from it a general intention that an executory contract can never constitute a disposition of property. Indeed, the very presence of the section in the terms in which it is expressed lends force to the proposition that, in some circumstances, an executory contract may amount to a disposition of that kind.

It is immaterial that sec. 12 makes no provision for valuing shares before they come into existence. Given its purpose as I have stated it, one would not expect the section to contain such a provision.

Section 18(1)(b) provides that the property is to be valued ``at the time of the making of the gift''. The comment of Kitto J. in
Robertson v. F.C. of T. (1952) 86 C.L.R. 463 at p. 486 , that the shares must be valued at the time of the gift but on the hypothesis that the gift has taken place, made in relation to sec. 16A(1) of the Estate Duty Assessment Act 1914, has equal application to sec. 18(1)(b). However, this does not produce a consequence favourable to the respondents' general argument for in the end it is possible to compute the value of the gift by reference to the value which the shares have when they come into existence.

I agree that in valuing the shares on an assets or liquidation basis it is proper to include in the company's assets the consideration payable by the allottee ( Ord Forrest, ATC at pp. 4047-48; C.L.R. at p. 158). But I do not agree with the respondents' submission that because the amount of the premium is infinitely variable it is impossible to arrive at the consideration which is fully adequate for the allotment of the shares. In every case it is a question of ascertaining the worth of the company's shares, calculating a premium which will reflect that worth and no more. No difficulty seems to arise in those cases in which shares are valued on a market or earnings basis, as here, because the amount of the premium payable will not significantly affect the value or, if it does, it should be capable of measurement, when we bear in mind that valuation is not an exact science, but an exercise in estimation. I certainly do not agree that the difficulty of calculating the worth of the shares is a reason for rejecting a literal interpretation of para. (a) of the statutory definition.

I am prepared to assume that in a case in which the relevant disposition of property is

ATC 4057

an allotment the company's liability to gift duty will need to be taken into account in computing the value of the gift. I acknowledge that in other situations it is not necessary to take account of liability to gift duty. But I can see no reason why this circumstance indicates that para. (a) should be given a limited meaning. The need to take the liability to gift duty into consideration is due to the nature of the property which is the subject of the gift, a share in a company, the donor being the company.

If it be assumed, contrary to my own view, that there is some difficulty in applying sec. 12 to an allotment not constituted by registration, it does not require the conclusion that para. (a) only catches completed allotments by direction. The application of sec. 12 to an allotment of shares is not essential to the allotment constituting a gift. As I have already pointed out, sec. 12 has a particular and limited role. Because it has a particular and limited role it would be wrong to use it as a basis for reading a limitation into para. (a) of the definition which the paragraph does not express.

There is the reference in para. (a) to the allotment of shares ``in a company'' rather than ``by a company''. In Ord Forrest this was rightly not thought to be of significance. The language in which the paragraph is expressed is wider than the expression ``by a company''. For this reason I would not infer that the language chosen reflects an intention that a para. (a) transaction is one in which the company is not an active participant.

A general ground of criticism of the respondents' argument is that it concedes to para. (a) a minimal operation, an operation not remotely suggested by the actual language of the paragraph. By way of contrast it may be said that the application of the statutory definition to the facts of this case is an application which I should have thought that the Parliament rationally intended.

For these reasons I would affirm the proposition established by Ord Forrest that para. (a) of the statutory definition of ``disposition of property'' is not to be read down so that it is confined to a completed allotment of shares by direction of a third party. This is to do no more than to give a literal interpretation to a revenue statute.

The respondents next argue that if an allotment pursuant to a binding contract is a disposition of property it is necessarily made for full consideration in money or money's worth. In the case of St. Helens, this has relevance to the allotment to Mrs. Palfreyman who was present at the directors' meeting which resolved to allot the ordinary shares on 25 June 1968. As she had notice of the company's acceptance of the applications for subscription, a binding contract to actually allot preceded the allotment of shares to her.

