FC of T v SARA LEE HOUSEHOLD & BODY CARE (AUSTRALIA) PTY LTD

Members:
Gleeson CJ
Gaudron J
McHugh J
Hayne J
Callinan J

Tribunal:
High Court of Australia

MEDIA NEUTRAL CITATION: [2000] HCA 35

Decision date: 15 June 2000

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Gleeson CJ, Gaudron, McHugh and Hayne JJ

The issue in this appeal concerns the identification of the year of income in which a capital gain made by the respondent taxpayer was brought to tax by reason of the provisions of Pt IIIA of the Income Tax Assessment Act 1936 (Cth) (``the Act''). The capital gain resulted from a disposal of assets by the respondent. The change in ownership of the assets occurred during the year ended 30 June 1992. The appellant contends that the assets were disposed of under a contract which was made during the year ended 30 June 1991. The question, which arises out of disallowances of objections against an assessment, and an amended assessment, to income tax, is whether the capital gain was made during the 1991 income year or the 1992 income year. The practical significance of the question for the respondent results from the availability of offsetting losses or deductions in the 1992 income year.

2. The respondent has changed its name a number of times. It appealed to the Federal Court of Australia at a time when it was named Kiwi Brands Pty Ltd. Its appeal failed before North J at first instance. ^[1] Kiwi Brands Pty Ltd v FC of T 97 ATC 4879 ; (1997) 148 ALR 605 . A further appeal to the Full Court of the Federal Court (Hill, Finn and Sundberg JJ) was successful. ^[2] Kiwi Brands Pty Ltd v FC of T 99 ATC 4001 ; (1998) 90 FCR 64 . The Commiss- ioner of Taxation now appeals to this Court from the decision of the Full Court.

The disposal of assets

3. The disposal of assets by the respondent was part of a wider transaction involving two foreign corporations and their subsidiaries in various countries. The respondent, then named Nicholas Kiwi Pty Ltd, was an Australian subsidiary of Sara Lee Corporation, a company incorporated in the USA. Sara Lee Corporation, directly, or through subsidiaries or associates, carried on, in a number of countries, including Australia, the business of manufacturing, marketing and distributing pharmaceutical and health care products. It offered its business for sale by a process of auction. The successful bidder was Roche Holding Ltd (``Roche''), a Swiss corporation which also had subsidiaries in a number of countries. For the purpose of the auction, a draft ``Purchase and Sale Agreement'' was prepared. Understandably, this was a complicated document, which had to address the circumstances of various businesses in different countries. When Roche emerged as the highest bidder, on 31 May 1991, the purchase and sale agreement was entered into.

4. The parties to the agreement were Sara Lee Corporation and other named companies (including the respondent) which were subsidiaries or affiliates of Sara Lee Corporation (collectively described as the ``Sellers''), and Roche (described as the ``Buyer''). The agreement was governed by the laws of England.

5. Section 2.2 provided:

``Subject to the representations and warranties contained herein and upon the terms and conditions hereof, at the Closing, Sellers shall sell to Buyer, and Buyer shall purchase from Sellers, free and clear of all liens, claims, options, charges, security interests, encumbrances and restrictions of any kind... all right, title and interest in, to and under the Assets and the Intangible Rights...''

6. The auction process provided for the purchase and sale agreement to be executed by the successful bidder and then exchanged with Sara Lee Corporation and the other sellers. The respondent was one such seller, as the Australian business was involved in the sale. In preparation for the exchange, a signature page was signed by Mr Patten, a director and the financial controller of the respondent. Mr Patten was acting under instructions from Sara Lee Corporation. He was not authorised by the board of directors of the respondent to sign the agreement. It was contemplated that, in due course, the board of directors of the respondent would ratify his action. This was done on 20 August 1991.

7. The assets being sold by particular sellers were listed in a schedule to the agreement. The agreement also provided for the Buyer to assume, at closing, specified liabilities of certain sellers, including the respondent.

8. There was a schedule to the agreement headed ``Allocation of Purchase Price''. It contained two columns. The first identified what was being sold by particular sellers, including the respondent. The second stipulated the price agreed to be paid to the particular seller.

