K.W.A. Bridges & Ors. v. Federal Commissioner of Taxation.Judges:
Supreme Court of New South Wales
Sheppard J.: To be determined are eleven appeals brought by taxpayers against assessments of income tax by the Commissioner of Taxation. Except in one case the assessments are in respect of the inclusion in the taxpayers' returns of moneys received during the year ended 30th June, 1969, which the taxpayers say is not assessable income, or in respect of the disallowance of expenditure paid out during the same year which the taxpayers say they were entitled to deduct. The appellants include Messrs. A.H. Urquhart, K.W.A. Bridges and F.H. Mullens who have at all material times been partners in the stock-
ATC 4341broking firm of Mullens & Co. Each partner controls a family company and Mr. Bridges' and Mr. Mullens' companies are also appellants. In Mr. Urquhart's case the company which is an appellant in two of the appeals, Hartal Pty. Limited, one in respect of the assessment issued in respect of the year ended 30th June 1969, and the other in respect of that issued in respect of the year ended 30th June 1970, is a subsidiary of his family company, Alhart Investments Pty. Limited. Mr. Bridges' company is Kitchwin Investments Pty. Limited and Mr. Mullens' company is Yeulba Pty. Limited, formerly Mullens Investments Pty. Limited. It is convenient, despite the change of name, to refer to Yeulba Pty. Limited as Mullens Investments Pty. Limited. The four remaining appellants are Messrs. W.B. Bridges, W.R. Gates, B.S.H. Rosenberg and R. Robinson who are all now partners in Mullens & Co. They became partners in the year 1969. They were previously employees of the firm.
By consent the eleven appeals were heard together. The evidence given in each one was treated by consent, so far as it was relevant, as evidence in each of the others.
In five appeals are raised questions as to whether sales of shares in a mining company, Surveys & Mining Limited (hereinafter called Surveys), by Kitchwin Investments Pty. Limited, Hartal Pty. Limited (two appeals), Mullens Investments Pty. Limited and Mr. Robinson were sales by the taxpayers of property acquired by them for the purpose of profit-making by sale, or from the carrying on or carrying out of a profit-making undertaking or scheme within the meaning of sec. 26(a) of the Income Tax Assessment Act 1936-1968 (hereinafter called the Act). In three appeals are raised questions as to whether Mr. Urquhart, Mr. Bridges and Mullens Investments Pty. Limited were each entitled to the deduction provided for in sec. 77A (4) of the Act in respect of certain payments made by them or on their behalf in February 1969, said by them to be ``moneys paid on shares'' in a company, Vamgas N.L. In all but the second appeal by Hartal Pty. Limited are raised questions as to whether payments made by or on behalf of each of the appellants in May 1969 also constituted ``moneys paid on shares'' in Vamgas N.L. so as to entitle the taxpayers to the benefit of the deduction provided for in sec. 77A (4) of the Act. The Commissioner has submitted that for various reasons the appellants are not entitled to the benefit of the provisions of sec. 77A (4) in respect of any of the payments. These include the submission that the transactions pursuant to which the payments were made constituted contracts or arrangements within the meaning of sec. 260 of the Act which had the purpose or effect of altering the incidence of income tax payable by the appellants or relieving the appellants from liability to pay income tax.
In certain appeals there were also raised questions as to the entitlement of the appellants therein to deductions pursuant to sec. 77A (4) of the Act in respect of payments made by or on their behalf, said to be ``moneys paid on shares'' in Vamgas N.L., the shares being shares which a number of overseas residents were entitled to take up but which were taken up by the taxpayers. The appellants in these appeals did not proceed with their appeals in relation to these payments.
Finally, there are, in some cases, questions as to the calculation provided for in sec. 82(4) of the Act. It is likely that these will be dealt with by the agreement of the parties once this judgment is published and I have not therefore dealt with them.
Accordingly, it is necessary to give consideration to three separate groups of transactions. These may be shortly described as the sales of shares in Surveys, the first sec. 77A transactions. I deal with them as follows.
The Sales of Shares in Surveys & Mining Limited.
(a) Kitchwin Investments Pty. Limited.
At all material times there was in existence a company known as Vam Limited. It was many years ago incorporated as Victorian Antimony Mines Limited. Its shares were listed in the mining section of the Sydney Stock Exchange. In 1967 and 1968 it owned, either directly or through subsidiary companies, amongst other assets, mining and prospecting tenements situated not far from Mt. Isa in Queensland. Its shares were well regarded by Mr. Urquhart and Mr. Bridges and they had personally acquired
ATC 4342parcels of them in 1967. On 5th October 1967, Mr. Bridges had purchased 2,000 shares in the company but in November of the same year sold 1,300. As a result of his holding he became entitled, in November 1967, to certain rights to additional shares and in that month he also bought rights which were for sale on the market. By March, 1968 his holding was 4,600 shares but by May this had been reduced to 2,000 shares by reason of a further sale of 2,600 shares. More rights became available in May, 1968. These were taken up and additional rights were purchased. Further substantial parcels of shares in the company were acquired in the months of August, September, October, November and December 1968, by the end of which year 15,000 shares were held.
It is convenient at this point to mention Mr. Urquhart's acquisition of shares in the company. These also began in October 1967. By 21st July 1968, he held 6,100 shares but on the following day sold 2,600 so that his holding was reduced to 3,500. He became entitled to rights to take up 875 new shares in the company in May 1968 and in June of that year acquired by purchase further rights to bring his entitlement to new shares up to 1,000. In or about that month these were taken up and his holding in Vam Limited remained at 4,500 shares throughout the remainder of the year.
Before September 1968 Vam Limited acquired a controlling interest in a company, Surveys & Market Research Holdings Limited. This was a company whose shares were then listed in the general or industrial section of the Sydney Stock Exchange. On 24th October 1968, it changed its name to Surveys & Mining Limited. It is the company to which I have referred as Surveys. It was intended that there be transferred to it the interests of Vam Limited in some of its copper mining ventures in Queensland and it subsequently became, but not until 1969, a copper producer. About the end of October 1968 its shares were listed in the mining section of the Exchange. The Exchange imposed a condition whereby, if its shares were to remain listed, the holding of Vam Limited in the company be reduced to 75 per cent. This was achieved by a distribution of some of the shares which were held in the company by Vam Limited to clients of broking offices and to members of their staffs. Amongst those who benefited was Kitchwin Investments Pty. Limited which acquired 17,000 shares.
The issued capital of Surveys as at 30th June 1969, comprised 11,156,000 fully paid shares of two and one half cents each. It does not clearly appear from the evidence but it would seem that its issued capital in the latter half of 1968 was about half this number of shares or a little less.
The Chairman of Directors both of Vam Limited and Surveys was Mr. F.A. Close. He was known to Mr. Bridges in the year 1968.
On 14th May 1968, Mr. Bridges left for an overseas trip. He returned to Australia on 31st July 1968.
A Mr. Shaw was an employee of the firm of Mullens & Co. During Mr. Bridges' absence overseas there culminated an arrangement for the formation of a syndicate, of which Mr. Shaw was the chairman, for the proving and possible development of a gold mine known as the Francis Furness Mine situated near Marvel Loch in Western Australia. On 22nd April 1968 two miners by the name of Carnicelli had granted to Mr. Shaw an option to purchase the mining tenements giving title to the mine. By deed dated 9th July 1968 the time within which the option was to be exercised was extended on the terms and for the considerations therein provided for. The formation of the syndicate is evidenced by a deed bearing date 26th July 1968 in which Mr. Shaw declared himself a trustee of the option agreements and the option itself on behalf of the syndicate members. The syndicate members included Messrs. Urquhart, Bridges and Mullens but did not include Mr. Close with whom Mr. Shaw had had some consultations about the project.
Mr. Bridges heard of the formation of the syndicate when he returned from overseas. He found Mr. Shaw then to be suffering from a terminal illness. Mr. Shaw died in August 1968 and thereupon Mr. Bridges became the promoter of the syndicate. Mr. Shaw had previously had some discussion with the directors of a company, Hill 50 Gold Mine N.L. (hereinafter called Hill 50). Mr. Bridges discussed the matter with Mr. Close and on 19th August 1968 they visited Perth and attended a board meeting of Hill 50. It is
ATC 4343enough to say that nothing came out of that visit in relation to the development of the mine.
There is some uncertainty in the evidence as to the detail of what further happened in the promotion of the venture between the visit to Perth on 19th August 1968 and the end of that year. The following facts, some of which relate to events not connected with the venture and others to events occurring after the end of 1968, are, however, common ground -
1. Mr. Atkinson, who at the material time was the secretary both of Vam Limited and Surveys and also a syndicate member, became the trustee for the syndicate in place of Mr. Shaw.
2. It was decided to form a company to develop the project, the company to be known as West Australian Gold Development N.L. (hereinafter called W.A.G.D.). This company was incorporated on 9th October 1968. Initially it was decided to issue 1,200,000 shares in the company. One hundred and sixty thousand fully paid shares of twenty cents each were to be allotted to the members of the syndicate, 500,000 shares of twenty cents each paid to five cents were to be allotted to Vam Limited and 540,000 shares of twenty cents each paid to five cents were to be allotted to Mullens & Co. to be dealt with by the members of that firm as they saw fit. These shares were issued accordingly.
3. After 19th August 1968, at least two, and possibly three, further visits were made to Western Australia by Messrs. Bridges and Close in connection with the project. These occurred between early September, 1968 and the end of November, 1968, but there is not agreement as to the dates of these visits nor as to what transpired on each.
4. During one of the visits a decision was reached that the Francis Furness Mine should not be developed as a gold mine. On the same or an earlier visit a decision was made by Messrs. Close and Bridges on the advice of a mining engineer and a geologist to acquire an option in, and to investigate a gold mine situated not far from the Francis Furness Mine near a place called Bullfinch. The mine was in production. If had been operated by the Barr brothers for a number of years and was known as the Radio Mine.
5. An agreement was reached between Mr. Close on behalf of the Vam interests and Mr. Bridges on behalf of the Mullens' interests that instead of taking up the whole of the Mullens' entitlement in W.A.G.D. shares, part of that entitlement would be exchanged for shares in Surveys on the basis of one share in Surveys for one share in W.A.G.D. In all, 250,000 shares were exchanged and these went to the companies of Messrs. Urquhart, Bridges and Mullens, as to 85,000 shares to Hartal Pty. Limited, as to 83,000 shares to Kitchwin Investments Pty. Limited and as to 82,000 shares to Mullens Investments Pty. Limited. By the time the exchange was effected towards the end of November 1968 Surveys shares were being sold on the market at between forty-three cents and fifty cents per share. Although the exchange was effected, as I have said, at the end of November 1968, the time when the agreement for the exchange was made is in issue, the Commissioner contending that it was shortly before the exchange was carried into effect, and the appellants contending that it was some time in October 1968.
6. In the latter part of November, 1968 Mr. Bridges made a visit to Mt. Oxide near Mt. Isa in Queensland and formed a very favourable impression of the mining operations there being carried out. Although it was then known that the mining tenements upon which the operations were being conducted would be taken over by Surveys, the transfer of the interests to that company had not then occurred. After that visit Mr. Bridges decided to buy on behalf of Kitchwin Investments Pty. Limited a further 17,000 shares in Surveys, bringing the holding of that company up to 100,000. These were acquired on 9th December 1968, and were the 17,000 shares made available to Kitchwin Investments Pty. Limited as the result of the need of Vam Limited to reduce its holding in Surveys in order to enable that company to remain listed on the Stock Exchange.
7. Between 5th February and 19th March 1969, Kitchwin Investments Pty. Limited sold 60,000 of its 100,000 shares at prices ranging between $2.50 and $3.15 per share.
8. Early in 1969 Mr. Bridges made a further visit to the Mt. Oxide area and inspecting mining or prospecting tenements either
ATC 4344transferred or to be transferred to Surveys and known as the Mammoth leases. He was still further impressed with the potential of the company.
9. Kitchwin Investments Pty. Limited later sought to exchange its remaining 40,000 shares in W.A.G.D. for shares in Surveys. On 10th April 1969 these were exchanged for 16,000 shares in that company with the result that the holding of shares in Surveys by Kitchwin Investments Pty. Limited increased from 40,000 to 56,000. Thereafter on 29th and 30th April 1969, a further 16,000 shares were sold at prices ranging between $3.29 and $3.44 per share. After these sales the company's holding was again reduced to 40,000 shares. It still retains these shares.
10. Surveys was suspended from trading on 10th February 1971 and delisted by the Stock Exchange on 19th April 1972. The 40,000 shares retained by Kitchwin Investments Pty. Limited are valueless.
11. On 11th July 1969 Surveys issued new shares and Kitchwin Investments Pty. Limited became entitled to take up 20,000 rights. All these rights were sold on 5th, 6th and 7th August 1969 at prices ranging between $1 and $1.16 per right.
The Commissioner has sought to tax the profit made by Kitchwin Investments Pty. Limited on the sale of the shares in Surveys, namely $207,775, pursuant to the provisions of sec. 26(a) of the Act. He relies on both provisions of the sub-section, that is to say he claims the profit is a profit arising from the sale by taxpayer of property acquired by it for the purpose of profit-making by sale, and he also claims that it is a profit arising from the carrying on or carrying out of a profit-making undertaking or scheme. In the view that I take of the matter I do not need to consider the second part of the section.
To adapt the words used by Fullagar, J. in
Pascoe v. F.C. of T. 30 A.L.J.R. 402 at p. 405), the question I must answer is: am I convinced, not beyond reasonable doubt but as a matter of belief, that Mr. Bridges, in making the acquisition on behalf of his family company, was not actuated by a dominant purpose of profit-making by sale? As a guide to the way in which I should approach the matter I refer also to what his Honour had earlier to say in the same case (p. 403) -
``Where a person's purpose or object or other state of mind in relation to a given transaction is in issue, the statements of that person in the witness box provide, in a sense, the `best evidence', but, for obvious reasons they must as Cussen J. observed in
Cox v. Smail (1912) V.L.R. 274 at p. 283, `be tested most closely, and received with the greatest caution'.''
Before I come to deal in more detail with the evidence of what transpired between August and December, 1968 I propose to refer to what Mr. Bridges has had to say about his reasons for acquiring and selling the shares in Surveys. Those reasons are stated not only in his evidence but also in a letter dated 2nd April 1969 written to the Commissioner seeking a ruling on whether the profit made up to that time was taxable and also in a document accompanying the return of Kitchwin Investments Pty. Limited for the year ending 30th June 1969.
I do not set out the various statements but their effect is as follows. Mr. Bridges saw his membership of the syndicate as an opportunity to make a long term investment in a company operating a gold mine. He had for a substantial period believed that the price of gold would not remain fixed at its then price of $U.S. 35 an ounce. He was interested in the income which such an investment would give him and his initial discussions with Mr. Close and the directors of Hill 50 were on this basis. This remained his attitude after his agreement to exchange the shares in W.A.G.D. for shares in Surveys. According to his recollection the agreement to exchange the shares was made shortly after his return from a visit to Western Australia which was made in the first half of October, 1968. The reason for the agreement on his part was that Surveys would have the technical ability to develop the mine, whereas W.A.G.D. would not. Furthermore it could be expected, if W.A.G.D. were entirely responsible for its development, that there would, from time to time, be calls payable on the shares which would not be the case if Surveys were developing it. The agreement for the exchange of the shares did not, according to the tenor of his evidence, alter Mr. Bridges'
ATC 4345long term purpose. The effect of his evidence is that the shares in Surveys simply replaced those in W.A.G.D. and that his purpose in acquiring them was the same as his purpose in acquiring the shares in W.A.G.D. itself. He continued to hold, personally, substantial numbers of shares in that company even after the second exchange in April 1969. In summary the two acquisitions - that is the acquisition of shares in W.A.G.D. and the acquisition of shares in Surveys - were to fulfil the same purpose, long term investment in gold, subject to the fact that the shareholding on Surveys gave his company also an increased interest in the copper projects of Surveys. He himself already had a not inconsiderable interest in these projects by reason of his personal holdings in Vam Limited which he had acquired the previous year and to which I have referred.
According to his evidence his views underwent a change after his visit to Mt. Oxide at the end of November, 1968. He then thought the prospects of Surveys were enormously good because of the copper which it would have in the various holdings it was to acquire near Mt. Isa. Thereafter gold seems to have been a secondary consideration and his optimistic view of the company's future was based on its potential as a copper mine.
His reason for selling the shares arose, so he said, because of the greatly increased price being paid for the shares by February, 1969. During January 1969 the market was rising steadily and by 29th January 1969 had gone over $2 per share. It had risen from about 50 cents per share early in December 1968. Kitchwin Investments Pty. Limited was a family investment company and he considered the greatly increased value of the shares in Surveys created an imbalance in the company's investment portfolio. In para. 44 of his first affidavit he said -
``In February, 1969 Surveys & Mining shares began to climb on the market because of the drilling and development results the company was obtaining mainly at Mt. Oxide. It happened that at that time the Surveys & Mining shares were virtually the only public company investment held by Kitchwin. Its Surveys & Mining holding at that time had a market value in excess of $200,000.00 and I formed the strong view that it had `too many eggs in the one basket'. Also, at that time Kitchwin was in need of cash to put into a beef cattle enterprise in which it had an interest and which was suffering because of drought and needed irrigation and other plant and equipment. These factors combined to convince me that Kitchwin should sell some of its Surveys & Mining shares, and accordingly Kitchwin sold 76,000 of the same between 5th February, 1969, and 30th April, 1969. These sales yielded $218,712.00.''
Of course the critical question is what was his purpose at the time of each of the acquisitions of shares in Surveys? His actions afterwards are only relevant insofar as they throw light on what his real purpose was.