The argument rests on the proposition already mentioned that a disposition of property made in performance of a binding contract must be for fully adequate consideration, even if the executory contract was entered into for less than fully adequate consideration. There is a very clear distinction between the adequate consideration for the purposes of the law of contract and the adequacy of consideration for the purpose of revenue legislation such as the laws imposing stamp duty and gift duty. The distinction is partly brought out by the insistence in the statutory definition of ``gift'' in sec. 4 on the absence of ``fully adequate'', ``consideration in money or money's worth passing from the disponee to the disponor''. The distinction has often been referred to. One instance was the observation of Dixon J. in
Archibald Howie Pty. Ltd. v. Commr. of Stamp Duties (N.S.W.) (1948) 77 C.L.R. 143 , when his Honour, speaking of sec. 66 of the Stamp Duties Act 1920 (N.S.W.) (as amended), said (at p. 152):

``In the context I think that the world `consideration' should receive the wider meaning or operation that belongs to it conveyancing rather than the more precise meaning of the law of simple contracts. The difference is perhaps not very material because the consideration must be in money or money's worth. But in the law of simple contracts it is involved with offer and acceptance: indeed properly understood perhaps merely a consequence or aspect of offer and acceptance. Under sec. 66 the consideration is rather the money or value passing which moves the conveyance or transfer.''

ATC 4058

Another instance is to be found in the judgment of Kitto J. in
Davis Investments Pty. Ltd. v. Commr. of Stamp Duties (N.S.W.) (1958) 100 C.L.R. 392 , where his Honour, speaking of the same section, said that the consideration in question ``is the money or money's worth really moving the conveyance'' (at p. 415).

The statutory definition of ``gift'' looks to consideration in the same sense, so that it is to the amount paid or payable by the intending shareholder in consideration of the allotment that we must look in ascertaining whether there was a gift. The remarks of Dixon and Williams JJ. in Archibald Howie, at pp. 152-153 and 156-158, do not run counter to this view because in that case their Honours were considering the declaration of a dividend and a special resolution to return capital. What the shareholder received was in satisfaction of rights attached to his existing shares. In one sense the shareholder's rights had their source in contract but in another sense his property rights were of a different order from the purchaser's right to call for a transfer under a contract of sale.

The respondents predict that if the view which I favour prevails, horrendous consequences will follow and that an oppressive liability to gift duty will descend upon an unsuspecting citizenry. The force of this argument is somewhat diminished, to say the least of it, by the abolition of gift duty on gifts made on and after 1 July 1979. But in any event I am far from convinced that the examples offered by the respondents would lead to a liability for gift duty in the situations postulated. Some examples seem to be clear instances of payments or benefits received in satisfaction of rights of property. One example which presents a problem is the sale of property under a binding contract when the value of the property rises (or falls) between contract and conveyance. The question is whether gift duty is payable on the transfer if the change in the value exceeds $10,000. I see no occasion to answer this question but I make the comment that sec. 12(1) appears to proceed on the footing that gift duty would be payable on the transfer in such a case. The subsection is, as I have pointed out, directed to a particular situation, but it is significant that Parliament provided in that situation for the very consequence that, according to the respondents, is so patently unacceptable that Parliament could not have intended it.

I turn now to the Commissioner's appeal. He contends that the primary judge erred in applying sec. 18(2)(c) of the Act by reason of an incorrect interpretation which he placed upon this provision.

The Commissioner's assessment to gift duty placed a value on each of the five ordinary shares in St. Helens of $330,529.60, resulting, according to the Commissioner, in a gift of $1,652,148 and giving rise to an assessment to gift duty of $460,949.29. This valuation of the shares was supported by resort to sec. 18(2)(c) and the winding-up basis evaluation which it authorized. An earnings basis produces a very much lower valuation basis. The reason for the difference lies in the high value of the assets of St. Helens and in the very low income which they yield.

The principal asset was the share in the Broken Hill Proprietary Co. Ltd. (``B.H.P.'') which had a very low income yield in relation to their market value. On 25 June 1968 the shares reached a peak of $25 on the Stock Exchange and at this price they yielded 0.08%. Their average yield between 1945 and 1968 was 3%.

