Case P21
Judges:KP Brady Ch
LC Voumard M
JE Stewart M
Court:
No. 2 Board of Review
K.P. Brady (Chairman); L.C. Voumard and J.E. Stewart (Members)
The questions for decision in these references are whether or not sec. 26AAA operates so as to tax profits made on shares exchanged upon a take-over, also to tax the profit made on a sale of shares which were acquired through a take-over. The relevant transactions in the references took place in the years of income ended 30th June, 1976, and 30th June, 1977.
2. The taxpayer, an elderly gentleman, did not state his occupation in the income tax returns tendered to us, but it would seem that he was an investor of some magnitude, his income for the years of income in issue being as follows:
3. At the hearing before us, the taxpayer appeared in person and was not represented. The Commissioner was represented by Mr. J.W.K. Burnside of Counsel. Without intending any disrespect to the taxpayer, it followed from the fact that he was not represented that the applicability of sec. 26AAA to his situation was not argued as comprehensively as might otherwise have been the case. Also, it would have been helpful to have tendered to us the documentation relating to the various take-overs, but this did not happen.
4. It is convenient to deal with the two years' take-over transactions in turn; first, the year ended 30th June, 1976.
5. A schedule accompanying the taxpayer's return for that year disclosed that the dividend income of $27,440 was derived from 33 different public companies, all of which were in the nature of gilt-edged investment stocks. That fact lent support to the taxpayer's statement that at no time had he engaged in share trading activities. Any sales were made only in the normal course of reviewing his share portfolio.
6. In the same schedule the taxpayer advised of two take-overs that took place in the year as relating to shares which he then owned. In the interests of confidentiality (and this is more relevant to the take-over which took place in the 30th June, 1977 year of income when the taxpayer was a very substantial shareholder in the offeree company), we shall call the parties in the first take-over A Company (the offeror) and B Company (the offeree), and in the second take-over M Company (the offeror) and N Company (the offeree).
7. Interpolating the above nomenclature, the taxpayer advised the Commissioner in his return as follows:
``I held 4,000 shares in (B Company) for over 5 years. On the 14th January 1975 I purchased a further 300 shares. These shares were taken over by (A Company) for 5,375 of its own shares. On the 15th January 1976 I sold the (A Company) shares. I did not hold the (A Company) shares for one year but the sale was more than one year since I bought the last 300 of the (B Company) shares.
Prior to the 4th March 1974 I held 34,000 shares in (N Company). These I sold between the 15th and 26th October 1975. Between the 30th January 1975 and the 10th April 1975 I purchased 9,300 shares in (N Company). These shares were taken over by (M Company) for 6,975 of its own shares and $1,743.75. I still hold the (M Company) shares which I received in exchange for (N Company) shares.
Any other shares sold by me had been held for a period of longer than one year.''
8. After obtaining further information relating to the two transactions from the taxpayer, the Commissioner increased the 1976 taxable income by adding to the figure of $44,504 the profit made on the sale of the A Company shares, $1,719, and the ``profit'' derived on the take-over of the N Company shares, $14,365, and issued an assessment accordingly. These adjustments were effected on the basis that the transactions were caught by sec. 26AAA. The taxpayer objected, and following the Commissioner's decision to disallow the objection the matter has come before this Board for review.
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9. Turning now to the year of income ended 30th June, 1977, the Commissioner issued an assessment on the income returned of $74,101. A schedule accompanying the return disclosed that the dividend income of $40,491 was derived from 36 different public companies comprising, with few exceptions, those same companies which had been listed in the taxpayer's 1976 return. In the same schedule, the taxpayer advised of a take-over undertaken by the X Company for the shares that he owned in Y Company. The taxpayer advised the Commissioner of the transaction in the following terms:
``Prior to the 21st November 1975 I had acquired 42,706 shares in (Y Company). After the 30th November 1975 I acquired a further 17,300 shares in (Y Company).
