Gorton v Federal Commissioner of Taxation

(1965) 113 CLR 604
39 ALJR 343

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(Judgment by: Barwick C.J. and Taylor)

GORTON
v FEDERAL COMMISSIONER OF TAXATION

Court:

Judges: McTiernan J.

Barwick C.J. and TaylorWindeyer JJ.

Judgment date: 22 January 1965

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Judgment by:
Barwick C.J. and Taylor

The principal question in this case is whether Frances Beatrice Eliza Abel, in her lifetime, made gifts to her two nephews, R. C. Crebbin and T. G. Crebbin, within the meaning of the Gift Duty Assessment Act 1941-1957 (Cth). If it be held that she did, a further question will arise as to the value of the gift.

The main question argued before us was whether upon the evidence each of two series of events, to use a neutral term, which occurred within a short period in May 1960, constituted, within the meaning of par. (f) of the definition of "disposition of property", a transaction entered into by the deceased with intent thereby to diminish, directly or indirectly, the value of her own property and to increase the value of the property of any other person. McTiernan J., who dealt with the matter in the first instance, thought that they did and he dismissed the appellants' appeal against the respondent's assessment.

The facts of the case are fully set out in the reasons given by McTiernan J. in reaching his conclusion and it is unnecessary that they should again be fully canvassed. It is desirable, however, that we should set out in their chronological sequence the events which took place in May 1960 in relation to the affairs of the two companies in question, Leba Pty. Limited and Batnors Pty. Limited. In each case the procedure followed was identical and it is sufficient, if in referring to these events, we mention only those which relate to the affairs of the firstnamed company:

(1)

Leba Pty. Limited was incorporated on 12th May 1960.

(2)

The first director's meeting, at which Mrs. Abel and R. C. Crebbin were present, was held at Mrs. Abel's residence at 2 p.m. on 19th May 1960. At this meeting the two subscribers' shares, of which the deceased was the beneficial owner, were allotted.

(3)

After this had been done Mrs. Abel announced that she was prepared to sell to the company 40,000 fully paid 1 pounds stock units in the capital of Marrickville Holdings Limited for the sum of 167,500 pounds. This was the market value of those shares and it was resolved that the company should purchase the stock units for the sum in question and that Mrs. Abel's account with the company should be credited with that sum.

(4)

At 2.10 p.m. on 19th May 1960 a further meeting of the directors of the company was held. The same two persons were present and pursuant to an application by Mrs. Abel for 14,998 ordinary shares of 1 pounds each in the capital of the company it was resolved that ordinary shares to that number be issued and allotted to Mrs. Abel. The consideration for this allotment was 149,980 pounds, that amount being made up of 1 pounds per share and a premium of 9 pounds per share. It was further resolved that Mrs. Abel's account with the company should be debited with the sum of 149,980 pounds.

(5)

At this meeting it was next resolved to convene an extraordinary general meeting of members of the company for the purpose of passing special resolutions to convert both these shares and the two subscribers' shares into six per cent cumulative preference shares.

(6)

At 2.15 p.m. on 19th May 1960 the extraordinary general meeting of members of the company, at which the same two persons were present, was held and the resolutions relating to the conversion of the 15,000 issued ordinary shares in the capital of the company were carried. It is sufficient to notice that the holders of such shares after their conversion into cumulative preference shares became entitled to receive dividends at the rate of six per cent per annum and a return of their paid-up capital upon a winding-up in priority to all other shares for the time being of the company. Beyond this the holders of such shares were not entitled to participate in any distribution of the company's profits or assets.

(7)

At 2.20 p.m. on the same day a further meeting of the directors of the company was held when it was resolved that, pursuant to an application by R. C. Crebbin for the issue of 10 ordinary shares at a premium of 9 pounds per share, 10 ordinary shares should be issued and allotted to the applicant in accordance with his application. Such shares were thereafter allotted.