The respondents' valuers approached the valuation upon the basis that each of the ordinary shareholders received one ordinary share. Each such shareholder had a minority interest and it was that interest that had to be valued. It was inappropriate to place on each ordinary share the value that would be placed on one-fifth of the company's shares in B.H.P. No single shareholder could wind up the company or bring about a distribution of the B.H.P. shares unless three of the other four shareholders joined with him to pass a special resolution for winding up. Although two shares were held by the one trustee company, the trusts affecting the two shares so held were different. It was therefore wrong to conclude that four shareholders would combine to wind up the company, and right to select earnings as a basis for valuation. Messrs. Bagnall and Goddard placed a value of $40,000 (approximately) on each of the ordinary shares. Mr. Young favoured a value of $30,000. Mr. ThompsonLaing, one of the Commissioner's valuers, agreed that

ATC 4059

agreed that $40,000 was approximately correct if an earnings basis was held to be appropriate.

The Commissioner's valuers considered that an earnings basis was inappropriate because, to their way of thinking, it meant that a valuation of $200,000 only was to be placed on assets worth $1,200,000. This led them to favour a winding-up basis, which they sought to justify on the footing that St. Helens was a family company and that there was a possibility that the shareholders might combine and wind up the company so that its assets could be distributed or deployed to better advantage. They therefore applied sec. 18(2)(c). However, one of their number, Mr. Robinson, adopted a different approach. He conceded that it was wrong to value the shares by reference to the value of the company's assets. He took the value of those assets and discounted them by 20% so as to make allowance for the slim prospects of each shareholder bringing about the realization of those assets.

Sheppard J. rejected the approaches taken by the Commissioner's valuers. He refused to apply sec. 18(2)(c) because so to do would be to regard each ordinary shareholder as having an asset worth precisely the same as a proportionate part of the company's B.H.P. shares. Further, he found that it was not within the contemplation of anyone that the B.H.P. shares would be sold - they had initially been acquired by Mrs. Palfreyman as an investment and the company held them in that character. As it was intended to hold them indefinitely, the very low yield was not of much significance. His Honour then rejected Mr. Robinson's approach and adopted an earnings basis with a capitalization rate of 4%, yielding a valuation of $60,000 for each ordinary share.

The Commissioner's attack on this valuation is based primarily on the submission that his Honour should have applied sec. 18(2)(c). Although it is normal to value on an earnings basis shares in an investment company which has a continuing business, there are exceptions to this rule. One such exception was recognized in the joint judgment of McTiernan, Williams and Webb JJ. (with whom Dixon and Fullagar JJ. agreed) in
Commr. of Stamp Duties (N.S.W.) v. Pearse & Ors. (1951) 84 C.L.R. 490 at p. 520 , when their Honours said:

``To value shares in a company which is a going concern on the basis that the company is in voluntary liquidation at the date of death savours of unreality. The choice of such a mode is not calculated to produce a fair value. It is more likely to produce a false value. Scope for the use of the provision contained in sec. 127(1)(c) may be found in cases where a company's operations do not produce income which can be regarded as affording any measure of the value of the shares, as well may be the case with an assets company or a company whose earning capacity is restricted or diminishes temporarily or by accidental circumstances. Other special cases may be imagined.''

Section 127(1)(c) of the Stamp Duties Act 1920 (N.S.W.) (as amended) is the counterpart of sec. 18(2)(c).

An example is provided by
Jekyll v. Commr. of Stamp Duties (Qld.) (1962) 106 C.L.R. 353 , where, owing to the difficulties of applying an earnings basis in a very complex situation, a valuation on an assets basis made by the primary judge was upheld. There the deceased held a large parcel of 154,574 £ 1 fully paid 1% first preference shares which entitled the holder to a preferential return of capital on a winding up. These shares carried 76% of the voting power in the company during the deceased's lifetime, but no voting power at all on his death. There were three other issued shares, each fully paid to £ 1, two ordinary shares and one second preference share, each of which carried one vote. There were restrictions on the transfer of shares by virtue of which the directors were first authorized to sell to a member at the auditor's valuation and ultimately had a discretion to approve or reject a transfer. The executors argued that a winding-up basis of valuation ``cannot be sustained except in a case where a liquidation is likely or could be forced or secured'' (at p. 361). It was, I think, accepted by the Court that a liquidation ``could not be forced, is not in contemplation and would be an extreme and unlikely course'' (at p. 361).