The Commissioner approaches the question of whether I should accept Mr. Bridges' evidence in two ways. The approaches are put both alternatively and cumulatively. One approach was described in argument as the general approach and the other as the particular approach.
The general approach was based upon the submission that the probabilities were against Mr. Bridges' account of his reasons for acquiring the shares in Surveys being reliable. He had, so he said, set out to acquire a long term investment in a gold mine. That remained his expressed purpose when he agreed to acquire by exchange the shares in Surveys, but after his November visit to Mt. Oxide it was the company's future as a copper mine which he said made the shares attractive to him, still as a long term investment. It was with this in mind that he apparently purchased the additional 17,000 shares in December, 1968 to bring the company's holding up to 100,000. Having acquired for his company the investment which he wished it to have for the purpose mentioned in his evidence, he, almost immediately, sold the greater part of it. Mr. Bridges, according to the submission, was a shrewd and experienced businessman and stockbroker. The very imbalance in his company's investment portfolio which came about must have been something not only foreseen by him as likely to occur if the project (gold or copper) were successful, but also something which he would have hoped for. It may be that he could not
ATC 4346have foreseen the imbalance coming about so quickly but the point made by the Commissioner is that his expressed reason for selling must of necessity be inconsistent with his evidence of purpose, and the sale of the shares so soon after acquisition places a question mark over that evidence, with the result that I should reject it. In summary what is submitted is that Mr. Bridges' evidence of his purpose in acquiring the shares when tested against the events which occurred in the early months of 1969, is so improbable that I should place no reliance upon it.
The particular approach relied upon by the Commissioner involves a detailed consideration of the evidence which it would not be necessary to undertake if I were to adopt the first approach relied upon by him. I do not think I can decide the matter in this way. What has to be done is to embark upon a consideration of the whole of the evidence and come to a conclusion on whether I am satisfied upon a balance of probabilities that Mr. Bridges, in acquiring the shares on his company's behalf, was not doing so for the purpose of profit-making by sale. This course will involve me in considering all the matters relied upon by the Commissioner in both his general and particular approaches. I proceed accordingly. In the course of my consideration of the matters relied upon by the Commissioner I shall deal with the submissions made on behalf of Mr. Bridges and his company.
Although Mr. Bridges was in doubt as to when the visit he made with Mr. Close to see the directors of Hill 50 in Perth occurred, he was otherwise firm throughout his evidence that there had been two visits to Western Australia, one in September and the other in October 1968. According to that evidence the decision to abandon the Francis Furness Mine and to develop the Radio Mine was made during the first visit. This was something about which Mr. Bridges also remained certain throughout his evidence. In order to corroborate his evidence he pointed to an agreement to give an option over the Radio Mine signed by the Barrs on 24th September, 1968. He was equally certain that it was during the flight home from Perth after the second visit, claimed by him to have been in October 1968, that the question of Surveys developing the mine was first raised by Mr. Close. It was this discussion that led to the agreement for the exchange of shares. It was concluded, so he said, after a discussion with his partners, a few days after his return. His doubt as to the date of the Hill 50 meeting arose because he was not sure whether he and Mr. Close had seen the directors of that company on one of the two visits to which I have referred or whether they had made a third visit for that purpose. He was also uncertain, if a third visit were made, as to when, in relation to the other visits, that visit occurred. The doubts were resolved by the production of copies of minutes of the directors' meetings of Hill 50 held in 1968. A minute of a meeting held on 19th August 1968 recorded the presence of Messrs. Close and Bridges and a discussion about the Marvel Loch area. This minute satisfies me that there was a separate visit to discuss the prospect with the directors of Hill 50. It occurred on 19th August 1968 and was the first visit of Mr. Bridges to Western Australia in relation to the project under consideration.
The Commissioner has submitted that I should reject Mr. Bridges' evidence as to the order of events because of matters which appear in other evidence in the case. He did not ultimately gainsay that there was a visit by Mr. Bridges and Mr. Close in September 1968, but he contended that the evidence established that there was not in September 1968, as Mr. Bridges had sworn, any abandonment of the Francis Furness Mine by the syndicate in favour of the Radio Mine. He claimed that there was no visit at all to Western Australia in October 1968. He further submitted that much of Mr. Bridges' description of what he said transpired during the September visit was an account of what occurred on a visit made by him at the end of November 1968 after his first visit to Mt. Oxide and after the exchange of shares had actually been effected. He submitted that the evidence revealed such a serious flaw in Mr. Bridges' overall recollection of the events which transpired in September, October and November 1968 as to cast a serious doubt upon the reliability of his recollection and thus upon his evidence of the purpose for which he acquired the shares firstly in W.A.G.D. and secondly in Surveys.
Plainly Mr. Bridges' recollection of the order and approximate dates of the events with which he deals in his evidence is incorrect. The effect of the evidence of Mr. Close, Mr. Atkinson and Mr. Campbell, and also of much of the documentary evidence, is that after the visit to Perth of 19th August 1968 there were two further visits by Mr. Bridges and Mr. Close to Western Australia in connection with the project, one in September as Mr. Bridges has said, and the other at the end of November 1968. Furthermore, it is clear that until the visit at the end of November no decision was made to abandon the Francis Furness Mine in favour of the Radio Mine. Between the September and November visits the two mines were being looked at and were both regarded as prospects possibly to be worked together. But, contrary to the case at one stage made by the Commissioner, I am persuaded by the evidence of Mr. Close that there was a visit by Mr. Bridges in his company to the Radio Mine on or about 18th September 1968. That both mines were regarded as prospects between September and November 1968 is established by the investigations which Mr. Campbell was required to carry out, and also by the fact that on 4th November 1968 Mr. Atkinson, as trustee for the syndicate, executed an indenture granting to W.A.G.D. an option to acquire the syndicate's interest in the option acquired from the Carnicellis.
Moreover, on 9th October 1968 Mr. Atkinson as trustee for the syndicate wrote to each syndicate member referring to the gold leases at Marvel Loch and referring to the proposed incorporation of W.A.G.D. The letter refers to the possible need for additional capital and the listing of the shares on the Stock Exchange, both of which are said to be subject to a successful exploration programme. That programme could only refer to an exploration of the mine at Marvel Loch. In para. 24 of his first affidavit Mr. Bridges referred to Mr. Atkinson's letter and to the fact that the letter spoke as though W.A.G.D. was to proceed with the Marvel Loch option. His affidavit continued -
``In that regard he must have been under a misapprehension. As I said above, what it was by then intended the company should acquire was an option in respect of the Radio Mine.''
I am satisfied that Mr. Atkinson was under no misapprehension when he wrote his letter on 9th October, 1968.
On the same day Mr. Close from the same address as that from which Mr. Atkinson's letter was written, wrote a letter to Mr. Campbell and Mr. Seymour, jointly, instructing them to investigate both the Francis Furness Mine and the Radio Mine, together with one other mine in the Southern Cross area not identified by Mr. Close, as a unit for gold production. He asked specifically for an investigation of the advisability of deepening the shaft at the Francis Furness Mine as an aid to the exploration of that mine as a gold prospect. He also asked that the Francis Furness Mine be investigated as a prospective nickel mine.
It was submitted on behalf of the appellants that the investigation of the Francis Furness Mine after 9th October 1968 was as to its potential as a nickel mine only; but not only does this submission run counter to what is to be found in Mr. Atkinson's and Mr. Close's letters, to which I have just referred, but it also runs counter to what in fact Mr. Campbell said he did. He gave evidence that gold was being prospected for. His diary contains entries as late as the end of November in relation to the Francis Furness Mine. It is true that these do not contain references either to gold or to nickel, and to that extent are equivocal. Moreover, Mr. Campbell's report of 15th October 1968 and Mr. Seymour's of 22nd October 1968 deal with nickel only. But both Mr. Atkinson's and Mr. Close's letters of 9th October 1968 plainly say that gold as well as nickel is to be the subject of investigation, and this, coupled with Mr. Campbell's evidence, leads me to the conclusion that the Francis Furness Mine remained a gold prospect throughout October and November 1968. Mr. Close confirms that this is so although there is disagreement between him and Mr. Campbell as to whether an underground visit was made to the mine in November 1968. This may perhaps be explained on the basis that Mr. Close went down without Mr. Campbell.
It is not necessary for me to refer to the detail of the evidence of Mr. Close and Mr. Campbell as to what transpired during the visit which took place in Novem-
ATC 4348ber. Mr. Campbell fixes the date with the aid of his diary as being from 30th November to 2nd December 1968. Mr. Bridges' name does not appear in his diary but he is firm in his recollection that Mr. Bridges was there. He was cross-examined closely about how it was that he remembered Mr. Bridges' presence and remained unshaken in his answers. Mr. Close said that Mr. Bridges was present during that visit and Mr. Bridges' account of what happened and of the other people who were present tallies well with that of Mr. Close and Mr. Campbell, the difference between them being that Mr. Bridges thought it had occurred in September and the others in November, Mr. Campbell, to the extent indicated, with the aid of his diary. Mr. Bridges' recollection was that there was only one visit made by him at which Mr. Campbell was present. In September 1968 Mr. Campbell was employed in the same area but by another undertaking in connection with different holdings. It is most unlikely that Mr. Bridges could have met him under the circumstances in which he was employed in September as distinct from November 1968.
For the above reasons I find that there was no abandonment of Francis Furness Mine until the end of November of early December 1968.
Mr. Bridges' evidence of an October visit is to be found in para. 33 of his first affidavit where he says -
``Later in October, 1968, Mr. Close and I paid another visit to the Radio Mine. We had gone to Western Australia to finish our business with the solicitors who incorporated W.A.G.D. and to discuss the area with the Western Australian Mines Department.''
It is possible that he went to Perth for the purposes he mentions but did not go to the Radio Mine, or that he went there without Mr. Campbell who may have been in Perth (his diary records that he was in Perth between 22nd and 28th October). Mr. Bridges' evidence must be approached with it in mind that he himself did not suggest that Mr. Campbell was present during the October visit which he claimed took place. On the other hand, Mr. Close recalls no such visit and if one had been made it seems unlikely that it would have occurred without contact being made with Mr. Campbell who was in the process, either at Southern Cross or in Perth, of carrying out the investigation he had been commissioned to make in Mr. Close's letter of 9th October 1968.
In order to support his submission that Mr. Bridges' evidence of an October visit should be accepted, reliance was placed by his counsel upon some evidence given about the occurrence of an earthquake in Western Australia on 13th October 1968. Although the evidence that the earthquake occurred on that day is meagre, I am prepared to find that it was on that date that it occurred. Mr. Bridges gave evidence that upon the visit which he claimed took place in October he remembered that there had been, some time before he arrived, an earthquake. He said that that was very apparent on the roadway and in a small town. By this I take him to mean that there were signs of the damage which the earthquake had caused visible to him. Although I accept Mr. Bridges' evidence that he did see the signs of the earthquake and, although as I have said, I find that the earthquake did occur on 13th October, it does not follow that Mr. Bridges was in Western Australia immediately after the earthquake occurred. It could be expected that there would be signs of damage such as he describes still to be seen at the end of November which is when I find he did visit the two mines next after a date which was approximately 18th September 1968.
Finally I should mention that in his second affidavit Mr. Bridges put, during the flight home from the October visit which he claimed to have taken place, a conversation had with Mr. Close about the first sec. 77A transactions. His recollection is obviously at fault about this because he had in September 1968 spoken to his bank manager about this matter. This is established by the extract tendered from the bank manager's diary. The entry for 24th September 1968 records that Mr. Bridges called and asked whether the bank would provide overdraft accommodation to enable Mullens & Co. to take up shares in Vamgas N.L. If such a conversation did occur on a flight home from Perth it is clear that it occurred after the visit on or about 18th September and not after any visit in October. Indeed, Mr. Bridges himself said this in his oral evidence.
Is there any significance in the errors which Mr. Bridges has made? Does it really matter that he has sworn to a visit in October which did not occur and that events which occurred at the end of November took place in September? In my opinion these errors do have significance in the resolution of the principal question to be answered for two reasons. Firstly, they provide a background against which Mr. Bridges' evidence generally is to be ``tested most closely'' (Pascoe v. F.C. of T. (supra at p. 403)). Secondly, they provide the starting point for a consideration of when and under what circumstances the agreement to exchange the share in W.A.G.D. for the shares in Surveys was made. Mr. Bridges has sworn that the agreement originated in a conversation had with Mr. Close on the flight home after the supposed October visit to Perth. On the findings I have so far made this evidence must be incorrect as to place. It may not, however, be incorrect as to time.
The initial discussion which led to the agreement for the exchange of the shares could not have occurred on the flight home after the November visit because by then the exchange had been effected. It is conceivable that it occurred on the return flight after the September visit along with the conversation about the shares in Vamgas N.L. but W.A.G.D. had not then been incorporated. It was only on 9th October 1968 that Mr. Atkinson was able to circularise the syndicate members as to the intended capital of the company just then formed and of the numbers of shares to be allotted to the syndicate members, Vam Limited and Mullens & Co. It is true that those statements appear in a document emanating from Mr. Atkinson and there is no reason why there could not have been a previous discussion dealing with the proposed exchange between Mr. Bridges and Mr. Close. But, according to Mr. Bridges, a consequence of the exchange of shares would be that Vam Limited through its recently acquired subsidiary, Surveys and Market Research Holdings Limited, would develop the mine. It was Mr. Close's wish that this should be so, which so he said, led to the exchange. I do not believe that if this had been the situation on 9th October 1968, Mr. Atkinson would not have known about it (in addition to being trustee for the syndicate he was the Secretary of Vam Limited and worked from the same office as Mr. Close) and would not have made reference to it in his letter. He may not have mentioned the agreement for the exchange, but it is inconceivable that he would not have mentioned that the development of the mine was to be carried out by Surveys. I do not think that what he said in a letter written the following day to Mr. Morris, an accountant in Perth, in which, amongst other things, he asked Mr. Morris to be a director of W.A.G.D. makes any difference to this conclusion. In this letter to Mr. Morris of 10th October 1968 Mr. Atkinson said, after referring to the fact that 540,000 shares were to be allotted to Mullens & Co., that the shares taken firm by them would be distributed to clients and others, ``but the largest proportion will probably be placed with one of VAM's Subsidiaries''. These words do not suggest an exchange of shares but an actual allotment of portion of the shares reserved for Mullens & Co. to a subsidiary of Vam Limited. It may be that some other kind of discussion than that deposed to by Mr. Bridges had taken place but the letter does not indicate any more than that.
Everything points to the agreement having been made after 9th October 1968, and indeed, that is Mr. Bridges' own evidence. That means that it could not have been initiated by a discussion on an aeroplane on a return flight from Perth, and the question arises as to whether that is something about which Mr. Bridges could really be mistaken, so clear is the description given by him in his affidavit of the conversation in which Mr. Close raised the question of Surveys developing the mine.
The Commissioner has submitted that the probabilities are that the agreement for the exchange was concluded very much closer to the date when it was actually effected, towards the end of November 1968. The significance of this submission, apart from the fact that such a finding would be a cause for further reflection on the reliability of Mr. Bridges as a witness, is twofold. Firstly, it puts the agreement for the exchange and the commencement of the selling of the shares early in February 1969 only just over two months apart, making it the more unlikely that Mr. Bridges' expressed reasons for acquiring the shares in Surveys were correct. I do not find this latter consideration
ATC 4350of great weight because on the face of Mr. Bridges' evidence the period is in event quite short. On any view of the evidence it was less than four months. More importantly, however, if the agreement for the exchange were made at or about the time it was documented at the end of November 1968 it must have been made at the time of Mr. Bridges' first visit to Mt. Oxide. Bearing in mind the very favourable impression which that visit made upon him, it could be inferred that Mr. Bridges' willingness to enter into the exchange agreement was because of what he had seen at Mt. Oxide and not for any of the reasons given in his evidence. Such a finding would completely destroy his credibility.
On 28th October 1968 Surveys, under the hand of its secretary, Mr. Atkinson (in the document he is described as its executive officer) made an announcement to the Stock Exchange. Its chief purpose was to inform the Stock Exchange of the change of the company's name and of the proposed acquisition of the mining interests of Vam Limited in Queensland. But toward the end of it the following paragraph appears -
``In addition Surveys has obtained through VAM an opportunity to acquire a 66 per cent interest in a further mine in the Southern Cross district approximately halfway between Perth and Kalgoorlie in Western Australia.''
Counsel for the appellants relies very much on this statement as indicating not only that an agreement for the exchange of shares had already been made, but also that Mr. Bridges had visited Western Australia with Mr. Close in October. I reject the latter submission because the other evidence to which I have referred outweighs any corroborative effect that the announcement could have. But it is capable of suggesting that the agreement for the exchange of shares, if not then made, was under negotiation at the date of the announcement. On the basis that Vam's entitlement to shares in W.A.G.D. was taken by Surveys it would have acquired 500,000 of the 1,200,000 shares to be issued. That is approximately 41.7 per cent. The 250,000 shares received by it when the Mullens' interests acquired shares in Surveys, pursuant to the exchange, gave it a total holding of 750,000 shares out of 1,200,000 or 62.5 per cent; not 66 per cent as the announcement says. The difference ought not to be regarded as significant, but it is to be noted that the words of the announcement do not indicate finality. The word ``opportunity'' is used and would tend to suggest that the matter was still at the stage of negotiation. My conclusion is that the probabilities are that discussions between Mr. Bridges and Mr. Close about an exchange of shares were undertaken some time after the middle of October 1968 and culminated in an agreement some time between 28th October 1968 which is the date of the announcement to the Stock Exchange, and the end of November 1968, when the exchange was actually documented. My conclusion is that Mr. Bridges' recollection as to the way in which the negotiations which led to the agreement for the exchange of shares originated is faulty but that the negotiations were commenced about the time he said, that is in October 1968.
