KIWI BRANDS PTY LTD v FC of TJudges:
Full Federal Court
Hill, Finn and Sundberg JJ
The Appellant, Kiwi Brands Pty Ltd (``the Appellant'') appeals against the decision of a judge of the Court dismissing its appeals from objection decisions of the Respondent Commissioner of Taxation (``the Commissioner''), disallowing its objections to an assessment and amended assessment in relation to its taxable income for the year of income ended 30 June 1991 [ reported at 97 ATC 4879].
There is no dispute as to the facts. What is in issue is whether, for the purposes of s 160ZO(1) of the Income Tax Assessment Act 1936 (``the Act''), a net capital gain accrued to the Appellant in the year of income ended 30 June 1991, as the Commissioner contends, that being the basis upon which the assessments objected to were made, or, as the Appellant contends, in the year of income ended 30 June 1992.
The background facts
Sara Lee Corporation (``Sara Lee''), an American corporation, carried on the business, inter alia, of manufacturing and distributing branded over the counter pharmaceuticals and prescription medicines, radiological and incontinence products in 25 countries throughout the world through 24 subsidiary or associated companies. In Australia the business was owned and conducted by the Appellant who was then known as Nicholas Kiwi Pty Ltd.
In late 1990 Sara Lee determined to sell that business. It did so through a process of auction. The successful bidder was Roche Holding Ltd (``Roche'') of Switzerland. In the result a purchase and sale agreement was exchanged on 30 May 1991.
The parties to this agreement (``the May Agreement'') were expressed to be Sara Lee, the 24 subsidiary or associated companies, which included the Appellant, all of whom were collectively referred to as ``Sellers'' and Roche, therein called ``Buyer''. Relevantly for present purposes the Sellers agreed to sell to the Buyer the ``assets'' (defined in the agreement) and the ``Intangible Rights'' (also defined). The assets were, in effect, the business assets of the vendors (goodwill, plant and machinery, inventory, books and records) except, relevantly, certain real estate and intellectual property rights. The intangible rights were intellectual property rights. The purchase price payable ``by Buyer to Sellers'' for the overall ``Health Care Group'' was US$597,681,000, subject to adjustment for certain intercompany transactions not presently relevant. The overall purchase price was, in accordance with Clause 2.4(b) of the May Agreement to be allocated:
``among the Shares, the Assets and the Intangible Rights in accordance with Schedule 2.4(b) of the Disclosure Schedules.''
(The reference to shares relates to other sellers who were to sell shares in companies rather than assets and has no present relevance.)
Schedule 2.4(b) was headed ``Allocation of Purchase Price''. It contained two columns. The first listed the assets/intangibles to be sold by particular companies. Relevantly it referred to the Appellant by name. The second column stipulated a price, relevantly US$61,461,000. The total purchase price allocated under the schedule was US$597,681,000.
The Agreement referred to liabilities which were to be assumed by the Buyer as at ``the Closing'', and the assignment by the Sellers of certain contracts. The liability assumptions and assignments were to be by instruments to be duly signed and delivered by the parties. As at the closing the Sellers agreed:
``Sellers shall transfer to Buyer and Buyer shall acquire from Sellers the... Assets and the Intangible Rights by delivering such assignments,... deeds... and other instruments and documents of conveyance and transfer in recordable form for each jurisdiction to which such instruments and documents relate, in form and substance reasonably satisfactory to Buyer... as shall
ATC 4004be effective to vest in Buyer... the Assets and the Intangible Rights...''
Sara Lee represented that the execution of the Agreement on behalf of each seller was duly authorised: cl 4.2 and, inter alia, the ownership of the relevant assets by the Sellers. In fact the execution on behalf of the Appellant was by a Director who at the time of signature had no authority from the Board of the Appellant to sign. That unauthorised execution was subsequently ratified, but not before 20 August 1991.
As might be expected the Agreement contained detailed commercial provisions. There were certain conditions precedent to the Buyer's obligation, including foreign investment approvals in Australia, and covenants given against competition by the Sellers. Relevant to some of the submissions of the parties was clause 12.3 which provided:
``This Agreement shall not be assigned by any party hereto without the prior written consent of the other parties; provided, however, that Buyer may assign any of its rights or obligations hereunder to one or more of its subsidiaries or affiliates without the prior written consent of Sellers; provided further, however, the assignee shall agree to be bound by the terms and conditions of this Agreement and that such assignment shall in no way limit or relieve the assignor of any of the assignor's obligations hereunder. This Agreement shall inure to the benefit of and be binding on and enforceable against the parties hereto and their respective successors and permitted assigns.''
The Agreement was to be governed by the laws of England. It was not suggested that the laws of that country differed in any relevant respect to those of the Australian States.
