Case G47

Judges: FE Dubout Ch

G Thompson M
N Dempsey M

Court:
No. 3 Board of Review

Judgment date: 15 July 1975.

---

G. Thompson (Member): At all material times the taxpayer was a pharmaceutical chemist who held certain shares in two companies. In respect of the years from 30th June, 1964 to 30th June, 1969 inclusive, he was assessed upon the receipt of dividends from shares as follows -

---

ATC 304

   Year Ended            Dividends

                  Company A     Company B

                     $               $

30 June 1964      2,766             546

30 June 1965      2,766             654

30 June 1966      2,767             655

30 June 1967      2,767             612

30 June 1968      2,767             437

30 June 1969      3,459             524
    

2. Taxpayer was also assessed pursuant to sec. 26(a) of the Act upon the profit of $3,000 on the sale of shares in Company A. I should add that there were amended assessments for the years ended 30th June, 1964 to 30th June, 1968 which the Commissioner claimed were authorised by sec. 170(2) of the Act because the taxpayer had not made a full and true disclosure of all the material facts necessary for his assessments, and that consequently there had been an avoidance of tax. As a further consequence the Commissioner acting under sec. 226(2) of the Act imposed additional tax on the taxpayer. These two latter ancillary issues will depend upon the decision as to whether the dividends mentioned and the alleged profit of $3,000 were properly assessable in the hands of taxpayer.

3. On the substantive issues taxpayer objected in similar terms in respect of each year. I leave aside for the moment the question of power to levy amended assessments and whether any further remission of additional tax is warranted. I proceed to deal firstly with the question of the assessability of the dividends.

4. The common grounds of objection made by taxpayer in relation to the assessability of the dividends in issue read as follows -

``3. The Commissioner has assessed against me dividends arising from shares held in Company A (the business of which is pharmaceutical chemist) and in Company B (the business of which is solely wholesale dealing in drugs) as though these dividends were my income which they are not in fact or in law.

4. An irrevocable trust was made by Deed on the tenth September, 1962 between myself and X Pty. Ltd. and as set out therein I sold to X Pty. Ltd. 4,372 shares in Company A and 6,918 shares in Company B. X Pty. Ltd. was thereupon immediately and absolutely entitled to all income under the Trust Deed and to all dividends and all other rights in respect of those shares. X Pty. Ltd. at all material times, made a return of income including the dividends on those shares and the Commissioner has assessed X Pty. Ltd. in respect thereof at all material times and has not re-assessed X Pty. Ltd. by deleting those dividends from the income of X Pty. Ltd.

5. The said dividends from Company A and from Company B were not in whole or in part income derived by me during the year as aforesaid and therefore did not constitute any part of my assessable income.''

5. It appears that a copy of the said irrevocable Deed of Trust dated 10th September, 1962 made between taxpayer and X Pty. Ltd. and mentioned in the grounds of objection, had unfortunately not been disclosed to the Commissioner until an investigation into the relevant matters had been launched. This omission was attributed by taxpayer to the default of his tax agent at the time. At the hearing the Commissioner maintained his defence of the relevant assessments, doubtless in order to protect the revenue and put the taxpayer to proof of his case. He also has not re-assessed the company X Pty. Ltd. to delete those dividends from its assessable income.

6. During the hearing of these references the duplicate original of the said Trust Deed of 10th September, 1962 was tendered in evidence. This document shows that it was executed under seal by both parties in the presence of a competent witness, a Solicitor, who is well known in legal circles in the State. Perhaps more importantly, the Deed was duly stamped in the Stamp Duties Office on 25th September, 1962. Further corroborative evidence appears in the Minute Book of X Pty. Ltd. which was also tendered in evidence. These factors show that there can be no question that the document was not properly executed according to law, and was intended to have legal effect; nor could it be seriously suggested that it was either a sham or was not executed on the day upon which it bears date. I am therefore satisfied that the Deed operated from 10th September, 1962. It then remains to

---

ATC 305

decide what the true legal or equitable effect of the Deed is in relation to the subject shares.

