Federal Commissioner of Taxation v. St. Helens Farm (A.C.T.) Pty. Limited.

Judges: Barwick CJ
Gibbs J

Stephen J
Mason J
Murphy J
Aickin J
Wilson J

Court:
Full High Court

Judgment date: Judgment handed down 11 February 1981.

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Stephen J.

These appeals and cross-appeals concern five schemes by means of each of which it was sought, with the aid of an interposed corporate structure, to confer inter vivos benefits upon certain donees without attracting liability to Commonwealth gift duty. Because gifts made since 1 July 1979 are no longer liable to gift duty the questions which these cases raise are unlikely to be of any direct relevance for the future. Their solution is therefore no longer a matter of any general importance but will of course affect those who participated in these five schemes and others similarly situated.

The facts appear in full in other judgments. One of the matters in issue is the correctness of the decision of this Court in
Ord Forrest Pty. Ltd. v. F.C. of T. 74 ATC 4034 ; (1973-74) 130 C.L.R. 124 . The scheme considered in that case has much in common with these five schemes and if that decision is not to be followed, the cross-appeals by the five cross-appellant companies will succeed.

A preliminary point is whether the decision in Ord Forrest, in which two members of an evenly divided Court of four Justices upheld the decision which I gave at first instance, is to be treated as authoritative. This Court may of course overrule its past decisions, but there nevertheless exists a clear distinction between decisions which are precedents of authority and those which, although resulting in determinative decisions because of provisions of the Judiciary Act 1903, have no such precedential authority because they involved an even division of opinion on appeal. The practice of this Court in sitting with even numbers in appeals from a single Justice, although no doubt principally to be explained by considerations flowing from those provisions of the Judiciary Act, may be thought to lend some support to the view that, if evenly divided, the decision of those upholding the single Justice is to be regarded as authoritative. However, in
Tasmania v. Victoria (1935) 52 C.L.R. 157 at p. 184 Dixon J. expressed the contrary view, which on balance I regard as preferable. I would accordingly treat Ord Forrest as not being a precedent of authority in the present appeals.

The question then arises whether the view which prevailed in Ord Forrest should be overturned. For my part, I would follow it. I regard it as correctly stating the law and do so in reliance upon my own reasoning at first instance and that of Gibbs and Mason JJ. on appeal. I also agree with the additional reasoning of Gibbs J. appearing in his judgment in the present case, both as it concerns the submission founded upon
Robertson v. F.C. of T. (1952) 86 C.L.R. 463 and generally in relation to the decision in Ord Forrest .

If Ord Forrest is to apply there remain the five appeals by the Commissioner which turn on questions concerning the valuation of the gifts in question. The learned primary judge resolved these questions substantially in favour of each of the five companies. They relate to sec. 18 of the Act.

Section 18 is concerned with the valuation of gifts. Both subsec. (1) and (2) prescribe certain rules for their valuation. The first question arises under sec. 18(1)(a), which reads:

``18(1) For purpose of computing the value of a gift

• (a) no allowance shall be made in respect of any contingency affecting the interests of the donees or any of them;''

The question is whether in the case of each of the schemes other than that involving St. Helens Farm the circumstances give rise to a ``contingency'' to which para. (a) applies. If so, to value the gifts without allowance for such contingency, as the paragraph requires, will result in much increased valuations. The learned primary judge held that the schemes gave rise to no such contingency as para. (a) applies to, so that no such increased valuations were called for.

The relevant circumstances are described in detail in other judgments. It is enough to

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say that in broad terms each of those four schemes involved the contingency that the real benefactor in each case, holding only preference shares, might at some future time convert those shares into ordinary shares, thereby greatly diminishing the value of the ordinary shares allotted to the donees whom the scheme was designed to benefit. Does, then, sec. 18(1)(a) require that the effect of the existence of this contingency upon the value of ordinary shares when allotted to donees be ignored in the valuation process?

Paragraph (a) is loosely drafted. It uses the words ``contingency'', ``affecting'', and ``allowance'', words of no single, invariable meaning but which depend upon context for their meaning but which depend upon context for their meaning in particular cases. The determining context in the present case is provided by the character of para. (a) as a rule of valuation for purposes of gift duty.

Context requires that some limits be placed upon the meaning of ``contingency'' in para. (a). It cannot, I think, refer to any aspect of the subject matter of a gift which itself forms part of the description of what is given. Were this not so, a direction to disregard such a contingency, to make no ``allowance'' for it, would be a direction to deem the subject matter of a gift to be other than it in fact is rather than a rule for its valuation. For example, assume a gift to one if he survives another: the contingency, survival, does not merely affect an already defined interest but instead forms part of the definition of what is given. To ignore it robs the subject matter of the gift of its identity and confers upon it a new and quite different identity. To interpret para. (a) as intending, even for valuation purposes, to transform such a gift into an absolute gift, stripped of its contingent element, would be to treat it as much more than a rule of valuation.

If contingencies which define what is given are not within the operation of para. (a), neither are those contingencies which are quite extrinsic to the gift itself, being features of the particular market by reference to which the value of what is given must be determined. To exclude such contingencies from consideration would in most cases make valuation impossible. For example, if a gift is of gold its value at the date of gift will depend upon the current state of the bullion market, which will be affected by a whole range of contingencies; sellers and buyers in that market will have made their appreciation of those contingencies and this will be reflected in the current price of gold. Likewise in the case of a non-fungible, say farming land; the current market will again reflect contingencies entirely extrinsic to the gift, such as the market's estimation of future trends in primary product prices. Market factors such as these are the very stuff of valuation, without which value is a concept without content. Paragraph (a), as a rule of valuation, is not to be understood as excluding such contingencies from the process of valuation.