As I read the judgment of Dixon C.J. (with whom McTiernan J. concurred), he rejected the appellant's argument that the discretion to value on a winding-up basis could not be exercised except in a case where a liquidation is likely or could be forced or

ATC 4060

secured. After referring to the disadvantages to which the first preference shares were subject, disadvantages which would deter a potential purchaser from offering a price equal to the assets value of the shares, his Honour observed that the holder of the other three shares in the company had a strong interest in excluding strangers and preventing them acquiring the first preference shares which conferred an ultimate right to a proportionate share in the capital which largely reflected ownership of the family property. On a winding-up the assets of the company would have been insufficient to return more than 19s in the £ on the first preference shares. Consequently, there was, as Dixon C.J. said, a strong reason for the ordinary shareholders seeking to acquire the first preference shares. It was this circumstance that made a winding-up basis a sound basis of valuation in what was described as a complex situation.

The St. Helens facts are significantly different. The ordinary shareholders do not have any strong reason for seeking to acquire the preference shares. The assets of St. Helens are so very considerable in relation to its paid-up capital that the payment of the preference share capital ($12,002) would still leave the five ordinary shareholders participating in a distribution of well over $1,000,000.

Even so, the Commissioner argued that St. Helens was an ``assets company'' of the kind mentioned in Pearse because the investments are not yielding a satisfactory return and because the value of the company's shares on an ``earnings'' basis was disproportionately low in relation to its assets - $300,000 on the primary judge's finding, whereas the net assets were worth well over $1,000,000. I have some difficulty in accepting the notion that the assets were not yielding a satisfactory return. After all, the return reflected in large measure the very low return attributable to the market valuation of the company's principal investment, its shares in B.H.P., an investment which had been made with knowledge of its low return. What can and should be said is that the investment in B.H.P. was yielding a lower return than usual because its market valuation had risen to a peak and that it therefore yielded such a low return that in ordinary circumstances shareholders would wish to sell at that valuation and re-invest the proceeds of sale in assets yielding a higher income return.

Another ``special case'' of the kind mentioned in the joint judgment in Pearse is that of a sharp and unexplained or unexpected rise in the value of assets, unaccompanied by any prospect of a corresponding increase in the income which it yields. Such a situation may well lend itself to a liquidation or assets valuation.

Sheppard J. answered this by finding (a) that it was not within the contemplation of anyone that the shares would be sold on that day or about that time; and (b) that to value the shares on an assets basis would be to bring about a situation in which each of the minority shareholders is to be regarded as having an asset worth precisely the same as a proportionate part of the company's assets.

Finding (a) above is important. It provides a reason for not adopting the suggestion made in the joint judgment in Pearse that there may be scope for valuation on a winding-up basis when the ``earning capacity is restricted''. Quite obviously, when, as a result of developments previously unforeseen, the income-earning capacity of a company becomes restricted, then it will be to the interest of the shareholders to wind it up if it has valuable assets. Here, however, though the income yield was low, the income itself was not lower than that expected when the investment was initially made and there was no ground for thinking it would be restricted. The income yield had fallen only because the value of the shares had risen. Consequently, apart from the rise in the market price, there was no reason why the shareholders should depart from the initial intention that the B.H.P. shares were to be held as a long-term investment.

It is somewhat ironical that an assets valuation is discarded and a much lower earnings valuation adopted because the shareholders are said to be unwilling to sell the B.H.P. shares or wind-up so as to realize their high assets valuation and prefer to continue to hold their shares, low though the yield is. This leads me to think that, although the shareholders express their intention not to dispose of their shares or to wind-up the company, allowance might well have been made for the possibility that they might pursue one of those courses at some time in

ATC 4061

the future because it has obvious financial advantages.

