DINGWALL v FC of TJudges:
The applicant, Kenneth Dingwall, (``the taxpayer'') objected against the assessment of income tax based on income allegedly derived by him during the year of income ended 30 June 1990 (``the year of income''). The relevant assessment issued to the taxpayer by notice of assessment dated 25 September 1991.
The source of conflict between the taxpayer and the respondent, the Commissioner of Taxation, (``the Commissioner'') was the inclusion in the assessable income of the taxpayer for the year of income of the sum of $616,699. That sum was based upon the manner in which the Commissioner reacted to a claim by the taxpayer that capital gains made by him in the year of income should be offset by alleged capital losses of $892,750. It was the case for the Commissioner that no such losses had been suffered by the taxpayer.
On 12 December 1985, the taxpayer acquired 75,000 shares partly paid to one cent (``the first shares'') in the capital of Southern Farmers Group Limited (``Southern Farmers''). The acquisition of the first shares occurred as a result of the taxpayer's participation in the Southern Farmers Group Executive Share Scheme (``the scheme''). At that time the taxpayer was employed as managing director of Safcol Holdings Limited, a wholly owned subsidiary of Southern Farmers. A few months later, in April 1986, he was appointed Group Managing Director of Southern Farmers, a position which he held until his retirement on 2 July 1990. On 10 April 1986, the taxpayer acquired a further 100,000 shares (``the second shares'') in the capital of Southern Farmers - they were also partly paid to one cent and were acquired by the taxpayer through the scheme. The taxpayer paid Southern Farmers $750 and $1,000 (being one cent per share) contemporaneously with his applications for the respective parcel of shares.
The first shares were offered to the taxpayer at an issue price of $4.46 and the second shares were offered at $5.60. Both parcels of shares had a par value of 50 cents; the respective premium per share was therefore $3.96 and $5.10. The taxpayer acquired a third parcel of partly paid shares and various parcels of fully paid shares (mainly as a result of bonus issues) but they play no part in a determination of this matter.
Industrial Equity Acquisition (No 21) Pty Limited (``IEL'') made a takeover offer in August 1989 for all the shares in Southern Farmers. The offer in respect of the partly paid shares that were owned by the taxpayer was one cent per share; he accepted the offer and received a cheque for $1,750 from IEL on or about 10 October 1989.
At the time when the takeover offer was made, the terms of the scheme, so far as they related to partly paid shares, were as follows:
``If shares are offered they shall be offered on the basis that one cent per Share is payable upon acceptance of the offer which shall be by way of application for the Shares and that the remainder of the par value and premium (if any) is payable upon the first to occur of the following at which time and not before a call shall be made on the Share concerned:
- (a) any Employee who holds the Shares ceasing to be an Employee except as a result of death or involuntary retirement;
- (b) the expiration of two years from the death or involuntary retirement of the holder of the Shares;
- (c) the holder of the Shares seeking to transfer them to any person other than another Employee approved by the directors of Southern Farmers or to the trustee of The Southern Farmers Superannuation Fund; or
- (d) the winding up of the Company.
Nothing shall prevent the payment in full of the Shares or the premium thereon at any time prior to the date mentioned above or a call being made in respect of a Share at the request of the holder of that Share.''
Following the receipt of the takeover offer, but before the taxpayer accepted the offer, those provisions were amended to remove any suggestion that there was a mandatory obligation on the Board of Southern Farmers to make a call and to expand the class of ``approved persons''. Clause 3.5, as amended and as operative at the time of the taxpayer's acceptance of the takeover offer was in the following terms:
``3.5 If shares are offered they shall be offered on the basis that one cent per Share is payable upon acceptance of the offer which shall be by way of application for the Shares and that the remainder of the par value and premium (if any) is payable upon the first to occur of the following at which time and not before a call may (at the discretion of the Board) be made on the Share concerned:
- (a) Any Employee who holds the Shares ceasing to be an Employee except as a result of death or involuntary retirement;
- (b) the expiration of two years from the death or involuntary retirement of the holder of the Shares;
- (c) the holder of the Shares seeking to transfer them to any person other than another Employee approved by the Board or other person (or corporation) approved by the directors of Southern Farmers or to the trustee of The Southern Farmers Superannuation Fund (hereinafter called `approved persons'); or
- (d) the winding up of the Company.
Nothing shall prevent the payment in full of the Shares or the premium thereon at any time prior to the date mentioned above or a call being made in respect of a Share at the request of the holder of that Share.