Precisely identical steps were taken in the case of Batnors Pty. Limited except that the person to whom 10 ordinary shares in the capital of that company were ultimately allotted was T. G. Crebbin.

There is no question that prior to these two series of events Mrs. Abel had had discussions with financial and legal advisers with a view to some re-arrangement of her affairs. The discussions were initiated by Mrs. Abel who wished to reduce the extent of her liability for income tax and at the same time make some suitable financial provision for her sister. Proposals were made with a view to achieving these objects and during the course of the discussions she was told that the plan proposed would also diminish the liability of her estate to death duty. At this time Mrs. Abel was seventy-four years of age but according to the learned judge of first instance "she was an intelligent and determined woman who was in full possession of her faculties" (1965) 113 CLR, at p 606 . In fact Mrs. Abel died suddenly on 21st May 1960, that is to say, two days after the series of events to which reference has been made, but "to the date of her death she appeared to be in good health and there were no signs of any deterioration in health" (1965) 113 CLR, at p 606 .

Upon the evidence in the case McTiernan J., in effect, found that the series of steps taken in relation to each company constituted, in each case, a transaction entered into by Mrs. Abel having the effect of diminishing the value of her property and of increasing the value of her nephew's property. Further, he found that each transaction was entered into by Mrs. Abel with intent to produce this result. After dealing fully with the evidence in the case his Honour observed that : "The key inquiry now to be made in this case is to discover the effect of the transaction on the property of Mrs. Abel and her nephews. Before it commenced she was possessed of 80,000 1 pounds shares in a public company, Marrickville Holdings Ltd., worth 335,000 pounds and her nephews of 100 pounds each. At the conclusion of the transaction she had 15,000 1 pound cumulative preference shares in Batnors Pty. Ltd., 15,000 1 pound cumulative preference shares in Leba Pty. Ltd., and a credit in the books of each company for 17,520 pounds. On the other hand, Richard Crebbin had 10 1 pound ordinary shares in Batnors Pty. Ltd. and his brother Thomas, 10 1 pound ordinary shares in Leba Pty. Ltd. Thus it is clear that before it can be ascertained whether a disposition of property to Mrs. Abel's nephews within par. (f) has been effected, the shares must be valued" (1965) 113 CLR, at p 613 .

Thereafter his Honour adopted an assets basis for the purpose of valuing the shares and proceeded: "Thus the value of Mrs. Abel's shares in each company, for which she had paid 149,982 pounds, would be 15,000 pounds. In addition to this as each company owed her 17,520 pounds, the value of her 'property' in respect of each company would then total 32,520 pounds. As the value of the 40,000 shares in Marrickville Holdings Ltd. sold to each company was 167,500 pounds it would appear that the transaction had decreased the value of her 'property' by 134,980 pounds in each case. At this stage the undistributed assets of the company total 135,080 pounds. This is calculated by adding to the value of the shares in Marrickville Holdings Ltd. the 100 pounds cash paid in consideration for the allotment of the 10 ordinary shares and the 2 pounds paid for the subscribers' shares and subtracting from this total the 32,520 pounds to be distributed to Mrs. Abel. The whole of this sum is attributable to the 10 ordinary shares. There are no limitations imposed on a return of capital to this shareholder and accordingly he would be entitled to receive the whole sum less the costs of the winding-up and the sale of the assets (unless they were distributed in specie) which would not be significant. Thus each share would be valued at 13,508 pounds 4s. 0d. The increase in the value of the property of the ordinary shareholder would be 135,082 pounds less 100 pounds, which is 134,982 pounds. This would be the value of the gift" (1965) 113 CLR, at p 614 .