Nevertheless, I am unwilling to disturb his Honour's finding on valuation. This Court has consistently applied the rule that on a question of valuation an appellate tribunal is not justified in substituting its own opinion for that of the court below unless it is satisfied that the court below acted on a wrong principle of law or that its valuation was entirely erroneous (
Commonwealth v. Milledge (1953) 90 C.L.R. 157 at p. 159 ;
Commr. of Succession Duties (S.A.) v. Executor Trustee and Agency Co. (S.A.) Ltd. (1947) 74 C.L.R. 358 at p. 367 ;
Commonwealth v. Reeve (1949) 78 C.L.R. 410 . See also
Emerald Quarry Industries Pty. Ltd. v. Commr. of Highways (1979) 24 A.L.R. 37 at pp. 41, 56 ). As with the assessment of damages, especially in personal injury cases, the valuation of property by a court has many of the characteristics of a discretionary judgment. Valuation is a matter of estimation, not of precise mathematical calculation. It certainly involves the making of a value judgment in the metaphorical as well as the literal sense.

Subsection 18(3) does not displace the principle to which I have referred; it applies only to a court having original jurisdiction to determine the value of shares or stocks; it is designed to enable such a court to substitute its own opinion or discretion for that of the Commissioner, something it could not do without legislative authority. The subsection has no application to this Court exercising appellate jurisdiction under sec. 36 of the Act.

Moreover, there are other grounds to sustain his Honour's conclusion. Each ordinary share was the subject of a separate gift. It is therefore necessary to value separately each ordinary share and in so doing to have regard to the restrictions on transfer contained in the Articles and the indications that all the shareholders favoured a retention of the shares. When this is done and regard is had to the fact that the market value of the shares on the day in question was at an all-time high, I think that the primary judge was right to reject the case for a valuation on a winding-up basis.

The Commissioner's alternative submission is that Mr. Robinson's valuation should be accepted, subject to an allowance for blockage and brokerage. He advocated an assets valuation, attributing $24 per share to the B.H.P. shares, with a discount of 20% to allow for the unfavourable prospects of each of the ordinary shareholders securing a realization of capital. His approach was rightly criticized by the primary judge on three grounds: (a) that a much larger discount figure than 20% was called for; (b) that his approach was unsupported by other expert evidence; and (c) that there was no discount for ``blockage'', reductions in market price attributable to the theoretical necessity to sell a large parcel of shares on one day. In addition to these criticisms there is the point that Mr. Robinson seems to have thought, for reasons not apparent to me, that he was required to value the shares on the footing that he was dealing with a hypothetical allotment. I therefore reject the Commissioner's submission that Mr. Robinson's valuation should be adopted.

The Commissioner did not seek to argue that, if an earnings basis was accepted to be appropriate, the primary judge's valuation was erroneous. I am disposed to think that the primary judge was inclined to treat the assets basis and the earnings basis of valuation as offering two distinct alternatives. In truth, in arriving at a correct valuation the exercise is to be approached on the footing that a price is arrived at between the hypothetical vendor who is willing but not anxious to sell and the hypothetical purchaser who is willing but not anxious to buy. In executing this exercise the Court is not bound to choose between the two alternatives and apply one wholly to the exclusion of the other. The Court may, and should, in appropriate cases have regard not only to an earnings valuation but also to any further value which the shares may have by reason of there being some prospect that the assets value of the shares will be realized either on a sale or on a winding up. In a case such as the present allowance should be made for the possibility that a potential purchaser, especially an ordinary shareholder, would pay substantially more than the value to be justified exclusively on an earnings basis, by reason of the high assets backing of the shares. I doubt whether sufficient allowance was made by his Honour on this account but as this matter was not argued I need not explore the question.

ATC 4062

But I should make the comment that too much attention is given both by valuers and judges to what has been said by courts in other cases on matters of fact and discretionary judgment, not being matters of law. Essentially valuations are estimations involving findings of fact and discretionary judgment made on the evidence given in the individual case and by reference to the circumstances of that case. To apply slavishly the approach taken by a judge in another case, to apply the same discount or capitalization rate that he applied, as if that rate had the force of a general rule, is to attribute to them the force that should be confined to propositions of the law.