I should add that in reaching this conclusion I have not overlooked evidence which is comprised in minutes of a meeting of the directors of another company in which Mr. Close was interested, Norwest Oil Pty. Limited. The meeting was held on 23rd November, 1968. It was not attended by any of the Mullens' interests, the persons present being Mr. Close and a Mr. Capper, who was an alternate director for a Mr. Palmer. There appear in the minutes a note of a resolution and an explanation of why that resolution was thought to be necessary. The resolution and the explanation are as follows -
``It was resolved to assist Surveys & Mining Limited by subscribing for shares in the Company at 40¢. It was noted that VAM Limited had acquired shares at 6¢ in Surveys on the market.
To carry out this assistance Norwest Oil agreed to act as the nominee and agent for -
Jean Close and Norwest Oil Pty. Ltd.
ATC 4351and sell the whole of its VAM holding of 31,250 shares and to invest in Surveys & Mining Limited.
The Chairman explained that all these transactions were to support the success of VAM Limited and Surveys as financing was not possible any other way.
The Chairman also undertook to sell VAM shares from his personal holding and make these proceeds available to Norwest Oil to purchase Surveys shares.
It was stated by the Chairman that once Surveys could obtain its own funds the Surveys shares would be sold and the proceeds re-invested in VAM shares to be issued in due course by that company.
It was noted that the current price of VAM shares was about $2.70. This compared with a peak of $4.20 two months previously.
It was resolved that the shares in VAM Limited after these two transactions would be re-allocated as between the parties mentioned above in the same proportions as now held. Mr. Close said that this would apply whether the transaction was a winning or losing one, it was not being carried out to win or lose but to assist in financing VAM Limited and Surveys & Mining Limited.''
During the evidence of Mr. Bridges a number of questions were asked him as to why he thought Mr. Close wanted Mr. Bridges and the other Mullens' partners to exchange shares in W.A.G.D. for shares in Surveys and there was some speculation about this matter. The contents of the minute which I have just set out provide evidence of Mr. Close's real reason for wanting the exchange, as does a letter written to Mr. Capper by Mr. Close on 22nd November 1968 in which the following appears -
``Approaches to short term money market and to our banks have so far failed to produce any funds. Other approaches to Banque de Suez et de L'Union des Mines, through Segards, to Union Corporation, to Kinsho Mataichi, to Mitsubishi and others may provide funds but scarcely timewise. The set back in timing of our VAMGAS N.L. float due to the difficulty in obtaining consents from taxation, Ministers of various departments in three States, Registrars and the overseas Companies and Gas purchasing Companies with consequent re writing of the agreements has set back our prospectus until February, 1969 (as far as any usable money is concerned) and this is causing considerable difficulty in financing our day to day wages and contract committments. (Sic.)
As a result directors of VAM Limited have agreed to support the sale of the Surveys shares we have on offer.
I am applying as a lead for 250,000 such shares at 40 cents and am aware that these shares cost VAM Limited 6 cents only. My personal cheque for $70,000 is tendered herewith for 175,000 shares on behalf of Norwest Oil Pty. Ltd. A further $30,000 will be received from the Bank of N.S.W. nominees for 75,000 shares in Surveys.
In addition I understand that Mr. Rodan and Mr. Capper will each be applying for 100,000 shares and Dr. W.D. Ackland-Horman for 20,000 shares I understand R.E. Porter & Co. may take up to 100,000 shares and I may be able too, to place some with Clem Mott in Melbourne. In all I hope for about $250,000 and this show by the directors should shake up Ralph King & Yuill and Carr Hordern & Co.
Mullens and Co's clients are receiving 250,000 new Surveys shares on issue from the Company's unissued capital and following receipt of these shares (bought from the proceeds of 250,000 West Australian Gold Development N.L. 20c. shares paid to 5c.) Mullens & Co. may also be interested in part of the placement. Mr. Bridges of that firm and Mr. King of Ralph King & Yuill have both been taken over Mt. Oxide and the Mammoth areas of Surveys in an endeavour to raise their interest in these placement. (Sic.)''
I recognise that the documentation of the exchange was only a few days after the letter and the meeting and that there are compelling reasons for thinking that, by reason of their business association, it would be likely that Mr. Close would have communicated his
ATC 4352difficulties and intentions to Mr. Bridges. I have decided, however, that the minute and the letter do not provide evidence against Mr. Bridges nor his company and I have left them out of account in arriving at my decision.
To summarise my conclusions so far, I have decided that I should reject Mr. Bridges' evidence of an October visit to Western Australia and also his evidence that the Francis Furness Mine was abandoned as a gold prospect in September 1968. I further find that the negotiations which led to the agreement for the exchange of shares, although commenced in October 1968, did not originate in a conversation between Mr. Close and Mr. Bridges on a return flight from Perth. These findings, whether regarded separately or together, do not necessarily destroy the case which Mr. Bridges makes, but the further consideration of the matter has to proceed on the basis that his recollection has proved unreliable in relation to three matters which are of some importance.
It is in the light of these findings that his statements as to his reasons for acquiring the shares made in the letter to the Commissioner of 2nd April 1969, his company's return, his affidavit and his oral evidence must be tested. These statements must also be tested in the light of what he did in the early months of 1969.
I have referred to the fact that he commenced to sell on 5th February 1969. His expressed reasons for selling must be given full weight, but so must the Commissioner's submission that a man of his business ability must have expected that the very situation which he said led him to commence selling would have eventually come about, if not by February, 1969 then within a not over long period. I should here state that I agree with the Commissioner's submission that Mr. Bridges is an astute and shrewd businessman. I do not think that he would have gone into the venture without appreciating what, in the event of the venture being successful, would be the effect upon the company's investment situation generally. Any success at all must have brought about the imbalance which, according to his evidence, was the main reason for his deciding to sell. It is important when considering the matter not to lose sight of the fact that his acquisition of the initial 83,000 shares on his company's behalf, although effected during the last week in November 1968, was pursuant to an agreement, the negotiations for which were in train by the end of October. At that time, according to Mr. Bridges' evidence, the venture was a gold mining one. Copper did not become the principal basis for it until his first visit to Mt. Oxide late in November, 1968. But his explanations for selling the shares have at no time included as one of his reasons the fact that, perforce of the exchange, he found his company with shares which he had intended to provide it with a long term investment in gold but which instead, although still giving it an interest in such a venture, gave it an investment which was principally a copper mining one. Moreover, it must not be forgotten that he was an experienced stockbroker, that on behalf of Vam Limited and Surveys announcements were made to the Stock Exchange in October that Surveys was to acquire the copper interests of Vam Limited, that he was closely associated with Mr. Close at this time and that he already had an interest in the copper projects by virtue of his personal holding of shares in Vam Limited to which I have earlier referred. Despite the fact that, in respect of the 83,000 shares originally acquired by exchange, the position has to be looked at as it was in late October, the situation is not one in which Mr. Bridges after the acquisition found out that Surveys was engaged in projects of which he had no knowledge and which changed his thinking about the retention of the shares he held in the company. As I have said, that is not something which he himself has sought to put forward as a reason why he decided to sell. In saying this I have not overlooked the fact that he maintained throughout that he was extremely surprised at the rapidity of the rise in the price of the shares in the months of January, February and March, 1969. This was what caused the imbalance in his investment portfolio but, as I have already said, that only occurred earlier than would otherwise have been the case if matters had proceeded as he had anticipated and hoped.
That this was his anticipation is plainly to be seen from the terms of a circular sent out to the clients of the firm under Mr. Bridges' hand on 31st January, 1969. For reasons which are not entirely clear there seems to have been, as I would apprehend from the evidence of Mr.
ATC 4353Mullens, a certain haste about the despatch of this circular which went out five days before Mr. Bridges commenced to sell. The circular was headed Vam Limited and its object was to induce clients of the firm to buy shares in that company. It was written after Mr. Bridges' second visit to Mt. Oxide. Its opening paragraphs were as follows -
``An attempt is made here to indicate some reasonable market value of the shares of this dynamic mining developer after allowing liberally for what may be called speculative content. Developments over the past two years certainly brand the company as dynamic and this is very evident in the outlook of the management who realise that success can only be attained by the use of the energy of individuals and the best brains obtainable. The company now has such a team and will no doubt attract more such men because of their successes, their willingness to pay and moreover, their willingness to make quick and accurate decisions on a situation; in other words they have the ability to get things done.
A great deal of research has been put into the activities of this company in the past six months, through their written reports, the thinking of the company's officers, both executive and technical and the personal inspection of its active mines and also its prospecting activities. However, at no time was information asked for or offered, which is not available to anyone, shareholder or not, who is interested enough to conduct such a study.
There was an element of doubt about the whole operation when the study was first commenced, the activities of the company were so complex, but, as the picture became clearer this doubt was replaced with quiet admiration for the officers of the company, in their efficient determination to do the job quickly and thoroughly. It was apparent that the market had for once failed to properly assess the stock largely because it had not effectively worked out the value of the complex subsidiary companies of Vam Limited.''
The circular then proceeded to set out ``the probable `Market Value' of the subsidiary companies, if they were in fact listed after depreciating their value by speculative content....''. There then followed accounts of the activities and an assessment of the prospects of three subsidiary companies, namely Vamgas Limited, Surveys (which was a listed company) and Hydro Mineral Development Limited. In relation to Surveys the circular said -
``This company has extensive copper leases some sixty miles north of Mt. Isa on the Mt. Gordon Fault and Gunpowder Creek. A great deal of development has been carried out on the Mammoth Leases, some drilling results from which have been published. It is our opinion that this area will produce at least 2,000,000 tons of high grade secondary ore carrying a copper metal content in excess of 4%; no allowance has been made for primary ore. A contract has been let for a treatment plant with a capacity of 1000 tons per day to be completed in September, 1969. It should be pointed out here that 10,000 tons of 4% ore has a copper metal content of 400 tons. The present market for copper is approximately $1,100 per ton, but, even at $1000 per ton the income from 10,000 tons would be $400,000 for ten days production at 1000 tons per day.
Mining is done by contract open cut, which is the cheapest method of all, but if the exorbitant sum of $100,000 is allowed as cost of the ten days production a nett $300,000 is the profit for that period, or, $9,000,000 profit per annum. (300 working day basis). At a production rate of 300,000 tons per annum it would appear that the secondary ore reserves of Mammoth would be depleted in seven years, but that causes no great concern for it is quite apparent that in the near future considerably greater reserves of equally rich or richer reserves will be proven in the adjoining leases which extend twenty miles north to Mt. Oxide. This area will prove to be one of the richest copper producers of its kind in the world.
Surveys & Mining Ltd. has a 662/3% interest in the Mammoth Leases and an issued capital of 6,556,000 shares of which Vam Ltd. owns 3,400,000. It could be a possibility that Surveys will acquire from Vam Ltd. further valuable leases in the area
ATC 4354for shares which could well bring the Vam Limited holding to 75% of the issued Surveys & Mining Limited capital. If this should be the case, and assuming Surveys & Mining Limited finish up with 10,000,000 shares issued, it is quite apparent that from 1970 onwards, earnings of 2/3 of $9,000,000 or 60¢ a share could be expected. This will most likely be increased by the shipment of rich ore overseas. 20,000 tons of 10% ore for instance would have a profit margin of approximately $1,000,000.
It appears therefore that the market has not yet accurately assessed the value of Surveys & Mining Limited and that over the next twelve months to two years a market price of $3 plus, per share could be expected. For this exercise, however, let us accept the present low market valuation of Surveys and then reduce it to $1.50 per share. Vam Limited holds 3,400,000 Surveys with a total value at $1.50 of $5,100,000.''
The emphasis is mine.
There is only a passing reference to W.A.G.D. on the final page of the circular.
The information which the circular contains could only have been acquired after a lengthy investigation, much discussion with one or more executives of Vam Limited and a considered assessment of the prospects of the company and its subsidiaries. According to the circular the market had not at the date it was written accurately assessed the value of the shares in Surveys. It went on to say that over the next twelve months a market price of $3.00 plus per share could be expected. A price of $2.00 per share or thereabouts was sufficient to lead Mr. Bridges to the conclusion that there was such an imbalance in his company's investment portfolio that he should sell substantial quantities of the shares. Although the relevant points of time at which his intention should be considered are the dates of acquisition, I find it exceedingly difficult in the light of what is in the circular concerning the shares in Surveys to reconcile those statements with the reasons he has given for selling.
On behalf of the Commissioner submissions were made which if accepted, would give the circular, in the light of Mr. Bridges' almost immediate heavy and systematic selling of the shares in Surveys, a sinister significance. It was submitted that although the prime purpose of the circular was to induce clients to purchase shares in Vam Limited it would also have the effect of persuading them to buy shares in Surveys or to retain shares already held by them in that company. It would thus have the effect of causing the market to rise or at least be maintained and it would tend to help bring about what it was apparent Mr. Close wished to achieve, as evidenced by what is contained in the minute of Norwest Oil Limited and the letter to Mr. Capper to which I have earlier referred. On the face of things one can well understand that such a submission would be made but the evidence does not enable me to find it established. All I would wish to say is that if stockbrokers send a circular such as the one in question to their clients and within a matter of days commence, on behalf of their family companies, the heavy selling of shares which they had indirectly recommended should be bought or retained, they have only themselves to blame if the result is public opprobrium. They are fiduciary agents and have an overriding duty to clients to deal with them frankly. It is inconceivable to me that Mr. Bridges had not foreseen the probability that he would begin selling within a week of the sending of the circular and if all was as innocent as he maintained one would have thought that in a circular to 4,000 clients whose numbers came from all walks of life he would have said that, for personal reasons not associated with any view he had of the company, he proposed to sell shares in the coming weeks. Perhaps to Mr. Bridges and other stockbrokers the making of such a statement in a circular of the kind in question would be unthinkable but it is this very fact that makes the sending of it without such a statement appear to have the sinister effect contended for by the Commissioner. With the Commissioner's submission a cynical public would no doubt have no disagreement, but there are matters in the evidence which tend to suggest that there was not the impropriety involved in the sending of it which outward appearances would suggest.
Firstly, the market had by no means reached its peak when Mr. Bridges began to sell. It continued to climb for many months thereafter
ATC 4355and if he were to get the full benefit from it, assuming that to be his intention, one would have expected him to wait until it has taken effect. It is doubtful whether the earlier prices obtained by Mr. Bridges were influenced by the circular at all. The fact that he did not wait for the market to arrive at a peak is something heavily relied upon by his counsel. It is a matter which I have taken into account in the resolution of the matter and to which I will return. In any event by 3rd February 1969 when the circular was delivered, the price of the shares was already over $2.00. The impact which it could have had on the market in the early part of February in the light of the prices being obtained late in January could not have been more than minimal at any stage.
A second factor which has to be taken into account favourably to Mr. Bridges is the fact that he used substantial amounts received on the sale of the shares to acquire shares on behalf of his company in Vam Limited. In this sense, although the company sold shares in Surveys, it did buy shares in Vam Limited and thus Mr. Bridges was following the advice which he was giving to clients. On the day of the first sale, 5th February 1969, the company purchased 2,950 shares in Vam Limited for $14,689.40. Further shares were bought on 6th and 7th February 1969, with the result that at the close of business on 7th February 1969, Kitchwin Investments Pty. Limited had acquired 11,000 shares in Vam Limited for $25,611.20. In the same period it had sold 25,500 shares in Surveys for which it had received $66,257.33. On 14th, 20th and 24th February 1969, it acquired further shares in Vam Limited, bringing its holding up to 10,000 shares for which it had paid in all $50,830. By 24th February 1969, it had sold 50,000 shares in Surveys and received $134,202.75. No further shares in Vam Limited were purchased and rights to which the company became entitled as a result of its holding in October, 1969 and thereafter were all sold. Eventually it was left holding 8000 shares in Vam Limited which are now valueless. However, the total investment in Vam Limited was the sum of $50,830 which I have mentioned, whereas the total received from the sale of shares in Surveys including sales made in March and April, 1969 resulted in proceeds of $218,711.18. In the same context it is appropriate to mention that Mr. Bridges personally bought further shares in Vam Limited after the circular was sent out. These purchases were made in March 1969 by which time his holding had risen to 23,000 shares. Some of these were sold in the ensuing months but he was left holding almost 10,000 shares in the company and these have no value.
Finally, the circular, at least in the short term whilst the mining boom developed and continued, proved to be good advice. The shares both in Vam Limited and in Surveys remained generally firm, despite movements upwards and downwards, throughout 1969, although there appears to have been some weakening of the prices paid for the shares towards the end of that year and in the early months of 1970. To what extent this was due to the watering of the stock I am unable to say.
