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

Members: Barwick CJ
Gibbs J
Stephen J
Mason J
Murphy J

Aickin J
Wilson J

Tribunal:
Full High Court

Decision date: Judgment handed down 11 February 1981.

Aickin J.

These five appeals and cross-appeals were heard together. Each is an appeal from a decision of Sheppard J. in the Supreme Court of New South Wales [79 ATC 4161]. The proceedings before him were challenges to assessments of gift duty made by the Commissioner of Taxation under the Gift Duty Assessment Act 1941 (Cth.) (``the Act'') as amended. The Commissioner issued notices of assessment in respect of gift duty to each of the companies and each company objected to such assessments. The Commissioner disallowed each objection and each company then requested the Commissioner to treat its objection as an appeal and to forward it to the High Court. Each matter was listed in the High Court for hearing but was remitted to the Supreme Court of New South Wales pursuant to the provisions of sec. 44 of the Judiciary Act 1903 (Cth.). The appeals were heard together by Sheppard J. who allowed each appeal and upheld each objection, some in part and some wholly. From those decisions the Commissioner appealed to this Court pursuant to sec. 36 of the Act and each company cross-appealed in various respects, details of which will require examination later in these reasons.

Before Sheppard J. the facts were substantially agreed between the parties and the only oral evidence was that of valuation of the alleged gifts. We were informed that these cases were ``test cases'' in the sense that it was said that there were a great many objections lodged with the Commissioner against assessments to gift duty in respect of gifts by companies based on the decision of this Court in
Ord Forrest Pty. Ltd. v. F.C. of T. ATC 4034; (1973-74) 130 C.L.R. 124 . In that case there had been no challenge to the quantification of the alleged gift but in the present cases there is a challenge to the valuation placed by the Commissioner on the shares the subject matter of the gift as well as a challenge to the correctness of the decision in Ord Forrest .

Although the facts in each of the five cases differ, they fall into two principal categories, the first of which is the appeal by St. Helens Farm (A.C.T.) Pty. Ltd. (St. Helens Farm) and the second comprises the remaining four appeals. In St. Helens Farm the Articles of Association of the company contained no provision which permitted the holder of the ordinary shares, who had procured or approved their conversion into preference shares prior to the issue of ordinary shares to the donees of the alleged gift, to reconvert the preference shares into ordinary shares or otherwise affect the value of the shares the subject of the alleged gift. In each of the other appeals there was such a provision. However different questions as to the proper mode of valuation arose in each of the other appeals though the differences were not always significant in the result.

St. Helens Farm

It will be convenient to begin with St. Helens Farm and I take the following statement of the material facts from the judgment of Sheppard J. as follows [79 ATC at pp. 4166-4167]:

``St. Helens was incorporated on 9th February, 1968, under the laws of the Australian Capital Territory. It had a capital of $10,000 divided into 10,000 shares of $1 each. On 12th February, 1968, one Ellen Federay Palfreyman became the holder of one share in the capital of the company by transfer to her from one of the subscribers to the Memorandum of Association. The other subscriber's share was transferred to Faris Addison Palfreyman. He held his share upon trust for Mrs. Palfreyman.

ATC 4066

At a meeting of the company's directors held on 2nd March, 1968, it was resolved to borrow from Mrs. Palfreyman the sum of $80,000. Such loan was to be repayable on demand and to be without interest. Immediately after the meeting Mrs. Palfreyman delivered her cheque for $80,000 to the company. Her loan account was credited with that sum.

At a further meeting of directors held on 5th March, 1968, it was decided to borrow from Mrs. Palfreyman the further sum of $270,000 on similar terms and conditions to those upon which the sum of $80,000 had been borrowed. The amount was paid by Mrs. Palfreyman to the company. Also at the meeting of directors held on 5th March, 1968, it was resolved to purchase from Mrs. Palfreyman 138,000 one percent non-cumulative preference shares in the capital of an associated company, St. Helens Estates Pty. Limited, for the price of $270,107. Completion of the purchase took place immediately following the meeting by the company handing to Mrs. Palfreyman its cheque in the sum of $270,107 and by Mrs. Palfreyman handing to the company a transfer in respect of the shares together with the relevant share certificates.

A further meeting of the directors of the company was held on 15th March, 1968. At that meeting the company resolved to borrow from Mrs. Palfreyman the further sum of $1,244,000 also to be repaid on demand and without interest. Immediately after the meeting Mrs. Palfreyman delivered to the company her cheque in the sum of $1,244,000 and her current account with the company was credited accordingly.

At the same meeting the company resolved to purchase from Mrs. Palfreyman 67,409 ordinary shares in the capital of The Broken Hill Proprietary Company Limited for the price of $1,193,139.30. Completion of the transaction took place immediately following the meeting. The company delivered its cheque to Mrs. Palfreyman in the required sum and Mrs. Palfreyman delivered to the company a transfer of the shares together with the share certificates.