The Amendment to the Purchase and Sale Agreement - August 1991
On 30 August 1991, the day on which closing occurred, the May Agreement was amended by a written agreement headed ``Amendment to Purchase and Sale Agreement'' (``the Amendment Agreement''). The Amendment Agreement was between Sara Lee purporting to act on behalf of itself and the other Sellers and Roche as ``Buyer''. After reciting the May Agreement and the desire of the parties to ``amend, clarify and supplement'', it went on to amend the May Agreement in a number of respects. Among other things, it altered the obligation of the Buyer to make offers of employment to employees of the Appellant on or prior to completion, reduced the overall purchase price by US$296,000 and in clause 5(b) provided:
``Schedule 2.4(b) is hereby amended and restated in its entirety as set forth on Schedule 9 attached hereto.''
Schedule 9 referred to an overall purchase price of US$821,100,000 which was divided up on the first page of the Schedule in a ``Summary'' among purchase of shares, assets and intellectual property rights, covenants not to compete and, inter alia, bank debt. Thereafter each page was headed:
``NICHOLAS ACQUISITION/PURCHASE OF SHARES August 29, 1991''
One page of the schedule was divided into 5 columns. The first, relevant to transactions involving assets rather than shares, was headed ``Acts as Cashier''. It has no relevance to the present issue. The second was headed ``Net Assets of''. Relevantly, the Appellant was named in that Schedule. The third column had no heading but indicated the relevant country where the assets were located. It was completed ``Australia'' in the relevant entry. The next column was headed ``Price US$''. It dealt with the allocation of the overall consideration. The relevant entry applicable to the Appellant was US$62,461,000. It will be noted that this increased the amount which was to be received by the Appellant for its part in the overall transaction by US$1,000,000. The final heading, absent from the original schedule to the May Agreement, was ``Purchaser''. Under this heading were listed the various Roche companies who were to purchase the assets in the various countries. The relevant entry shows the purchaser to be ``Nicholas Products Pty Ltd (new company)''.
At this point it may be interpolated that Nicholas Products Pty Ltd (``Nicholas Products'') was incorporated as a shelf company on 25 June 1991 under another name. The change of name to Nicholas Products Pty Ltd was effected on 6 August 1991, a few days before shares had been allotted to Roche Products Pty Ltd and changes of directors were effected.
On the same day (ie 30 August 1991) many documents were signed and exchanged between
ATC 4005the Sara Lee interests and the Roche interests. No doubt all were signed at the same time and handed over. They should, however, be taken as being intended to take effect in the order required to give them effect. One such document was a letter from Roche to Sara Lee which, omitting formal parts which referred back to the May Agreement ``as amended'' read:
``In accordance with Section 12.3 of the Agreement, Buyer has assigned its rights and obligations under the Agreement to certain of its subsidiaries and affiliates as set forth in Schedule A hereto (the `Assignees') and the Assignees have agreed to be bound by the terms and conditions of the Agreement.''
Among the companies referred to in Schedule A under the heading ``Buyer'' appears Nicholas Products Pty Ltd. Opposite its name under the heading ``Seller & Items Purchased'' are the words: ``Assets, Assumed Liabilities and Assigned Contracts from Nicholas Kiwi Pty Ltd.''
It may, perhaps, be the case that this letter preceded the amendment which showed Nicholas Products as the buyer. Nothing, however, turns upon the order of these two documents.
Among the myriad of documents executed and handed over are two which warrant fuller description. The first was a document headed: ``Deed of Assignment''. It was between the Appellant and Nicholas Products and dated 30 August 1991. It referred to the May Agreement ``as amended'', recited that all conditions precedent had been complied with, and that:
``Roche has assigned to the Buyer pursuant to Section 12.3 of the Agreement certain of its rights and obligations under the Agreement.''
and in its operative part provided:
``... in consideration of the sum of US$62,461,000 paid by the Buyer to the Seller pursuant to the terms of the Agreement at or before the execution and delivery hereof (the receipt and sufficiency of which is hereby acknowledged), subject to Section 10.6 of the Agreement, the Seller does hereby sell convey, assign, transfer and deliver to the Buyer, its successors and assigns forever, all of the Seller's right, title and interest in and to the Assets, the Intangible Rights... and the Assigned Contracts, to have and to hold such Assets, Intangible Rights and Assigned Contracts unto the Buyer and its successors and assigns, to and for its or their use forever.
This instrument shall inure to the benefit of the Buyer and its successors and assigns and shall be binding upon the Seller and its successors and assigns, effective immediately upon its delivery to the Buyer.
This deed of Assignment is delivered pursuant to the Agreement and it shall not alter, supersede, augment, abridge or affect any provision of the Agreement. In the event of any conflict between the terms of the Agreement and the terms hereof, the terms of the Agreement shall be controlling.''
Next there was the Deed of Assumption of Liabilities as contemplated by the May Agreement.