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9. The agreement provided for completion to occur at a closing meeting, which the parties did not expect to occur earlier than 31 July 1991. It was provided that, on the completion date, the Sellers would transfer to the Buyer and the Buyer would acquire from the Sellers the assets and intangible rights being sold, such transfers and acquisitions to be effected by the delivery of instruments of transfer and assignment, accompanied by board resolutions and other documents appropriate to give effect to the transfers of property and assumptions of liabilities involved.

10. Section 12.3 in Article XII provided:

``This Agreement shall not be assigned by any party hereto without the prior written consent of the other parties; provided, however , that Buyer may assign any of its rights or obligations hereunder to one or more of its subsidiaries or affiliates without the prior written consent of Sellers; provided further, however , the assignee shall agree to be bound by the terms and conditions of this Agreement and that such assignment shall in no way limit or relieve the assignor of any of the assignor's obligations hereunder. This Agreement shall inure to the benefit of and be binding on and enforceable against the parties hereto and their respective successors and permitted assigns.''

(original emphasis)

11. The company which acquired the assets transferred by the respondent was Nicholas Products Pty Ltd, a subsidiary of Roche. That company was not in existence on 31 May 1991. It was incorporated on 25 June 1991. Roche did not take up shares in Nicholas Products Pty Ltd until 28 August 1991. By a letter dated 30 August 1991, Roche advised Sara Lee Corporation that it had assigned some of its rights and obligations under the purchase and sale agreement to certain subsidiaries and affiliates, and that they had agreed to be bound by the terms and conditions of the purchase and sale agreement. One such assignment was to Nicholas Products Pty Ltd, in relation to the sale of assets by, and assigned liabilities of, the respondent.

12. There were a number of amendments to the purchase and sale agreement insofar as it related to Australian assets and liabilities. These amendments were the subject of an ``Amendment Agreement'' executed on 30 August 1991 by Sara Lee Corporation, on its own behalf and on behalf of the other sellers, and Roche. The total purchase price payable under the purchase and sale agreement was originally US$597,681,000. In addition, an amount of US$200,000,000 was payable as consideration for a covenant not to compete. The amendment agreement varied the overall purchase price. The price originally allocated to the assets sold by the respondent was US$61,461,000. By the amendment agreement, the price allocated to those assets was increased by US$1,000,000 to US$62,461,000. The purchase and sale agreement obliged the Buyer to offer employment to fifty-four employees of the respondent. The amendment agreement varied this. The Buyer was obliged to employ only fourteen of the employees and to reimburse the respondent in respect of certain redundancy payments. The price allocation schedule was said to be ``amended and restated in its entirety''. The price allocated to the Australian assets was altered as above. Nicholas Products Pty Ltd was named as the purchaser of those assets.

13. Section 11 of the amendment agreement provided:

``Effect on Agreement . This Amendment to Purchase and Sale Agreement shall be deemed an amendment of the Agreement for purposes of Section 12.6 of the Agreement. Except as provided in this Amendment and in any other agreement executed by the parties on or after May 31, 1991, the Agreement remains in full force and effect.''

14. There was some argument as to the legal consequences of the amendment agreement. It will be necessary to return to that subject. In that respect, the concluding words of s 11 are significant.

15. On 30 August 1991, completion took place. As part of the closing, a ``Deed of Assignment'' bearing that date was executed by the respondent, described as ``the Seller'', and Nicholas Products Pty Ltd, described as ``the Buyer''. The deed was recited to be made ``pursuant to a Purchase and Sale Agreement among Sara Lee Corporation, the other Sellers named therein and [ Roche], dated May 31, 1991, as amended (the `Agreement')''.

16. The operative part of the deed was in the following terms:

``NOW, THEREFORE, in consideration of the sum of US$62,461,000 paid by the Buyer to the Seller pursuant to the terms of

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the Agreement at or before the execution and delivery hereof (the receipt and sufficiency of which is hereby acknowledged)... the Seller does hereby sell, convey, assign, transfer and deliver to the Buyer, its successors and assigns forever, all of the Seller's right, title and interest in and to the Assets, the Intangible Rights... and the Assigned Contracts, to have and to hold such Assets, Intangible Rights and Assigned Contracts unto the Buyer and its successors and assigns, to and for its or their use forever.