On 24th June, 1968, at 11.30 a.m. an extraordinary general meeting of the members of the company was held. It was there resolved that the capital of the company be increased to $20,000 by the creation of 10,000 new shares of $1 each. At a directors' meeting held at 2.25 p.m. the following day, it was reported that Mrs. Palfreyman had called for payment to her of the sum of $1,200,000, portion of the loan moneys placed in her name with the company. A cheque for that amount was drawn in her favour. It was then resolved that 12,000 ordinary shares of $1 each in the capital of the company be allotted to Mrs. Palfreyman at a premium of $99 per share. She was entered in the Register of Members as the holder of such shares as from 25th June, 1968. She paid for the shares by delivering to the company a cheque in the sum of $1,200,000.

At 2.35 p.m. on 25th June, 1968, a further extraordinary general meeting of the members of the company was convened. All members of the company were present and agreed to waive the notice of the meeting to which they were entitled. At that meeting it was unanimously resolved that each of the 12,002 shares already issued in the capital of the company be converted into preference shares of $1 each. The rights, privileges and conditions attaching to the shares were to be as follows:

  • `(a) the said shares shall not confer any right to vote at any general meeting of the company. The holders thereof shall be entitled to notice of and to attend any general meeting of the company.
  • (b) the said shares shall carry the right to a fixed preference dividend at the rate of 4% per annum on the capital paid up thereon respectively but not including any premium in respect thereof.
  • (c) the said shares shall rank in a winding up and on a reduction of capital both as regards capital and dividend up to the commencement of the winding up in priority to all other shares in the capital of the company.
  • (d) the said shares shall not carry the right to any further participation in the profits or assets of the company or in any amount paid by way of premium

    ATC 4067

    upon any share subscribed for in the company.'

At the meeting it was resolved that the Articles of Association be altered by deleting the existing Art. 3 and substituting the following Article therefor:

  • `3. (i) That the capital of the company is the sum of twenty thousand dollars ($20,000) divided into eighteen thousand (18,000) preference shares of one dollar ($1) each and two thousand (2,000) ordinary shares of one dollar ($1) each.
    • (ii) Notwithstanding anything in these Articles contained the preference shares shall confer upon the holders thereof the following rights and privileges and shall be subject to the following conditions that is to say: -
  • ...'

There then followed paragraphs in identical terms to those just set out.

At 2.40 p.m. on 25th June, 1968 a further meeting of directors of the company was held. At that meeting it was noted that applications had been received for five ordinary shares of $1 each at a premium of $99 per share from Mrs. S. Williams, Mrs. M.A. Holmes, the Trustees, Executors and Agency Co. Limited as trustee for the children of Mrs. S. Williams, the Trustees, Executors and Agency Co. Limited as trustee for the children of Mrs. M.A. Holmes and Miss Ellen Palfreyman. It was resolved that the five ordinary shares of $1 each be allotted at a premium of $99 per share to the aforementioned persons. It was reported that cheques totalling $500 had been received being the fully paid value of the shares and premium which was payable thereon. It was resolved that share certificates be issued under the common seal of the company in respect thereof and that appropriate entries be made in the share register of the company. At the same meeting it was noted that Mr. Palfreyman had transferred his single share to Mrs. Palfreyman. The transfer was accepted with the result that Mrs. Palfreyman became the holder of the entirety of the 12,002 preference shares which had been issued.

The balance sheet of the company immediately before the issue of the five ordinary shares showed that it had assets comprising land and buildings situated at 2 Ord Street, Forrest, A.C.T., motor vehicles, shares in The Broken Hill Proprietary Company Limited and shares in St. Helens Estates Pty. Limited. Additionally it had cash at the Commercial Bank of Australia Limited and an unsecured loan at call. The total value of those assets was said to be $1,643,961. Its current liabilities were moneys owing to Mr. and Mrs. Palfreyman totalling $437,647 with the result that the shareholders' funds amounted to $1,206,314.''

It will be observed that after the 12,002 issued ordinary shares had been converted into preference shares they carried no vote at a general meeting and that the holder of each share was on a winding-up entitled only to $1.

It was submitted before Sheppard J. that the decision of this Court in Ord Forrest should not be followed but Sheppard J. rightly said that that was not a submission which he could entertain. The matters with which he dealt concerned only the value of the gift which the Commissioner contended had been made when the shares were allotted to the ordinary shareholders. These matters arose from a number of provisions in the Act which it is desirable to set out in full:

``4. (1) In this Act, unless the contrary intention appears -

  • `disposition of property' means any conveyance, transfer, assignment, settlement, delivery, payment or other alienation of property and, without limiting the generality of the foregoing, includes -
    • (a) the allotment of shares in a company;
    • (b) the creation of a trust in property;
    • (c) the grant or creation of any lease, mortgage, charge, servitude, licence, power, partnership or interest in property;
    • (d) the release, discharge, surrender, forfeiture or

      ATC 4068

      abandonment, at law or in equity, of any debt, contract or chose in action, or of any interest in property;
    • (e) the exercise of a general power of appointment of property in favour of any person other than the donee of the power; and
    • (f) any transaction entered into by any person with intent thereby to diminish, directly or indirectly, the value of his own property and to increase the value of the property of any other person;
  • ...
  • `gift' means 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;
  • ...
  • `interest in property' means any estate, interest, right or power whatsoever, whether at law or in equity, in or over any property;
  • ...
  • `property' includes real property and personal property and every interest in real property or personal property;
  • ...