Again the parties were Nicholas Products and the Appellant. That document likewise referred to the May Agreement ``as amended''. It recited, inter alia, that the Appellant had ``concurrently herewith sold, conveyed, assigned, transferred and delivered to Roche certain Assets and Intangible Rights''. In partial consideration of the sale ``pursuant to the Agreement, by the Seller to the Buyer of the Seller's right, title and interest in and to the Assets and the Intangible Rights...'', the Buyer agreed to assume the liabilities as contemplated by the May Agreement.
The only remaining document which needs mention is a receipt also dated 30 August 1991. Relevantly it provided:
- ``Pursuant to the Purchase and Sale Agreement dated May 31, 1991, as amended, among Sara Lee Corporation (`SLC'), the Sellers named therein (collectively with SLC, the `Sellers') and Roche Holdings Ltd (`Roche'), SLC hereby acknowledges, on behalf of the Sellers and certain of its subsidiaries or affiliates, receipt of the following funds from Roche and/or certain of its subsidiaries or affiliates:
Receiving Company Amount in US$ ... 7. Nicholas Kiwi Pty Ltd (Aust) 62,461,000 ...''
The statutory background
Section 160ZO(1) is the operative provision of Part IIIA of the Act. It provides:
``Where a net capital gain accrued to a taxpayer in respect of the year of income, the assessable income of the taxpayer of the year of income includes that net capital gain.''
A net capital gain arises where there is ``a capital gain [which] accrues to a taxpayer in respect of a year of income'': s 160ZC. The computation will be affected by matters such as indexation and capital losses, not presently relevant. Section 160Z is concerned with defining the circumstances where a capital gain is deemed to accrue to a taxpayer during the year of income. It provides, relevantly:
``Subject to this Part, where an asset... has been disposed of during the year of income:
- (a) if the consideration in respect of the disposal exceeds the indexed cost base to the taxpayer in respect of the asset - a capital gain equal to the excess shall be deemed for the purposes of this Part to have accrued to the taxpayer during the year of income....''
What constitutes a ``disposal'' for the purposes of Part IIIA is defined in s 160M of the Act. Subsection (1) of that section provides:
``Subject to this Part, where a change has occurred in the ownership of an asset, the change shall be deemed, for the purposes of this Part, to have effected a disposal of the asset by the person who owned it immediately before the change and an acquisition of the asset by the person who owned it immediately after the change.''
Subsection (2) of that section then provides:
``A reference in subsection (1) to a change in the ownership of an asset is a reference to a change that has occurred in any way, including any of the following ways:
- (a) by the execution of an instrument;
- (b) by the entering into of a transaction;
- (c) by the transmission of the asset by operation of law;
- (d) by the delivery of the asset;
- (e) by the doing of any other act or thing
- (f) by the occurrence of any event.''
The section then continues to expand on the circumstances which constitute a disposal in terms that are not presently relevant.
In the normal case of an arm's length transaction for consideration, what is to constitute the ``consideration in respect of a disposal of an asset'' is calculated in accordance with s 160ZD(1). Where a taxpayer is ``entitled to received an amount or amounts of money as a result of or in respect of the disposal'' the amount or sum of amounts is to be treated as the consideration in respect of the disposal: s 160ZD(1)(a).
Section 160U is, as the heading it bears attests, concerned with the time of a disposal or acquisition. It provides, relevantly:
``(1) Subject to the provisions of this Part other than this section, where an asset has been acquired or disposed of, the time of acquisition or disposal for the purposes of this Part shall be ascertained in accordance with this section.
(2) If the time of acquisition or disposal as ascertained under a subsection of this section is different from the time of acquisition or disposal as ascertained under a subsequent subsection of this section, the time of acquisition or disposal shall be taken to have been the time of acquisition or disposal as ascertained under that subsequent subsection.
(3) Where the asset was acquired or disposed of under a contract, the time of acquisition or disposal shall be taken to have been the time of the making of the contract.
(4) Where the asset was acquired or disposed of otherwise than under a contract, the time of acquisition or disposal shall be taken to have been the time when the change in the ownership of the asset that constituted or gave rise to the acquisition or disposal occurred.''
It will be observed that subs (3) and (4) are mutually exclusive. Subsection (3) applies only where the disposal is ``under a contract''; subs (4) where the disposal is ``otherwise than under a contract''. The dispute between the parties depends upon whether the disposal constituted by a transfer of the assets of its business including intellectual property rights by the Appellant to Nicholas Products was ``under a contract'', and if so under what contract.
The submissions of the parties
The Appellant submitted:
- 1. The disposal by it was not ``under'' the May Agreement but rather under the Amending Agreement entered into in August 1991, that being the relevant ``contract''.
- 2. Alternatively, the disposal was ``under a contract'', that being the document headed ``Deed of Assignment'', which should be construed as a contract followed by an assignment.