This instrument shall inure to the benefit of the Buyer and its successors and assigns and shall be binding upon the Seller and its successors and assigns, effective immediately upon its delivery to the Buyer.

This Deed of Assignment is delivered pursuant to the Agreement and it shall not alter, supercede [ sic], augment, abridge or affect any provision of the Agreement. In the event of any conflict between the terms of the Agreement and the terms hereof, the terms of the Agreement shall be controlling.''

17. By definition, what was referred to as ``the Agreement'' was the purchase and sale agreement of 31 May 1991, as amended.

18. Another deed, described as a ``Deed of Assumption of Liabilities and Contracts'', was executed by the respondent and Nicholas Products Pty Ltd on 30 August 1991. In brief, Nicholas Products Pty Ltd, in accordance with the requirements of the purchase and sale agreement, as amended, and in partial consideration for the sale of the assets and intangible rights, assumed certain obligations and liabilities of the respondent in relation to the intangible rights and the assigned contracts. The deed was also expressed to be entered into pursuant to the purchase and sale agreement of 31 May 1991, as amended.

The legal effect of the transaction

19. There was some disagreement between the parties concerning the legal consequences of certain aspects of the transaction. It is convenient to deal with those matters before turning to the central issue in the case, which involves the application of Pt IIIA of the Act to the facts.

20. First, there is the question of Mr Patten's lack of authority, on or before 31 May 1991, to sign the purchase and sale agreement, and the ratification of his act by resolution of the board of directors of the respondent on 20 August 1991. North J, and the Full Court, applied the general rule that, where a principal ratifies the earlier act of a person acting as agent without authority, the ratification relates back to the date of the unauthorised act, and the principal is bound as if the agent had had authority at the earlier time. ^[3] Bolton Partners v Lambert (1889) 41 Ch D 295 at 306 per Cotton LJ; Keighley, Maxsted & Co v Durant [ 1901] AC 240 at 247 per Lord Macnaghten; Davison v Vickery's Motors Ltd (In Liquidation) (1925) 37 CLR 1 at 19 per Isaacs J, 31 per Higgins J . They were correct to do so. This is not a case in which the rights of third parties have intervened. Although the principle is sometimes described as operating upon the basis of a fiction, it is a well settled rule of common law, and is part of the background against which the taxation legislation operates. There is no reason to deny its application in the present case.

21. Secondly, there is an issue as to the effect of the amendment agreement of 30 August 1991 upon the purchase and sale agreement of 31 May 1991. The variations to the rights and obligations of the contracting parties made by the amendment agreement were not insubstantial. The purchase price was altered by US$1,000,000. The obligations of Roche in relation to employees of the respondent were significantly modified. Nicholas Products Pty Ltd was identified as the company which was to acquire the Australian assets, although it was not itself a party to the amendment agreement.

22. When the parties to an existing contract enter into a further contract by which they vary the original contract, then, by hypothesis, they have made two contracts. For one reason or another, it may be material to determine whether the effect of the second contract is to bring an end to the first contract and replace it with the second, or whether the effect is to leave the first contract standing, subject to the alteration. For example, something may turn upon the place, or the time, or the form, of the contract, and it may therefore be necessary to decide whether the original contract subsists. In the present case, if the effect of what occurred on 30 August 1991 had been to rescind the agreement of 31 May 1991, then that would go a long way towards providing an answer to the appellant's argument that the assignment which occurred on 30 August was pursuant to the agreement of 31 May, with whatever that entails for the application of Pt IIIA of the Act.

23. In Tallerman & Co Pty Ltd v Nathan's Merchandise (Victoria) Pty Ltd ^[4] (1957) 98 CLR 93 at 144. Taylor J said:

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``It is firmly established by a long line of cases... that the parties to an agreement may vary some of its terms by a subsequent agreement. They may, of course, rescind the earlier agreement altogether, and this may be done either expressly or by implication, but the determining factor must always be the intention of the parties as disclosed by the later agreement.''

24. That passage was cited with approval by Wilson and Dawson JJ in Dan v Barclays Australia Ltd . ^[5] (1983) 57 ALJR 442 at 448-449; 46 ALR 437 at 448. It accords with principle and with authority. ^[6] eg Morris v Baron and Company [ 1918] AC 1 ; British and Beningtons, Ld v NW Cachar Tea Co & Ors [ 1923] AC 48 ; United Dominions Corporation (Jamaica) Ltd v Shoucair [ 1969] 1 AC 340 .