18. (1) For the 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;
  • (b) subject to this Act, the value of a gift shall be taken to be the value thereof at the time of the making of the gift; and
  • (c) no deduction shall be allowed in respect of any mortgage, charge, encumbrance or liability affecting or incident to the property comprised in the gift existing at the time of the making of the gift, if and so far as the donee is entitled as against the donor or any other person or as against any other property to any right of indemnity or contribution in respect of that mortgage, charge, encumbrance or liability.

(2) Where the Commissioner is of the opinion that it is necessary that the following provisions should apply for the purpose of computing the value of a gift for the purposes of this Act, the following provisions shall apply -

  • (a) The value of shares or stock in any company, whether incorporated in Australia or elsewhere, shall be determined upon the assumption that, on the date when the gift was made, the memorandum and articles of association or rules of the company satisfied the requirements prescribed by the Committee or governing authority of the Stock Exchange at the place where the share or stock register is situate, for the purpose of enabling that company to be placed on the current official list of that Stock Exchange;
  • ...
  • (c) Where a gift includes any shares or stock in any company the shares or stock of which are not or is not quoted in the official list of any Stock Exchange, the Commissioner may, in his discretion, notwithstanding anything contained in the last two preceding paragraphs, adopt as the value of any such shares or stock such sum as the holder thereof would receive in the event of the company being voluntarily wound up on the date when the gift was made.''

The contention which arose in the case of St. Helens Farm was whether it was appropriate to apply sec. 18(2)(c). By reason of sec. 18(3) it was a matter for the trial judge to consider whether he should form the opinion that it was necessary for the provision to apply for the purpose of computing the value of the gifts. Sheppard J. concluded that it was not necessary for the provision to apply and that it should not apply. He had before him valuations made by five valuers, two called on behalf of the

ATC 4069

Commissioner and three called on behalf of the taxpayer companies. It is convenient to note that in the case of St. Helens Farm one of the Commissioner's valuers (Mr. Thompson-Laing) adopted the liquidation method of valuation in accordance with sec. 18(2)(c), which was the method used by the Commissioner in making each of the assessments. That valuer however arrived at a figure differing slightly from that adopted by the Commissioner. He also said in his valuation that a buyer of all the ordinary shares would be prepared to purchase at the same figure. He further said that, if contrary to his view, it were necessary to value a minority holding of ordinary shares (i.e. one share) the valuation should be made on a capitalisation of maintainable dividends. For that purpose he used a capitalisation rate of 6% and valued each share at $40,023, whereas by the use of sec. 18(2)(c) he valued each share at $286,334.

The second valuer called by the Commissioner (Mr. Robinson) first valued on a discounted assets-backing basis. He said that he had discounted the value of the assets of St. Helens Farm on the basis that the market discounts the assets-backing of investment companies, and because it is an unlisted company. He used a discount of 20% and arrived at a figure of $257,922 per share. However, the evidence showed that the average market discount below the assets-backing value in the case of listed investment companies holding shares in listed companies was 26%. He also valued the shares on the basis that sec. 18(2)(c) applied and arrived at a figure of $306,332 per share, being $24,000 lower than the Commissioner's figure. He made no valuation on an earnings basis.

Sheppard J. made a careful review of the various cases in which sections similar to this have been dealt with in the courts. He referred to two cases in which this Court has had regard to and applied such sections, namely
Jekyll v. Commr. of Stamp Duties (Qld.) (1962) 106 C.L.R. 353 and
Gregory & Anor. v. F.C. of T. 71 ATC 4034 ; (1970-1971) 123 C.L.R. 547 . Gregory's case concerned share holdings in two different private companies. In one, the deceased had held all but 2,400 of 39,165 issued shares, and in the other, he held 13,280 out of a total of 898,440 shares. In relation to the first company, Gibbs J. thought it appropriate to apply the provisions of the Act because the deceased was in a position to procure the winding-up of the company without having to rely upon support from any other shareholder and the purchaser of his shares would have taken that into account. In respect of the other company, Gibbs J. regarded it as inappropriate to apply the equivalent provisions and said that a purchaser of so small a holding would have recognized that it was unlikely that the position of the company would change from one which held a very substantial holding in a public company and was likely to continue to do so without regard to considerations which would influence the conduct of an investment company.

Sheppard J. expressed his conclusion in relation to this aspect of the case as follows [79 ATC at p. 4172]:

``I think that in the present case one has to bear very much in mind that the substantial asset of the company was shares in a well-known company listed on the Stock Exchange. To my mind the case has similarities not only to Crane but also to Gregory insofar as that case dealt with a minority shareholding in a private company, the main asset of which was also shares in a listed company. The same considerations moved Mr. Bagnall, Mr. Goddard and Mr. Young in relation to the evidence which they gave in the present case. In my opinion, to apply sec. 18(2)(c) to the case would bring about a situation, as I have earlier said, in which each of the minority shareholders was to be regarded as having an asset worth precisely the same as a proportionate part of the shareholding of the company in The Broken Hill Proprietary Company Limited.