For these reasons the sending of the circular ought not to be regarded as an act of dishonesty on the part of Mr. Bridges or his partners. But it does have another significance in the resolution of the question to be answered. Assuming, as I do, that the document is an honest one and that its actual compilation and printing were done within quite a short period, the information which it contains could nevertheless not have been gathered overnight nor, as I have mentioned, without close contact with and research into the activities of the companies mentioned in it. Mr. Bridges' faith in Vam Limited is to be traced back to his investment in that company in 1967. He had a growing association with Mr. Close particularly in the latter months of 1968. The facts I have yet to relate in connection with the first sec. 77A transactions are a further indication of this. It is true that the effect of Mr. Bridges' evidence is that his interest in Surveys was sharpened by his two visits to Mt. Oxide and that there were a number of promising announcements made to the Stock Exchange on behalf of the company particularly in January 1969. But in its opening paragraph the circular refers to developments over the last two years having branded ``the company as dynamic''. The second paragraph refers to a great deal of research having been put ``into the activities of this company in the past six months''. The effect of the opening paragraphs upon a reader would be to lead him to think that there had been a close and
ATC 4356continuing study of Vam Limited and its subsidiaries over a substantial period and that the serious assessment of the prospects of Vam Limited and its subsidiaries made in the circular was made only after careful and painstaking investigation. Although the purpose of the circular was to bring to the notice of readers of it the worth of shares in Vam Limited as an investment, it dealt with the prospects of Surveys as well in order to establish the value of shares in Vam Limited. The copper holdings which were the basis of its promise, according to the circular, were held in the periods of two years and six months which the circular mentions either by Vam Limited or by another subsidiary. Surveys did not become an active member of the group until after the change of name which occurred in October 1968. Although Mr. Bridges' visits to Mt. Oxide did not take place until after he had agreed on behalf of his company to acquire the initial 83,000 shares in Surveys, the circular would indicate knowledge on his part of what was likely to come about long before any visit occurred. It is unthinkable that a stockbroker of Mr. Bridges' experience taking the interest he was in the companies' activities (that is Vam Limited and Surveys) would not have perceived what might be the effect on the market, if his hopes and expectations were realised, if not by February 1969, then within the following twelve months. This is precisely what the circular says in the paragraph which I have emphasised.
Accordingly I consider the terms of the circular viewed in the light of the length of time it would have taken to be able to form the opinions therein contained are quite inconsistent with evidence given by Mr. Bridges that he sold the greater part of a long term investment which he had sought to acquire for his company because of an unexpected and quite unforeseen imbalance occurring in his company's investment portfolio.
Strong reliance was placed by counsel for Mr. Bridges upon the following four considerations, namely -
- (a) There was in fact the imbalance in the company's investment portfolio of which Mr. Bridges speaks;
- (b) Mr. Bridges, if his reasons had not been as he said, would not have made such a substantial investment in Vam Limited. To the extent that there was investment in Vam Limited there was no more than a transposition of the investment and it was obviously wise to have shares in the parent company rather than in the subsidiary;
- (c) If he were speculating, Mr. Bridges would not have sold when he did; he would have waited until the market had risen further and then got out; and
- (d) If things were not as he said, he would not have kept any shares at all; he would have seen to it that the 40,000 shares with which his company was ultimately left were also sold off.
I deal with these submissions shortly. As to the imbalance which came about, I have already said enough in passing to indicate my views on this. It was the very thing that he must have foreseen as likely to happen from the beginning if things went well. It must have been precisely what he hoped for.
In relation to Vam Limited he clearly had great faith in that company, as his personal shareholding towards the end of 1968 indicates. It is true that he had sold as well as bought shares in that company during 1968 but I am satisfied that he did have a genuine belief in its future. This does not, however, take him very far. Firstly, he did not put much more than twenty-five per cent of the total proceeds of the sale of shares in Surveys into Vam Limited. Such transposition as there was was therefore by no means as to the whole investment. Secondly, unless he sold the Surveys shares which he had acquired so cheaply he could not generate sufficient capital to enable him to purchase the Vam Limited shares. Finally, transposition by investment in Vam Limited was not mentioned by Mr. Bridges as a prime reason for selling. He did not mention it at all in his evidence but there is a statement about it in his letter to the Commissioner asking for a preliminary ruling on whether the profit was taxable.
As to whether a speculator would have sold at the time he did, it has to be said that on what it had cost him to acquire the shares the profit he made by selling in February was still
ATC 4357substantial. Despite his knowledge of the company's affairs and his general experience as a stockbroker he could not have been sure that the shares would in fact continue to rise. Furthermore, the relevant question is not whether he was a speculator but what was his purpose in the original acquisition. If it were as he said, he would not have sold in the quantities and within the short time in which he did. I have already adverted to this matter.
There may have been many reasons for the retention of the 40,000 shares with which the company was left. He himself did not give reasons as to why it was that it retained them. But by the middle of May, 1969 he knew the Commissioner's attitude and this of itself, in the light of the gain already made, may have induced him to sell no more.
One further matter adds to my conviction that I ought not to accept Mr. Bridges' evidence. It is the further acquisition of shares in Surveys by the exchange effected in 1969 and the almost immediate sale of an equivalent number. In relation to that acquisition his affidavit suggests that it was not completed until after the end of June, 1969 but when he returned to the witness box after the enforced adjournment of three months he verified a schedule showing, inter alia, acquisitions of shares and sales of shares by his company in Surveys. This schedule showed that on behalf of his company he acquired by exchange 16,000 shares in Surveys on 10th April 1969 eight days after the letter written on 2nd April 1969 seeking the Commissioner's ruling. Sixteen thousand shares were sold on 29th and 30th April 1969. It may be that the 16,000 shares so sold are not identifiable as the 16,000 shares acquired by exchange less than three weeks before, but the fact is that in April his holding was increased from 40,000 to 56,000 shares and within a very short time reduced, by a sale of 16,000 shares at a substantial profit, again to 40,000 shares. In the statement accompanying the company's income tax return and in his original evidence Mr. Bridges did not deal specifically with the acquisitions of shares made either in December 1968 nor in April 1969. Particularly in the statement which accompanies the income tax return, and to a degree also in his affidavit, these transactions have been glossed over and absorbed into the general account of how he came to acquire shares in Surveys in the first place. To my mind the accounts he has given lack frankness. More importantly the sale of 16,000 shares in April, so soon after the acquisition of an equivalent number, even though those sold may have been part of the original acquisition in November, 1968, leaves me with such a reservation about the purpose of each of his acquisitions that I could not accept his evidence.
I am conscious that it is no light matter to come to the conclusion that a person in Mr. Bridges' position should be disbelieved in relation to his alleged state of mind at the time that the shares were acquired, but having given the whole matter much anxious thought, I am firmly of the opinion that his evidence cannot be accepted. In reaching this conclusion I have not relied to any substantial degree on my observation of Mr. Bridges as a witness. My observation of him, however, in relation to evidence given about one aspect of the first sec. 77A transactions is of some importance in relation to the resolution of the facts relevant to those transactions. I shall come to that matter in due course. Mr. Bridges is not a young man. He was questioned closely over a period of days about the detail of the transactions with which I have so far dealt, as well as about the sec. 77A transactions. At one stage he became very tired and I had to permit his cross-examination to be deferred. This, however, reflects no discredit upon him. In the circumstances he was undergoing a substantial ordeal, his recollection being tested upon a great many matters of detail as to events which had happened up to six years before. He did impress me, as I have indicated, as a shrewd and capable businessman and stockbroker. There were some few occasions when I felt his shrewdness came a little too much to the fore, but the witness box is a difficult place and as I have said his demeanour as a witness is not a decisive factor in my conclusion that he should not be believed. In broad terms my conclusion rests upon the improbability of his story in the light of his subsequent conduct and upon the fact that his recollection was clearly faulty in respect of events in the latter part of 1968. In other circumstances those faults of recollection might not have had any decisive effect, but in the overall circumstances of this case I am satisfied that they should.
Accordingly the appeal of Kitchwin Investments Pty. Limited against the inclusion of the profit made upon the sale of the shares in Surveys is dismissed.
(b) Hartal Pty. Limited
The evidence to which I have chiefly paid regard in considering the appeals of Hartal Pty. Limited against the inclusion, as part of its income for the 1969 and 1970 tax years of profit made by the company on the sale of shares in Surveys, is that of Mr. Urquhart who, by reason of his control of its parent, Alhart Investments Pty. Limited, also controls its activities. It is true that he has sworn that the initial decisions taken in respect of the acquisition of the shares both in W.A.G.D. and Surveys were made by Mr. Bridges and has said that it was Mr. Bridges and not either he nor. Mr. Mullens who had any detailed knowledge of the matter. But the transaction was not a partnership one and it is not correct to regard Mr. Bridges' purpose as that of Mr. Urquhart. It is his statement of the purpose he had, on behalf of his company, in acquiring the shares which I must consider.
Mr. Urquhart said that the acquisition of the shares, firstly in W.A.G.D. and secondly in Surveys, was an investment which he thought might, over a long period, bear fruit. It was not a large investment and he found himself putting money into it because he had been made an original syndicate member by Mr. Shaw. The matter evolved from there; he was busy with other activities both within the partnership and outside it and he did not give the matter substantial thought.
Despite my impression of him as a witness who did his best to assist, there are on the face of his evidence, that is the evidence he gave both in his affidavits and orally, some matters which puzzle me. However, in the view that I take of the matter I need only advert to one of these. My conclusion is that the appeals brought by the company against the inclusion of the profits made on the sales of the shares should be allowed. I have reached the conclusion that I should accept Mr. Urquhart's evidence that the shares were not acquired with the dominant purpose of profit-making by sale, principally because I consider that what transpired after the acquisition of the shares indicates strongly that his evidence of his state of mind at the time of the acquisition should be accepted.
At the end of November 1968, his company acquired by exchange 85,000 shares in Surveys. Hartal Pty. Limited did not acquire more shares in December 1968, as did Kitchwin Investments Pty. Limited. It sold only 8,600 shares in the year ending 30th June, 1969. These were sold between 14th and 18th February 1969 at prices ranging between $2.40 and $2.80 per share, and resulted in a profit of $21,040. The entirety of the proceeds, as well as other moneys, were immediately re-invested in shares in Vam Limited in which, between 14th and 19th February, 1969, Hartal Pty. Limited acquired 5,000 shares at prices ranging between $4.80 and $5.34 per share. Prior to the sale of shares in Surveys, Hartal Pty. Limited had acquired, in December 1968, 2,000 shares in Vam Limited at prices ranging between $2.30 and $2.45 per share. Mr. Urquhart continued to hold personally the 4,500 shares in Vam Limited which I have already mentioned.
He caused Hartal Pty. Limited to acquire a further 16,000 shares in Surveys by exchanging 40,000 shares held by the company in W.A.G.D. on 10th April 1969, and the company's holding accordingly rose to 92,400 shares. This was its holding on 30th June, 1969.
On 11th July, 1969, there was an issue by Surveys of one share for every two shares held and Hartal Pty. Limited accordingly became entitled to 46,200 rights. Twenty-three thousand rights were sold on 7th August, 1969, at prices ranging between $1.08 and $1.15 per right. With the proceeds of sale 23,200 new shares were taken up, with the result that, by 15th September 1969, the company held 115,600 shares which had cost it $31,200.
On 10th October 1969 2,300 shares were sold. Further sales followed on 13th, 14th and 15th October, 1969. In all, 10,400 shares were sold at prices ranging between $2.60 and $2.80 per share. On 16th October, 1969, a further 19,600 shares were purchased at $1.70 each with the result that the holding increased from 105,200 shares the previous day to 124,800 shares. In December 1969 and January and February 1970 there were substantial sales of
ATC 4359the shares, 54,800 being sold at prices ranging between $2 and $2.14 per share. The profit made on the sale of the shares in the year ending 30th June 1970 was $131,389.
Hartal Pty. Limited was left with 70,000 shares which were still worth more than $2 per share in February 1970. These were not sold and are now valueless. The company additionally acquired further shares and also options in Vam Limited and although there were some sales of both shares and options in April 1970 it continued to hold 1,500 old shares, 9,100 new shares and 11,200 options. All these are now valueless. Mr. Urquhart himself retained the 4,500 shares originally acquired in Vam Limited, took up rights which gave him a further 4,500 shares in that company and, as well, acquired 4,500 options. He still holds these shares and options and they are valueless.
His evidence of the reasons why he sold the shares in Surveys are to be found initially in his affidavits. In relation to the sale of the 8,600 shares sold in February, 1969, he said that the rise in the value of the shares in Surveys was quite unexpected. According to his evidence it occurred at such a rate ``and the shares reached such a value that Hartal's investment portfolio got out of balance. The result was that I decided that Hartal should sell some of its Surveys & Mining shares and during February, 1969 Hartal sold 8,600 of the same.''
In a further affidavit Mr. Urquhart said that Hartal, in August 1969, sold the abovementioned 23,000 rights in Surveys for the purpose of financing the taking up by that company of the 23,200 Surveys shares ``to which its other Surveys & Mining rights entitled it''. In reference to the October sales, Mr. Urquhart said that his company sold a further 10,400 Survey shares for the purpose of paying to Mullens & Co. the balance of an amount of $33,200 due from Hartal to Mullens & Co., for 19,600 Surveys shares which Mullens & Co. had purchased for Hartal at $1.70 per share and were holding for it. I have referred to the acquisition of these 19,600 shares above.
In relation to the sales which occurred between December 1969 and February, 1970, Mr. Urquhart said that he sold the shares for two reasons. His affidavit continues as follows -
``First, the shares had got so high on the market that for Hartal to continue to hold all of them was unwise. Second, my wife and I had bought a new home at Point Piper using Hartal as the purchaser. The whole of the proceeds of the sale of the 54,800 Surveys & Mining shares was applied by Hartal in reduction of temporary borrowing from Mullens & Co., and Commonwealth Trading Bank of Australia made to finance the purchase of the Point Piper property (the cost of which was $131,817.00).''
Mr. Urquhart in his oral evidence deals further with the acquisition of the house at Point Piper. I do not set out the evidence he gave about it in the course of his cross-examination but in the light of what he said I am satisfied that I should accept the evidence he there gave as to his reason for selling the shares in the period December, 1969 to February 1970. I am satisfied that if he had not had the need to purchase the home for the reasons given in his oral evidence he would have continued to hold the 54,800 shares in Surveys and that these, like the 70,000 still retained, would have proved valueless. I do not think that the other reason mentioned by him in his affidavit would have led him to sell if it had not been that he needed to change his place of residence.
I also accept the evidence given by him as to the reason why he, on behalf of his company, sold rights in August, 1969, and shares in October, 1969.
In my opinion Mr. Urquhart's evidence of the reasons why he sold rights and shares in August, October, and the period December 1969 to February 1970, provides strong support for the evidence which he gave as to the purpose for which he acquired the shares initially. Although he did not deal with it expressly I am satisfied that his purpose was the same when he acquired the 16,000 additional shares in Surveys by exchange in April 1969. The whole of his conduct indicates that he did in fact regard the acquisition as an investment and his only reasons for selling were either to provide finance to enable the
ATC 4360investment to be held and increased, or, to enable him in the changed circumstances in which he found himself, to acquire the house at Point Piper.
I have found it more difficult to regard the reasons advanced by him for the sale of the 8,600 shares in February 1969, as being correct. The company bought 85,000 shares and sold 8,600, leaving it still with 76,400. The holding never fell below this number until after the sales to finance the purchase of the house, which concluded in February, 1970. The sale of 8,600 shares would not really rectify any imbalance in the investment portfolio of Hartal Pty. Limited and the question I have asked myself is whether, despite the conclusions to which I have come in relation to Mr. Urquhart's evidence of his reasons for selling the later parcels of shares, I should regard the totality of his evidence as unsatisfactory because of what he has said about the sale of the 8,600 shares. Having given the matter due consideration I have reached the conclusion I should not do so. My principal reason is the fact that the entirety of the proceeds of the profit which arose, and more, was immediately invested in shares in Vam Limited thus increasing the holdings of Hartal Pty. Limited in that company. As Mr. Urquhart said, there is in some cases wisdom in transposing an investment from an investment in a subsidiary to an investment in a parent. In my opinion Mr. Urquhart's evidence has established that his company acquired the shares in Surveys without giving the matter over-much thought and in the belief that, either by re-sale or by retention as an investment, acquiring them would prove profitable. Insofar as he had a dominant purpose it was not one of profit-making by sale and at the most he had an appreciation that if at some time it was necessary or desirable to do so the shares might, if things went well, be sold at a profit - see
Buckland v. F.C. of T. 34 A.L.J.R. 60 at p. 62.
As earlier mentioned the Commissioner relied also upon the second limb of sec. 26(a) of the Act but what I have said shows that the profits arising by reason of the sales of the shares did not arise from the carrying on or carrying out of any profit-making undertaking or scheme within the meaning of the section.
For the reasons I have given, the appeals of Hartal Pty. Limited, in the respects in which I have dealt with them, are allowed.
(c) Mullens Investments Pty. Limited.
In his affidavit Mr. Mullens emphasised the fact that neither he nor Mr. Urquhart played any direct part in the negotiations which led to the acquisition both of the shares in W.A.G.D. and in Surveys by their respective companies. In para. 15 of his affidavit he said that the involvement of Mullens Investments Pty. Limited ``(and of Kitchwin Investments Pty. Limited and Hartal Pty. Limited for that matter) in the W.A.G.D./Surveys & Mining episode was more-or-less accidental and did not occur because I saw any prospect of profit-making by sale in it.'' He further said that the exchanges of the W.A.G.D. shares for the Surveys shares were effected because they met the wishes of Vam Limited and also because they meant that Surveys would develop the gold mine. In para. 16 of his affidavit he said that the sales of the Surveys shares which were made by Mullens Investment Pty. Limited during the year ended 30th June, 1969, were made because of the quite unexpected and extraordinarily large rise in the value of the shares on the stock market. He said that it seemed to him at the time that it would be unwise for Mullens Investments Pty. Limited not to dispose of part of its large holdings of Surveys shares.
The acquisitions of Mullens Investments Pty. Limited of shares in Surveys occurred as a result of the original exchange upon which it received 82,000 shares in Surveys. For reasons already mentioned I find that the negotiations which led to the agreement for the exchange were commenced some time in October 1968. The second exchange was effected on 11th April 1969 when Mullens Investments Pty. Limited received 16,000 shares in Surveys in return for its remaining 40,000 shares in W.A.G.D.