In the event that Shares are transferred to an approved person the transferor shall have no liability whatsoever for any unpaid portion of the par value or premium (if any) which may at any time after such transfer become due and payable in respect of any such Share.''
The case for the taxpayer was simply expressed; he claimed that the cost base of the two parcels of shares was the total of their issue prices; i.e.
75,000 shares @ $4.46 ea. = $334,555 100,000 shares @ $5.60 ea. = $560,000 -------- $894,500 ========
The argument advanced by the taxpayer was to the effect that no regard need be had to the fact that he had only paid out $1,750 - rather what had to be considered was the existence of his liability for the uncalled capital and unpaid premium. Thus it was submitted that, as the taxpayer had only received $1,750 on disposal, he had suffered a capital loss of $892,750 (being the difference between $894,500, the claimed cost of acquisition, and $1,750, the amount received on disposal).
Alternatively, it was put, in terms of s 160ZYI of the Income Tax Assessment Act 1936 (Cth) (``the Act''), that the ``consideration in respect of the acquisition'' of the shares was their market value at the times of acquisition and that their market value at those dates totalled $894,500. It will be convenient to deal with that argument first.
Section 160ZYI provides as follows:
``If an amount is included in the assessable income of a taxpayer under section 26AAC as a result of the acquisition by the taxpayer of shares in a company, the taxpayer shall be deemed for the purposes of this Part to have paid-
- (a) subject to paragraph (b), at the time when the shares were acquired by the taxpayer; or
- (b) in a case to which subsection 26AAC(15) applies - at the time when the shares are deemed for the purposes of section 26AAC to have been acquired by the taxpayer,
as consideration in respect of the acquisition of the shares, an amount equal to the market value of the shares at that time, reduced by so much of the reducing amount (if any) as is attributable to those shares.''
Section 26AAC is the provision in the Act that deals with the acquisition of shares under a scheme for such acquisitions by employees; the assessable income of an employee will include the benefit that the taxpayer derives, being the difference between the value of the shares at the time of acquisition and the amount paid or payable by the taxpayer for the shares and for any attached rights.
Mr Slater QC, counsel for the taxpayer, submitted that the operation of s 160ZYI would be triggered if such a benefit should have been included (even though it might not have been included) in the assessable income of the taxpayer in a year of income; Mr Pagone, counsel for the Commissioner submitted, on the other hand, that there would be no such trigger unless there had been, in fact, an inclusion of such a benefit in a return of income by the taxpayer. I have concluded that Mr Pagone's submission is correct. It seems to me that the words in s 160ZYI have a clear and understandable objective. If an employee derives a benefit from participating in a scheme for the acquisition of shares and pays a sum less than the value of the shares, he or she will be taxed on the consequential benefit that he or she enjoys. If, later, the employee disposes of those shares and becomes liable to capital gains tax, he or she would suffer a double detriment if the base cost of the shares was not increased by the value of the benefit. In my opinion, s 160ZYI is designed to avoid such a result. It being an accepted fact that Mr Dingwall has never brought any amount to account in respect of these shares as assessable income under s 26AAC, s 160ZYI can have no application in a consideration of the issues that are presently before the court.
Should I be wrong, there is, in my opinion, a further evidentiary hurdle that the taxpayer has failed to clear. If Mr Slater's interpretation is correct, or if, for some other reason, s 160ZYI operates with respect to the affairs of Mr Dingwall, then there is the normal onus on the taxpayer to satisfy the court of the market value of each parcel of shares at the time of acquisition (there is no need to consider s 26AAC(15) as it is agreed that the taxpayer never made an election under that subsection). In my opinion, the taxpayer has failed to meet that onus. I do not consider that there is any evidence before the court that would enable the court to make a finding as to the market value of either parcel of partly paid shares.
In his affidavit sworn 19 May 1995 the taxpayer deposed that-
``The market value of the shares allotted to me pursuant to the First offer on the 12th day of December 1985 was Four Dollars and Eighty Cents ($4.80) per share.''
