Case H16

Judges:
JL Burke Ch
RE O'Neill M
CF Fairleigh QC

Court:
No. 1 Board of Review

Judgment date: 5 April 1976.

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J.L. Burke (Chairman): The question before the Board is whether transfers of shares by the objector company on 25 March 1969 constituted gifts for the purposes of sec. 4(1) of the Gift Duty Assessment Act 1941 (as amended) by reason of the consideration on disposal being not fully adequate. If the transactions constituted gifts the further question arises as to whether they are exempt under sec. 14(f) of the said Act as having been made in the course of carrying on a business for the purpose of obtaining a commercial benefit.

2. The objector company (O Pty. Ltd.) is one of a group of private companies structured, prior to 25 March 1969, on a four tier basis as under: -

• Tier 1: A Pty. Ltd. and B Pty. Ltd., being private companies in the ownership of natural persons and representing the

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  interests of A and B who controlled the group and whose enterprise had been responsible for the financial success thereof.
• Tier 2: O Pty. Ltd., its shares being held by A Pty. Ltd. and B Pty. Ltd. Prior to 25 March 1969 its principal asset was shares in a subsidiary company, D Pty. Ltd.
• Tier 3: D Pty. Ltd. in which the 200,000 issued ``A'' shares of $1 each representing 99 ½ % of the paid-up capital were held by O Pty. Ltd. It was basically a holding company.
• Tier 4: Five operating companies, three wholly owned and two partly owned by D Pty. Ltd.

3. The companies included in the first three tiers above were incorporated in the Australian Capital Territory and the wholly owned subsidiaries (including the principal operating company) were incorporated in New South Wales.

4. The group of companies operated in a specialized field and its directors were anxious to withhold from competitors the financial results of the principal operating company. For some time prior to March 1969 the view was held, erroneously as is now conceded, that the company structure outlined above destroyed the operating company's status as an exempt proprietary company and rendered it liable to include copies of its accounts with the annual returns furnished by it under the N.S.W. Companies Act 1961. After much deliberation and consultation with their advisers A and B decided to protect the group's position by having O Pty. Ltd. transfer the 200,000 shares of $1 each it held in D Pty. Ltd. to A Pty. Ltd. and B Pty. Ltd. in two parcels of 100,000 each.

5. At meetings of directors of A Pty. Ltd. and B Pty. Ltd. held at Canberra on 25 March 1969 at 11 a.m. and 11.20 a.m. respectively it was ``resolved that an offer should be made to O Pty. Ltd. to purchase from it 100,000 $1 `A' shares held by it in D Pty. Ltd. at $1 (one dollar) per share''. At a meeting of directors of O Pty. Ltd. held at Canberra on 25 March 1969 at 11.20 a.m. it is recorded that ``Mr. Y informed the meeting that offers had been received from A Pty. Ltd. and B Pty. Ltd. to purchase 100,000 each, of the 200,000 $1 `A' class shares held in D Pty. Ltd. for $1 per share. Resolved that the Company accept the offer to purchase its shares. Resolved further that the transfer in respect of those shares be executed by the Company as transferor by the fixing of the Common Seal...''. At meetings of directors of A Pty. Ltd. and B Pty. Ltd. held at Canberra on 25 March 1969 at 11.30 a.m. and 11.40 a.m. respectively it is recorded in respect of each company that Mr. Y ``informed the meeting that O Pty. Ltd. had accepted the Company's offer to purchase its shares in D Pty. Ltd. for $1 each. Resolved that the transfer in respect of those shares be executed by the Company as transferee by affixing the Common Seal...''. Mr. Y was secretary of the three companies and was present at all the above meetings. Share transfers were duly executed on 25 March 1969 giving effect to the agreements recorded in the resolutions.

6. Section 17 of the Gift Duty Assessment Act provides that where a disposition constitutes a gift by reason of inadequate consideration the value of the gift shall, for the purposes of the Act, be the extent of the inadequacy. In making the assessment which is presently the subject of review by the Board the Commissioner valued the 200,000 shares transferred at $674,000 and assessed duty on $474,000. As the objector declined to lodge a return the assessment was made under the default provisions of the Act - sec. 23. In the event of the Board finding against it on the issues summarized in para. 1 of these reasons the objector does not dispute the value of the gifts as arrived at by the Commissioner.