Sales by Mullens Investments Pty. Limited of shares in Surveys commenced on 3rd February 1969. In all, 30,000 shares were sold between 3rd February 1969 and 8th April 1969 at prices ranging between $2.40 and $3.25 per share. There were no sales after the exchange of the 40,000 shares in W.A.G.D. for 16,000
ATC 4361further shares in Surveys until after the end of the tax period in question. In July, August and September 1969 there were further sales of shares and also of rights to which the company had become entitled by reason of its shareholding. Ultimately the company was left with 62,000 shares which are now valueless. Unlike both Mr. Bridges and Mr. Urquhart, Mr. Mullens did not either personally or through Mullens Investments Pty. Limited invest in Vam Limited, although there were in March and May 1968 transactions by him personally in shares in that company in which he purchased and sold shares for the same price, either on the same day or the day following that on which the shares were acquired. Like his partners, Mr. Mullens took up 4,000 shares in W.A.G.D. which in April 1969 were exchanged for 1600 shares in Surveys. He did not sell these shares and has been left with them.
In his oral evidence Mr. Mullens said that his decision to bring about the sale of the shares by his company as from 3rd February, 1969, was based upon the fact that the market price had risen. He did not have any particular purpose to which the resulting gain would be applied. His evidence continued -
``Q. So it would be fair to say it was purely a matter of market judgment that caused you to sell at the time? A. It was purely a matter of my attitude to these matters, financial prudence. If you have an investment which in a very short space of time has become more than you thought it would in 20 years' time you do not wait for 20 years, you take the advantage there and then, that the capital sum was such for a company with my limited resources... it became to my mind obvious common sense to reduce the holding.''
Mr. Mullens was asked questions about the circular advocating the purchase of shares in Vam Limited. His evidence established that 1,500 copies of it were despatched from the firm's office on 31st January, 1969. This was on a Friday and on the following Monday, 3rd February 1969, Mr. Mullens began to sell. It will be recalled that the circular, although not designed to advocate the purchase or retention of shares in Surveys, stressed the fact that the shares were under-valued and spoke of a price of $3 in the next twelve months to two years. Allowing for some exaggeration in the answer given by Mr. Mullens which I have just set out (I refer to his reference of twenty years), it does not seem to me to run very well with the fact that he had authorised the sending out of a circular containing the material to which I have referred.
But he was not, according to his evidence, very enthusiastic about the terms of the circular. I refer to the following evidence -
``Q. At the beginning of February 1969 it looked as if the affairs - if the shares could go to $3 within 12 months or more? A. Which shares?
Q. Surveys & Mining? A. Well I find those sort of figures that were being thrown around too good to believe. I could not see that they would get to $3 in three months, that was the sort of figure I thought they would achieve in some years.
Q. You did not believe that Surveys & Mining could get within $3 in 3 months to 12 months? A. I didn't think so but Mr. Bridges did.
Q. That is what he said in the circular, isn't it? A. Yes, that is what he said.
Q. And you did not agree with that? A. No. I didn't.
Q. And yet you let the circular go out with that statement contained in it? A. Yes, but I cannot agree with every circular.
HIS HONOUR: Q. But that is a pretty important thing, isn't it, that statement? A. I did not disagree with the company. I did disagree with the way the stock market was operating and I did agree with the promise. We do have disagreements over particular investments, of course. We can't agree with everyone.
Q. But none of your investors were to know that, were they? A. No, but my clients would have asked me and no doubt circulars have gone out with particular suggestions that we have made about companies, and no doubt I have disagreed with Mr. Bridges in some of these cases in the strong terms in which he has expressed his enthusiasm for the company.
HIS HONOUR: Q. It is easy enough to see that Mr. Bridges was enthusiastic? A. It went out over his name, he signed it.
Q. But it went out over your name too, didn't it? A. Yes, but as a general nature in a stock broking business there are frequently disagreements about the various stock brokers views about different companies. I do not find that particularly unusual. You might think it is but I don't find that unusual.''
Not only did the circular, although signed by Mr. Bridges go out over Mr. Mullens' name but the evidence which he gave when he returned to the witness box almost three months later established the date of the despatch of the first group of circulars, and also that he himself had played a physical part in sending them out. He said -
``The bulk of them at least would have been sent on Friday the 31st because I do have a recollection of as many of the staff as could be spared correlating, folding, inserting and posting the circulars on that day, and in fact we worked through into the evening of Friday the 31st to have them despatched on that day...
Q. You took some part in this yourself? A. Purely physically, mechanical action, yes. I think we all did, your Honour.''
I regret to say that I have not found Mr. Mullens' evidence at all satisfactory. It seems inconceivable that on Friday, 31st January 1969, when he was placing circulars in envelopes, that he did not know that he was to commence selling on Monday, 3rd February 1969. Furthermore I find it incredible that he really would have had on the Friday not only a lack of enthusiasm for the contents of the circular, but a positive disagreement with its optimism. I feel constrained to say that Mr. Mullens gave the evidence which I have set out on the previous page because he saw the difficulty he was in in attempting to reconcile his statements as to his purposes in acquiring the shares with his subsequent conduct in selling so soon, unless he could say that he had no reason to think the price of the shares would increase with such rapidity. He was forced to say that he disagreed with the contents of the circular at the time it was despatched and, to the extent that he did, I find his evidence dishonest. There is an aspect of his evidence given in relation to the second sec. 77A transactions which I also find unsatisfactory. With this matter I shall later deal, but I mention it here because it is a matter which I have taken into account in assessing Mr. Mullens' credibility generally.
In reaching that assessment I have had regard, additionally, to his manner and demeanour in the witness box. He left me with the impression that he resented being asked details about the transactions in question. I have allowed for the fact that he may have been nervous and not have done himself justice and I think that this may explain his manner to some degree. But giving that matter due weight I was left with the impression that notwithstanding the quiet and restrained manner in which he was questioned and the fact that many things in the documents in the case called for an explanation, he had a quite unreasonable resentment of the whole proceedings. This stemmed, I think, from an attitude that what he had to say about his part in the transactions and particularly his purpose in acquiring the shares should have been accepted without enquiry.
Submissions similar to those made in relation to Kitchwin Investments Pty. Limited were relied upon and I have taken them into account. Mr. Mullens' company did not acquire further shares in December 1968 as did that company and there was no immediate sale of the 16,000 additional shares acquired by exchange in April 1969. Mullens Investments Pty. Limited did retain a large parcel of the shares and these are now valueless. I have taken these and other matters into account in the company's favour but, for the reasons I have mentioned, I have no belief in Mr. Mullens' evidence and the appeal by Mullens Investments Pty. Limited in relation to the inclusion in its taxable income, for the year ending 30th June 1969, of the profit made on the sales of the shares is dismissed.
(d) Mr. R. Robinson.
Mr. Robinson was at the relevant time an employee of the firm of Mullens & Co. and became a partner in the firm in 1969. He did not participate in the original exchange but in
ATC 43631969, before 30th June of that year, exchanged shares in W.A.G.D. for 2,000 shares in Surveys. Mr. Robinson does not depose to when it was in 1969 that he acquired the shares in Surveys, but it must have been about the time of the second exchange made by the three appellants with whose cases I have just dealt. The evidence shows that Mr. Robinson sold the shares before the end of June, 1969, so he could not have held them for long and must have sold them at prices which ranged between $2.55 and $3.90 per share. In his affidavit he sought to say that his agreement to exchange the shares was really forced upon him because of the fact that other shareholders (I assume he means the family companies of the members of the firm) had agreed to it. Having agreed to it, he immediately, as I have already said, sold. The tenor of his evidence is that the matter should be looked at as an investment in shares in W.A.G.D. and that his agreement to exchange in April 1969 was something which was not really a voluntary act on his part. I do not think that one should look at the matter in this way. I am not satisfied that the shares acquired by exchange in Surveys were not acquired with it in mind that they would almost immediately be sold. But if the question were what was Mr. Robinson's purpose in acquiring the shares in W.A.G.D. I would still not be satisfied by his evidence that his purpose in acquiring those shares was not profit-making by sale. I have endeavoured to make due allowance for the use by him in his evidence of the expression ``spec'', but having done so, I nevertheless think that it tended to reveal his true purpose as one of profit-making by sale. Accordingly Mr. Robinson's appeal in relation to the taxation of the profit made on the sale of the shares in Surveys is dismissed.
The Section 77A transactions.
Before coming to the detail of these transactions I should shortly refer to the provisions of the legislation in question. Section 77A is no longer part of the Act, it having been repealed in 1969. It was available in respect of the payments claimed as deductions here, they having been disbursed during the year ending 30th June 1969. Section 77A(4) provided that the amount of any moneys paid on shares paid by a person in the year of income of that person to a company and included in money specified in a declaration lodged by the company under sub-sec. (3) should be an allowable deduction from the assessable income derived by that person in that year of income. Subsection (3) of the section provided that a petroleum exploration company might, before the expiration of one month after the end of the year of income of the company in which the company had received moneys paid on shares or within such further time as the Commissioner allowed, lodge with the Commissioner a declaration in writing signed by the public officer of the company that the company had expended, or proposed to expend, such of those moneys as were specified in the declaration in carrying on prospecting or mining operations in Australia for the purpose of discovering or obtaining petroleum or on plant necessary for carrying on such operations. The expression ``petroleum exploration company'' was defined in sec. 6(1) of the Act to mean a company carrying on as its principal business prospecting or mining operations for the purpose of discovering or obtaining petroleum in Australia or in the territory of Papua and New Guinea. The word ``petroleum'' was also defined in sec. 6(1). It included what is colloquially known in the community as natural gas. The expression ``moneys paid on shares'' was defined in sec. 77A(1) of the Act. For relevant purposes the definition was as follows -
- ``moneys paid on shares'', in relation to a company, means moneys paid to the company in respect of shares in the company by the owners of the shares, including owners who are beneficial owners only, but does not include -
- (b) moneys paid to the company in respect of a share the beneficial owner, or any one of the beneficial owners, of which was not a resident at the time of payment...
The word ``resident'' was defined in the same subsection to include a resident of the territory of Papua and New Guinea.
Vam Limited had, as I have already indicated, a number of mining and prospecting interests. It proposed to become part of a venture prospecting for natural gas in certain recognised natural gas fields in South Australia and south western Queensland. In order that persons investing in the project might obtain the benefit of the provisions of sec. 77A of the Act and thereby be induced to put money into it, it was decided by the directors of Vam Limited that a company, Vamgas N.L., should be incorporated. The intention was that it would be solely engaged in carrying out prospecting for natural gas. The company was incorporated on 13th August 1968 with an authorised capital of $10,000,000 divided into twenty million shares of 50 cents each. Five million ordinary shares of 50 cents each paid to 10 cents were issued to Vam Limited for cash and a prospectus was issued offering a further 5,000,000 ordinary shares of 50 cents each. Of these 3,000,000 were reserved for the shareholders of Vam Limited and 2,000,000 were reserved for clients of the underwriting brokers and of the four brokers to the issue, none of whom was Mullens & Co. Between 17th January 1969 and 17th February 1969 the company received applications for shares.
The first transactions are in respect of shares taken up by Mr. Urquhart and Mr. Bridges and by Mullens Investments Pty. Limited in February 1969 and the second transactions are in respect of calls paid on shares which had been issued to Vam Limited. The shares were transferred to a nominee company Emdecelex (Nominees) Pty. Limited, the shareholders of which were the partners in Mullens & Co. A call of 40 cents per share was paid towards the end of May 1969. The shares were then re-transferred to Vam Limited. I deal with the two sets of transactions as follows.
The first Section 77A transactions.
Mr. Bridges said that the discussion which led to the subsequent dealings in the shares occurred when he was returning by aeroplane from one of the visits he made to Western Australia with Mr. Close in connection with the gold mining prospects there. According to Mr. Bridges' evidence he said to Mr. Close, ``Mullens and Co. would be interested in underwriting the issue provided the Commissioner of Taxation rules that it carries the full benefit of sec. 77A of the Income Tax Act''. Mr. Close replied, ``The Commissioner will make that ruling but King and Yuill have been appointed underwriters. Even so, I will be able to arrange for Mullens and Co. to get a share of the underwriting.'' Mr. Close mentioned later in the discussion that the shareholders in Vam Limited were being given non-renounceable rights to take up shares in the Vamgas first issue. Mr. Close and members of his family and his friends were entitled to nearly 500,000 such rights. He said, ``We cannot possibly afford to pay for our full entitlement in the Vamgas first issue. Furthermore we don't need the tax deductions. We are looking for some way of financing the taking up of our full entitlements.'' Mr. Bridges said that it occurred to him that it might be useful for Mullens and Co. to take up the entitlements in the Vamgas issue of Mr. Close and the members of his family and his friends so that Mullens & Co. might thereby gain deductions under sec. 77A of the Act and he said so to Mr. Close. Mr. Close said that if Mullens & Co. did that he would want to retain for himself and the members of his family and his friends the chance of regaining the same number of Vamgas shares from Mullens and Co. at some time in the future.
I should interpose to say something about the expression ``non-renounceable rights''. It really means non-transferable rights. The rights were personal to the shareholders to whom they were given and could not be ``renounced'' and transferred on the market as is usually the case with entitlements to new shares accruing to shareholders in public companies.
On arriving in Sydney Mr. Bridges discussed the matter with his partners who expressed interest in participating in taking up the entitlements. His affidavits continued, ``Having regard to the fact that the rights were non-renounceable the Vamgas shares could be taken up only in the names of the persons having the rights. My partners and I accordingly decided that it should be suggested to Mr. Close that while the partners in Mullens and Co. would pay for the shares to which Mr. Close and his associates were entitled the latter
ATC 4365should apply for them and execute declarations of trust in favour of the partners in Mullens and Co. At the same time the partners in Mullens and Co. would give to the applicants options to buy the same number of Vamgas shares. In the first instance I put the proposal to Mr. Close on the basis that the option should be a `two-way' option. If there had been such an option then during the option period Mullens and Co. could have forced the trustee-holders of the shares to buy the shares at the option price even if on the market the shares had fallen below that price. Mr. Close would not agree to a `two-way' option and the result was that a `one-way' option was settled on, the effect being that during the option period the option-holders had the right to exercise the options but the option-givers could not force them to do so.''
Mr. Bridges said that the discussions he had with his partners and Mr. Close about this matter took place over the period from late October 1968 to the end of January 1969. About the end of January 1969 Mr. Close handed to Mr. Bridges applications for 433,800 shares in the Vamgas issue executed by Mr. Close and those of the members of his family and his friends who held the non-transferable rights. The shares were paid for by a cheque dated 5th February 1969 for $216,900 drawn on the Commercial Banking Company of Sydney Limited in favour of Vamgas N.L. According to Mr. Bridges the sum of $216,900 was contributed as to $71,900 by himself for which he received 143,800 shares, as to $75,000 by Mr. Urquhart who became entitled to 150,000 shares and as to $70,000 by Mullens Investments Pty. Limited which became entitled to 140,000. A typical trust deed executed by one of the holders of non-transferable rights is that executed by Norwest Oil Pty. Limited. It bears the company's seal and is in the following form -
- 1. The Trustee Norwest Oil P/L has applied for and been allotted 23500 shares of the capital of Vamgas N.L., a company incorporated in the State of New South Wales and having its registered Office at 271 Elizabeth Street, Sydney, New South Wales, and paid to the company the sum of Eleven Thousand Seven Hundred & Fifty dollars ($11,750) for the allotment of the said shares.
- 2. The whole of the said sum of 11,750 dollars ($11,750) was provided by Alastair Hugh Urquhart, Kitchener William Alfred Bridges and Mullens Investments Pty. Ltd., trading as Mullens & Co., Members of The Sydney Stock Exchange Limited, and the said abovementioned shares were subscribed for by Norwest Oil P/L merely as Trustee for the Beneficiary.
After the seal appears the date 4th February 1969.
On 3rd February 1969 Mr. Bridges signed an option agreement on behalf of Mullens and Co. and also apparently as agent for Mullens Investments Pty. Limited. The option agreement is as follows -
``1. The Vendors, Alastair Hugh Urquhart, Kitchener William Alfred Bridges and Mullens Investments Pty. Ltd., Members of The Sydney Stock Exchange Limited are the beneficial owners of 23500 ordinary shares of 50 cents fully paid in Vamgas N.L.
2. Alastair Hugh Urquhart, Kitchener William Alfred Bridges and Mullens Investments Pty. Ltd. have agreed to give Norwest Oil P/L an option to purchase the said shares upon the terms hereinafter appearing. Consideration for this option is $1.00 hereby duly acknowledged.
3. Alastair Hugh Urquhart, Kitchener William Alfred Bridges and Mullens Investments Pty. Ltd. hereby grant to Norwest Oil P/L an option to purchase 23500 ordinary shares fully paid to 50 cents in Vamgas N.L., for a total price of Eleven Thousand Seven Hundred & Fifty dollars ($11750).
4. Alastair Hugh Urquhart, Kitchener William Alfred Bridges and Mullens Investments Pty. Ltd. warrant that they are the beneficial owners of the said shares and the same are free from encumbrance and that they have been the beneficial owners thereof continuously since the third day of February 1969.
5. The said option shall be exercised at any time after the 28th day of February, 1969, and prior to the 15th day of May, 1969.''
The other trust deeds and option agreements are to the same effect although there are some differences. None of these is of any consequence in the resolution of the present problem.