In support of that assertion, he exhibited to his affidavit the Australian Stock Exchange daily official listing on the allotment date. He also claimed that the market value of the second parcel of shares on 10 April 1986, their allotment date, was $6 per share; the Stock Exchange listing was exhibited to substantiate that figure. Of course, what the taxpayer deposed to in his affidavit was not accurate, as he readily agreed when in cross-examination it was pointed out to him that the values of $4.80 and $6.00 to which he had referred were the quoted market values for the fully paid listed shares in the capital of Southern Farmers. It is true, as Mr Slater pointed out, that the holder of partly paid shares could pay them up in full at any time and it is also true that there would then be an obligation on Southern Farmers to arrange for their listing on the Stock Exchange. But these are not factors that would support a submission that the unlisted partly paid shares should have the same value as the listed fully paid shares. The time needed to obtain listing, the cost of funds to convert them to fully paid shares and the lack of negotiability in the meantime are cogent reasons why a discount factor would have to be applied. The function of the court would be, in an appropriate case, to fix that discount factor based on the evidence that had been adduced by the parties. No such evidence was presented and no finding as to the market value of the partly paid shares can be made; as a consequence, it is not open to the taxpayer to argue that the deeming provisions of s 160ZYI are available to him.
I turn then to consider the application of s 160ZH of the Act to the affairs of the taxpayer. Subsection (1) of that section deals with ``the cost base to a taxpayer of an asset''. It is the sum of the amounts described in pars (a) to (e) inclusive. So far as this case is concerned, it is
ATC 4349sufficient to have regard only to par 160ZH(1)(a) which refers to:
``... the amount of any consideration in respect of the acquisition of the asset;''
Subsection 160ZH(4) then proceeds to define the term ``the consideration in respect of the acquisition of an asset''. The subsection is in the following terms:
``160ZH(4) Subject to the following provisions of this section, for the purposes of this Part, the consideration in respect of the acquisition of an asset is-
- (a) if the taxpayer has paid or is required to pay an amount or amounts of money in respect of the acquisition - that amount or the sum of those amounts;
- (b) if the taxpayer has given or is required to give property other than money in respect of the acquisition - the market value of that property at the time of the acquisition; or
- (c) if the taxpayer has given or is required to give both an amount or amounts of money and property other than money in respect of the acquisition - the sum of that amount or those amounts and the market value of that property at the time of the acquisition.''
The case for the taxpayer was that he, in the language of par 160ZH(4)(a) ``paid'' $1,750 and was ``required to pay'' the uncalled capital and unpaid premiums. Thus, so it is said, his cost base was, as I have previously said, $894,500. The taxpayer maintains, as part of his argument, that on disposal he received no other relevant benefit other than the payment of $1,750; in particular, he submits that no account should be taken of any release from his liability to pay uncalled capital and unpaid premiums; he maintains that any such benefit (if it exists) does not come within the parameters of subs 160ZD(1) which deals with the subject of consideration in respect of a disposal of an asset. The subsection provides as follows:
``160ZD(1) Subject to this Part, for the purposes of this Part, the consideration in respect of a disposal of an asset is:
- (a) if the taxpayer has received or is entitled to receive an amount or amounts of money as a result of or in respect of the disposal - that amount or the sum of those amounts;
- (b) if the taxpayer has received or is entitled to receive property other than money as a result of or in respect of the disposal - the market value of that property at the time of the disposal; or
- (c) if the taxpayer has received or is entitled to receive both an amount or amounts of money and property other than money as a result of or in respect of the disposal - the sum of that amount or those amounts and the market value of that property at the time of the disposal.''
This particular issue was not developed by counsel in argument and, in view of the conclusions that I have reached, it is neither desirable nor necessary for me to express a view on the subject. Before considering further the relevant provisions of the Act, it is desirable to say something about the liability of shareholders to meet calls on partly paid shares. The relevant statutory provision was, at the relevant time, s 361 of the Companies (South Australia) Code (cf. s 527 of the Corporations Law). Section 361 provided:-
``The liability of a contributory is of the nature of a specialty debt according to the law of the State accruing due from him at the time when his liability commenced but payable at the times when calls are made for enforcing the liability.''
There is, of course, as the authorities make clear, a difference between a debt that is due and a debt that is payable. To acknowledge the existence of a liability does not constitute an acknowledgment that the debt represented by the liability is payable. The problem in this case is to relate that difference to the use of the phrase ``required to pay''.