- 3. Alternatively, the disposal was not ``under a contract'' but was effected by the ``Deed of Assignment'' on August 30 1991.
- 4. Alternatively, if the disposal was under the May Agreement, that agreement was in May 1991 not validly executed by the Appellant, and that remained the case until ratified by the Appellant on 20 August 1991. The contract made by the Appellant was thus to be treated as made in August 1991, notwithstanding the common law doctrine to the effect that ratification, once made, relates back to the initial date of execution by the unauthorised agent.
- 5. A disposition can only be ``under a contract'' if the contract directly effects the disposal. As this did not happen in this case, the disposition lacked the necessary closeness of relationship with the agreement for it to be said that they were made ``under'' the May Agreement. For this submission the Appellant relied upon what was said by Wilcox J in
Elmslie & Ors v FC of T 93 ATC 4964 at 4976; (1993) 46 FCR 576 at 592.
- 6. Finally, it was submitted that the May Agreement only became a relevant ``contract'' for the purposes of s 160U when the conditions precedent to it were performed, that being outside the 1991 year of income.
For the Commissioner it was submitted that the disposition of assets, which was effected by the Deed of Assignment was pursuant to the May Agreement, that being the relevant contract because:
- 1. The Amendment of the May Agreement did not operate to rescind the May Agreement, there still being one relevant agreement, namely that made in May 1991.
- 2. Ratification of the May Agreement operated retrospectively to effectuate the May Agreement as and from the date of its initial unauthorised execution.
- 3. It was immaterial that the May Agreement was subject to conditions precedent. It was made in May 1991, not when the conditions were fulfilled.
The judgment appealed against
The learned Primary Judge was of the view that the disposition of assets by the Appellant was made ``under'' the May Agreement. He regarded the Deed of Assignment and related assumption of liabilities as depending upon the May Agreement as amended, being:
``part of an elaborate process of documentation at the closing meeting necessary to implement the agreement.''
``In my view, the provision for the deeds in the purchase and sale agreement, the dependence of the deeds on the purchase and sale agreement and the function of the deeds as part of the implementation of the transaction all show that the deeds were made `under' the purchase and sale agreement as amended.''
His Honour rejected the submission that for a disposition to be ``under'' a contract the contract had to actually effect the disposition, distinguishing Elmslie.
His Honour likewise rejected a submission that the contract had to be specifically enforceable or that conditions precedent to its operation had to be performed.
Turning to the question of the Amending Deed his Honour found, and this is not challenged, that the Amending Deed did not operate as a rescission of the May Agreement. After considering the decision of the High Court in
Tallerman & Co Pty Ltd v Nathan's Merchandise (Vic) Pty Ltd (1957) 98 CLR 93, his Honour concluded that there was only one contract made in May 1991.
In his Honour's view the fact that the purchaser, Nicholas Products was only incorporated after the May Agreement did not affect the result. He found that no new contract came into existence between the Appellant and Nicholas Products. He commented:
``Instead, the rights and obligations of the appellant, Roche and Nicholas Products
ATC 4008continued to be governed by the purchase and sale agreement as amended. The disposal continued to be under the original contract. Nicholas Products became bound by the original contract only upon the assignment. As Nicholas Products was incorporated prior to this assignment, the time of that incorporation does not affect the determination of the contract under which the disposal occurred. Thus, the fact that Nicholas Products was not in existence on 31 May 1991 did not prevent 31 May 1991 being the time of the making of the contract under which the relevant assets were disposed.''
Finally, his Honour held that the doctrine of ratification of a contract executed by an unauthorised agent operated to make the contract binding upon the principal as if an original party. His Honour held that s 160U imported general law concepts of contract and provided no basis for the conclusion that doctrines of general law had no application.
Accordingly, his Honour found that the Appellant's disposition of its business assets to Nicholas Products was made ``under'' the May Agreement.
Was there a disposition made under a contract and, if so, what contract?
Before examining the particular facts of the present case it is useful to return to the statutory background and to set out some conclusions which can be drawn from it which assist in the resolution of the appeal.
First, it must be said that the legislation in bringing capital gains within assessable income does so with respect to particular dispositions. Where those dispositions are for consideration it is necessary to determine what the consideration in respect of that disposition is: s 160ZD. It will be the amount of money which the taxpayer will have received or be entitled to receive, either as a result of the disposition or in respect of it. It is only when it is known what the consideration is in respect of a particular disposition that it is possible to compute the amount which is to be included in assessable income. It is not necessary for present purposes to distinguish between receipt and entitlement as a ``result'' of disposition and the case where the consideration is ``in respect of'' the disposition. All that is important is that the Act requires there to be the identification of the disposition and the consideration for it. In the present case the disposition is a disposition from the Appellant to Nicholas Products; the consideration in respect of that disposition is US$62,461,000.