It may be said at once that it is beyond doubt that each series of events took place pursuant to and according to a predetermined plan and it may be that, in the end, each nephew acquired 10 ordinary shares for an amount which represented a mere fraction of their value. Further it is, in our view, incontestable that the end result was intended by the deceased. However, these conclusions do not dispose of the matter. The critical question remains whether the deceased made a gift within the meaning of the definition of that term in the Act to each of her nephews so that she as donor became liable to pay gift duty. The answer to this question, as we see it, depends primarily upon the meaning and effect of par. (f) of the definition of the expression "disposition of property". We say "primarily" because if this question is answered favourably to the respondent it will still be necessary for us to consider other matters which were argued in relation to the basis upon which the learned judge of first instance proceeded to ascertain the value of the gift.

The expression "disposition of property" is defined by the Act in the widest possible terms. It means "any conveyance, transfer, assignment, settlement, delivery, payment or other alienation of property" and "without limiting the generality of the foregoing, (it) includes -

(a)

the allotment of shares in a company;

(b)

the creation of a trust in property;

(c)

the grant or creation of any lease, mortgage, charge, servitude, licence, power, partnership or interest in property;

(d)

the release, discharge, surrender, forfeiture or abandonment, at law or in equity, of any debt, contract or chose in action, or of any interest in property;

(e)

the exercise of a general power of appointment of property in favour of any person other than the donee of the power."

It is impossible to conceive any type of transaction by which property is transferred from one person to another which would not be comprehended by these provisions. But the definition goes further. By the ultimate paragraph - (f) - transactions which do not involve a disposition of property are also included within the meaning of that term. In other words, transactions which are not in any sense dispositions of property are deemed by par. (f) to fall within the meaning of that expression. Such transactions are those "entered into by any person with intent thereby to diminish, directly or indirectly, the value of his own property and to increase the value of the property of any other person" and, to that extent, the meaning of the expression "disposition of property" is extended beyond the general words and pars. (a) to (e) of the definition. As Williams J. said in Grimwade v. Federal Commissioner of Taxation (1949) 78 CLR 199 : "The whole emphasis of par. (f) is upon a transaction entered into by one person, which seems to me to mean that where there is an act done by one person with the requisite intent, and as a result there is a transfer of value from any property of that person to the property of another person, the conditions of liability are satisfied" (1949) 78 CLR, at p 208 .

In Grimwade's Case (1949) 78 CLR 199 the taxpayer ultimately succeeded because in the view of the Full Court he had not entered into "a transaction" but, in our view, on the facts of the present case it should be held that the deceased did enter into a transaction. However, in the course of disposing of that case Latham C.J. and Webb J. joined in observations concerning the meaning and effect of par. (f) upon which the respondent in this case placed some reliance. After observing that par. (f) applies to any transaction entered into with the specified intent they said: "It is evidently intended to include within the scope of the Act transactions which do not consist in an actual transfer of property from a donor to a donee. Such latter transactions are dispositions of property within the meaning of other parts of the definition" (1949) 78 CLR, at p 215 .

With these observations we respectfully agree but they added that: "A transfer of property by A, not directly to another person C, but through an intermediary B, where it was the intention of A that C should obtain the property without giving consideration, would be a transaction falling within par. (f). . . . Thus if B for some valuable consideration moving from A made a contract with A that he (B) would pay 1,000 pounds to C without receiving any consideration from C, the intent of A would be to diminish the value of his own property by giving consideration to B and by that means to increase the value of C's property by 1,000 pounds, which sum would be paid to C by B" (1949) 78 CLR, at pp 215, 216 . These latter observations were unnecessary for the decision in that case and with respect to those learned Justices we find ourselves in disagreement with them. We do not think that the effect of the transaction in the illustration given by them would be to diminish the value of the property of A and to increase the value of the property of C; its effect would be to diminish the property of A and to increase the property of C but that is not, in our respectful view, the type of transaction which par. (f) can be fairly said to describe. Of course, it may well be that such a transaction would be caught by the earlier paragraphs of the definition as a payment made by B on behalf of A to C. The emphasis on par. (f) is, however, as Williams J. pointed out, upon transactions having the intended effect of transferring value from the property of one person to the property of another and, no doubt, it was framed to cover cases where this result is achieved by "transactions" involving the modification, pursuant to an agreed plan, of the rights of different classes of shareholders.

