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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C.F. Fairleigh Q.C. (Member): The directors of a group of companies held the

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opinion that where there is an operating proprietary company and there are three proprietary companies between it and the natural person shareholders then there is an obligation to furnish financial accounts to the Registrar of Companies (cf. sec. 5(7) and (8) of the N.S.W. Companies Act ). Consequent upon this belief (which was later acknowledged to be erroneous) and in an endeavour to avoid confidential information becoming available to competitors, one company in the group transferred all its ``investment'' shares (200,000 shares in a ``holding'' company) to two other companies in the group.

2. The consideration which passed for the transfers was $1 per share (par value). It was conceded at the hearing that as at the material date, 25 March 1969, the market value was $3.37 per share.

3. It is recorded in minutes of the same date as that of the transfer of shares that there is an offer and acceptance of $100,000 for 100,000 shares in each instance. The agreement, prior to the execution of the transfers, was not otherwise recorded in writing.

4. As at the time of the transfer the assets of the transferor were those shares, some chattels which had no significant value and a small bank balance. Prior to the transfer each of the transferees held 50% of the issued share capital of the transferor and continued to do so at all relevant times. The shareholding in each of the transferee companies remained the same; so also in every other company in the group.

5. An assessment of gift duty in terms of sec. 23 of the Gift Duty Assessment Act 1941 (as amended) issued in respect of the purported gift of $237,000 in each instance. An objection was lodged and the Commissioner decided to disallow it. That decision was referred to a Board for review. The Commissioner contends: -

• (i) The transaction whereby the objector disposed of 200,000 shares equally to the other two companies constituted a gift for the purposes of sec. 4(1) of the Act because the consideration for the disposal of the shares was not, in the opinion of the Commissioner, fully adequate.
• (ii) The gift was not exempt from gift duty under sec. 14(f) of the Act because it was not made in the course of carrying on a business or alternatively it was not made for the purpose of obtaining a commercial benefit.

6. The Act states that: -

```gift' means any disposition of property... if the consideration is not, or in the opinion of the Commissioner is not, fully adequate.''

The objector submits that the issue is not to be determined simply by a comparison of the sum of money paid out and the admitted market value of the shares: regard is to be given to the fact that the parties to the transfers are members of a group of companies and most importantly to the fact that the transaction did not result in any financial change so far as the individual shareholders or the transferee companies are concerned. It is said that although the net worth of the transferor company was diminished by $237,000 in each instance those individual shareholders who have the equity in the transferee companies did not gain at all. In this light both the loss and gain are illusory from the point of view of those shareholders.

7. In the Revenue notes in 47 A.L.J. 559 at p. 560 the question is raised whether a gift is involved if a company allots shares to its employees at par when the value of the shares is greater than par. The author (Mr. I.V. Gzell) then says: -

``However, sec. 14(f) of the Act exempts from gift duty any gift made in the course of carrying on a business for the purpose of obtaining any commercial benefit by a listed company or by a non-listed company provided the donee is not a director or a relative of a director. In this case it may be argued that the company gains a commercial advantage because a satisfied workforce is a more efficient workforce and a gift made to obtain an efficient workforce is made in the course of carrying on a business.''

In the same article the author raised another point which is analogous to the contentions of the objector in the present case: -

``Upon revaluation of an asset the increased value is credited to an assets revaluation reserve and this amount is debited upon the issue of the bonus shares satisfying the dividend. How does this process involve any diminution in the company's overall position? It still holds the revalued asset. All that has happened, from the company's point of view, is that it has increased its issued capital and reduced a capital reserve. Correspondingly, it is difficult to see that

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the relative position of shareholders has been improved. A bonus issue proportionate to previous shareholding leaves each shareholder with the same congeries of rights as he held before the issue.''

8. Whether or not ``commercial benefit'' in sec. 14(f) extends to the proposition advanced in that article it does not encompass the circumstances of the present case. The standard judicial dictionaries contain several instances of the use of the word ``commerce'' and ``commercial'' but they are so remote from the present context that it is unnecessary to set them out. Furthermore the facts set out in para. 1 to 4 hereof make it impossible to sustain the argument that the transaction occurred (i.e., the gift, if any, was made) in the course of carrying on a business whether it be the business of the transferor or of the transferees or of any other company in the group.

9. One of the difficulties in the way of the objector's submissions is that the issue is not concerned with a gift in the common law meaning of that word (as in
F.C. of T. v. McPhail (1968) 117 C.L.R. 111 ) but with a special statutory meaning. Similarly these transfers are indisputably a ``disposition of property'' by the opening phrases of the statutory definition without proceeding to the particular instances thereof the last of which depends on an intent to diminish the value of the property of the disponor and to increase the value of the property of the disponee (contrast
Gorton & Ors. v. F.C. of T. (1965) 113 C.L.R. 604 and see also
Ord Forrest Pty. Ltd. v. F.C. of T. 74 ATC 4034 ; (1974) 130 C.L.R. 124 ; 48 A.L.J.R. 48 ).

10. The representative for the objector sought to distinguish the majority judgment in
Davis Investments Pty. Ltd. v. Commr. of Stamp Duties (N.S.W.) (1958) 100 C.L.R. 392 in which the appellant having become solely entitled to the shares in D. Davis & Co. Pty. Ltd. proceeded to obtain transfers of certain of its assets including 57 shares in three other companies at par ( £ 1 each). The actual value was £ 54,382 but the appellant gained no accession of wealth as the value of the shares which it held in that other company dropped correspondingly (per Dixon C.J. at p. 405). As in the present case the transferor in Davis's case depleted the value of its assets by the transfer. But as it did so to its only shareholder it thereby satisfied the potential demand of its shareholders upon its assets; under the company law those demands were exercisable or capable of effectuation by securing either the declaration of a dividend or dividends or a reduction of capital on a winding up (ibid) .

11. The essential point which distinguished Davis's case from
Archibald Howie Pty. Ltd. v. Commr. of Stamp Duties (N.S.W.) (1948) 77 C.L.R. 143 was that in Davis's case ``the transaction was thrown by the parties into the form of a sale at a price'' (per Dixon C.J. at p. 408). That is so also in the present case and in both instances the sale price is the consideration within the established meaning of that term - there is only evidence of circumstances warranting the companies proceeding as they did (cf. Dixon C.J. at pp. 408-409). As Taylor J. pointed out (at p. 419) the Stamp Duty Act gives the usual restricted meaning to consideration and so does the definition of ``gift'' in the Gift Duty Assessment Act and (at p. 421) the agreement (here effectively the transfer) created an independent right to the shares and if it is to be regarded as a conveyance (and such the transfer clearly is) it must be taken to be a conveyance upon the consideration expressed for the creation of that right, i.e., $100,000 in each instance.

12. The reasoning of the majority in Davis's case is applicable in the present case. There has been a disposition of property with a consideration passing from transferee to transferor which is not fully adequate. The extent of the deficiency is $237,000 in each instance. The decision on the objection was correct and the assessment should be confirmed.

Claims disallowed