Pursuant to a take-over all my shares in (Y Company) totalling 60,006 were acquired by (X Company) on the 29th November 1976, in exchange for 60,006 shares in (X Company). I still hold the shares in (X Company).
I submit this by way of information only as I contend that I am not liable to any tax on the take-over of the 17,300 shares in (Y Company). I have not realized as yet any gain or loss on the same.
Any other shares sold by me had been held for a longer period than one year.''
10. Some 14 months after the issue of the original assessment, the Commissioner issued an amended assessment whereby he increased the taxable income by an amount of $13,827 representing the profit alleged to have been made on the Y Company shares, again on the basis that the transaction was caught by sec. 26AAA.
11. The taxpayer objected to the amended assessment and, following the Commissioner's decision to disallow the objection, the matter has come before this Board for review.
12. A statement detailing the computations of profit which were agreed upon by both the taxpayer and the Commissioner was tendered to us. With the facts and figures agreed, the sole matter in issue was the applicability of sec. 26AAA to the taxpayer's situation.
13. Section 26AAA was introduced by Act No. 165 of 1973 and came into effect on 11th December, 1973. It applies to property purchased after 21st August, 1973, where that property, or an interest in it, is sold before the expiration of 12 months from the date of purchase (the date 21st August, 1973, was the date on which the Government announced its intention to introduce the section).
14. The section renders assessable the profit made within the prescribed period on a sale of property or an interest in property, irrespective of the purpose for which the property was acquired. In that important aspect, it differs materially from sec. 26(a). Similar to that section however, it departs from the general scheme of the Act as set out in sec. 48, in that it brings a net amount of profit into assessable income.
15. The section applies to all forms of property other than the specific exceptions enumerated in subsec. (5). They include the case where the property concerned is a dwelling used as the taxpayer's sole or principal residence, and the sale takes place ``as a result of a change in the place of employment or place of business of the taxpayer''. Additionally, the section does not apply where ``the property was included in the assets of a business carried on by the taxpayer and, as a result of the sale, an amount will be included in the assessable income of the taxpayer of the year of income under a provision of this Act other than this section''. Finally, the section has no application in the situation where there has been a sale of depreciable property, with sec. 59 operating so as to bring a balancing charge into assessable income.
16. The word ``property'' has a very wide meaning, and in fact sec. 26AAA(1)(a) extends it even further by stating that:
``a reference to property generally or to a particular kind of property includes a reference to an estate or interest in property or in that kind of property, as the case may be;.''
See also the comments of Neasey J. in
Brettingham-Moore v. F.C. of T. 81 ATC 4658 at p. 4659.
17. In a decision of the Supreme Court of New South Wales in
F.C. of T.v. Miranda, 76 ATC 4180,
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Rath J., in dealing with the application of sec. 26(a) to ``rights'' to shares, said at p. 4189:``I am satisfied that the rights were `property' within the meaning of sec. 26(a). That term is not defined in the Income Tax Assessment Act but I see no reason to restrict its meaning. In Stroud's Judicial Dictionary (3rd ed., vol. 3 p. 2340) it is said that `property' is the generic term for all that a person has dominion over; and the following observation of Langdale M.R. in Jones v. Skinner 5 L.J. Ch. 90 is quoted:
- `Property is the most comprehensive of all terms which can be used, inasmuch as it is indicative and descriptive of every possible interest that a party can have.''
18. A share in a company being a chose in action is obviously ``property'' (see
Commonwealth Homes and Investment Co. Ltd. v. Smith (1937) 59 C.L.R. 443 at p. 461), and in fact subsec. (1) and (7) of sec. 26AAA have specific provisions relating to shares. Also as a consequence of introducing sec. 26AAA, sec. 6D (which deemed the purpose with which a shareholder acquired shares which he retained for at least 18 months to be other than that required under the first limb of sec. 26(a)) was necessarily amended so as to limit its application to shares acquired before 22nd August, 1973.