Second, and this suffices to answer the Appellant's submission that the fact that Nicholas Products was not incorporated at the time of the May Agreement leads to the conclusion that the disposition can not be under the May Agreement, there is no reason why the date of disposition and date of acquisition to be determined under s 160U are necessarily the same. Section 160U is throughout expressed in the alternative, namely the time of acquisition or the time of disposal. That this is so necessarily follows, it might be thought, from the fact that in some cases, at least there may be a disposal but no acquisition. So, for example, if a right be extinguished, there will be a disposition (s 160M(3)(b) but no relevant acquisition.
Where there is a disposition it is irrelevant not only that there is no acquisition of the same asset, but also whether if there is an acquisition it occurs at the same time. No doubt normally a disposition and acquisition will be coextensive. But there is no reason in principle and certainly no reason apparent from the language of s 160U to conclude that the same transaction could not give rise to a disposal at one time and an acquisition at a later time. So, there is nothing in s 160U, or for that matter any other provision in Part IIIA, which renders it absurd that a disposition of an asset can occur prior to the incorporation of the entity who acquires it. The question whether there is an acquisition and if so when it took place is irrelevant to the capital gains tax consequences to the disponor. Likewise, it is irrelevant to any capital gains tax liability of the acquirer when the disponor disposed of the asset. It is only relevant that the acquirer acquired it and at what point of time.
Third, there is nothing in s 160U which requires the conclusion that the relevant contract must effect the disposition, indeed the contrary is the case. If the contract itself is a disposition, and that would be a rare case, contracts for the sale of goods providing that title will pass at contract may be an example, there is no reason for s 160U or any room for the operation of s 160U(3). The disposition will not be ``under'' the contract as that expression is used in s 160U, the disposition will be the
ATC 4009contract itself. We shall return to this point later in discussing Elmslie.
Fourth, there is nothing in s 160U which requires that the contract be specifically enforceable or unconditional or not subject to conditions precedent. A transfer pursuant to a conditional contract would still be made ``under'' that contract. Further, the contract is made when the contractual obligations are formed, not when the condition is fulfilled.
Fifth, there is no reason why the person who acquires the asset need be a party to the contract to which s 160U refers. No privity of contract is required. This was said to be the case by Wilcox J in Elmslie and was not the subject of dispute before us. One example will suffice. Assume a contract providing for conveyance to be taken in the name of a company not yet incorporated followed by a conveyance to that company on completion following incorporation. Such a transfer, constituting a disposition, would be ``under'' the contract: cf
Vickery v Woods (1952) 85 CLR 336 at 343 per Dixon J.
However, there may be a question where the contract provides for a disposition to the purchaser or a person nominated in some way by the purchaser whether the disposition, if to a person nominated in that way, could still be regarded as ``under'' the contract, notwithstanding that a nomination was necessary before the disposition could be made to the purchaser. A contrary view could gain support from cases in the area of stamp duty such as
Lake Victoria Ltd v Commissioner of Stamp Duties (1949) 49 SR (NSW) 262, although it may be said that the stamp duty context is somewhat different to the present context. It is unnecessary in the present case to decide the question. We are content to proceed upon the basis that if there was an ``assignment'' which satisfied the terms of Clause 12.3 of the May Agreement, and the evidence on the point was to say the least sparse, that in itself did not preclude the ultimate disposition to Nicholas Products from being under the May Agreement.
One may, at this stage pause to lament the drafting of the documents in the present case and in particular the failure to distinguish between assignment and novation as concepts. What is clear is that there was never any novation of the contractual liability of Roche to purchase even the Australian assets of the Appellant with the consequence that Nicholas Products never became bound prior to 20 August 1991.
The first, and somewhat considerable difficulty which the Commissioner's submissions must face is that the May Agreement, considered apart from the Amending Agreement, provided not merely for a transfer of assets from the Appellant to Roche (subject to the operation of clause 12.3) but more significantly it provided for a transfer to Roche not for the consideration which was actually paid, but for a figure US$1,000,000 different. What is apparent is that something else intervened, that being the Amending Agreement in August 1991. Hence it is important to consider that agreement, and the question whether the disposition which the Commissioner in fact assessed as resulting in a capital gain, namely a disposition for US$62,461,000 to Nicholas Products, was made not under the May Agreement, but under the Amending Agreement.
The Amending Agreement introduced for the first time, although only in Schedule 9, an allocation, not merely of purchase price among the assets by country but also a nomination of the companies, subsidiaries or otherwise affiliates of Roche, which were to be the relevant purchasers. It seems clear, as we have already suggested, that by the time the Amending Agreement was executed and became effective, notice had been given to Sara Lee of what was at least a nomination of the companies which were to become the purchasers of the relevant assets. It was, as we have already indicated, the allocation which also changed the consideration which was to be paid for the Australian assets.