7. ``Gift'' is defined in sec. 4 of the Assessment Act as meaning ``any disposition of property which is made otherwise than by will (whether with or without an instrument in writing), without consideration in money or money's worth passing from the disponee to the disponor, or with such consideration so passing if the consideration is not, or, in the opinion of the Commissioner, is not, fully adequate''. ``Disposition of property'' is defined to mean, inter alia, any conveyance or transfer. The objector does not dispute that in this case there were dispositions. It argues however that the consideration which passed from A Pty. Ltd. and B Pty. Ltd. in money or money's worth was fully adequate. As the money consideration which supported each transfer was $237,000 less than the acknowledged value of the shares which passed under the transfers the objector has to answer the question as to how the apparent inadequacy in value is satisfied. It attempts to do this by submitting that the value of the

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shares in A Pty. Ltd. and B Pty. Ltd. was the same before and after the transactions and that the consequential diminution in the value of the shares held by each of A Pty. Ltd. and B Pty. Ltd. in O Pty. Ltd. should be regarded as part of the consideration for the transfer of the shares in question.

8. The first objection to this proposition is that the definition of ``gift'' speaks of ``consideration... passing from the disponee to the disponor''. In no sense can the diminution in the value of the shares held by A Pty. Ltd. and B Pty. Ltd. (the disponees) in O Pty. Ltd. be regarded as consideration flowing to O Pty. Ltd. (the disponor).

9. Secondly, there is strong judicial support for the view that when the definition of ``gift'' in sec. 4 of the Act speaks of ``consideration'' it is referring, in a transaction of purchase and sale, to the price fixed by the parties for the transfer. The case to which I refer is
Davis Investments Pty. Ltd. v. Commr. of Stamp Duties (N.S.W.) (1957-1958) 100 C.L.R. 392 in which the Full Court of the High Court upheld (by majority) a unanimous decision of the Full Supreme Court of N.S.W. The head note reads as follows: -

``The appellant company owned all the shares in another company which had among its assets three parcels of shares, fifty-seven shares in all, in other companies. The appellant company made an agreement with the other company to purchase those shares for a total price of £ 57: they were all fully paid up £ 1 shares but in fact of a total value of £ 54,382. The question upon the appeal was under which subsection of sec. 66 of the Stamp Duties Act 1920-1949 (N.S.W.) the agreement fell. The answer depended on whether the transfers were made without consideration (subsec. 3), or, if there was a bona fide consideration in money or money's worth, whether they were made upon a consideration which was (subsec. 3A) or was not (subsec. 3B) less than the unencumbered value of the shares.

Held, by Dixon C.J., McTiernan and Taylor JJ., Webb and Kitto JJ. dissenting, that although the relationship of the companies doubtless explained the transaction, it was not one for which the company law provides for the effectuation of the rights and duties subsisting between shareholder and company but a transaction of purchase and sale; so that although the value of the shares the appellant held in the other company dropped correspondingly the transaction should be considered as a transfer for a price and the consideration must be confined to the price expressed in the agreement: accordingly the agreement fell under sec. 66(3A).''

10. Although the Court was there dealing with a revenue statute which levies duty on instruments whereas here we are dealing with an Act which intrudes into the broad field of dispositions of property as defined, I think, nonetheless, that the decision in the Davis Investments case is apposite in the case of a formalized purchase and sale transaction such as we have here. So much is made clear in the following citation from the judgment of Dixon C.J. (at pp. 408-409): -