There remains for consideration in the St. Helens case the respondent's argument, already mentioned in another connexion, that the primary judge should have reduced the amount of his valuation by the amount of the gift duty payable by the company on each of the five shares. Gift duty is payable on the making of the gift (sec. 25(1)) and is a joint and severable liability of the donor and the donee (sec. 25(2)). The question raised in the respondent's submission could only arise in a case in which the disposition of property comprises an allotment by a company of its shares, as in Ord Forrest where the point was not argued. It arises in this class of case because in ascertaining the value of the property given, the share, it may be necessary to look to the company's liabilities. Had the primary judge valued the shares in St. Helens on an assets basis it would have been appropriate to take into consideration the liability of the company to gift duty. As the judge arrived at his valuation on an earnings basis, it is not a relevant consideration, though it is a factor which tends to counterbalance the additional price which a purchaser may have been prepared to pay because the assets had a high value.

In the result I would accept the primary judge's valuation of each share in St. Helens at $60,000 and I would dismiss the appeal and the cross-appeal.

Ceedon Pty. Ltd.

The principal difference between this case and that of St. Helens is that there was a power in the company to re-convert the preference shares held by Mr. Donald to ordinary shares. Since Mr. Donald during his lifetime retained control of voting rights, he could effectively control the meeting at which any proposal to re-convert the shares was made. Because the shares were under the control of the directors he could, by reason of his position as governing director, prevent the issue of any further shares.

Another difference is that in this case there was an escalation clause. A third difference is that all six ordinary shares were taken up by one person, Nodeec Pty. Limited, with the result that the property which was the subject of the disposition included all six shares.

Many of the issues sought to be raised in this case have been concluded by my judgment in the St. Helens case . His Honour found the value of the six ordinary shares in the company to be worth $5,000. In arriving at this valuation he applied the principles which he had applied in the case of St. Helens.

In this Court the respondents do not argue that by reason of the existence of the escalation clause there was no gift by Ceedon to the ordinary shareholders because on its true interpretation the escalation clause required the payment of a fully adequate consideration in money for the shares to be allotted. The respondents accept that the escalation clause is void but submit that it was not, as Sheppard J. found, severable. The respondents were content to defeat, if they could, the Commissioner's appeal and to accept an assessment to duty in accordance with the judgment of Sheppard J. They offered no explanation of their attitude.

Sheppard J. held that the escalation clause was void either because it was uncertain or because it involved the parties in agreeing to what was an impossibility. He took the view that the Deputy Commissioner of Taxation ``is a statutory office-holder designated in his official capacity who not only refuses to do what is asked of him but has, so it appears to me, no power to do so''. His Honour had earlier said:

``The parties have selected the Deputy Commissioner of Taxation as the person who is to determine the difference between what is described as the true value of the shares and the amount of the application moneys to be paid by Nodeec Pty. Limited.''

ATC 4063

This last comment seems to reflect a misunderstanding of the effect of the deed. As I read it, it was ``the true value of the shares'' which the Deputy Commissioner was to calculate under the deed, not the difference between that value and the amount of the application moneys. However, in view of the respondents' attitude and the absence of argument on the question, I need not explore it further. I shall assume that the escalation clause is inoperative. On that assumption Gibbs and Aickin JJ. have demonstrated that, if invalid, it is clearly severable. I do not wish to add to what they have said.

The Commissioner submitted that the possibility of Mr. Donald exercising his power to re-convert his shares to ordinary shares was a contingency for the purposes of sec. 18(1)(a), relying on the remarks of McTiernan J. in Gorton (at p. 615) in preference to the decision of Gibbs J. in
Bray & Anor. v. F.C. of T. (No. 2) 71 ATC 4060 ; (1971) 123 C.L.R. 348 .

The essential question, as it seems to me, is whether the expression ``any contingency affecting the interests of the donees'' is confined to a contingency which affects the existence or nature of the proprietary interests or whether it extends to a contingency which affects the value of the proprietary interests of the donees. In this context ``contingency'' means ``an event conceived of as a possible occurrence in the future''. And the expression ``the interests of the donees'' means ``the proprietary interests of the donees'' or their interests in property. The statutory definitions of ``disposition of property'' (para. (c) and (d)), ``donee'' and ``interest in property'' all suggest that ``interest'' bears this meaning.