Mr. Bridges, Mr. Urquhart and Mullens Investments Pty. Limited each claim to be entitled to a deduction in the respective amounts to which I have referred for the sums paid in respect of the shares. In addition to signing the declarations of trust each applicant also signed a share transfer in blank in respect of the shares applied for. In due course the certificates for the shares issued and these were given to Mullens & Co. The shares remained registered in the names of the original allottees.
According to Mr. Bridges' second affidavit each of the options was exercised on 14th May 1969. The options were exercised orally by Mr. Close giving to Mr. Bridges notice of the exercise of them on behalf of himself and the other option holders.
Paragraph 50 of his second affidavit is as follows -
``50. The methods by which the option holders raised the cash required to exercise the options varied. A few of the option holders had cash available, but most of the option holders raised cash by selling the rights attaching to the subject shares and making other sundry sales on the market. It should be noted that the rules surrounding the trading in options are such that the holder of the option is entitled to bonus issues or dividends or rights to new issues declared during the option period, and as I have stated above Vamgas announced a one-for-one issue at par in March, 1969.''
No applicable rule to the effect of that referred to was produced. Paragraph 51 is in part as follows -
``51. All of the option holders used Mullens & Co. as their stock and share brokers and payment to the givers of the option of the moneys made payable by the exercise of the options were effected by means of Mullens & Co. debiting the accounts which the option holders had with them with the relevant amounts.''
On 16th May 1969 Mr. Bridges, Mr. Urquhart and Mullens Investment Pty. Limited were credited with the amount due to them by reason of the exercise of the options.
The bankers to the partnership of Mullens and Co. were the Commercial Banking Co. of Sydney Limited. Amongst the exhibits are two diary entries of the bank manager dated respectively 24th September 1968 and 3rd October 1968. The first of these entries is in part as follows -
``Mr. Bridges called and asked whether the Bank would provide overdraft accommodation to the extent of $250,000 as from 1/11/68 to say 31/1/69, to enable the Firm to take up that value of shares of an issue to be made by VAMGAS N.L., which will be a subsidiary of VAM Ltd. The parent Company will take up 8 million shares of a total issue of 15 million, each of 50c. VAM Ltd. shareholders will be offered one share in VAMGAS N.L. for each share held in VAM Ltd. One million shares is earmarked for an oil company, leaving two million shares for public subscription. The issue will be underwritten by Messrs. Ralph W. King and Yuill.
Mr. Bridges advised that the shares which would be available to the Firm will be shares which certain shareholders of VAM Ltd. will be entitled to take up. It is proposed that Mullens and Co. should advance these shareholders the sum of $250,000 to enable them to put up the funds to take up the shares in VAMGAS N.L. and to hold the shares as beneficial holders for Mullens and Co. on the understanding that the shareholders will purchase the shares from Mullens and Co. at par when the shares are listed, which is anticipated to be towards the end of January next.
The only security for this accommodation which could be offered to the Bank would be a receipt for the application monies for the shares in VAMGAS N.L. and copies of letters to be exchanged between the shareholders concerned and Mullens and Co., setting out the position as between the parties. VAMGAS will acquire a one-fifth interest of Delhi Australian Petroleum Limited 50% interest in the Delhi-Santos oil
ATC 4367explora- (sic) and natural gas venture in South Australia, and Queensland, for $5,250,000 plus. It is expected that natural gas will be on tap in Adelaide by November, 1969.
The purpose of the exercise is to enable the partners of Mullens and Co. to take advantage of the $250,000 to be provided by them to off-set their income for taxation purposes for the twelve months ended 30th June, 1969. Also, as a result of this off-set, the amount of provisional tax which the partners would be obliged to provide in April next, assessed on their income for the twelve months ended 30/6/1968, would be substantially reduced upon reassessment, which would be applied for.''
The Bank agreed to advance the moneys and the second diary entry is concerned with the terms upon which the Bank was prepared to agree to the proposal.
The Commissioner made four submissions as to the transactions under consideration. They were -
(a) The payments were not payments by or on behalf of the taxpayers.
(b) The taxpayers were at no time the beneficial owners of the shares because of the option agreements. Nor were they the registered owners of them and accordingly by reason of the definition of ``moneys paid on shares'' in sec. 77A(1) they are denied the benefit of the deduction.
(c) The transactions were in reality not ones under which the shares were purchased and options to purchase given but were loans by the taxpayers to Mr. Close and his associates to enable them to acquire the shares, the benefit which the taxpayers believed would accrue to them being their right to deduct from their taxable incomes the amounts paid for the shares. In other words the submission is made that the transactions as evidenced by the trust deeds, the options and the transfers were shams.
(d) If, contrary to the previous submission the transactions were as they purported to be on the face of the documents to which I have referred, they were avoided as against the Commissioner by reason of the provisions of sec. 260 of the Act.
I deal with each of these submissions as follows -
(a) No argument was addressed to me in support of this submission. It was simply stated that the Commissioner did not concede that it had been established that the payments were payments by or on behalf of the taxpayers. In the absence of any argument to support the submission I think I should reject it and I do so.
(b) The Commissioner has submitted that the taxpayers in question were not owners of the shares within the meaning of the definition of ``moneys paid on shares'' in sub-sec. (1) of section 77A. His basis for this submission is that for the taxpayers to be owners of the shares they would be required to be the registered holders of them. Reliance was placed upon
Dalgety Downs Pastoral Co. v. F.C. of T. 86 C.L.R. 335 particularly at p. 341 and upon what Dixon J. (as he then was) had said in
Avon Downs Pty. Limited v. F.C. of T. 78 C.L.R. 353 referred to in the joint judgment in the Dalgety Downs case. The words in question in those cases, which were to be found in sec. 80(5) of the Act as it was at the time that their Honours considered it, were ``persons who beneficially held shares''. The effect of the two decisions is that the word ``hold'' in that context meant legal ownership of the shares according to the register of members. The word ``hold'' is not used in the section under consideration and I do not find the reference to the two cases just mentioned helpful in resolving the present problem. I think however that the words ``owners of shares'' do mean registered owners when one takes into account the words which follow namely, ``including owners who are beneficial owners only''. These words were intended to show that the section was to apply to persons who may not be the registered holders of the shares but who are entitled beneficially to them. Thus the section applied both to registered holders, (who, I would think, although I do not decide the matter, must also have held the shares beneficially) and to persons not registered as holders of shares but who were beneficial owners thereof. It is conceded by the taxpayers that they were not registered as the holders of the shares but they claim to be beneficial owners by reason of the
ATC 4368execution by the various allottees of shares of the declarations of trust to which I have referred and the signing of the memoranda of transfer of the shares in blank. The answer which the Commissioner makes to this proposition is that the taxpayers were not the beneficial owners of the shares because of the existence of the option agreements. It is said that these brought about a situation under which the taxpayers were not entitled to the full bundle of rights necessary to constitute beneficial ownership of the shares. Reliance was placed upon a number of cases one of which was
C. of T. (Q.) v. Camphin 57 C.L.R. 127. There Latham C.J. in whose judgment, Rich and McTiernan JJ. agreed, said at pp. 132-3 -
``When an option to purchase property has been given for value and the option contract is one which would be specifically enforced in equity, a court of equity attaches to it the consequence that it creates an equitable interest in the property which is the subject matter of the option (London and South Western Railway Co. v. Gomm (1882) 20 Ch.D.562.) The contract remains a contract imposing an obligation on the person giving the option, but, when it is an option relating to land and capable of specific performance, the ordinary doctrine of a court of equity results in the person giving the option becoming a trustee of the land for the intended objects of the trust (
Central Trust and Safe Deposit Co. v. Snider (1916) 1 A.C. 266, at p. 272). Where the option to purchase is an option to purchase a leasehold estate, then the result of the granting of an option for value is, it is argued, to create an equitable interest in personal property. Thus it is said and, in my opinion, rightly said, that the option in this case created an equitable interest in the leasehold estate which the respondent owned by virtue of the assignment from Massey, the original lessee from the city council. Similarly an equitable interest was created in the issued shares of Civic Theatres (Brisbane) Ltd.''
However at pp. 133-4 his Honour further said -
``The result of giving an option for value is that the person to whom the option is given acquires an equitable interest. But this equitable interest has not, in my opinion, been sold to him. The equitable interest is measured by what a court of equity would decree in an action for specific performance. The right of the person who may be called the owner of the option is a right to prevent the owner of the property in question from disposing of it inconsistently with the option, together with a right, if he exercises the option, to compel the owner of the property to carry out the contract which has been made by the exercise of the option. This right of the optionee is a right which has been created by the option, but it is not a right which the owner of the property ever possessed. He has created a new right in the optionee which is a right of property, but he has not transferred to the optionee any right which previously belonged to him as the owner of the property in relation to which the option was given. Thus there has been no sale of any property.''
In the light of what the Chief Justice said in the second passage which I have cited I must conclude that the Commissioner's argument is unsound. The granting of the option by the taxpayers did not cause them to cease to be the owners of the shares. There were a number of other arguments addressed to me by counsel for the parties on this aspect of the case. In view of the conclusion I have reached I do not need to deal with them but I should mention them shortly. It was contended by counsel for the taxpayers that no equitable interest was created by the option because specific performance of the agreement pursuant to which it arose would not be granted, the subject of the option being shares in a company listed on the Stock Exchange. The company was not however listed until 6th March 1969 and there was not a readily available market for the shares until this time. The taxpayers also contended that upon their true construction the option agreements did not oblige the taxpayers, in the event of the options being exercised, to transfer any specific shares in the company to the holders of the options but merely obliged them to secure for the holders of the options an equivalent number of shares in the company.
Mention was also made of the far reaching
ATC 4369effect which a construction such as was contended for by the Commissioner would have if it were upheld on the basis that a shareholder would lose his right to the deduction if he were to mortgage his equitable interest, for example, by deposit.
For the reasons given above the second submission made on behalf of the Commissioner is rejected.
(c) and (d) I deal with these submissions together. They are mutually exclusive alternatives. If the transactions were shams, as is submitted by the Commissioner, then there were no relevant payments made in respect of the shares. If the transactions were in accordance with the documents, the question arises as to whether they are avoided as against the Commissioner by reason of the operation of sec. 260 of the Act - cf.
Peate v. F.C. of T. 111 C.L.R. 443 per Menzies J. at p. 458 and
Albion Hotel Pty. Limited v. F.C. of T. 115 C.L.R. 78. The Commissioner contends that the real transactions were ones in which the taxpayers financed Mr. Close and his associates so that they might ultimately acquire the shares, they not being in a position to afford them at the time they had to be taken up. In return the taxpayers were to appear to be the beneficial owners of the shares, rather than mortgagees, so that they might claim the deduction of the moneys paid in respect of the shares from their taxable incomes pursuant to the section under consideration. If contrary to that submission I should find that the transactions were as evidenced by the declarations of trust, share transfers and options, I should nevertheless find an arrangement of the kind specified in sec. 260, it being one under which there was an understanding between Mr. Close on behalf of himself and his associates, on the one hand and Mr. Bridges on behalf of himself, Mr. Urquhart and Mullens Investments Pty. Limited on the other, that the shares would be held on trust by the allottees pursuant to the declarations of trust but subject to the terms of the option agreements and revert to the Close interests at no profit to the Mullens' interests.
Before I consider the competing submissions made on behalf of the parties I should refer to some further evidence. The Commissioner of course places strong reliance upon paragraphs from the Bank manager's diary which I have earlier set out. But he relies additionally on further matters. There was admitted into evidence over the objection of counsel for the taxpayers a copy of a minute of a meeting of Norwest Oil Pty. Limited held on 12th February 1969. The minute is signed by Mr. Close who was called as a witness and is in the following terms -
``IT WAS RESOLVED Norwest Pty. Limited assign its rights in VAMGAS N.L. to K.W. Bridges and Alistair Urquhardt (sic) so that Bridges and Urquhardt have the tax benefit.
It was agreed that any profit arising from a sale of the said VAMGAS shares by Bridges and Urquhardt should revert to Norwest Oil and be used to take up shares in Vamgas N.L. which shares would be sold at no Norwest Oil profit to VAM Limited.''
The original basis for the admission of the resolution was sec. 14B of the Evidence Act which I considered to be applicable by reason of the provisions of sec. 79 of the Judiciary Act 1903 (as amended) (Commonwealth). However, statements in documents are only admissible pursuant to sec. 14B of the Evidence Act if direct oral evidence of facts stated in them would be admissible. The fact which the resolution tends to establish is that the shares in Vamgas N.L. were to be assigned to Messrs. Bridges and Urquhart so that they might have ``the tax benefit''. This is no more than a statement of the understanding of those present at the meeting of the purpose for which the assignment was made. It is not therefore evidence of a fact which is relevant to an issue in this case. It is not evidence of Mr. Bridges' and Mr. Urquhart's purpose. The same may be said of the statement in the second part of the resolution. The minute does no more than reveal that it was Mr. Close's understanding that any profit arising from the sale would revert to Norwest Oil. But the matter does not end there. Mr. Close was asked whether the minute accorded with his understanding of the arrangement he had made with Mr. Bridges. His answer was as follows -
``I can't exactly say but what I do honestly believe is that this is the spirit of an offer that was made by Mr. Bridges.
My reply to the offer was, `If the tax deductions from the taking up of these shares can be of advantage to you, then you see your tax people whoever they may be and let them make the arrangements. If I can help you I don't want any profit out of it.'
Mr. Bridges, I clearly remember, said he only wanted the tax deduction, he did not want any profit out of me, that I might make. That was in the discussion.
Now I myself never ever read the documents that were prepared eventually by Mr. Bridges' advisers.''
Mr. Close does not mention that he and his associates were in difficulty in funding the taking up of the shares but that is the effect of Mr. Bridges' evidence and that Mr. Close and his associates were in that difficulty is not in question. Mr. Close's evidence thus tends to establish not only that the minute reflected his understanding of the transaction but also that it was his belief that it reflected Mr. Bridges' understanding of it as well. I accept Mr. Close's evidence in this regard and it follows that there is more to the transactions than is to be found in the deeds of trust, the share transfers and the options. They do not deal with profit by anyone on the sale of the shares and they do not necessarily contemplate the reversion of the beneficial interest in the shares to the allottees. There is a consistency between Mr. Close's understanding of Mr. Bridges' view of the transaction and that of the bank manager as evidenced by the paragraphs from his diary earlier set out.
Yet further evidence has to be considered. In his oral evidence Mr. Bridges sought to correct what he had said about each of the options being exercised on behalf of the option holders by Mr. Close on 14th May 1969. It will be recalled that in para. 50 of his affidavit set out above he had referred to the fact that most option holders in order to raise cash to acquire the shares sold rights, the option holders, according to his evidence being entitled by reason of ``the rules surrounding the trading in options'', to rights to new issues. He also said that a few of the option holders had cash available. The correction was necessary because an option holder, Mrs. Walser, sold not rights but shares in Vamgas N.L. in March and April 1969, that is she sold shares which were the subject of the declaration of trust signed by her and the option agreement over a month before the date of the alleged exercise of the option by Mr. Close on 14th May 1969. Mr. Bridges said that he thought another option holder, Virbaca Pty. Limited, had acted similarly through one of its directors Mr. Capper. In relation to its account, however, I cannot find any reference to a sale of shares as distinct from a sale of rights. Yet another option holder, Mr. Rodan, paid cash for the shares on 17th April 1969, again before the exercise of the option.
In relation to Mrs. Walser certain correspondence was tendered. On 28th March 1969 Mr. Robinson on behalf of Mr. Bridges wrote to her husband saying amongst other things -
``Bruce Atkinson gave me your message regarding Vamgas. We will sell enough to cover the original cost and you will have the balance running for nothing.''
Transfers were enclosed. The enclosing of the transfers is equivocal because the sale, if it were to be made, would have to be made in Mrs. Walser's name and the fact that it was made would not necessarily suggest that it was being made on her behalf rather than on behalf of the Mullens interests. But on 3rd April 1969 Mrs. Walser wrote to Mr. Bridges as follows -
``As requested I enclose 4 signed copies of Security Transfer Forms.
I understand that VAMGAS is about to make a new issue on a 1 for 1 basis. It would be much appreciated if, over the period of the issue, Mullens and Co. would act to take up my entitlement.''
The emphasis is mine.
The words I have italicised coupled with the statement in the letter of 28th March 1969 ``you will have the balance running for nothing'' is a clear indication that both Mrs. Walser and Mr. Bridges regarded the shares as belonging to Mrs. Walser and were not shares in which he or the Mullens interests had any interest at all. Sales of them were effected on 28th and 31st March and on 1st and 15th April 1969.
Mr. Bridges said that since swearing his
ATC 4371affidavit he had had a close look at the documents referred to therein and that the statement that the options were all exercised on 14th May 1969 was not correct. He said that Mr. Close exercised the options on behalf of his group but that Mrs. Walser was a different case altogether. By ``his group'' he meant ``himself, his wife, his children and his relatives''. The effect of his evidence is that he regarded Mrs. Walser's decision to sell the rights as an exercise by her of her option and he said the same of Virbaca Pty. Limited. Mr. Bridges was cross-examined extensively about this evidence which he obviously found embarrassing. I found his answers in relation to the questions asked him evasive. He made an attempt, without actually saying so, to leave the impression that the word ``option'' was really used in conversations which occurred at the time, but when faced with direct questions as to whether it was or not, had to concede either that it was not or that he had no recollection of what was said. It would be possible of course for persons to exercise an option inferentially in the way that he suggests and it would also be possible for him after a number of years to make a mistake as to the manner in which the options were exercised. I have taken these matters into account and I have already had something to say about Mr. Bridges as a witness. Having observed him on this matter in the witness box and having taken into account the evidence which he originally gave in his affidavit and the answers he gave both in chief and in cross-examination about this matter I can only say that I find his evidence unsatisfactory. I think the shares were simply treated by him as belonging to Mrs. Walser. This is quite inconsistent with the declaration of trust signed by her having any effect.