In support of his proposition that the taxpayer was ``required to pay... amounts of money in respect of the acquisition'' Mr Slater referred to certain authorities dealing with liabilities for calls, the first of which was
Ex parte Canwell (1864) 4 De G J & S 539 (46 ER 1028). That case dealt with the Companies Act, 1862 (UK), s 75 of which stated that:
``The liability of any person to contribute to the assets of a company under this Act in the event of the same being wound up, shall be deemed to create a debt (in England and Ireland in the nature of a specialty) accruing due from such person at the time when his liability commenced, but payable at the time
ATC 4350or respective times when calls are made as hereinafter mentioned for enforcing such liability:...''
The similarity in language between this section and s 361 of the former Code is apparent. Lord Westbury LC concluded in Canwell's case that the liability referred to in s 75 related back to the date of the contract for the acquisition of partly paid shares. The question of the interpretation of s 75 of the 1862 Act was considered again in
Buck v Robson (1870) 10 L.R. Eq 629 when Mr Bacon V.C. said at 633-634:
``So that it is the same legal obligation which binds members and contributories at all times subsequent to the registration of the articles of association, and a winding-up order does not in this respect influence or change the nature of the original liability.''
The difference between the creation of a liability and the date when the debt becomes payable was discussed in
In re The Peter Lalor Home Building Co-operative Society Limited (in liquidation); Tuckman v Dunlop  VR 165, a decision of the Full Court of the Supreme Court of Victoria. In that case, Dean J said:
``When does liability `commence'. It is at some time prior to the making of the call. It may be when he agreed to take the shares, or it may be at the commencement of the liquidation. The latter seems correct, as it is the liability `of a contributory' which is referred to, and he was not a contributory until winding up. The final words show that the liability is enforced by making calls, and that the debt then becomes payable. The liquidator could not sue for calls until they have become payable by the making of a call, so that the cause of action would not arise until the call was made.''
Smith J, after referring to Ex parte Canwell and Buck v Robson and other authorities came to the more traditional conclusion at 185:
``These cases show, I think, that the true position is that at the time when a person becomes a shareholder he incurs a liability to the company which is capable of ripening into a debt or a number of debts in a variety of contingencies. It may do so by reason of the making of a call or calls by the directors before winding up, and it may do so by reason of the making of a call or calls by the liquidator after winding up.''
Mr Pagone did not question these authorities or the concept of the creation of a liability arising at the time of the issue of the partly paid shares. However, he maintained that the issue of liability is not the determining factor because the liability was contingent and would remain contingent unless and until a call was made by the company. He therefore submitted that the existence of a contingent liability does not assist in determining what is meant by the words ``required to pay an amount'' in par 160ZH(4)(a) of the Act.
In support of this proposition, Mr Pagone referred to the decision of the High Court in
Clyne & Anor v DFC of T (1981) 150 CLR 1. In that case, the High Court had to consider the meaning of s 218 of the Act and, in particular, the meaning to be given to the word ``due'' where it appeared in that section. Mason J (as he then was) with whom Aickin and Wilson JJ agreed said:
``However the correct view in my opinion is that income tax is due when it is assessed and notice is served of that assessment and that the tax does not become payable before the date fixed by s. 204.''
Woodward and Northrop JJ considered the decision in Clyne's case in
Taylor v DFC of T 87 ATC 4441; (1987) 16 FCR 212 when considering the expression ``any other tax payable by the employee'' in par 221H(2)(b) of the Act. After referring to the passage from Mason J referred to above their Honours went on to say:-
``In the light of these expressions of opinion, it is necessary to consider whether the provisions of sec. 82 of the Bankruptcy Act apply where an assessment has not been issued and served at the time of the bankruptcy. It should be emphasised that this question arises from the application of an Act other than the Income Tax Assessment Act; cf. what Mason J said in Clyne's case (above). On a literal application, the liability imposed by sec. 17 of the Income Tax Act would seem to be a liability within sec. 82 of the Bankruptcy Act. In the absence of an assessment, that tax is not due, in the sense of owing, and is certainly not payable. It is a liability contingent on an assessment being issued and served.''
(at ATC 4446; FCR 218)
What then is the meaning of the word ``required'' when par 160ZH(4)(a) posits: ``if the taxpayer... is required to pay an amount or amounts of money...''? It must take its meaning from the context in which it is found; so much is clear from the decision of the House of Lords in
Smith v National Coal Board  2 All ER 593 per Lord Guest at 599. In that case, which involved an allegation of an unsafe system of work, the relevant regulation provided that if any material was placed in close proximity to a railway line and ``any person employed at the mine is required... to pass on foot over that material or between it and the line,'' the material must be so placed that the person could pass without being exposed to risk or injury by traffic on the line.