If our inquiry were confined to the mere words of para. (a) of sec. 18(1) it might be said that the word ``affecting'' was equivocal and that, by reason of its being equivocal, it should be strictly construed so as to signify an event which, if it occurs, will divest or alter the proprietary rights or interests of the donees. Viewed in this light, the event in question, which is the possible exercise by Mr. Donald of the power to re-convert his preference shares into ordinary shares, though it would diminish the value of the existing ordinary shares, would not affect the interests of the donees because it would not alter their proprietary interests. The rights attaching to the existing ordinary shares would remain unaltered. On this argument the exercise of the power would ``affect'' Mr. Donald's preference shares and in consequence affect the value of the existing ordinary shares, but the exercise of the power would not of itself touch those shares or relate to them.

However, this approach turns a blind eye to the opening words of sec. 18(1) and to the purpose which it so clearly expresses. The purpose which para. (a) is designed to serve is that ``of computing the value of the gift''. By way of fulfilling this purpose para. (a) facilitates the computation of the value of interest in property which the donee obtains. In this setting para. (a) is to be read as referring to any contingency which affects the value of that interest, whether it divests or alters that interest or not. If Parliament intended that contingencies which affect the actual existence of the donee's interest are to be ignored in computing value - and this is conceded - it is rational to suppose that Parliament intended that contingencies which merely affect the value of the interest are also to be ignored. So understood, the word ``affecting'' has a meaning similar to ``affecting'' in the expression ``injuriously affecting''; it denotes contingencies which, if they occur, will affect the enjoyment, and consequently, the value, of the donee's estate or interest in property, though they may not affect the existence of that estate or interest or alter the rights which attach to it.

The decisions of the Court of Appeal in
White v. Bristol Aeroplane Co. Ltd. (1953) Ch. 65 and in
Re John Smith's Tadcaster Brewery Co. Ltd. (1953) Ch. 308 provide no support at all to the respondents. They are plainly to be distinguished. There it was held that the new issue of stock with voting rights did not ``affect'' the voting rights of existing preference stockholders, notwithstanding that it affected the enjoyment of those voting rights. But in each of these cases the word ``affect'' appeared in a traditional modification of rights article which when read with other provisions in the Articles demonstrated that ``affect'' meant affect by way of destroying or altering rights attaching to shares, as distinct from affecting the enjoyment or value of those rights. No such

ATC 4064

context exists here; instead, the context is that of valuation.

In the result I would allow the appeal, dismiss the cross-appeal and remit the matter to the Supreme Court.

Gwynedd Pty. Ltd.

The escalation clause here was expressed in different terms. It required the allottees to pay the allotment and premium ``or such if any greater sum as will constitute the consideration'' passing from the allottee to the company in respect of the allotment ``fully adequate within the meaning of that expression as used in'' the statutory definition of ``gift'' in sec. 4 of the Act.

However, for the reasons stated in the previous appeal, on the assumption that the clause is invalid, I conclude that it is severable. Likewise, for the reasons stated in the appeal, I consider that the primary judge should have applied sec. 18(1)(a).

I would allow the appeal, dismiss the cross-appeal and remit the matter to the Supreme Court.

Lucinda Investments Pty. Ltd.

For the reasons which I have expressed in the Ceedon appeal the primary judge should have applied sec. 18(1)(a) and ignored the contingency that Mr. Field might reconvert his cumulative preference shares into ordinary shares. Accordingly, I would allow the appeal, dismiss the cross-appeal and remit the matter to the Supreme Court.

Q.A.W. Pty. Ltd.

Again sec. 18(1)(a) should have been applied so as to ignore the contingency that Mr. Wright might, during his lifetime, reconvert his cumulative preference shares into ordinary shares. I would allow the appeal, dismiss the cross-appeal and remit the matter to the Supreme Court.


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