19. It was stated earlier that there were two take-over transactions in the year ended 30th June, 1976, viz.:
- - a take-over by A Company of the taxpayer's B Company shares and the subsequent sale of the A Company shares by the taxpayer;
- - a take-over by M Company of the taxpayer's N Company shares, with the taxpayer retaining the M Company shares.
It is convenient to deal with the second transaction first.
20. The statement of agreed facts reveals that the taxpayer purchased shares in N Company as follows:
Date of No. of Cost
Purchase Shares
30 January 1975 1,200 $754
6 February 1975 100 63
10 April 1975 8,000 5,734
----- ------
9,300 $6,551
----- ------
In exchange for those shares he acquired 6,975 shares in Company M and $1,744 cash when that company took over N Company on 16th February, 1976. If sec. 26AAA were to operate at all, it could only apply to that parcel of shares purchased within the prior 12 months, i.e. the parcel of 8,000 shares purchased on 10th April, 1975. The Commissioner saw fit to apply the section on the basis that the transaction was of the kind contemplated by sec. 26AAA(1)(f). That subsection states as follows:
``26AAA.(1) For the purposes of this section -
- ...
- (f) if property is transferred from a person or persons to another person or other persons in exchange for other property or without consideration, the transfer shall be deemed to constitute the sale of the property by the first-mentioned person or persons and the purchase of the property by the second-mentioned person or persons;''
21. In our view, those words are plain and unambiguous and give extended meanings to what would normally be regarded as a sale transaction and a purchase transaction. The aim of the legislature in giving these concepts a wider meaning than in normal usage is consistent with the extended meaning given to the word ``property'' in sec. 26AAA(1)(a), to the words, ``agreement or option'' in sec. 26AAA(1)(b), to the word ``agreement'' in sec. 26AAA(1)(c) and to what shall constitute a ``purchase'' within the terms of sec. 26AAA(1)(d) and (e).
22. It is, of course, not unusual for Courts to give extended meanings to concepts having no precise or technical connotation when considering the objective of specific legislative provisions. In
Smith v. F.C. of T. (1932) 48 C.L.R. 178, the High Court had cause to consider the assessability of a dividend paid ``wholly and exclusively out of
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the profits arising from the sale of assets which were not acquired for the purpose of resale at a profit'', when the profit was derived from a compulsory resumption of land. There, Rich J. in a separate judgment, but speaking as one of the majority, stated at p. 186:``Sale is not a word of precise technical import. In many contexts the essential idea it conveys is an agreement to transfer property for a valuable consideration. Often the valuable consideration intended is restricted to money. In other contexts agreement is not the essence of the conception but the conversion of property into money or its realisation is the notion sought to be expressed.''
He went on to say at pp. 187 and 188:
``It is true that the Queensland statute under which the land was taken from the Company does not proceed by notice to treat but by a Gazette notice of acquisition. Perhaps in England the procedure by notice to treat produced a greater similarity in conveyancing practice to the completion of a voluntary sale, but the difference is not material in considering whether agreement is an essential element in the connotation of the word `sale', or whether it is capable of including alienation of property for a money sum, when the alienee alone possesses freedom of action; see per Lord Macnaghten in
Williams v. Permanent Trustee Co. of New South Wales (1906) A.C. 249 at p. 252 where he says: `It is a compulsory purchase just as much in the one case as in the other'. The common speech of lawyers in Courts of Equity justifies the assertion that the word is capable of the more extensive meaning, and the only question remaining is whether in this statute it should receive the more restricted construction. The subject with which the statute is dealing points unmistakably in the direction of the more extended meaning.''
23. That line of reasoning was expressly approved by the High Court in a later case of
Coburg Investment Company Proprietary Limited v. F.C. of T. (1960) 12 A.T.D. 242 at p. 248. See also
Henty House Pty. Ltd. (In Voluntary Liquidation) v. F.C. of T. (1953) 88 C.L.R. 141, and the judgment of Lord Reid as one of the majority in
Kirkness v. John Hudson & Co. Ltd. (1955) A.C. 696 at p. 729.