It is true that by reason of the very high price at which BHP shares were being traded on the day in question the yield was extremely low, but it was not within the contemplation of anyone that the shares would be sold on that day or about that time. The shares had been held firstly by Mrs. Palfreyman and then by the company as an investment. The shares would in the course of the years at times be at a peak and at others in a trough. But the intention was to continue to hold them; value on a given day was not of

ATC 4070

great consequence; cf. Gregory (71 ATC at p. 4047; 123 C.L.R. at p. 573). The fact that the yield was extremely low is not therefore to the point.

The considerations I have mentioned lead me to the conclusion that this is not a case for the application of sec. 18(2)(c) of the Act.''

Sheppard J. proceeded upon the basis, which was indeed common ground between the parties, that there were five individual allotments of shares, each of one share, and that each gift must be looked at separately, though it would follow that the result of valuing one such share would necessarily fix the value of each of the other four. It was therefore necessary to proceed upon the basis that each donee held only a minority interest in the company and could not procure its winding-up without the concurrence of the holders of three other shares because without such concurrence no special resolution could be passed.

Although such a circumstance cannot be conclusive that the winding-up basis of valuation is not an appropriate and proper approach, it is a powerful factor tending against the adoption of that method of valuation. Where an individual shareholder can procure liquidation and where there is no likelihood of the holders of four out of the five shares joining together in the foreseeable future to wind up the company it can seldom be appropriate to use sec. 18(2)(c).

It was because of this factor that the companies' valuers regarded an earnings basis as the appropriate mode of valuation. Valuations made upon that basis by the various valuers did not differ greatly. The three valuers called on behalf of St. Helens Farm gave figures of $30,000, $40,600 and $42,820 per share and, as I have said, one valuer called by the Commissioner arrived at $40,023 per share on this basis.

There are some cases in which it has been held that a suitable method of valuation is to use sec. 18(2)(c) or equivalent provisions in other taxing Acts but it is only in what may be described as special circumstances that this has been done. The proper approach is set out in the following passage from the joint judgment of McTiernan, Williams and Webb JJ. in
Commr. of Stamp Duties (N.S.W.) v. Pearse (1951) 84 C.L.R. 490 at p. 520 :

``To value shares in a company which is a going concern on the basis that the company is in voluntary liquidation at the date of death savours of unreality. The choice of such a mode is not calculated to produce a fair value. It is more likely to produce a false value. Scope for the use of the provision contained in s. 127(1)(c) may be found in cases where a company's operations do not produce income which can be regarded as affording any measure of the value of the shares, as well may be the case with an assets company or a company whose earning capacity is restricted or diminishes temporarily or by accidental circumstances. Other special cases may be imagined.''

Although Dixon J. and Fullagar J. dissented in that case on another question, they agreed with the joint judgment on the matter dealt with in the passage quoted (see pp. 506 and 523). The decision of Gibbs J. in Gregory's case provides examples of a case where the use of such a section is appropriate and of a case where it is inappropriate although there is no rigid rule that the method cannot be used except in cases where the holder of the shares is himself in a position to force a winding-up as Jekyll v. Commr. of Stamp Duties (Qld.) demonstrates. There the winding-up basis was adopted because of the difficulty of assessing any value that could be justified on any other footing.

The Commissioner's appeal in St. Helens Farm raised no question other than whether Sheppard J. erred in not applying sec. 18(2)(c) or a discounted assets-backing basis. In considering appeals from a trial judge on matters of valuation an appellate Court is faced with a somewhat special task as the decisions of this Court demonstrate.

The task of a trial judge is to approach a question of valuation in accordance with established principles and to endeavour to arrive at a fair and just figure, bearing in mind that valuation by expert witnesses is not an exact science and that the task involves in most cases a consideration of differing expert opinions. In the end his conclusion is not merely a judgment as to the value of the relevant property but is in the nature of a ``value judgment''. It is not a judicial discretion in the technical sense of that term but the boundary line between the formation of a value judgment and the exercise of a

ATC 4071

discretion is neither clear nor precise. It is no doubt for this reason that Dixon J. (as he then was) said in the well-known passage in his judgment in
The Commonwealth v. Reeve & Anor. (1949) 78 C.L.R. 410 at p. 423 that:

``For the estimation of a money sum is usually so much a result of judgment and sound discretion and so little the product of analytical reasoning, that, were it otherwise, every appeal would mean an assessment of compensation de novo, without any assignment of error in the reasoning or conclusions of the court appealed from.''

Section 18(3) gives to a board or to a court (i.e. to the two tribunals to which a challenge to an assessment may go) power to substitute its own opinion, or substitute its own discretion for that of the Commissioner under subsec. (2). That power however is not given to this Court on an appeal from a court of first instance (which would include a Supreme Court on appeal from a Board of Review which is a re-hearing de novo ). This was common ground between the parties. The task of an appellate Court under this legislation is to consider whether the trial judge has made some error in principle or some gross error of fact, and not to substitute its own collective opinion or discretion, or that of a majority, for the trial judge's opinion or discretion.

The process of valuation in accordance with ordinary principles may produce different results from different judges approaching the task in accordance with proper principles and making no errors of law. There is thus invariably a range of figures, any one of which may quite well satisfy a particular judge that it is as close to true value as it is possible for him to attain.

