Case L35

Judges:
MB Hogan Ch
DP Gerber M
GW Beck M

Court:
No. 3 Board of Review

Judgment date: 20 June 1979.

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M.B. Hogan (Chairman) and Dr. P. Gerber (Member): In these references, which were heard together by consent, the taxpayers (brothers) were at all relevant times shareholders in P.U.B. Properties Pty. Ltd. (henceforth referred to as ``the Company''). The issue in these references is whether the issue of 4,750 $1 bonus shares, issued to each of the taxpayers in the 1974 tax year, are deemed to be part of the taxpayers' assessable income pursuant to sec. 44(1), or excluded by virtue of sec. 44(2). The provisions read as follows:

``Sec. 44(1) - The assessable income of a shareholder in a company (whether the company is a resident or a non-resident) shall, subject to this section and to section 128D -

• (a) if he is a resident - include dividends paid to him by the company out of profits derived by it from any source...

Sec. 44(2) - Subject to the succeeding provisions of this section, the assessable income of a shareholder shall not include dividends paid by a company wholly and exclusively out of profits (not being profits that are included in the assessable income of the company by reason of section 26AAA) arising from the sale or re-valuation of assets not acquired for the purpose of re-sale at a profit or from the issue at a premium of any instrument that is a convertible note for the purposes of Division 3A (not being a convertible note in relation to which sub-section (1) of section 82S or sub-section (1) of section 82SA has effect or has at any time had effect) if the dividends paid from such profits are satisfied by the issue of shares (other than redeemable shares) of the company declaring the dividends.''

The sequence of events can be briefly summarised as follows.

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ATC 185

2. Towards the end of 1969, the taxpayers' father, who had a long association with the hotel business, became aware that The Bull and Bush, a country hotel, was for sale at a price which he considered very reasonable. With the intention of acquiring and holding this hotel, the father formed the company and the only shares allotted (20) were held equally by him and his wife. This gentleman (the only witness called) frankly conceded that this company was formed on advice:

``It is the old story, you can get too much in your own name, and you have death duties and all this sort of thing, and I also wanted to bring my two sons in... so I said this is one way I can bring the two sons, who were still school age, into the business and, well, later on, we could probably work something through to them.''

(p. 4 tr.)

3. On 4 January 1970, the father, as managing director of the company, entered into a contract of sale to purchase The Bull and Bush, the contract of sale apportioning the consideration ($50,000) on the basis of ``land and buildings'' $43,600 and ``plant and furniture'' $6,400.

4. On 29 January 1970, due to unforeseen circumstances, the company allegedly ``sold the business as a package deal'' for $15,000 to a former associate of the father. In the 1972 tax year, each of the taxpayers was allotted 200 ordinary shares in the company, and in the 1974 tax year, each son received 4,750 $1 bonus shares - the subject of this reference.

5. The taxpayers' argument is that what occurred on 29 January 1970 should be seen as constituting a ``sale'' of the goodwill of the hotel as to $9,500; the remainder - $5,500 - being for the furniture and fittings. Indeed, the company so purported to deal with it and, in the 1974 year, on the view that the $9,500 was a premium on consolidation, made a distribution by way of bonus shares of such amount by allotting to the two taxpayers 4,750 $1 bonus shares each from the company's Capital Profits Reserve Account. The extended definition of ``dividend'' is deemed to include the paid-up value of shares issued by a company to any of its shareholders to the extent to which the paid-up value represents a capitalisation of profits (cf. sec. 6).

6. With all due deference to the resourceful argument advanced in support for this proposition by Mr. Pape of learned counsel for the taxpayers, we are unable to accept the view that the sum of $9,500 represents the proceeds of a sale. Exhibit D is a lease executed on 29 January 1970 by the company. The company, the alleged ``vendor'', is referred to as ``the lessor'', the subject matter of the lease is The Bull and Bush and the ``purchaser'' is referred to as ``the lessee''. There follows a Real Property description ``UPON which is erected the licensed premises of `The Bull and Bush' TOGETHER with all beer drawing equipment the refrigeration plant... etc.''. The term is expressed to be five years, the consideration $9,500, and the rental $5,200 p.a. The deed is silent on the issue of goodwill.

7. It is now solemnly sought to adduce by parol evidence that what purports on the face of it to be a lease, is really something else; we are asked to re-write, so to speak, the agreement which the parties have deliberately subscribed, a rectification which is sought on the basis that the deed does not in truth represent the true intention of the parties and is merely an example of:

``the way things are done in the liquor industry through a solicitor who handles a lot of liquor work.''

A party who seeks to vary the effect of a deed carries a heavy onus. It has not been discharged in this case.

8. It follows that if the company leased the premises for a stated period - and we have no doubt that this is the effect of the agreement dated 29 January 1970 - it is in our view impossible to characterise the premium or any part of it as constituting the proceeds of the sale of goodwill. Whatever goodwill attaches to the demised premises is as much part and parcel of the premises as though it constituted a fixture; it is both inseverable and incapable of sale and reverts to the lessor at the end of the term. In any event, it has not been shown that, whatever was transferred from the company to the licensee, resulted in a profit. Since the taxpayers carry the onus of proof, this is sufficient to dispose of this appeal.

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ATC 186

9. In deference to our colleague, Dr. Beck, we do not think that the argument that the payment does not constitute a dividend is open on the objection. For good measure, it was not relied on by counsel for the taxpayers.

10. For the above reasons, we would confirm the Commissioner's decision on the objection.