24. Also the intention of the legislature in framing sec. 26AAA was to give it a very wide meaning. In the second reading speech of the then Treasurer, Mr. Crean, he said:
``A further proposal announced in the Budget speech relates to the taxing of casual profits from the sale of property within the year following its acquisition. The Bill contains provisions to treat such profits on property purchased after 21st August 1973 as assessable income.
These short-term profits are essentially in the nature of income and ought to be subject to tax as such. The provisions give expression to this concept. An exemption is proposed to meet the case where a person finds it necessary to quickly sell a home because of a change in place of business or employment.''
We have noted that the exemption of which the Treasurer spoke was introduced as sec. 26AAA(5)(c). The exemption operates if the taxpayer's sole or principal residence is sold because of a change in his place of employment or business. Thus, the profit derived from the sale of a taxpayer's home within 12 months of purchase would be caught by the section unless the above special features appertained. Accordingly, a profit which might properly be called a capital profit comes within the ambit of the section. This fact is mentioned only to indicate the extremely wide compass in which the section can operate.
25. For all of the above reasons, we consider that the terms of sec. 26AAA(1)(f) should not be read down in any way. We are of the view that a sale was effected by the taxpayer of his N Company shares when he despatched a duly signed transfer to M Company indicating his consent to that company taking over his shares.
26. In the light of that view, we consider that the charging provision of sec. 26AAA, viz. subsec. (2), can properly be invoked by the Commissioner to bring the profit made on that ``sale'' into the taxpayer's assessable income. That taxing subsection states as follows:
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``Where -
- (a) a taxpayer has purchased property after 21 August 1973 and before the commencement of this section or purchases property after the commencement of this section; and
- (b) the taxpayer has, whether before or after the commencement of this section, sold the property or an interest in the property before the expiration of the period of 12 months from the date on which he purchased the property,
then, subject to this section, the assessable income of the taxpayer includes any profit arising from the sale of the property or interest.''
27. The combined effect of sec. 26AAA(1)(f) and sec. 26AAA(2) thus runs counter to the long-established proposition stated in
Californian Copper Syndicate Ltd. v. Harris (1904) 5 T.C. 159 that an enhancement in value of an investment as reflected on its sale is not assessable to income tax unless realised in carrying on a business.
28. It was argued by the taxpayer that he did not have it in his mind to sell his N Company shares when he exchanged them for shares in M; he saw the transaction as merely merging his interest in N's assets with the assets of M. However, consent is not always necessary before a transaction can be called a sale (see Smith v. F.C. of T. (supra)), but in any event the taxpayer at the very least knew he was alienating his N shares when signing the transfer. Also of relevance to the question of voluntariness is the case of Brettingham-Moore v. F.C. of T. (supra) where the Supreme Court of Tasmania held that a compulsory acquisition of land was a sale for the purposes of sec. 26AAA; a fortiori, a voluntary alienation, as is the case now before us, can be properly considered to be a sale and come within the ambit of that provision.
29. Accordingly, we find that the profit of $16,084 made on the transfer of the N Company shares in exchange for M Company shares was properly assessable under sec. 26AAA. Because there is no difference in the fact situation appertaining to the take-over of the taxpayer's Y Company shares in the 1977 year, we also find that that profit of $13,827 was properly assessable under sec. 26AAA.
30. The first of the three take-over transactions, i.e. that transaction relating to the A Company shares, gave rise to an actual sale by the taxpayer of the shares acquired in the take-over; to that extent it differed from the other two transactions where the shares acquired were retained. In that sort of circumstance the converse situation applies, in that sec. 26AAA(1)(f) operates so as to make the acquisition of the A Company shares in exchange for his B Company shares a deemed purchase, with the date of that purchase being, we were told, the 27th October, 1975. As he sold them only a few months later, on 15th January, 1976, sec. 26AAA(2) operates so as to treat the profit of $1,719 as assessable income.