7. In view of the opposing arguments presented to the Board by learned Counsel for both the taxpayer and the Commissioner, the terms and conditions of this Deed should be reproduced in full with necessary modifications and deletions. The document reads -

``THIS TRUST DEED is made the tenth day of September, One thousand nine hundred and sixty-two BETWEEN Taxpayer Pharmaceutical Chemist (hereinafter called `the trustee') of the one part AND X PTY. LTD. a Company duly incorporated and having its registered office at Y (hereinafter called `the Beneficiary') of the other part WHEREAS the Trustee is the registered owner and the beneficial owner of the shares specified in the Schedule hereto AND WHEREAS the Trustee has this day sold the said shares to the Beneficiary for the market value thereof namely £ 12,563 AND WHEREAS the Trustee has agreed as from the date hereof to hold the said shares as Nominee for the beneficiary and that the Trustee should execute this Declaration of Trust.

NOW THIS DEED WITNESSETH AS FOLLOWS -

• 1. The Trustee hereby declares that he holds the shares specified in the Schedule hereto and all dividends and interest accrued or to accrue upon the same or any of them upon trust for the Beneficiary its successors and assigns and agrees to transfer pay and deal with the said shares and the dividends and interest payable thereon, in such manner as it shall from time to time direct.
• 2. The Trustees will at the request of the Beneficiary attend all meetings of stockholders shareholders or otherwise which he shall be entitled to attend by virtue of being the registered proprietor of the said shares or any of them and will vote at every such meeting in such manner as the Beneficiary shall have previously directed in writing and in default of and subject to any such direction at the discretion of the Trustee and further will if so required by the Beneficiary execute all proxies or other documents which shall be necessary or proper to enable the Beneficiary or its nominee to vote at any such meeting in place of the Trustee.
• 3. The Beneficiary will at all times hereafter indemnify and keep indemnified the Trustee his personal representatives estate and effects against all liabilities which the Trustee or they may incur by reason of such shares or any of them being so registered in the name of the Trustee as aforesaid and in particular will punctually pay all calls and other demands which the Trustee or his personal representatives may be or become liable to pay in respect of any of the said shares or in respect of any shares or securities for which pursuant to any condition or preferential right offered to the Trustee in respect of his holding of the said shares or any of them the Trustee may in his discretion subject as hereinafter mentioned think fit to subscribe and all costs and expenses incurred by the Trustee in the execution of the trusts of this Deed.
• 4. If any conditional or preferential right to subscribe for shares or securities in any Company or any other option shall be offered to the Trustee as holder of the said shares or any of them or otherwise in respect thereof or any call be made upon any of the said shares or other payment be demanded in respect thereof the Trustee shall so soon as conveniently may be give notice of such offer call or demand to the Beneficiary and if the Trustee shall receive any direction from the Beneficiary and the Beneficiary shall pay or provide for any money required to be paid to comply with such direction the Trustee shall act on such direction but if no such direction shall be received or the money required to be provided for such action shall not be received or sufficient money to the satisfaction of the Trustee shall not be received the Trustee shall act on his discretion in the matter and such action shall be binding on the Beneficiary.
• 5. If the Trustee shall pay any money for calls or other demand in respect of the said shares or in respect of any shares or securities so offered to and subscribed for by the Trustee as aforesaid such

  ---

  ATC 306

  money together with interest thereon at the sum of Six Pounds ( £ 6.0.0) per centum per annum until payment shall be and remain a charge in favour of the Trustee upon the said stocks and shares.
• 6. The Trustee shall hold all and any shares or securities so offered to the Trustee in respect of the said shares as aforesaid and subscribed for by him upon the trusts and subject to the powers and provisions hereby declared concerning the said shares as if the same were an accretion thereto.
• 7. Should the said Trustee retire or die during the continuance of the said Trust MAM of a country town, wife of HBM shall be the trustee hereof and the said shares shall be vested in the name of the said MAM as Trustee thereof under the terms hereof and the said MAM has executed this Deed to signify her consent to act as Trustee should either of such events occur.
• 8. The Trustee remains the owner in his own right of certain shares in both Companies referred to in the Schedule hereto and any Directors fees received by the Trustee from either of such Companies shall belong to the Trustee as beneficial owner thereof.