The fact that the process may be difficult and involve the balancing of a variety of conflicting considerations does not mean however that wherever such a difficulty arises it is ``necessary'' to resort to the artificial process prescribed by sec. 18(2)(c). The opening words of subsec. (2) of sec. 18 govern each of the three paragraphs and it is the opening words which appear to me to indicate the manner in which the power or discretion given should be exercised. Those words are ``Where the Commissioner [or the Judge] is of the opinion that it is necessary that the following provisions should apply'' and if that condition is satisfied, then the provisions become applicable. The present case does not require a decision as to whether there is a separate question in relation to each of the three paragraphs.

The proper operation of sec. 18(2)(c) must take account of the fact that the opening words of subsec. (2) express the preliminary condition that the Commissioner is of opinion that it is necessary that the provisions of para. (2)(b) and (c) should apply. There is then added in para. (c) the words ``the Commissioner may, in his discretion, notwithstanding anything contained in the last two preceding paragraphs [adopt the winding-up basis]''. Thus it appears to be a two-stage process, namely, the Commissioner having first concluded that it is ``necessary'' that the provisions should apply, nonetheless retains a discretion as to whether or not para. (c) shall in fact be applied. It appears to me that the purpose of the subsection is to be ascertained by giving due attention to the use of the word ``necessary''. The proper operation of the subsection is to give the Commissioner this discretion in cases where the application of the ordinary principles of valuation does not enable a conclusion to be arrived at which satisfies the mind of the Commissioner or the Judge, as the case may be, that it is as close as he can come to a true and fair value. It is in effect to be a ``last resort'' available to the Commissioner or the Judge when all else fails to produce a rational conclusion. It is not a mechanical solution for application in difficult cases; it is in my opinion to be applied only where other endeavours to provide a true and fair valuation fail. The additional discretion given to the Commissioner and the Court by para. (c) appears to me to be designed to ensure that it is not to be used to produce an unjust solution, and to require a re-examination on ordinary principles of valuation if the result of the winding-up process appears to produce an unjust result. The case of a person holding a substantial majority of the shares in a proprietary company, the assets of which are listed shares, has sometimes been regarded as an example of a case where it is ``necessary'' to adopt a hypothetical winding-up basis of

ATC 4072

valuation, but that cannot always be so because in the general run of such cases, ordinary principles of valuation would produce a realistic figure. The hypothetical willing but not anxious purchaser of a majority of the shares in such a company would after completion of his purchase be in as good a position as the former owner of the shares to procure the winding-up of the company and obtain access to the underlying assets if he did not regard the yield as appropriate. Such a hypothetical purchaser would of course impose a discount against the risk that the underlying assets would diminish in value during the period of delay which would be necessary before the winding-up could be completed. It would be also necessary for the hypothetical purchaser to bear in mind in particular two possibilities, the first being opposition from the remaining shareholders including the possibility of attempted reliance on the ``oppression'' provisions of the Companies Acts and Ordinances, and the second the delays made necessary by the operation of sec. 215 of the Income Tax Assessment Act 1936 (Cth.). That section prevents any distribution by a liquidator without the consent of the Commissioner. Moreover the hypothetical purchaser would have regard to any tax which would be payable upon the distribution of any retained profits.

In
C. for T. (Tas.) v. Perpetual Trustees Executors and Agency Company of Tasmania Ltd. (1969) 118 C.L.R. 325 this Court considered sec. 16A of the Deceased Persons' Estate Duties Act 1931 (Tas.) which contained a provision embodying all the words in sec. 18(2)(c) but with the addition of the following phrase ``notwithstanding that no such winding up is intended or contemplated''. That case did not raise any question of whether the winding-up basis of valuation should have been adopted but only a question of whether the amount at which the Commissioner had arrived should be reduced by reason of the fact that part of it represented undistributed profits of the company. Such profits would have been included in any distribution by the liquidator and would have been assessable income in the hands of the shareholders by reason of sec. 44(1)(a) and sec. 47(1) of the Income Tax Assessment Act . It was contended that the value adopted by the Commissioner should be reduced by the amount of income tax which the executors would have to pay on receipt of the distribution. This argument was rejected on the ground that the section was concerned only with the amount which would be received, and not with its character as capital or income. The joint judgment of the Court ( Barwick C.J., McTiernan, Kitto, Menzies and Windeyer JJ.) also contained the following observations (at p. 329):

``The value of those shares is `such sum as the holder thereof would receive in the event of the company being voluntarily wound up on the death of the deceased person', that is to say if the distribution to shareholders on the winding up took place on that day. This provision [sec. 16A(1)(c)] is not in any way concerned with what happens to the shares in the course of the administration of the estate.... It is concerned simply with the sum which the holder of the shares would receive from the liquidator upon a distribution in the hypothetical liquidation. In such a hypothetical liquidation, indeed, the hypothetical holder would, it seems, of necessity, be the personal representative of the deceased person whose estate included the shares. It is the personal representative that would hypothetically `receive' a sum from the hypothetical liquidator. It is, we think, important to emphasize, as we have, that the section is not concerned with an actual liquidation and what would happen to sums received from the liquidator. It proceeds upon a limited hypothesis and it would, we think, be an error to attempt to apply it upon the footing that there had been an actual distribution and that income tax or any other liability has become payable by some person or other by reason of the distribution.''