``But here, for their own purposes the parties have given the transaction the form of a sale at a price. Had it not been for the situation occupied by the two companies one to another it might not have been possible, or at all events lawful, to transfer at such prices. In a practical sense doubtless the transaction was `moved' by that circumstance. But within the meaning of the words in sec. 66(3A) would the consideration moving the transfers - the consideration `upon' which the transfers are made - be anything but the price the parties chose to adopt? After all we are dealing with a transfer on sale. To go beyond the price may be to prefer realism to formal expression, but it means going to the circumstances warranting the parties in fixing the price they chose and that is not necessarily the same thing as consideration. It cannot be denied that it is an attractive view that the consideration in money or money's worth `upon' which the transfers would be made consists of all the essential elements involved in the change of rights effected by the transfers, involving as it does the effectuation of pre-existing rights. But, notwithstanding some hesitation, I have reached the conclusion that, in the circumstances of the present case, it is the price which must for the purposes of stamp duty be regarded as the consideration upon which the transfers would be made. I think that the transaction is not in itself a fulfilment or satisfaction of the rights of the shareholder as such. It is to be explained, indeed it is to be justified, by the existence of such rights or in other words by the legal situation which a sole shareholder occupies,

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but nevertheless the actual transaction is not one for which the law - the company law - provides for the effectuation of the rights and duties subsisting between shareholders and a company or for the effectuation of the property or personal rights of the shareholders in respect of the company. It is a transaction of purchase and sale. That is a form into which it was thrown because, doubtless, it was best calculated to achieve the ends of those in control. But considered as a transfer on sale it is a transfer for a price. The price is fixed by the parties for the sale, that is for the transfer. It is not supplied by the surrounding or accompanying circumstances, however essential the elements discoverable therein may be to the legal and economic efficacy of the transaction as a whole. In the end it is for that reason that the consideration must be confined to the price for the purpose of ascertaining the ad valorem stamp duty. The case is by no means an easy one but in my opinion the only consideration for the purpose of sec. 66(3A) is the price of £ 57.''

11. I conclude that the consideration which passed between A Pty. Ltd. and B Pty. Ltd. (as disponees) and O Pty. Ltd. (as disponor) on the transfer of the shares was $200,000 and that, subject to the question of the possible application of sec. 14(f), the Commissioner was correct in treating the extent of the inadequacy of consideration as a ``gift'' for the purposes of levying duty.

12. Section 14(f) of the Gift Duty Assessment Act provides, so far as is material, that notwithstanding anything contained in the Act gift duty shall not be payable in respect of any gift which is made in the course of carrying on a business, for the purpose of obtaining any commercial benefit.

13. Goods given away by a manufacturer or trader for promotional purposes provide the classic case for the exemption provided for by sec. 14(f). Clearly such gifts are made in the course of carrying on a business and have as their purpose the obtaining of a commercial benefit by way of increased sales.

14. To succeed in its claim to exemption the objector has to establish in the first place that the gifts by O Pty. Ltd. to A Pty. Ltd. and B Pty. Ltd. were made in the course of carrying on a business. At 30 June 1968 the objector showed in its balance sheet assets totalling $209,121 being furniture and fittings, a motor vehicle and a boat at cost (less depreciation) totalling $8,941, cash at bankers $180 and shares in D Pty. Ltd. at cost $200,000. It is difficult to see how, on any view, the sale of the company's only investment asset in the course of a capital reconstruction could warrant the description of a sale made in the course of the business of the objector or for that matter of the group.

15. In
Ord Forrest Pty. Ltd. v. F.C. of T. 74 ATC 4034 ; (1973-1974) 130 C.L.R. 124 Gibbs J. expressed the view (at p. 4043 ATC; p. 151 C.L.R.) that sec. 14(f) might apply in appropriate circumstances where a company issued shares to its employees or placed shares with particular buyers, not already members of the company, at a price less than their full value. Mason J. declined to express an opinion on the subject but Barwick C.J. (with whom McTiernan J. agreed) expressed the positive view that a company does not make allotments of shares in its capital in the course of carrying on its business whatever that business might be. Here although we are not considering an allotment of shares but a sale of shares in the course of a capital reconstruction the obiter dicta of the Chief Justice, whose judgment was adopted by McTiernan J., fortifies the conclusion which would have suggested itself without judicial support, namely, that the sale of shares by O Pty. Ltd. was not made in the course of carrying on a business for the purposes of sec. 14(f).

16. For the foregoing reasons I would uphold the Commissioner's decision on the objection and confirm the assessment the subject of review.