25. It is clear that the parties to the agreements of 31 May and 30 August 1991 did not intend that the agreement of 31 May should be wholly rescinded. That is apparent from a number of the provisions of the 30 August agreement. In particular, it was made clear by s 11 of the 30 August agreement, which has been quoted above. This is hardly surprising. The agreement of 31 May had worldwide operation, and covered many dispositions and acquisitions that were unaffected by the alterations proposed in relation to Australia. It is also to be observed that the deed of assignment executed by the respondent and Nicholas Products Pty Ltd on 30 August 1991 recited that it was entered into pursuant to the agreement of 31 May 1991, as amended. The manifest intention of the parties was not that the agreement of 31 May 1991 should be wholly rescinded and replaced by a new agreement, but that the rights and liabilities under, and the mode of performance of, the agreement, should be varied in certain respects.

26. Thirdly, there was some argument as to the appropriate categorisation of the manner in which the disposal and acquisition of Australian assets occurred. The purchase and sale agreement of 31 May 1991 did not effect a change in ownership, legal or beneficial, of the assets. ^[7] cf Brown v Heffer (1967) 116 CLR 344 at 349 . Indeed, the agreement contemplated that the disposal of the Australian assets might be to a company other than Roche and, in the events that occurred, that turned out to be a company that was not in existence on 31 May. Both the agreement of 31 May, and the amendment agreement of 30 August, contemplated that the assignment of assets, and the assumption of liabilities, involved in the transfer of so much of the Australian business as was to be taken over by Roche or a Roche subsidiary or affiliate, would be effected by separate deeds, to be delivered at closing, as in fact occurred.

27. Nicholas Products Pty Ltd was not a party either to the purchase and sale agreement of 31 May or to the amendment agreement of 30 August. Its agreement to be bound by the terms and conditions of the agreement of 31 May was a necessary condition of the capacity of Roche to assign to it its rights. By reason of the provisions of s 12.3 of the 31 May agreement, Roche itself was not relieved of its obligations by such assignment. In the absence of novation, the reference in s 12.3 to ``assignment'' of obligations is curious, but the result which the parties intended to achieve is reasonably clear.

28. The change in ownership of the Australian assets occurred on 30 August 1991. That was the date of their acquisition by Nicholas Products Pty Ltd. It was also the date of their disposal by the respondent.

29. Fourthly, it was argued on behalf of the respondent that the disposal could not have occurred under a contract made during the year ended 30 June 1991 because the agreement of 31 May was subject to conditions which were not fulfilled until some time after 30 June 1991.

30. Section 9.1(c) of the purchase and sale agreement stipulated that the obligation of Roche to consummate the transactions contemplated in the agreement was subject to the fulfilment, prior to or at closing, of a number of conditions, which included the receipt of certain governmental approvals. Clearly, these were conditions precedent to performance of the contract. They were not conditions precedent to the formation or existence of the contract. ^[8] cf Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 at 552 . There was a contract in force on 31 May 1991. The central question is whether the disposal which occurred on 30 August 1991 was under that contract.

31. In order to examine that question it is necessary to turn to the relevant legislation.

The legislation

32. The relevant provisions of the Act are in Pt IIIA.

33. Under s 160ZO(1), where a net capital gain accrued to a taxpayer in respect of the year of income, the assessable income of the taxpayer of the year of income includes that net capital gain.

34. By virtue of s 160Z, a capital gain will be deemed to have accrued to a taxpayer during a

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year of income where an asset has been disposed of during the year of income if the consideration in respect of the disposal exceeds the indexed cost base to the taxpayer in respect of the asset.

35. This case is not concerned with the provisions which affect the calculation of a capital gain, or a net capital gain. It is the provisions as to timing which are material. They are, relevantly, ss 160M and 160U.

36. Section 160M, so far as presently relevant, provides:

``160M(1) Subject to this Part, where a change has occurred in the ownership of an asset, the change shall be deemed, for the purposes of this Part, to have effected a disposal of the asset by the person who owned it immediately before the change and an acquisition of the asset by the person who owned it immediately after the change.