What must be appreciated is that the May Agreement encompassed commercially two separate kinds of agreements. First, there was an overall agreement between Roche and Sara Lee for the sale of the whole of the Sara Lee health care business for a composite figure. Second, and more importantly for present purposes, there were separate agreements from the Sara Lee subsidiaries or affiliates for the sale to Roche of the various assets for particular prices. Roche could, subject to the performance of the conditions precedent, compel each subsidiary to transfer assets on tender of the allocated purchase price and documents required to be executed by Roche.
It is clear that the Amending Agreement changed at least the most fundamental term of the contracts between the Sara Lee subsidiaries and affiliates on the one hand and Roche on the other, namely the price payable by Roche to each Sara Lee company for the assets to be acquired from that company. It was only as and from the time of the Amending Agreement that there was a contract providing for the disposition of the Australian assets to a Roche company, by then nominated as Nicholas Products for the consideration which formed the basis of the assessment of the capital gain which is the subject of the two objection decisions.
The question can then be posed whether the relevant disposition was one made under a contract and if so whether, having regard to the terms of s 160U that contract is to be regarded as having been made in May 1991 or August 1991 when the Amending Agreement was made.
The first part of the question can be simply answered. Once the May Agreement was amended by the Amending Agreement the disposition was one which was made under a contract. The Deeds of Assignment and Assumption of liabilities and related documents were but the working out of the contractual obligations of the parties provided for by the terms of the contractual relationship between them. Although the drafting of the Deed of Assignment is far from felicitous using both the expression ``sell'' as well as ``assign'' it does not sound in contract. It is the assignment for which the contractual obligations themselves provided.
It is thus necessary to turn to the more difficult question, namely, whether, having regard to the language of s 160U and the policy implicit in it, as well as the general law consequences of amendments to contracts, the contract pursuant to which the assignment was carried out was under the May Agreement or under the contract formed by the Amending Agreement in August 1991.
What does ``under a contract'' mean in s 160U?
Both parties accepted as correct the decision of Wilcox J in Elmslie. In that case the taxpayers were partners in a stockbroking firm. A document entitled ``Heads of Agreement'' was executed between them and Jardine Fleming Australia Limited relating to a take over of an initial half interest in the firm by Jardines. A term of the Heads of Agreement was that the stockbroking firm was to be acquired by a corporation which was to be capitalised to a nominated amount and half owned by the stockbrokers and half by the Jardine interests. The Heads of Agreement which were expressed to be subject to the signing of a formal agreement were dated 28 June 1985, that is to say before the commencement of the capital gains tax provisions. A subsequent formal agreement referred to as the ``Shareholders Agreement'' was entered into together with a Purchase Agreement. Each of the subsequent agreements was entered into on 7 November 1985, that is to say subsequent to the commencement of the capital gains tax provisions on 20 September 1985, and an allotment of shares took place pursuant to applications which bore the date 28 October 1985. The shares were subsequently sold and the question for decision was whether the shares had been acquired pursuant to a contract, and if so whether the relevant contract was that of June 1985 or that of 7 November 1985.
Wilcox J held that the shares were acquired under the contract of 7 November, while accepting that the parties intended to be bound by the Heads of Agreement and that it had contractual force. In his Honour's view the relevant contract under which the allotment was made was that which was the means by which the asset was actually acquired. There were, his Honour said, three reasons for his Honour's decision.
The first was that the Heads of Agreement was not intended to serve as an allotment of the shares. More importantly for present purposes the directors had not yet decided how many shares were to be issued. Rather they intended a further agreement which would deal with that question.
The second reason was that because s 160U could only envisage one contract in a case where there had been more than one contract in fact entered into, the relevant contract to which s 160U(3) referred had to be that which directly effected the disposition. His Honour said that it was necessary to disregard any earlier contract obliging one or both parties to the acquisition to enter into the immediately operative contract.
Although his Honour did not identify directly the third reason it is apparent that it was the
ATC 4011assistance he gleaned from decided cases which had discussed the meaning of analogous phrases such as ``under an enactment'' or ``under a lease'', the latter being the context in which the High Court had decided
Chan v Cresdon Pty Ltd (1989) 168 CLR 242, a case which his Honour described as ``particularly telling''. His Honour said of these cases:
``They demonstrate that the word `under' usually imports a direct connection between the relevant act and the instrument...''
Referring particularly to Chan his Honour continued at 592:
``In that case, it was not enough that there was a contract (the lease) that envisaged that the lessee would go into possession and, indeed, required it to do so. It was not enough that, absent the lease, the lessee would not have gone into possession and the liability for rent not arisen. For the guarantors' liability to arise, the rental liability had to be incurred under the lease; that is, through its operation as an instrument that created a legal interest. In the same way, the contract under which an asset is acquired, within the meaning of s 160U(3), is the contract through whose operation the asset changes ownership.''