The respondents were held liable in negligence for allowing a normally safe route to become blocked by a dangerous obstruction. It was held that the word ``required'' did not mean ``ordered'' or ``instructed''; in the context of the facts of that case the deceased workman was ``required'' to use the normally safe route even though he had not been ordered to do so.
Lord Hodson said at 597:
``The word `required' does not mean specifically ordered, but it does involve that the use of the route was reasonable in proceeding on the journey which the person employed was making.''
Lord Guest had this to say:
``... nor do I think that it means that it was a matter of necessity for the workman to pass that way, or that, in other words, there was no other way open to him. There were alternative routes for him to take... I am content to adopt the test of `required' as being whether it was reasonably incidental to the performance of the deceased's duty as a shunter. So judged, my view is that the deceased was `required' in the terms of reg. 20.''
At page 600 Lord Pearce asked the question whether the deceased was ``required'' in the course of his duty to pass along the route which he followed. He answered by saying at 601:
``Once it is conceded... that he was `accompanying' the train, it can be said that he was `required to pass on foot' by any route that was normal to a shunter accompanying a train on that particular track.''
An entirely different meaning to the word ``required'' was given by Rogers J in
Milligans & Sons Pty Ltd v Chief Commr of Land Tax (NSW) 86 ATC 4433; (1986) 17 ATR 994. In that case the term ``discretionary trust'' was defined by the Land Tax Management Act 1956 (NSW) in the following terms:
``Discretionary trust means a trust under which the vesting of the whole or any part of the capital of the trust estate, or the whole or any part of the income from that capital, is required to be determined by a person either in respect of the identity of beneficiaries, or quantum of interest to be taken, or both.''
His Honour rejected a submission that would substitute for the wording of the definition, in so far as it contained the need for a determination enshrined in the word ``required'', the possibility of a determination. His Honour described the definition as ``the mandatory requirement'' that there is ``required'' to be a determination by the trustee; he rejected a submission that the definition would permit him to read the provision as though it provided for a vesting which ``may'' be determined by the trustee.
In my opinion, as a matter of grammatical construction, par 160ZH(4)(a), in its use of the word ``required'', means that there is a requirement for either an actual payment or, at least, a present obligation to pay a sum certain at some future date. It is not enough that an amount might become payable in the future upon the happening of some contingency. Unless a call is made the unpaid amount and, therefore, the requirement to pay, will never ``ripen'' into a present obligation to pay either presently or in the future. For these reasons, I have concluded that the taxpayer did not have, at any relevant time, a requirement to pay any sum on account of uncalled capital or unpaid premiums. That conclusion means that ``the consideration in respect of the acquisition'' of the partly paid shares is limited to $1,750, the total of the amounts that the taxpayer has paid; that amount of $1,750 is therefore ``the cost base to the taxpayer'' of those assets.
The Commissioner raised an alternative argument based on the decision of the Full Court of the Supreme Court of Victoria in
Niemann v Smedley  VR 769. In that case the directors of a company had created a special
ATC 4352class of shares called ``Executive Employee Shares''. The shares had a par value of 5 shillings and were issued at a premium of 5 shillings per share to selected employees. On the liquidation of the company there was a large deficit and the liquidator settled a list of contributories which included all executive employees who had not paid 10 shillings per share in full. It was held that employees were not liable, as contributories, to pay, in the winding up of the company, the amount unpaid on the premium on each share. Their liability to contribute in the winding up was limited to the amount, if any, unpaid on the nominal amount of the shares held by them. Based on this decision, the Commissioner argued that if the taxpayer has suffered a capital loss then the extent of the loss is to be determined by disregarding the unpaid element of the premium on each parcel of shares. Having regard to the decision which I have reached, it is not necessary for me to express a concluded view on this argument. However, in case the matter goes further, I proffer the observation that the decision in Niemann v Smedley is distinguishable by virtue of the fact that there is no evidence before the court suggesting that Southern Farmers was in liquidation at the time of the takeover or has since gone into liquidation. That being the case, the question of any liability in respect of any uncalled capital or unpaid premium would be ascertained by having regard to contractual commitments and without considering the statutory provisions of the Companies Code or the Corporations Law.
For the reasons earlier stated this appeal must be dismissed with costs.
THE COURT ORDERS THAT:
1. The appeal be dismissed.
2. The applicant pay the respondent's costs.