...

160M(2) A reference in subsection (1) to a change in the ownership of an asset is a reference to a change that has occurred in any way, including any of the following ways:

• (a) by the execution of an instrument;
• (b) by the entering into of a transaction;
• (c) by the transmission of the asset by operation of law;
• (d) by the delivery of the asset;
• (e) by the doing of any other act or thing;
• (f) by the occurrence of any event.

...''

37. Both parties to the present appeal argued the case upon the basis that the relevant change in the ownership of assets occurred on 30 August 1991, by the deed of assignment of that date, and that what was effected was a disposal of the assets by the respondent and an acquisition of the assets by Nicholas Products Pty Ltd. The difference between the parties related to the operation of s 160U which, so far as relevant, provides:

``160U(1) Subject to the provisions of this Part other than this section, where an asset has been acquired or disposed of, the time of acquisition or disposal for the purposes of this Part shall be ascertained in accordance with this section.

...

160U(3) Where the asset was acquired or disposed of under a contract, the time of acquisition or disposal shall be taken to have been the time of the making of the contract.

160U(4) Where the asset was acquired or disposed of otherwise than under a contract, the time of acquisition or disposal shall be taken to have been the time when the change in the ownership of the asset that constituted or gave rise to the acquisition or disposal occurred.

...''

38. The present appeal is concerned with the time of disposal of assets. The time of acquisition will be an important matter in relation to the liability of Nicholas Products Pty Ltd to tax in the event of a disposal of the assets, or part of them, by that company, but it is not determinative of this case. It is to be noted that the section refers to ``the time of acquisition or disposal'', not the time of acquisition and disposal.

39. The appellant argued, and North J held, that the case is governed by s 160U(3), and that the time of the making of the relevant contract was 31 May 1991. The respondent argued, and the Full Court held, that the case is governed by s 160U(3), and that the time of the making of the relevant contract was 30 August 1991. Alternatively, the respondent argued that the case is governed by s 160U(4). On that basis, it is agreed that the relevant time would have been 30 August 1991.

40. The Full Court, ^[9] Kiwi Brands Pty Ltd v FC of T 99 ATC 4001 at 4008-4009; (1998) 90 FCR 64 at 72-74. before coming to the issue to be resolved, made the following observations as to the legislative scheme. There is no reason why the date of disposition and the date of acquisition referred to in s 160U are necessarily the same. The section refers to the time of acquisition or disposal. Other provisions make it clear that disposal and acquisition are not necessarily contemporaneous, and it is not difficult to think of cases where they may be different. In order for there to be a disposal under a contract for the purposes of s 160U(3) it is not necessary that the contract be unconditional or specifically enforceable. What is relevant is the time of the making of the contract, not the time when it became unconditional, or specifically enforceable. Nor is there any reason why an asset cannot be said to be disposed of under a contract even though

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the transferee of the asset was not a party to the contract.

Application of the legislation

41. Taking into account the later ratification of the signature by Mr Patten, on 31 May 1991 the respondent entered into a contract with Roche by which it was bound to transfer to Roche, on completion of the contract, the assets in question, in consideration for the payment of a sum of money and the assumption of certain obligations. The contract gave Roche the capacity, subject to certain conditions, (including the retention by Roche of its own liability under the contract), to assign its rights to a subsidiary.

42. The words ``under a contract'', in s 160U(3), direct attention to the source of the obligation which was performed by the transfer of assets which constituted the relevant disposal. ^[10] cf Chan v Cresdon Pty Ltd (1989) 168 CLR 242 at 249 per Mason CJ, Brennan, Deane and McHugh JJ. From 31 May 1991, until completion on 30 August 1991, there was a contractual obligation upon the respondent to dispose of its assets to Roche, or to an entity of the kind referred to in s 12.3 of the purchase and sale agreement. The content of that obligation did not change. The price was varied, as were certain other terms and conditions of the sale, but the agreement of 31 May 1991 was the source of the obligation which the respondent discharged by performance on 30 August 1991.