Moreover the statement in para. 50 of his affidavit to the effect that the rights to the new shares belonged to the option holders requires examination. Although there is some reference to a stock exchange by-law in the evidence, it did not, so far as I can understand, have the effect which Mr. Bridges said in his affidavit. No rule or by-law to this effect was tendered. Mr. Bridges rather withdrew from the use of the word ``rule'' and mentioned ``practice''. Again I do not find his evidence in this regard satisfactory, particularly as no evidence to support him was led from any of his six partners each of whom gave evidence. Of course he could have been mistaken, but it is difficult to think a stockbroker of Mr. Bridges' experience could be mistaken about such a fundamental matter. The significance of this is that, in the absence of there being a rule or practice such as Mr. Bridges refers to and also of there being any misunderstanding on his part as to the existence of any such rule or practice, not only did Mrs. Walser and possibly Virbaca Pty. Limited with his concurrence act inconsistently with the declarations of trust in selling shares which were the subject of them but also each of the other option holders, except Mr. Rodan, acted similarly, not by selling the shares but by selling rights which were attached to them. In my opinion all this evidence goes to show that the shares were treated by all parties as the property of the original allottees and as if the declarations of trust had never been executed.
The evidence in relation to the selling of shares by Mrs. Walser and by Virbaca Pty. Limited, and of rights by Virbaca Pty. Limited and by Norwest Oil Pty. Limited and also by Mr. Close and members of his family, is inconsistent with beneficial ownership of the shares by the Mullens' interests. It provides the basis for the Commissioner's submission that the real transactions were not as contained in the declarations of trust and option agreements. The evidence is not consistent with what is to be found in the bank manager's diary nor with Mr. Close's evidence of his understanding of Mr. Bridges' belief as to the nature of the transactions. Both Mr. Close and the bank manager rather thought that the beneficial ownership in the shares would be vested in the Mullens' interests but that the shares would go back to the Close interests at par. It is true, however, that the bank manager did say that it was proposed that Mullens and Co. should ``advance these shareholders the sum of $250,000 to enable them to put up funds to take up the shares in VAMGAS N.L.'', but the diary entry immediately continues by saying, ``and to hold the shares as beneficial holders for Mullens and Co. on the understanding that the shareholders will purchase the shares from Mullens and Co. at
ATC 4372par when the shares are listed, which is anticipated to be towards the end of January next.'' Despite the language used, I think it is fair to conclude that the bank manager meant that Mullens and Co. should be ``the beneficial holders''.
In my opinion the totality of the evidence establishes that the moneys for the shares would be put up by the Mullens' interests, that by 15th May 1969 those interests would be reimbursed, and that, either the shares were to be held, pending that payment, as security for a loan or were, as the documents suggest, to be held beneficially. The clear understanding between the Mullens' interests and the Close interests was that the shares would revert to the Close interests at no profit to the Mullens' interests. The only purpose which the Mullens' interests had in entering into the transactions was to alter the incidence of the income tax which they would pay and to relieve them from liability to pay income tax. Unless sec. 260 of the Act operates in the Commissioner's favour or the moneys were not ``moneys paid on shares'' within the meaning of sec. 77A of the Act, the taxpayers' purpose will be achieved and the transactions will have had the effects referred to in para. (a) and (b) of sec. 260.
It is often a difficult question to determine whether or not documents purporting to evidence a particular transaction are shams. In
Boydell v. James 36 S.R. 620 Jordan C.J. said at p. 627 -
``If the transactions were never intended by either party to have any legal effect, but were set up as a mere pretence to cloak a loan, then, as between the parties, the only real transaction is the loan. The sham documents are either wholly inoperative or, if the second contract of repurchase or hire purchase is intended to be operative, its true nature is that of a security given by the purported hirer over his own goods which never leave his possession.''
Perpetual Trustee Co. v. Bligh 41 S.R. 33 the Chief Justice said at p. 39 -
``Oral evidence may be given that the document is a sham - that it was never intended by the parties to be operative according to its tenor at all, but was meant to cloak another and different transaction: In
re Watson, Ex parte Official Receiver in Bankruptcy 25 Q.B.D. 27;
Boydell v. James 36 S.R. 620 at 627. Cases in which oral evidence has been received to show that the real transaction is illegal:
Collins v. Blantern 2 Wils. 341;
See v. Cohen 33 C.L.R. 174 at 181-2;
Marks v. Jolly 38 S.R. 351 at 354; or that an ostensible sale was a cloak for a loan:
Maas v. Pepper (1905) A.C. 102; or a purported conveyance on sale a cloak for a mortgage:
Barton v. Bank of N.S.W. 15 App. Case. 379; 11 Austn Digest 1244 would appear to be instances of this rule. In the latter types of case, although the documents may be operative as assurances, oral evidence may be received that they were not intended to constitute the real transaction between the parties: ibid 15 App. Cas. at 380-1.''
I refer also to Albion Hotel Pty. Limited v. F.C. of T. (supra) at pp. 91-3.
The Commissioner claims that the documents here are shams, the real transactions being ones in which the Mullens' interests financed the acquisition of the shares by the Close interests, the taxpayers' reward being, as I have said, their ability to claim the deductions provided for in the section under consideration. If the Commissioner be right the moneys which the taxpayers claim they are entitled to deduct were not moneys ``paid on shares'' within the meaning of that section and no deductions are allowable.
I put that submission aside for the moment in order to consider whether, in the event that the transactions are not shams, they nevertheless form part of an arrangement avoided against the Commissioner by the operation of sec. 260 of the Act. The meaning of the word ``arrangement'' in the section is well settled but it is appropriate to refer to what was said by the Privy Council in
Newton v. F.C. of T. 98 C.L.R. 1 at pp. 7-8. Lord Denning giving the judgment of the Board said -
``Their Lordships are of the opinion that the word arrangement is apt to describe something less than a binding contract or agreement, something in the nature of an understanding between two or more persons - a plan arranged between them which may not be enforceable at law. But it
ATC 4373must in this section comprehend, not only the initial plan, but also all the transactions by which it is carried into effect - all the transactions that is, which have the effect of avoiding taxation, be they conveyances, transfers or anything else. It would be useless for the Commissioner to avoid the arrangement and leave the transactions still standing.''
Compare the judgment of Fullagar J. in the same case in the High Court 96 C.L.R. 577 at p. 649.
The Commissioner placed general reliance on Newton's case and also on the decision of the High Court in
Jaques v. F.C. of T. 34 C.L.R. 328.
It is well established that if a transaction is carried out in the ordinary course of business or family dealing it will not be affected by the section, although what is done will have the effect of altering the incidence of income tax or relieving a person from liability to pay income tax and although, in cases where the transaction might have been carried out in one of two ways, the taxpayer has selected that method which will relieve him of income tax. Nor will transactions be affected by the section where they have been entered into only or principally for the purpose of gaining the advantage of deductions from assessable income made available by the Act itself. The policy of sec. 77A of the Act was to make available to taxpayers a deduction for expenditure incurred in acquiring or paying premiums or calls on shares in a petroleum exploration company and thus to encourage petroleum exploration. The additional fact which exists in the present case, assuming the transactions evidenced by the documents not to be shams, is the understanding which was in existence between the Mullens and the Close interests that the shares would by 15th May 1969 revert to the original allottees at no gain to the Mullens. This is not a case where the shares were acquired and held, for however short a time, the beneficial owners taking the risk of whether the shares rose or fell on the market. It is a case where the shares were held beneficially during the time between issue and either inconsistent dealing by persons such as Mrs. Walser or Mr. Close's conversation in which he purported to exercise the options or the repayment of the moneys to the Mullens' interests, the beneficial holders knowing that they would pass back to the persons in whose names the shares were held for the very price which had been paid.
In saying this I have not overlooked the fact that it was possible that the market might not rise up to the par value of the shares. In that event, assuming the transactions were not shams, the Close interests could have refused to exercise the options with the result that the Mullens' interests would have had to obtain the best price they could for the shares on the market or retain them. Although this was a theoretical possibility I do not think that it really entered the minds of any of the parties as one which might actually transpire. Mr. Bridges did give evidence of wanting a two way option, that is one which would entitle him to compel purchase at par just as Mr. Close could compel sale at that figure. According to Mr. Bridges, Mr. Close refused to agree to such an option. This is a matter relied upon by the taxpayers, but in the conclusion drawn above I have deliberately chosen the words, ``knowing that they (the shares) would pass back to the persons in whose names the shares were held for the very price which had been paid''. I think the word ``knowing'' is fairly used. The conduct of all the parties is indicative of the fact that they all considered that the chance that the shares would not reach a figure above par was indeed remote. The early issue of new shares so soon after the original flotation, which entitled the Close interests by the sale of rights, to purchase the shares, went a long way towards ensuring that there would be a favourable market for the shares. It is inconceivable that the intention to make this issue was not known to Mr. Bridges and it should not be forgotten that he did what he could to see that the shares were well launched by the despatch of the circular to the clients of Mullens and Co. which referred not only to Surveys but also to Vamgas N.L. In relation to that company the circular said -
``This company holds a 10% overall interest in the Delhi-Santos oil and gas operation. Vam Limited holds 5,000,000 shares in this operation which we consider at this moment has a market value of $5,000,000, equal to $1.25 per Vam Limited share.''
It would have been delivered to most recipients on 3rd February 1969, the date which some of the deeds of trust and option agreements bear. Others are dated a little later.
Although a person may have decided, when sec. 77A of the Act was in force, to invest in shares in a petroleum exploration company only because of the deduction which would be made from his assessable income as a result of the expenditure he would incur, he must still have been making an investment in the real sense in such a venture if sec. 260 of the Act were not to operate upon what he did. In this case it is quite unreal to talk of the Mullens' interests having made a real investment in a petroleum exploration company.
Reliance was placed by the appellant upon the decision of Stephen J. in
A.C. Williams v. F.C. of T. 72 ATC 4157. I have considered that case and the facts found in it by the learned Judge. It does not seem to me to be useful to enter into a comparative analysis of the facts in that case with those in the present. It is enough to say that there was an acquisition of the shares by the taxpayer which was not affected by the fact that he agreed to the subsequent reduction of his holding because of the pressure brought upon him to do so by the stockholder. The case under consideration differs because of the understanding which was arrived at between Mr. Bridges on behalf of the Mullens' interests and Mr. Close. Reliance was also placed upon the decisions of the High Court in
F.C. of T. v. Casuarina Pty. Limited 71 ATC 4068 and in
Finance Facilities Pty. Limited v. F.C. of T. 71 ATC 4225. Again I do not think it is helpful to enter into an analysis of those cases. I have given my reasons why I think that the present cases, assuming the documents are not shams, is affected by sec. 260 of the Act. I think there are many distinctions between the transactions in it and those under consideration in the two cases just referred to.
I therefore conclude that, assuming the declarations of trust and options not to be shams, they formed part of an arrangement which is avoided against the Commissioner by the provisions of sec. 260 of the Act. In arriving at that conclusion I have placed some reliance upon what was said by Menzies J. in
Franklins Selfserve Pty. Limited v. F.C. of T. 70 ATC 4079 at p. 4091-2.
If my assumption is wrong the only alternative conclusion is, the declarations of trust and the options being shams, there were no moneys ``paid on shares'' within the meaning of sec. 77A of the Act.
Before I conclude this section of the judgment there are two further matters to which I should refer. Firstly, although Mr. Bridges carried through the transactions himself, he did so as agent for the other taxpayers and there was no argument that they stood in any different position from him. Secondly, there was, during the argument, some discussion about onus of proof. The question was raised as to whether it was for the Commissioner, when he contends that there is an arrangement under sec. 260, to establish the terms of the arrangement and the transactions, acts and understandings which comprise it. The Commissioner contended that it was not for him to establish the arrangement but for the taxpayer to establish that no arrangement existed. Reliance was placed by the Commissioner on the provisions of sec. 190 of the Act. I have not been able to find authority which deals with this question. I have decided, however, that it is not necessary for me to resolve it. I am in this case satisfied positively by the evidence either that the transactions relied upon by the taxpayers were shams or that, if they were not, there was in fact an arrangement under sec. 260 which is avoided as against the Commissioner by the section.
For the above reasons the appeals of Messrs. Urquhart and Bridges and of Mullens Investments Pty. Limited against the disallowance by the Commissioner of the deductions claimed for payments made in respect of shares in Vamgas N.L. in February 1969 are dismissed.
The Second Section 77A Transactions.
According to Mr. Bridges' evidence Mullens and Co. were in May 1969 being consulted in respect of the affairs generally of both Vam Limited and Vamgas Limited. There was a discussion between Messrs. Close, Urquhart and Bridges about Vam's financial position in Mr. Close's office in May 1969. Mr. Bridges' evidence continues as follows -
``Mr. Urquhart, Mr. Close and I discussed Vam's financial position in Mr. Close's office late in May 1969. It was pointed out
ATC 4375that if Vam were to pay to Vamgas the calls due on Vam's partly paid shares in Vamgas no benefit would accrue to Vam under sec. 77A of the Income Tax Assessment Act because Vam was making no profits against which the calls could be set off; also Vam had adequate tax deductions in hand from its own mining operations. It was pointed out that on the other hand if the partners in Mullens & Co. owned the shares and paid the calls the deductions made available by sec. 77A would be available. This was at a time when I had received from the Deputy Commissioner of Taxation the letter dated 12th May, 1969... That letter was a reply to my letter of 2nd April, 1969 to the Commissioner of Taxation... I had been prompted to write the letter (of 2nd April, 1969) by a suggestion made to me by my accountants that it would be as well to seek the Commissioner's confirmation that no part of the proceeds of the sales of Surveys & Mining Limited shares referred to in cl. 44 of my first affidavit would be taxable.''
After a discussion amongst the partners of Mullens and Co., who by then included Messrs. W.B. Bridges, W.R. Gates, Robinson and B.S.H. Rosenberg, it was decided to make an offer ``on behalf of ourselves and or our `family' companies as the case might be'' whereby Mullens and Co. should offer to buy for ten cents each some 1,250,000 of the ten cents paid shares in Vamgas N.L. held by Vam Limited. According to Mr. Bridges ten cents per share was the ruling market price for the shares at the time.
Mr. Bridges second affidavit proceeds as follows -
``60. When Mr. Urquhart and I indicated to Mr. Close the willingness of Mullens & Co. to make this offer I said to him: `If the market goes down some of the shares might not be held for long once the call is paid'. Mr. Close said: `The placing of a large parcel of Vamgas shares on the market would depress the value of Vamgas shares considerably to the detriment of Vam. I want an undertaking that if and when the 1,250,000 Vamgas shares are to be put on the market they will first be offered to Vam at the then prevailing market price'. Mr. Urquhart and I discussed the matter with our partners and, with their assent, agreed.
61. The sum of $125,000.00 payable for the 1,250,000 partly paid Vamgas shares being purchased from Vam was paid to Vam by Mullens & Co. by cheque number 39456 drawn by Mullens & Co. on 23rd May 1969 on the head office of Commonwealth Trading Bank of Australia in favour of Vam....
62. The 1,250,000 shares purchased from Vam were purchased by the members of Mullens & Co. or their `family' companies as follows -
- by Mr. Urquhart - 100,000 shares (purchase price $10,000.00)
- by Hartal - 275,000 shares (purchase price $27,500.00)
- by me this deponent - 30,000 shares (purchase price $3,000.00)
- by Kitchwin - 375,000 shares (purchase price $37,500.00)
- by Mr. Mullens - 300,000 shares (purchase price $30,000.00)
- by Mr. W.B. Bridges - 50,000 (purchase price $5,000.00)
- by Mr. Gates - 40,000 shares (purchase price $4,000.00)
- by Mr. Robinson - 40,000 shares (purchase price $4,000.00)
- by Mr. Rosenberg - 40,000 shares (purchase price $4,000.00)
63..... each of the aforesaid amounts of $10,000.00, $27,500.00, $3,000.00, $37,500.00, $30,000.00, $5,000.00, $4,000.00, $4,000.00 and $4,000.00 was debited to the relevant account on 2nd June, 1969.
64. The 1,250,000 partly paid Vamgas shares purchased from Vam were transferred not to the individual purchasers but to Mullens & Co.'s nominee company, Emdecelex (Nominees) Pty. Limited....
65. The anticipated call of 40¢ per share was made on Emdecelex (Nominees) Pty. Limited in respect of the said 1,250,000
ATC 4376Vamgas shares by a letter written by Mr. Close as the Chairman of the Board of Directors of Vamgas to the directors of Emdecelex (Nominees) Pty. Limited on 23rd May, 1969....
66. The aforesaid call of 40¢ per share on the said 1,250,000 Vamgas shares amounted to $500,000.00 and it was paid to Vamgas by Mullens & Co. cheque number 39457 drawn on 23rd May, 1969 on Commonwealth Trading Bank of Australia head office Sydney....