That case does not appear to have been the subject of any subsequent reference and there is no reason why it should not apply to sec. 18(2)(c) of the Act. Its importance lies in its emphasis on the artificial character of that mode of valuation. The hypothetical winding-up is one which must be assumed to have begun and concluded within whatever part of the day remained after the death of the deceased, i.e. concluded to the point of the distribution of the balance of the

ATC 4073

proceeds of the sale of the company's assets and the satisfaction of its liabilities. The calculation of the figure must of necessity be made at a later date and probably with the benefit of hindsight. On that basis, however, it can bear no close resemblance to the value of what would later be received on an actual voluntary winding-up commenced by the passing of a special resolution on that day. In a real winding-up time would be occupied in realizing the assets, and the Stock Exchange proceeds of any shares held would be unlikely to be the same as on the date of the death or of the gift. Moreover any distribution to the contributories would require the consent of the Commissioner of Taxation. What would arise from the special resolution for a voluntary winding-up would be a right to a future distribution by the liquidator not before the time when the Commissioner consented to distribution. Its present value at the date of death would be capable of estimation from the nature of the company's assets and liabilities and with a knowledge of the Commissioner's practice under sec. 215 of the Income Tax Assessment Act . It would, however, be likely to differ significantly from the result of a mere arithmetic exercise on the basis that all the assets were realized, all debts ascertained and discharged and the company completely wound up on the day of the death or of the gift.

The judgment of the Court in C. for T. (Tas.) v. Perpetual Trustees Executors and Agency Company of Tasmania Ltd . does not refer expressly to the added words in the relevant subsection. Taken literally those words would indicate that the draftsman regarded the subsection as dealing with what would have been the result of a real winding-up commenced on the date of the death, rather than a hypothetical winding-up commenced and concluded on that date. Such a view, however, would be contrary to the observations which I have quoted above, and from which it must be concluded that the Court did not regard the additional words as adding anything to the effect of the preceding words.

The kind of hypothetical winding-up required by sec. 18(2)(c) to be postulated by the Commissioner or the Court will necessarily produce a figure different from an actual winding-up commenced on the date of the gift and will thus not be likely to coincide with or approximate the figure which a hypothetical willing but not anxious buyer would pay if buying for the purpose of winding-up a company to obtain access to its assets rather than holding the shares as an income-earning asset.

These factors demonstrate that it can only be an unusual case in which it is ``necessary'' to use sec. 18(2)(c) to arrive at a true and fair figure for the value of shares. It is for that reason that I have described it as a ``last resort''.

The present case is not one where an individual ``donee'' held sufficient shares to bring about a winding-up and that is a further powerful reason why it cannot be necessary to have resort to that method to arrive at a true and fair value. In the light of that consideration of the role of sec. 18(2)(c), I can see no sound reason for departing from the view expressed by Sheppard J. that this is not a case in which it is appropriate to apply that provision. He rightly concluded that to adopt such a valuation would be to proceed as if each of the individual shareholders had an asset which was the precise equivalent of one-fifth of the number of shares in The Broken Hill Proprietary Company Ltd. (B.H.P.) which constituted the principal asset of St. Helens Farm, i.e. an asset capable of immediate realization by sale on the Stock Exchange. The asset in question (i.e. one ordinary share in St. Helens Farm) was, however, one which was not readily disposable and the disposition of which would require the approval of the directors of the company.

St. Helens Farm was incorporated in the Australian Capital Territory where there is no Stock Exchange so that the company's share register being in the A.C.T., there was no room for the operation of sec. 18(2)(a). St. Helens Farm being a proprietary company, the right to transfer shares was necessarily subject to a restriction (sec. 15(1)(a) of the Companies Ordinance 1962 (A.C.T.)) and in fact by its Articles the directors were authorized to refuse to register any transfer to a person of whom they did not approve. I respectfully agree with Sheppard J. that it would be artificial and unreal to value these shares on a liquidation basis because it would give to them a value

ATC 4074

which would be quite unreal and incapable of being realized in any manner available to an individual shareholder.

It was argued for the Commissioner that this Court should substitute its own view of the proper value for that of Sheppard J. on the ground that there were matters of principle involved. It was said that the choice between a valuation on a winding-up basis and one in accordance with ordinary principles involved a matter of principle and it was therefore one in which this Court should interfere and substitute its own view for that of the trial judge.

Counsel for the Commissioner argued that the application of ordinary principles involved difficulties but said that he did not wish the Court to make fresh calculations. In the end he acknowledged that the evidence would not enable him to support the original assessment of the Commissioner. When asked what was the matter of principle on which the trial judge had erred, he said that in all the circumstances upon which he had relied the proper method of valuation should have been under sec. 18(2)(c), and alternatively, if that were wrong, it should have been an assets-backing basis. The difficulty with that submission is, however, that it cannot be regarded as a matter of general principle but rather as a matter of an examination of particular circumstances in order to arrive at what is the most appropriate method of determining a true and fair evaluation or as near thereto as the circumstances permit. It cannot be regarded as a matter of principle whether on particular facts a court should or should not value by reference to a notional liquidation under sec. 18(2)(c) or upon an earnings basis.