IN WITNESS WHEREOF the parties hereto have duly executed this Deed the day and year first above written.

                THE SCHEDULE ABOVE REFERRED TO:

COMPANY A

                Distinctive Nos. of Shares      No. of

Cert. No.       from                  to      Shares Held

---------       -----             --------      ---------

 265            37606               37705             100

 188            26393               26492             100

 308             4505                4617

                 7965                8077             452

                53059               53284

 358            42508               42937             430

 372            43930               44691             762

 452            69089               70484            1396

 496            78496               79495            1000

 511             1809                1846

                30717                3075             132

                64507               64562

                                                    -----

                                                     4372

                                                    -----



COMPANY B



1241            99264               99565             302

1510           108841              109165             585

               122468              122727

1893           132839              133215

               144360              144595             613

2789             1526                1550

                43017               43041

                10680               10779

                23578               23620

                19966               19990             550

                51031               51065

                68807               68847

                85209               85274

               131245              131339







            

            107053              107147

COMPANY B continued



                Distinctive Nos. of Shares            No. of

Cert. No.        from                 to            Shares Held

--------      -------              -------            -------

2799           126331               126632

               134216               134342

                   99                  128

               142721               142795

                51859                52858

               100691               100992              2014

                 2051                 2070

                 4672                 4709

                18342                18461

2457           162413               163078               666

3129           211952               214042              2091

 147             6740                 6759                20

 388            17217                17293                77

                                                        ----

                                                        6918

                                                        ----''
          

8. Another incident which could well have reasonably excited the suspicions of the Commissioner may be mentioned. On or about 30th November, 1965, there was a bonus issue of 1 for 4 shares held at par in Company A which amounted to some 2,000 new shares. As trustee of the shares in the Company, taxpayer was obliged to ensure that the shares, the subject of the trust, followed the beneficial ownership of those out of which they were issued, as it were. He did not do so. However, he did rectify the matter subsequently on 17th May, 1969, when the requisite proportion of the bonus shares, some 1,730 shares, were declared and acknowledged to be the property of X Pty. Ltd. as beneficial owner. Accounting adjustments then ensued. This action of the taxpayer, before he took the necessary remedial steps, constituted a breach of trust, but could not, in my opinion, destroy the legal or equitable efficacy of the trust instrument. Perhaps I should also add that I do not regard relationships which existed between shareholders of X Pty. Ltd. and the taxpayer as of any particular significance in these references, and I draw no adverse inferences against him on that account.

9. Learned Counsel for the taxpayer put his case broadly on two grounds; firstly, he submitted that the Trust Deed was effectual to grant the equitable interest in the subject shares to the cestui que trust , and, secondly, that there was a good and valid contract between the parties supported by valuable consideration for the sale and purchase of the shares. It is common ground that cheques were exchanged and that consideration for the sale passed. Counsel also canvassed certain case law as to whether specific performance of the contract for the sale and purchase of the shares could be ordered, and whether, in view of restrictive provisions in the articles of association, any transfer of the shares could or would be registered by the companies. Learned Counsel for the Commissioner, naturally enough, sought to deny that any transfer could lawfully be registered; and, as I understand him, went to the length of contending that the contract of sale was null and of no effect, and did not pass any equitable interest to the purchaser. Again, he submitted that the declaration of trust also did not have this desired effect, and that the dividends flowing from the subject shares remained the property of taxpayer and were rightly taxed. It is agreed that no form of transfer of the shares was either executed by the parties or registered by the company.