Assuming, as we think was the case, that the evidence shows that the deceased did enter into "transactions" the question to be resolved is whether in each case its intended effect was to diminish the value of the deceased's property and to increase the value of her nephew's property. That the result of the steps which were taken in relation to the shares of each company was to diminish the value of the deceased's 15,000 shares is not open to question and it is immaterial to inquire whether this diminution occurred when her shares - the only shares which had then been issued - were converted into cumulative preference shares or whether it occurred upon the allotment of 10 ordinary shares to her nephew. But it is, we think, impossible to say that the value of either nephew's property was increased as the result of the transactions. The effect of each transaction was that in return for the expenditure of 100 pounds each nephew became entitled to 10 shares of a total value far in excess of the amounts expended by them. But it cannot be said that the effect of the transaction was to increase the value of their property; its effect was to vest in each of them, in return for an expenditure of 100 pounds each, 10 shares which at the moment of acquisition were of great value. There was no moment of time when any change in the value of the shares in the hands of the nephews took place. All that can be said is that the transaction into which the deceased entered ensured that when the nephews acquired the property in the shares, they should have a value beyond the actual consideration which the nephews would pay for them.

For these reasons we are of the opinion that the transactions did not fall within par. (f). It is not to the point to say that if, as she might have done, the deceased had procured the issue of each parcel of 10 shares to herself and had, thereafter, transferred a parcel to each of her nephews in return for the sum of 100 pounds, there would have been clear evidence of a gift by her, or, that if each parcel of 10 shares had been allotted to her nephews before the conversion of her ordinary shares to cumulative preference shares the series of steps which we have detailed would have been caught by par. (f). The question is not whether the substance of the transactions is within what may be said to be "the policy of the Act" or within its spirit and intendment (see per Lord Cairns in Partington v. The Attorney-General (1869) LR 4 HL 100, at p 122 ; Potts' Executors v. Inland Revenue Commissioners [1951] AC 443 , at pp 454-456 ; and per Harman L.J. in Grosvenor Place Estates Ltd. v. Roberts (1961) 1 Ch 148 , at p 167 ), but whether the transactions themselves can be said to fall fairly within the terms of that paragraph, that is to say, whether they had the intended effect of diminishing the value of the property of the deceased and of increasing the value of the property of her nephews. Holding the view, as we do, that the transactions did not have the latter effect we are of the opinion that the transactions were not caught by par. (f). That being so, it is unnecessary to consider whether the learned judge of first instance adopted a correct basis for the valuation which he was constrained to make or whether the attack upon the use he made of s. 18 (1) (a) of the Act in making his valuation can be sustained.

It was not contended by the respondent that there was a disposition of property by the deceased within the meaning of any part of the definition of that term other than par. (f). But we have considered whether it is possible, in the circumstances of the case, to hold upon the principles discussed in Smith, Stone and Knight Ltd. v. Birmingham Corporation [1939] 4 All ER 116 and In re F. G. (Films) Ltd. [1953] 1 WLR 483 that in the transaction, and particularly with respect to the issue of the shares to the nephews of the deceased, each company could be said to be acting as the agent of the deceased, or whether upon any other basis it can be said that the shares in question were given by the deceased to her nephews merely through the company as an intermediary. The principles to which we have referred are discussed at some length in chap. 10 of Gower's Modern Company Law 2nd ed. (1957) but after full consideration we are satisfied that it is not possible to reach such a conclusion. No doubt the respondent's advisers reached the same conclusion and it may well be that for that reason these propositions were not advanced. In spite of the fact that the moment before the shares were allotted the deceased was the owner of all the shares in the company, it is not possible to regard the company as her agent for that purpose.