67. The said call of $500,000.00 was contributed as follows -
- by Mr. Urquhart - $40,000.00
- by Hartal - $110,000.00
- by me this deponent - $12,000.00
- by Kitchwin - $150,000.00
- by Mr. Mullens - $120,000.00
- by Mr. W.B. Bridges - $20,000.00
- by Mr. Gates - $16,000.00
- by Mr. Robinson - $16,000.00
- by Mr. Rosenberg - $16,000.00''
Paragraph 69 of Mr. Bridges' second affidavit is as follows -
``69. On 17th June, 1969 all of us at Mullens & Co. decided that we would sell all of the 1,250,000 Vamgas shares (by fully paid) purchased from Vam. The decision to sell was taken for purely commercial reasons. On 17th June, 1969 the shares were selling on the market at 51¢ each. In accordance with out undertaking we first offered to sell the shares to Vam. I myself made the offer to Mr. Close verbally. We offered to sell the shares to Vam at 50¢ per share because we knew full well that the market could not absorb all of the parcel even at 50¢ let alone at 51¢ over a short period. Vam agreed to buy the shares at 50¢ per share on the understanding that we would pay the stamp duty involved in the transaction. The sale was made on 17th June 1969. Shortly afterwards Vamgas shares went down to 30¢ each on the market.''
Paragraph 72 of the affidavit is in the following terms -
``Vam paid the $625,000.00 payable by it for the purchase of the 1,250,000 Vamgas shares by cheque drawn by it on the Martin Place, Sydney Branch of E.S. & A. Bank Limited. That cheque was handed to Mullens & Co. on the afternoon of 17th June 1969, deposited by Mullens & Co. at the head office, Sydney of Commercial Trading Bank of Australia on the same day and paid on the same day.''
He means the Commonwealth Trading Bank.
Paragraph 74 of the affidavit so far as it is material is as follows -
``... the $625,000.00 was credited among those persons and companies as follows (the due proportions of the stamp duty payable in respect of the sale having first been deducted);
to Mr. Urquhart $49,900.00 to Hartal $137,225.00 to me this deponent $14,970.00 to Kitchwin $187,125.00 to Mr. Mullens $149,700.00 to Mr. W.B. Bridges $24,950.00 to Mr. Gates $19,960.00 to Mr. Robinson $19,960.00 to Mr. Rosenberg $19,960.00 ----------- $623,750.00'' -----------
Mr. Bridges said that his purpose in acquiring the 30,000 shares in Vamgas N.L. was to gain the benefit of the taxation deduction referred to and further that his company, Kitchwin Investment Pty. Limited, had the same purpose in acquiring the 375,000 Vamgas N.L. shares referred to by him. There is no issue that the purpose of the other taxpayers concerned in the second sec. 77A transactions was the same.
The transfers by which the shares were transferred from Vam Limited to Emdecelex (Nominees) Pty. Limited and by Emdecelex (Nominees) Pty. Limited to Vam Limited were tendered and show that the two transactions occurred on 23rd May 1969 and 17th June 1969 respectively.
The Commissioner made the following submissions in support of his contention that the appeals, in relation to the second sec. 77A transactions, should each be dismissed -
- (a) By reason of the provisions of article 24 of the Articles of Association of Vamgas N.L. a call could not be made upon a person who was not registered as a shareholder and accordingly the payment made was not a payment made in respect of the shares.
- (b) It was not established that there was any call made by Vamgas N.L. in respect of the shares in question.
- (c) The real transactions were transactions under which Mullens & Co. were to have the use of the shares simply for the purpose of endeavouring to gain the benefit of the provisions of sec. 77A of the Act and there was not in fact any vesting of the beneficial interest in the shares in Mullens & Co. nor in Emdecelex (Nominees) Pty. Limited on their behalf.
- (d) The dealings between the parties consituted an arrangement within the meaning of sec. 260 of the Act which was avoided by reason of the provisions of that section.
I deal with each of these submissions as follows -
(a) Articles 24 to 26 inclusive of the Articles of Vamgas N.L. are in the following terms -
``24. Subject to the terms and conditions of the issue of any shares the Directors may subject to sec. 322 of the Act from time to time make calls upon the members in respect of any money unpaid on their shares whether on account of the nominal value of the shares or by way of premium and not by the conditions of allotment made payable at fixed times. A call may be revoked or postponed as the Directors may determine.
25. A call shall be deemed to have been made at the time when the resolution of the Directors authorising such call was passed and may be required to be paid by instalments.
26. Notice of any call shall be given in accordance with sec. 322 of the Act.''
(the Companies Act, 1961).
Article 1(p) of the Articles provides that unless there be something in the subject or context inconsistent therewith the words ``shareholders'' and ``members'' where used in the Articles respectively mean and include holders or joint holders from time to time of the shares inscribed in the register of members. It is argued by the Commissioner that, by reason of the definition of ``members'' in article 1(p), the only persons upon whom calls may be made pursuant to article 24 are persons who are registered in the register of members of the company. Despite the transfers to which I have referred, Emdecelex (Nominees) Pty. Limited was not so registered and was never registered as the holder of the relevant shares in the company.
The provisions of the Articles of Vamgas N.L. are such as to prevent a call being made upon a person who is not a member of the company, that is upon a person not entered in the register of members. I think, however, that the Articles ought to be read as empowering the making of a call upon a person who is entitled to be so registered; cf.
Minsoul Pty. Limited v. F.C. of T., 74 ATC 4149. The Articles do not contain a provision empowering the directors of the company to refuse to register a transfer of shares for any reason. There is a power in article 38 to refuse to register a transfer of shares upon which the company has a lien. The shares in question were not subject to any lien. There is evidence from the secretary of the company, Mr. Atkinson, about the way in which the two transfers of shares, that is the transfer from Vam Limited to Emdecelex (Nominees) Pty. Limited of 23rd May, 1969 and the transfer from Emdecelex (Nominees) Pty. Limited to Vam Limited of 17th June 1969 were dealt with. By this evidence Mr. Atkinson explains why no certificate for the shares was issued. However the ``marrying'' of the two transfers to which he refers did not occur until 11th July 1969 at the earliest. It more probably occurred on 17th June 1969. There is certainly no evidence that the first transfer was lodged with Vamgas N.L. prior to the payment of the
ATC 4378moneys paid for the alleged call. Whilst the present case may differ from the Minsoul case because of the differences that there are between the Articles of the companies there being considered and the Articles of Vamgas N.L., I do not think that the taxpayers here can overcome the difficulty in which they are placed unless they can show positively that the transfer to Emdecelex (Nominees) Pty. Limited had actually been lodged with Vamgas N.L. for registration before the moneys said to have been due for calls on the shares were paid. It would only be then that it could be said that a situation had arisen under which Vamgas N.L. was bound to register the transfer.
It was submitted on behalf of the taxpayers that they were the beneficial owners of the shares within the meaning of the definition of ``moneys paid on shares'' in sec. 77A of the Act and that in their capacity as such they paid moneys which were in fact paid in respect of the shares, also within the meaning of the definition. I do not feel able to agree with this submission. If, Emdecelex (Nominees) Pty. Limited was not registered nor entitled to be registered as a member of the company at the time the moneys were paid, any purported call on it to pay the moneys was, by reason of the provisions of the Articles to which I have referred, not valid as a call. The moneys could not therefore be said to have been paid at the relevant time in respect of the shares. It may be, when entitlement to registration arose, that the moneys received could properly be appropriated to the call, but so far as the evidence discloses this did not occur until July 1969 after the shares had been re-transferred and outside the income year in respect of which the deductions were claimed.
I should conclude this part of the judgment by saying that it is not to the point that as between the transferor and the transferee of the shares the transferee was entitled to the beneficial ownership and entitled to have vested in it the legal title to the shares. The question is, was the transferee as regards Vamgas N.L. entitled to be registered at the relevant time. The evidence does not satisfy me that it was. The position may have been different if the call had been made on the registered holder of the shares, Vam Limited, but it was not. The letter purporting to make the call was addressed to Emdecelex (Nominees) Pty. Limited.
For the above reasons I consider the Commissioner's first submission to be sound.
(b) The provisions of articles 24 and 25 of Vamgas N.L. contemplate the making of calls by resolutions of directors. Such a resolution may be passed at a meeting of directors called in the ordinary way or in accordance with the provisions of article 10. That article provides that a resolution in writing signed by all the directors or a telegraphed, cabled or wirelessed message assenting to such resolution and received by the secretary from a director is to be as valid and effectual as if it had been passed at a meeting of the directors duly called and constituted. Mr. Atkinson gave evidence that it was the practice to keep two minute books, one containing minutes of resolutions passed by directors at meetings and one containing records of resolutions passed pursuant to article 110. These latter resolutions were known within both Vam Limited and Vamgas N.L. as ``flying resolutions''. Mr. Atkinson does not recall a meeting of directors at which it was resolved to make a call, nor does he remember any ``flying resolution''. Neither minute book contains any such resolution. Mr. Atkinson felt confident that the making of the call would have been regularly carried out in accordance with the provisions of the articles. He said, in effect, and I accept his evidence in this regard, that he would not expect to remember the passing of any such resolution either at a meeting or pursuant to article 110. His state of mind was one in which he simply could not believe that a resolution would not have been passed. The fact remains that there is no record of any such resolution in either minute book. In contrast with this state of affairs the transaction was carefully documented in the minute book of Vam Limited. There is a flying resolution signed by the directors on 23rd May 1969 in which it was resolved that the company sell 1,250,000 of its shareholding in Vamgas N.L. to Emdecelex (Nominees) Pty. Limited for 10 cents per share. Similarly there is a flying resolution dated 17th June 1969 signed by the directors whereby it was resolved that Vam Limited purchase 1,250,000 shares in Vamgas N.L. for 50 cents per share. Notice of the call was given under the
ATC 4379hand of Mr. Close by a letter written to Emdecelex (Nominees) Pty. Limited on the notepaper of Vamgas N.L. and dated 23rd May 1969, the same date as the flying resolution by which the directors of Vam Limited decided to sell the shares.
Mr. Close was firm in his evidence that there would also have been a flying resolution in relation to the call passed by the directors of Vamgas N.L. on 23rd May 1969. But in the absence of the production of that resolution I am not satisfied by his evidence, nor by that of Mr. Atkinson, that any such resolution was passed. It may be true to say that there was no reason not to pass it, but its unexplained absence from the Vamgas N.L. minute books in what appears to have been a well ordered system leads me to a state of mind in which I am quite unpersuaded that there was any such resolution passed. Furthermore, if any credence at all is to be given to Mr. Close's evidence on this point, (at the most I think he was saying what he believed must have been the position without any real recollection of what occurred) it would lead one to conclude that the resolution, if passed, must have been, as was the resolution passed by the directors of Vam Limited on 23rd May 1969, a flying resolution. This is the tenor of his evidence. There is no evidence that the procedure provided for in article 110 was carried out and this is a further reason for holding that there was in fact no resolution by the directors of Vamgas N.L. by which any call was made in respect of the shares in question.
For these reasons I also uphold the Commissioner's second submission.
(c) and (d) I deal with these submissions together. The money needed for the first sec. 77A transactions was borrowed from the Commercial Banking Company of Sydney Limited. I have already referred to the entries in the bank manager's diary in this regard. It would appear that the account had not, by the end of May 1969, been put in order. This was despite the fact that the moneys which concluded the first sec. 77A transactions were credited to the accounts of the taxpayers in the middle of May 1969. The moneys needed for the second sec. 77A transactions came, as is indicated in the evidence of Mr. Bridges to which I have referred, from the Commonwealth Trading Bank, the two cheques for $125,000 and $500,000 being debited to the account of Mullens and Co. with that bank on 26th May 1969.
On 28th May 1969 Mr. Thompson was the manager of the Head Office of the Commercial Banking Company of Sydney in Sydney. He was called to identify a memorandum signed by him dated that day. It was headed Mullens and Co. and bore a note that the overdraft of that firm was then $269,472. The memorandum was in the following terms -
``With the debt standing at the present figure we 'phoned the Firm and spoke to Mr. Mullens who advised that the Company had issued a cheque for $470,000 to take up 1,250,000 shares of 5¢ each ($625,000) Vamgas Limited, which amount will be returned to the Company on 17th June next.
It is proposed that the shares will be repurchased by Vam Limited and the purpose of the exercise is to the effect that the Vamgas shares are tax deductible in the names of the Partners of Mullens and Company and their family companies and it is unlikely that any income tax will be paid this year or next year.
We informed Mr. Mullens that we considered the matter hardly a banking proposition and on the understanding that the debt would be fully cleared within 2/3 weeks we would not disturb the position.
Within the next few days Mr. Mullens will forward us additional shares with a market value of approximately $254,000 being 68,000 shares at $3 market value in surveys, buyer $3.35, seller $3.38.''
On 28th May 1969 Mr. Mullens wrote a letter to the Commercial Banking Company of Sydney Limited. The letter began with the sentence, ``As arranged in our telephone conversation this afternoon I enclose herewith the following documents.'' There were then referred to a number of share certificates for shares in Vam Limited standing either in the name of Mr. Urquhart or in that of Hartal Pty. Limited. It was said that the market value of the shares was approximately $80,000. There followed a reference to the certificates of title of two properties in Mosman one in the name of
ATC 4380Mr. Mullens and the other in the name of his wife. These were enclosed with the letter which then continued -
``The approximate current market value of these two properties is $100,000.
We expect our overdraft requirements will terminate on June 17th next and we will contact you at that date with regard to this matter.''
The shares in Vamgas N.L. were re-transferred to Vam Limited by Emdecelex (Nominees) Pty. Limited on 17th June 1969 in return for a cheque for $625,000 then paid.
The purpose of the second sec. 77A transactions was to gain the benefit of the deduction provided for in that section. Although a number of persons and companies are concerned therein there can be little doubt that they would not have been entered into if the Commissioner had not ruled that the profit made up to that time by Kitchwin Investments Pty. Limited on the sale of its shares in Surveys was taxable. The mere fact that advantage was sought to be taken of the provisions of sec. 77A of the Act would not, as I have already said, attract the provisions of sec. 260 of the Act. But the Commissioner contends that the evidence establishes an understanding between Mr. Close and Mr. Bridges that the shares would be held for a time certain and then revert to Vam Limited at par. In the meantime the call of 40 cents per share would have been paid thus increasing the par value from 10 cents to 50 cents per share. In respect of the payment of that call the taxpayers would seek the benefit of sec. 77A of the Act. The Commissioner submits that either there was no real vesting of the shares in Emdecelex (Nominees) Pty. Limited on behalf of the various taxpayers with the result that the payment of the call was an advance only, or that there was an arrangement having the effects mentioned in pars. (a) and (b) of sec. 260 of the Act which was comprised, in part, of an understanding that the shares would certainly revert to Vam Limited, and this on 17th June 1969. Strong reliance is placed by the Commissioner on Mr. Thompson's evidence and the contents of Mr. Mullens' letter to him. Both contemplate finality on 17th June 1969.
Mr. Bridges was asked about the letter written by Mr. Mullens but was unable to remember anything about it. Mr. Mullens then knew that he would be asked about it when he went into the witness box on the following day. He said that he had no recollection of the letter which he had written. Accordingly he was unable to help in resolving the question of how it was he expected that the overdraft requirements ``would probably terminate on 17th June 1969'', which, as it turned out, was the date of the re-transfer of the shares. The letter was written approximately five years before he gave his evidence. I am fully aware that people can forget many things in such a period, particularly busy men. But I find it hard to believe that he could, when his memory was refreshed by his own letter and he had a day to think about the matter, have absolutely no recollection of sending a letter to his firm's bank manager enclosing, amongst other things, the title deeds to his home. It could be said that Mr. Mullens' evidence of a complete lack of recollection was an indication of frankness. I do not take that view. I think that Mr. Mullens had a convenient lapse of memory which made it impossible for counsel for the Commissioner to endeavour to find out the explanation for Mr. Mullens' expectation that the matter of the overdraft would be cleared up on the very day that in fact the shares were re-transferred and the moneys paid.
My conclusion is that there was more to the transaction than Mr. Bridges' evidence discloses. What was said to the bank manager by Mr. Mullens viewed in the light of what did occur on 17th June 1969 provides clear evidence of an understanding that the shares would go back to Vam Limited on that day. That understanding and the transactions by which the shares were transferred to Emdecelex (Nominees) Pty. Limited and from that company to Vam Limited together with the payment of the call moneys, in my opinion constituted an arrangement within the meaning of sec. 260 of the Act.
The only other view of the matter is that the transactions were not genuine ones. I think the basis for such a view is not as strong in relation to the transactions now under consideration as
ATC 4381it was in the case of the first sec. 77A transactions. If it were to be adopted it would mean that there was an advance of the moneys which were paid in respect of the calls and that the taxpayers were not the beneficial owners of the shares so as to bring themselves within the provisions of sec. 77A of the Act. My difficulty with this proposition is the fact that the shares were in fact transferred before payment of the call, and, in return for their transfer, the sum of $125,000 was paid. Again I do not feel it necessary to determine which of the two submissions now under consideration is correct. On any basis the Commissioner's submissions should be upheld.
In relation to the second sec. 77A transactions there was also an argument on the part of the Commissioner that it was not established that at the time the call moneys were paid on 23rd May 1969 the payment was in fact made on behalf of each of the taxpayers concerned. I have decided that the evidence given by Mr. Maize and Mr. Fong should lead me to reject this argument despite some puzzling features of the calculation sheet which was produced by Mr. Bridges.
For the above reasons the appeals brought in respect of the disallowance as deductions of the call moneys paid in respect of the shares in Vamgas N.L. in May 1969 are dismissed.
The result is that the appeals of Hartal Pty. Limited brought against the inclusion in its taxable income for the years ending 30th June 1969 and 30th June 1970 of the profit made by it on the sale of the shares in Surveys are allowed. All other appeals, to the extent that I have dealt with them, are dismissed. I stand the appeals over to a date to be fixed to enable any argument in relation to sec. 82(4) of the Act to be dealt with and for argument on costs. Short minutes to give effect to my decision should then be brought in by the Commissioner.