43. The Full Court accepted that the respondent's assets were disposed of under a contract. Subject to one argument, which was advanced for the first time in this Court, that conclusion appears inevitable. The transfer of ownership of the assets in question was, as is usual in such commonplace disposals as conveyances of real estate, effected pursuant to a contractual obligation which the respondent had previously undertaken. The transferor was acting in performance of a pre-existing contract. Whether the same was true of the transferee is beside the point.

44. The new argument put by the respondent was to the effect that s 160U(3) can have no application to a case where there is more than one contract to which a disposal is potentially referable, and where there is no compelling reason to relate the disposal to one of those contracts rather than to another. Where s 160U(3) applies, it can only produce one result. The legislation does not countenance the possibility that there can be two different times of disposal. In a case where s 160U(3) cannot produce a single answer to the question as to the time of disposal, then s 160U(4) applies.

45. It is true that s 160U(3) assumes that, in a case to which it applies, there is a single time of disposal which can be established by reference to the contractual background to the change of ownership. Even so, the circumstance that, in a given case, there may be room for doubt about the correct conclusion does not make the task of reaching it impossible. If, in some case, it were impossible to relate a change of ownership to a contract in such a way as to produce a single time of disposal, then it may be necessary to apply s 160U(4). That is not this case. If it were, the practical operation of s 160U(3) would be seriously curtailed.

46. The Full Court emphasised that the legislation operates in relation to particular dispositions and on the basis of the consideration in respect of each particular disposition. ^[11] Kiwi Brands Pty Ltd v FC of T 99 ATC 4001 at 4008; (1998) 90 FCR 64 at 72-73. Their Honours said: ``In the present case the disposition is a disposition from the [ respondent] to Nicholas Products; the consideration in respect of that disposition is US$62,461,000.'' ^[12] Kiwi Brands Pty Ltd v FC of T 99 ATC 4001 at 4008; (1998) 90 FCR 64 at 73. That disposition, for that consideration, they held was referable to the amendment agreement. They said: ^[13] Kiwi Brands Pty Ltd v FC of T 99 ATC 4001 at 4012; (1998) 90 FCR 64 at 78.

``In the context of s 160U(3), the first time that there was a contractual obligation on the part of the [ respondent] to transfer assets for a consideration of US$62,461,000 was in August 1991 and as a result of the Amending Agreement. The contract under which the disposition which brought into play the provisions of Part IIIA of the Act occurred was not the contract which was made in May, but the contract which was made in August and was brought into existence by the Amending Agreement. That contract was, in our view, the contract under which the disposition was made.''

47. It appears that it was the variation in the consideration effected by the amendment agreement that was seen as being of particular significance. As was noted, Nicholas Products Pty Ltd was not a party to the amendment agreement, and although it was identified in a schedule to that agreement as the purchaser of the assets, that was done pursuant to a right given to Roche by s 12.3 of the agreement of 31 May 1991. Insofar as the identity of the disponee can be related to a contract anterior to the deed of assignment of 30 August 1991, there is less reason to relate it to the contract of

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30 August, than to relate it to the contract of 31 May, pursuant to which Roche acted in assigning its rights to Nicholas Products Pty Ltd. Both the deed of assignment and the deed of assumption of liabilities and contracts of 30 August 1991 were expressed to be pursuant to the agreement of 31 May, as amended.

48. There was an additional reason advanced by the respondent in support of the Full Court's conclusion. It was that the assumption of obligations by Nicholas Products Pty Ltd, by the further deed of 30 August 1991, was an important aspect of the acquisition of the respondent's Australian business, and that was only effective by reason of the contractual operation of the deed into which Nicholas Products Pty Ltd entered on 30 August. However, that assumption of obligations was referable to s 12.3 of the agreement of 31 May, (the concluding words of that provision having continuing importance), and, as was noted, it was said to be pursuant to the agreement of 31 May, as amended.

49. Where there are two or more contracts which affect the rights and obligations of the parties to a disposal of assets, the identification of the contract under which the assets were disposed of, for the purpose of applying s 160U of the Act, requires a judgment as to which of the contracts is properly to be seen as the source of the obligation to effect the disposal. In the present case, that contract is the purchase and sale agreement of 31 May 1991.

Conclusion

50. The appellant's contention is correct. The appeal should be allowed with costs. The orders of the Full Court of the Federal Court should be set aside. In place thereof, it should be ordered that the appeal to that Court be dismissed with costs.