To the extent that his Honour's comments may be taken to suggest that the only operation of s 160U(3) is where the contract itself constitutes a disposition it can not be accepted. The policy behind the subsection is to advance the time of acquisition or the time of disposition as the case may be to the time of making an antecedent contract. If the contract itself constituted the disposition there would be no work at all for the subsection to do. In any event the contract of 7 November, which it seems his Honour accepted was the relevant contract, was itself not an allotment of shares which constituted a disposition. Of course, since the actual allotment occurred, as a matter of fact on the same day it was not really necessary in Elmslie to distinguish between the contract to allot and the allotment treating the disposition as being the allotting and issuing of the shares. Nevertheless there is nothing in the judgment which suggests that his Honour really envisaged that on the facts of the case there was a disposition which was not at all under a contract.
However, it is clearly right, and for the reasons advanced by his Honour, that s 160U(3) envisages that there is only one contract to which it can refer. The timing of an acquisition or disposal must be certain and fixed - there can not be multiple occasions on which an acquisition or disposal is deemed to occur. Where, as in Elmslie, there is more than one contract it will be necessary to see which contract s 160U(3) refers to. If the contract is one which does not require the particular disposition, in that case an allotment of a particular number of shares and for a particular price, it can not be the contract under which the disposition is made. The Heads of Agreement fell into this category. Accordingly, there was no contract under which the disposition was made until the contract formed, as his Honour found, in November 1985. That was the contract which obliged the parties to undertake the specific disposition. It was, to adopt his Honour's language, ``immediately operative'', not in the sense that it was, itself, the disposition but because it was the contract under which there was a direct connection with the disposition required by it. A similar view of Elmslie may be said to have been taken by Dr Gerber sitting as Deputy President of the Administrative Appeals Tribunal in AAT Case 24/94,
94 ATC 239.
Accepting that, at least, as and from the date of amendment, there was a contract under which the relevant dispositions of the Appellant were made, the next question which arises is when the relevant contract was made.
The Commissioner relies upon the decision of the High Court in
Tallerman & Co Pty Ltd v Nathan's Merchandise (Vic) Pty Ltd (1957) 98 CLR 93 for the submission that there was only one contract, the May Agreement, as amended by the Amending Agreement and that one contract was made in May when the May Agreement was executed. It is necessary to examine Tallerman carefully to see whether it really requires this conclusion to be reached in the present context.
The issue before the Court in Tallerman was whether the Supreme Court of New South Wales had jurisdiction to give judgment in favour of a plaintiff who sued on a contract said to have been made in New South Wales and which purported to amend an earlier contract which had been made in Victoria. Dixon CJ and Fullagar J were of the view that the so called contract which was sued upon and which was said contractually to amend the original
ATC 4012Victorian contract was ineffective. However, their Honours then assumed it to be effective but nevertheless found for the defendant. Their Honours said at 112, in the passage upon which the Commissioner relies:
``But what is the position where a contract is concluded in one place and subsequently varied by agreement in another place? There is only one contract, and one would think it clear that that contract must, if it ever becomes material to inquire where it was made, be regarded as made at the place where it was originally concluded. The variation affects the content of the obligation but not the obligation itself.''
Williams and Kitto JJ, in separate and dissenting judgments were both of the view that there was a valid contract on which the plaintiff could sue, that being the contract effected at the time of amendment. Williams J, while of the view that the original contract had been rescinded, was also of the view that had there been no rescission the result would have been the same. His Honour said at 127-128:
``There would be the two sets of contracts on foot, the old contracts and the new contract consisting of some of the terms of the old contracts and a new term. The old contracts and those contracts as varied cannot be the same contract. They must be different contracts. The new contract must override the old contracts so far as their terms clash and the old contracts even if they are not rescinded rendered inoperative to this extent. An existing contract that is varied as to one of its terms must be in law a new contract.''
Taylor J, who formed part of the majority, was of the view that if there was a contractually enforceable amendment so that the contract sued upon was the original contract made in Victoria as amended by a contract made in NSW the plaintiff had to lose because the contract as amended was not wholly made in NSW.
In our view the case provides little guidance here. The context in which the questions arise differs considerably. No doubt in the present case it would be correct to say that the parties to the Amendment Agreement (admittedly enforceable in contract) could not have sued on that alone if, for example, a dispute had arisen between them. No doubt it is true as the parties before us have accepted that the Amending Agreement did not operate to rescind the May Agreement. But neither proposition really answers the question whether the obligation of the Appellant to transfer certain assets for a specified price arose under the May Agreement or under the Amending Agreement made in August which then operated to amend the May Agreement.