10. In my opinion, the first point to make clear is that the Board does not have to decide the legal efficacy of a non-existent transfer of shares. It is not necessary for a purchaser for valuable consideration, let alone a beneficiary under a written declaration of trust under seal, to get in or attempt to get in the legal estate. I find it quite unnecessary here to decide whether specific performance of the contract would be

---

ATC 308

ordered, or whether a transfer of shares would or could be registered. I accordingly do not propose to analyse many of the cases cited in argument. An attempt was made by Counsel for the Commissioner to make much of the decision of the Full High Court in
Norman v. F.C. of T. (1963) 109 C.L.R. 9 . But that case concerned itself with a purported assignment by deed by way of gift of the interest to be derived from a certain sum of money deposited by the taxpayer with a firm, and also an attempt to assign future interest, dividends, and other income from two estates. This constituted merely an expectancy or possibility, and it is not at all surprising to learn that this assignment could not be effected without consideration, and that future undeclared dividends could not effectually be assigned. Accordingly the interest on the money when received was held to constitute assessable income of the taxpayer, and the future dividends were assessable to the taxpayer under sec. 44 of the Act. The case did not concern itself with any declaration of trust, but was simply an attempt to make a gift of future income to be derived. Indeed Dixon C.J. (at 109 C.L.R. 15) had no doubt that if a shareholder is a trustee, the operation of Div. 6 may protect him. A similar opinion was expressed by Menzies J. at p. 23 where he said: ``Of course, had he been a trustee of the shares the provisions of Div. 6 of the Act would have applied.'' I do not think that the Commissioner can draw any support from Norman's case in these references.

11. I think that it follows from the judgment of Vaisey J. in
Hawks v. McArthur & ors. (1951) 1 All E.R. 22 that notwithstanding a complete failure to comply with the procedure for transfer prescribed by a company's articles, an intended purchaser who pays full consideration for the shares, obtains equitable rights therein. The purchaser here, in my view, obtained beneficial ownership of the subject shares. Nothing that was said in the House of Lords in
Hunter v. Hunter (1936) A.C. 222 can, in my opinion, derogate from this principle. The latter case depended upon many special considerations relative to the enforcement of securities, the sale of shares, and to rectification of the register. Indeed it was held that there had been no effective demand for payment before action was taken to sell the shares, the subject of the security.

12. In any event the taxpayer has a second, even stronger, string to his bow in that he can rely upon an irrevocable declaration of trust of personal property in writing under seal. It is trite law that such a bona fide instrument is effectual to confer the beneficial interest in the property upon the beneficiary. No authority is needed for this proposition. This beneficial interest then entitles the company X Pty. Ltd. to the beneficial ownership of the dividends derived from the shares. It follows that, for the above reasons, the taxpayer succeeds on this substantive issue.

13. The next matter for decision is whether the alleged profit of $3,000 on the sale of shares held by taxpayer in Company A during the year ended 30th June, 1967 was correctly included in his assessable income for that year by virtue of sec. 26(a) of the Act. Taxpayer personally gave evidence on this issue and asserted that he did not acquire the subject 1,000 shares for the purpose of resale at a profit. Rather did he agree to sell the shares to a fellow pharmaceutical chemist at the request of the latter, and in order to maintain good professional relations between the company with which he was associated as director and shareholder, and the purchasing chemist who had business dealings with that company. Taxpayer is a man of professional substance, and I regard him as a credible and reliable witness. I do not hesitate fully to accept his evidence on this point. That is the end of the Commissioner's case under the first limb of sec. 26(a).

14. Furthermore, taxpayer did not have any history of dealing or trafficking in similar shares, and merely sold the subject shares to oblige a good customer of the company. There was apparently only one other instance of his selling shares in the company, and that was to his own daughter, also a pharmaceutical chemist. Against this background it could not be seriously contended that he was engaged in a profit-making undertaking or scheme so as to fall into the net cast by the second limb of that section. On the evidence I accordingly hold that the said $3,000 was not assessable income of the taxpayer for the said year ended 30th June, 1967.

15. The further ancillary issues relating to the power of the Commissioner to raise the said amended assessments, and the imposition of additional tax, do not now arise for decision.

---

ATC 309

16. The result is that the taxpayer succeeds in toto and that the said amended assessments and the original assessment for the year ended 30th June, 1969 must be amended to accord with this my decision.