That para. (a) does not refer to, and hence does not require the exclusion of these two kinds of contingency from the process of valuation is confirmed by the use of the word ``allowance''. To have regard to either of them in the valuation process would not aptly be described as the making of an ``allowance'' in respect of them. ``Allowance'' suggest some adjustment made to an arrived-at value to take account of an isolated element or circumstance, whereas the existence of contingencies of these kinds are central to the valuation process itself. Without reference to them, no proper value can be placed upon the true subject matter of the gift. Accordingly, to speak of making no ``allowance'' is language which is inappropriate to refer to the exclusion of these kinds of contingencies from the valuation process.

If these limits to the meaning of ``contingency'' in para. (a) be accepted, no further narrowing of its meaning seems permissible. It will then describe a contingency the happening of which affects no more than a donee's enjoyment of what is given and the existence of such a contingency will presently affect the value of what is given.

The use of ``affecting'' in para. (a) is entirely appropriate if it be used to describe the effect of the existence of such a contingency upon the value of a donee's interest in what he is given. As to ``interests'' in para. (a), its meaning has been described by Gibbs J. in
Bray v. F.C. of T. (No. 2) 71 ATC 4060 at p. 4065; (1971) 123 C.L.R. 348 at p. 357 as the interests of donees ``in the

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property the subject of gifts'', in this instance their interest in the ordinary shares. I would, with respect, accept that description and use it, together with my understanding of the meanings of ``contingency'' and ``affecting'', to express the operation of para. (a). Its operation is to require that in valuing gifts no allowance shall be made in respect of any contingency which is neither definitive of what is given nor, being extrinsic to the gift itself, pertains generally to the applicable market but is one which affects the value of the interests of donees in what is given.

It was contended on behalf of the five companies that para. (a) did not operate in this way, that what it operated to exclude were only those contingencies which bore on the nature of the particular legal interests taken by donees; accordingly it did not exclude contingencies which only related to the enjoyment by a donee of his interest in what had been given to him. Decisions concerned with the variation of class rights were relied upon in support of this view. However, those decisions turn upon quite special considerations, in no way applicable to sec. 18(1)(a), as appears from their reasoning. The leading judgment in
White v. Bristol Aeroplane Co. Ltd. (1953) Ch. 65 , that of Evershed M.R., illustrates this. In concluding that to affect in value the enjoyment of the rights of holders of existing preference shares was not to affect the rights or privileges attached to their shares, his Lordship relied exclusively upon the terms of certain of the company's Articles of Association - pp. 75-76. The same may be said of his Lordship's judgment and that of Jenkins L.J. in
Re John Smith's Tadcaster Brewery Co. Ltd. (1953) Ch. 308 .

These decisions are in my view of no assistance in determining the meaning of sec. 18(1)(a), which is concerned with matters entirely foreign to their particular subject matter. They draw a distinction between that which varies the rights of classes of shareholders and that which merely affects the enjoyment of those rights. In these cases the distinction was critical because the latter, although depreciating the value of one class of shares, accorded with the company's articles of association and was irrelevant as any ground of complaint. But in sec. 18(1)(a) the focus of attention is entirely different; the value of gifts is in question and when shares are the subject matter of a gift that which affects their value is directly relevant.

Despite their quite different concerns, something may be gained from one of the earlier decisions on the variation of class rights,
Greenhalgh v. Arderne Cinemas Ltd. (1945) 2 All E.R. 719 . In that case Vaisey J. said at p. 723 that:

``... if you have an equal number of preference and ordinary shares in a company, with equal voting rights, assuming each class to have one vote per share, you would not vary the rights of the preference shareholders by issuing additional ordinary shares; in substance you would materially affect those rights, but you would not vary them. In my judgment, that argument must prevail''

In the context of the variation of class rights it was irrelevant that what had occurred ``materially affected those rights'' and in doing so materially diminished the value of shares conferring those rights. In the context of sec. 18(1)(a), concerned with the valuation of gifts made to donees, a contingency consisting of the possible conversion of preference shares to ordinary shares and which materially affects the rights of donees as existing ordinary shareholders is most pertinent.

Such a contingency is neither extrinsic to the gift nor is it definitive of what is given; it affects the value of the interests of the donees in what is given. In my view it falls within sec. 18(1)(a) and accordingly no allowance is to be made in respect of it in computing the value of the gifts to the donees.

The second question arising under sec. 18, again a matter of valuation, concerns subsec. (2)(c) and affects all five of the companies. Sheppard J. concluded in each case that that provision should not be applied in the valuation of the shares allotted to the donees. I agree with his conclusions and with the method of valuation which his Honour adopted and do so for the reasons discussed in detail in the judgment of Aickin J., with whose observation concerning sec. 18(2)(c) and 18(3) I am generally in agreement. I likewise agree with the view expressed by Sheppard J. concerning the severability of the escalator agreements which were entered into in the cases of the Ceedon and Gwynedd

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companies. Again I do so for the reasons appearing in the judgment of Aickin J.

It follows that I would allow the appeals, but only insofar as they relate to sec. 18(1)(a). I would dismiss the cross-appeals.