An amendment to an earlier contract which is effected by contract and does not operate to rescind the earlier contract does not take effect retrospectively. It operates from its date. While it is true that a party may not necessarily sue on the Amending Agreement alone (as in Tallerman where the agreement sued upon contained terms in the original agreement unaffected by the amendment), it is also true that a party could not sue merely on the initial contract in such a case without pleading the amendment, if the matter in dispute was affected by the amendment. But the present case is not concerned with matters of pleading, or for that matter jurisdictional limits.
In the context of s 160U(3), the first time that there was a contractual obligation on the part of the Appellant to transfer assets for a consideration of US$62,461,000 was in August 1991 and as a result of the Amending Agreement. The contract under which the disposition which brought into play the provisions of Part IIIA of the Act occurred was not the contract which was made in May, but the contract which was made in August and was brought into existence by the Amending Agreement. That contract was, in our view, the contract under which the disposition was made.
As we are of the view that the appeal should be allowed for the reasons we have given it is strictly unnecessary to consider the Appellant's submission to the effect that the May Agreement was only made by the Appellant when it was ratified by it, having regard to the initially unauthorised execution of the May Agreement by an agent. However, we do not accept the submission.
There is no dispute as to the general law consequences of ratification. As Cotton LJ said in
Bolton Partners v Lambert (1889) 41 Ch D 295 at 306, in a passage cited by the learned Primary Judge:
``The rule as to ratification by a principal of acts done by an assumed agent is that the
ATC 4013ratification is thrown back to the date of the act done, and that the agent is put in the same position as if he had authority to do the act at the time the act was done by him.''
It is also true, as Lord Macnaghten said in
Keighley, Maxsted & Co v Durant  AC 240 at 247 in another passage cited by the learned Primary Judge, that:
``... by a wholesome and convenient fiction, a person ratifying the act of another, who, without authority, had made a contract openly and avowedly on his behalf, is deemed to be, though in fact he was not, a party to the contract.''
It may be accepted that the doctrine of ratification is correctly described by Lord Macnaghten as a fiction, cf to the same effect Isaacs J in
Davison v Vickery's Motors Ltd (1925) 37 CLR 1 at 19. But that does not mean that it is to be ignored for the purposes of applying the income tax law. The Income Tax Assessment Act 1936, and like statutes proceed on a basis which assumes the general law, unless specifically modified. So, for example, where a partner assigns an interest in a partnership the effect of that assignment is to be judged by reference to the general law consequences of it. The income tax consequences then follow:
FC of T v Everett 80 ATC 4076; (1980) 143 CLR 440;
FC of T v Galland 86 ATC 4885; (1986) 162 CLR 408. So, when, as in Galland an assignment is by deed delivered in escrow, the effect of the condition being fulfilled will follow the general law, namely that, except in respect of intermediate income, the deed relates back to the time the deed was initially delivered in escrow, notwithstanding that at the time it was initially delivered its operation was suspended:
FC of T v Taylor (1929) 42 CLR 80. What income tax consequences follow then fall to be determined by reference to the relevant statutory provisions.
Oates v FC of T 91 ATC 4060; (1990) 27 FCR 289, a case concerned with the consequences of annulment of bankruptcy, Hill J said at ATC 4069-4070; FCR 300-301:
``... reference was made [by the Commissioner] to the undoubted principle that income tax is an annual impost. Thus it was said that the liability of a taxpayer for income tax crystallised on the last day of the year of income so that that liability may not be affected by subsequent events. While that proposition will normally hold true it cannot be accepted as of universal validity. A case may be imagined where the liability of a taxpayer is dependent upon an act done by an attorney under power where as at the end of the year of income the power was unregistered. In New South Wales, if the act concerned land it would be in certain cases of no force or validity whatever unless the instrument creating the power was registered: s 163(2) of the Conveyancing Act 1919 (NSW). Yet the proviso to that section provides that the acts in question will take effect, retrospectively once the power is registered. A similar result would seem to flow from s 29 of the Stamp Duties Act 1920 (NSW) if the liability of a taxpayer depended upon a transaction effected by an unstamped instrument which is subsequently stamped after the year of income cf
Shepherd v Felt & Textiles of Australia Ltd (1931) 45 CLR 359. In such circumstances it seems to me that the income tax legislation must assume the existence of and follow the result of the general law cf
FC of T v Galland 86 ATC 4885; (1986) 162 CLR 408.''
In our view it follows that the lack of authority of the Appellant's agent to execute the May Agreement does not result in the conclusion that that agreement was made only when the execution was ratified. It was made when it was executed.
In our view the Appeal should be allowed, the orders made by the learned Primary Judge set aside, and in lieu thereof it be ordered that the objection in each case be allowed. The Commissioner must pay the Appellant's costs of the Appeal and of the proceedings below.
THE COURT ORDERS THAT:
1. The Appeal be allowed.
2. The orders made at first instance be set aside and in lieu thereof it be ordered that the objection in each case be allowed.
3. The Commissioner pay the Appellant's costs of the Appeal and of the proceedings below.