Counsel for the Commissioner further submitted that Sheppard J. had said ``he preferred Mr. Bagnall, in effect, right through'', whereas the Commissioner submitted that Mr. Robinson's approach should be accepted right through. He said then that a recourse to sec. 18(2)(c) was not calculated to place a fair value on the shares and that Mr. Robinson's approach amounted to applying sec. 18(2)(c) with a discount. So stated, the question cannot be regarded as one of principle. I have examined in detail Sheppard J.'s reasons for rejecting the application of sec. 18(2)(c) in St. Helens Farm notwithstanding that this is in my opinion not a case where his exercise of this quasi-discretionary function should be overturned. I am, however, satisfied that he was right to reject the Commissioner's contention.

Sheppard J., having rejected the Commissioner's argument that sec. 18(2)(c) should be applied, then considered and rejected the alternative assets-backing basis of valuation adopted by Mr. Robinson which was to take the assets valuation less a discount of 20%. In cross-examination Mr. Robinson was not prepared to agree to a discount greater than 25%. Sheppard J. said that if he had thought that method appropriate he would have regarded a much larger discount as necessary because that discount was no more than that allowed by the market price of listed investment companies as against their assets-backing of shares in other listed companies and allowed nothing for the lack of an available market and restrictions on transfer. He concluded, however, that it was more appropriate to adopt an earnings basis notwithstanding the disparity between the value of the principal asset, namely the B.H.P. shares on the date of issue of the ordinary shares and the earnings value of the shares in St. Helens Farm. That disparity he regarded as perhaps exaggerated somewhat in view of the boom market and in fact on the particular day in question those shares reached their highest price on the Stock Exchange. The nature of the market may be illustrated by the fact that, between 15 March 1968 when Mrs. Palfreyman sold her B.H.P. shares to St. Helens Farm and 25 June 1968 when the 5 ordinary shares were issued, the market price rose by some 40%, i.e. from $17.70 to $25 per share. He then considered whether the earnings approach should be based upon a substantially lower capitalisation rate than those selected by the valuers. The lowest capitalisation rate adopted by the company's valuers was 5%, and one of the Commissioner's valuers, in considering an earnings basis, used the same figure. Sheppard J. said that he preferred the approaches of Mr. Bagnall (5%) and Mr. Goddard (6%) rather than that of Mr. Young who had arrived at the lowest figure using a capitalisation rate of 10%. Sheppard J. adopted a rate of 4% rather than the rates

ATC 4075

selected by the two valuers with whose valuations he otherwise agreed.

It was submitted in the cross-appeal that he had given no reasons for adopting a lower capitalisation rate and that his valuation should be reduced at least to the extent reflected by the use of a 5% capitalisation rate and that he was wrong in going outside the range of figures given by the valuers. It does not appear to me, however, that it is correct to say that he gave no reasons for that conclusion. His conclusion follows after his discussion of the apparent disparity between the value of the principal asset of the company, even if the market price on that day were abnormal, and the value of each ordinary share arrived at on an earnings basis. He posed the question whether the earnings approach should be adopted but with a lower capitalisation rate in order to take into account that disparity. It appears to me that the choice of 4% rather than 5% reflected his view about that disparity. In my opinion that conclusion was open to him in the circumstances and involves no error of principle. It was a matter of judgment in the unusual circumstances and I can see no basis for interfering with it.

If there be error in arriving at the capitalisation rate, it cannot in the light of all the circumstances be regarded as a matter of principle and for reasons which I have already indicated this Court should not attempt to make its own valuation.

Ceedon Pty. Ltd.

This company was incorporated in the A.C.T. on 23 February 1972. By its Articles of Association, one Charles Archibald Donald was to be governing director of the company during his lifetime or until he became disqualified pursuant to the provisions of the Articles of Association. As governing director he was given authority to exercise all the powers, authorities and discretions of the directors generally in relation to the conduct of the company's business. The voting rights of the various classes of shares were dealt with in Art. 58 which provided that on a poll during the lifetime of Mr. Donald, every member of the company (including the holders of the preference shares) was entitled to one vote for each share held but that after his death there was to be a sliding scale of voting rights, the details of which are not material. Article 7 included the following provision:

``(a) During the lifetime of Charles Archibald Donald and subject to the provisions (if any) in that behalf of the Memorandum of Association the shareholders may from time to time by Special Resolution vary the rights conferred on the holders of any of the issued shares and any issued shares may from time to time by Special Resolution be converted into shares with such preferred deferred or other special rights or such restrictions whether in regard to dividend voting or return of share capital as the Company may from time to time by Special Resolution determine. The power hereby conferred shall extend to the extinguishment removal or variation of any preferred deferred or other special rights or restrictions conferred or imposed pursuant to the provisions of this Article or Article 6.''

It further provided that after the death of Mr. Donald the rights attaching to any class of shares, if the share capital were divided into different classes at that time, might be varied with the consent in writing of the holders of three-fourths of the issued shares of that class or by special resolution at a separate meeting of the holders of shares of that class. Mr. Donald was the governing director at all relevant times. It was agreed by the parties that at the time of the relevant transactions the life expectancy of a man of his age was shown in the tables as 14.94 years.