31. It is necessary to refer to one other matter before concluding these reasons. That matter relates to the question of whether the taxpayer made a full and true disclosure in his return for the year ended 30th June, 1977, of the X Company take-over of Y Company as affecting his own shareholding in Y Company, as it will be recalled that the assessment to which the taxpayer objected for that year of income was an amended assessment calling for the payment of additional tax of $8,988 on the alleged sec. 26AAA profit.
32. In his notice of objection, the taxpayer included the following ground:
``Without limiting the generality of the foregoing, full and true disclosure of all the material facts necessary for the taxpayer's assessment has been made and accordingly the amended assessment issued by the Commissioner is incorrect and not within the provisions of the Act.''
33. In providing the Board with his reasons for disallowing the taxpayer's objection as required by reg. 35(1), the Commissioner denied that the taxpayer had made a full and true disclosure necessary for his assessment within the terms of sec. 170(2) of the Act. The terms of sec. 170 apply only to amended assessments, with subsec. (2) of that section stating as follows:
``Where a taxpayer has not made to the Commissioner a full and true disclosure of all the material facts necessary for his
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assessment, and there has been an avoidance of tax, the Commissioner may -
- (a) where he is of opinion that the avoidance of tax is due to fraud or evasion - at any time; and
- (b) in any other case - within six years from the date upon which the tax became due and payable under the assessment,
amend the assessment by making such alterations therein or additions thereto as he thinks necessary to correct an error in calculation or a mistake of fact or to prevent avoidance of tax as the case may be.''
34. We consider that the taxpayer has not made a full and true disclosure as required of him. In
Austin Distributors Pty. Ltd. v. F.C. of T. (1964) 13 A.T.D. 429, the High Court had cause to examine the terms of sec. 170 as regards the assessability of a premium on a lease. Menzies J. there stated at pp. 432 and 433:
``The requirement of sec. 170 of the Income Tax and Social Services Contribution Assessment Act is not met by anything less than full disclosure of all the material facts, and a disclosure which leaves the Commissioner to speculate as to some of the material facts is not sufficient. I have reached the conclusion that there was not full disclosure of the facts requisite to arrive at a determination whether the taxpayer was a lessee of the land for the purposes of the Income Tax and Social Services Contribution Assessment Act. The matter can be tested in this way. If advice were to have been sought by the taxpayer whether or not the sum in question was a taxable premium, would the person from whom that advice was sought have required more information than this return disclosed to the Commissioner? I cannot escape the conclusion that he would and that, in particular, he would have required to know the purpose for which the licence was granted and its terms.''
35. We consider that the same question if posed in the instant case would have received the same affirmative answer, i.e. the person advising on the assessability of the transaction would have required more information than disclosed in the return. Specifically, it seems to us he would have required the cost price of the 17,300 Y Company shares and the market price of the X Company shares as at the date of the take-over in order to ascertain whether there was a profit element in the transaction.
36. We therefore consider that there was clearly an avoidance of tax as indicated by the further amount required to be paid on the amended assessment. Having arrived at that conclusion, we hasten to mention the dicta of Fullagar J. in
F.C. of T. v. Westgarth (1950) 81 C.L.R. 396, because we believe the taxpayer to be a man of the utmost probity and integrity. At p. 414, the learned Judge said:
``The word `avoidance' is, I think, to be contrasted with the word `evasion'. It involves, I think, no notion of escaping by any device or artifice, but conveys simply the notion of actually escaping through not being called upon to pay.''
37. In the light of the above judicial pronouncements, we consider that the amended assessment was properly made by the Commissioner under sec. 170(2).
38. For the reasons stated above, we confirm the assessment for the year ended 30th June, 1976, also the amended assessment issued in respect of the year ended 30th June, 1977.
Claims disallowed
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