On 19 April 1972, the directors of Ceedon set in motion a series of directors' meetings which followed a similar pattern and were, in all material respects, to the same effect as those already outlined in relation to St. Helens Farm. No useful purpose will be gained by again outlining the precise details of these meetings save to point out that the ordinary shares of $1 each taken up by Mr. Donald were issued and allotted to him at a premium of $99 and also that he had previously transferred assets to Ceedon for a total consideration of $273,376.14.

In the course of the operation, all the issued ordinary shares of the company (of which Mr. Donald held 2,699 out of a total of 2,700 shares) were converted, pursuant to

ATC 4076

Art. 7, into cumulative preference shares with, so far as is here relevant, the following rights -

The directors at a meeting also held on 19 April 1972 immediately following the extraordinary general meeting at which the special resolution effecting the conversion of ordinary shares into cumulative preference shares was passed, allotted pursuant to an application for shares, 6 ordinary shares at $1 each at a premium of $99 to a company called Nodeec Pty. Ltd. (Nodeec). A cheque for $600 accompanied the application. Also tabled at the meeting was an agreement between Nodeec and Ceedon dated 19 April 1972 which recited the application for shares and then contained the following:

``AND WHEREAS the Applicant (Nodeec) is desirous of making provision for the payment of a greater sum by it for the allotment of the said shares in the event of the amount of the application, moneys being inadequate

NOW THIS DEED WITNESSETH that the Applicant hereby agrees with the Company (Ceedon) that if, but for this Agreement, the allotment of the shares at a premium at $99 each would constitute a gift within the meaning of the Gift Duties Assessment Act 1941 (as amended) then the Applicant agrees to pay to the Company the quantum of the difference between the true value of the shares as calculated by the Deputy Commissioner of Taxation for the Commonwealth of Australia and the amount of the application moneys to be paid by the Applicant for the allotment of the shares as a debt due and payable by the Applicant to the Company on demand.''

It was resolved that Ceedon should enter into the agreement referred to.

Nodeec held the six shares in question upon trust pursuant to a number of declarations of trust by which each share was to be held upon discretionary trust in favour of one or more beneficiaries in the absolute discretion of Nodeec as trustee.

As at 19 April 1972 the assets of Ceedon consisted substantially of the various assets transferred to it by Mr. Donald. When an unsecured loan of $3,576 to Mr. Donald is deducted, these assets amounted to $269,802.

The critical difference between Ceedon and St. Helens Farm was, as Sheppard J. pointed out, that there was in Ceedon a power existing in the company to reconvert the preference shares held by Mr. Donald to ordinary shares. Since Mr. Donald was the governing director and the holder of 2,699 preference shares and had full voting rights in respect of those shares during his lifetime, he could convene and control an extraordinary general meeting for the purpose of passing a special resolution amending the Articles so as to reconvert the preference shares to ordinary shares. Moreover, as governing director he could control and indeed prevent the issue of any further shares. Sheppard J. rejected an argument that the powers conferred by Art. 7 were invalid and in my opinion he was right to do so. He dealt also with a separate argument that the power given to Mr. Donald could not be exercised for his own benefit but only for the benefit of the company as a whole. I defer consideration of that point for the moment.

ATC 4077

There was a further distinction between St. Helens Farm and Ceedon, namely that the agreement of 19 April 1972 to which I have referred contained an ``escalator clause''. In addition, the 6 ordinary shares were issued to one person, Nodeec, which held them on 6 separate discretionary trusts, so that there is no real question of a minority interest amongst the ordinary shareholders.

The most significant distinction between the two cases however is the provisions of the Articles which enabled Mr. Donald to effect a reconversion of his shares into ordinary shares. That gave rise to the Commissioner's argument that those provisions or the possibility of their use constituted a ``contingency affecting the interests of the donees or any of them'' within the meaning of sec. 18(1)(a) of the Act. However, as Sheppard J. said, even if the capacity to reconvert were ignored Mr. Donald would still retain his voting rights during his lifetime and would control the company and its Board of Directors.

The existence of the power to reconvert had a substantial influence upon the values placed on the shares in each of the companies other than St. Helens Farm because the valuers who were called by the companies regarded that power as requiring a substantial reduction in the value to be attributed to the ordinary shares as they would be seen through the eyes of a hypothetical willing but not anxious purchaser. There was no material difference between the relevant Articles giving the power to reconvert in each company.

Section 18(1)(a) has not previously been considered by a Full Court and has no counterpart in the Estate Duty Assessment Act 1914 (Cth.) nor in the legislation dealing with death duties in New South Wales. It has however been considered by members of this Court sitting in its original jurisdiction.

The critical question is whether there was a contingency and if so whether it did affect the interests of the donees. It was not contested by Counsel for Ceedon that there was a contingency, namely the possible exercise of the power to reconvert the preference shares into ordinary shares. However the contingency of which the section speaks is one ``affecting the interests of the donees''. It is clear that the possibility of the power to convert being exercised would affect the value of the shares and this was not in dispute. The word ``donee'' is defined in sec. 4(1) of the Act as meaning ``any person who acquires any interest in property under a gift, and, where a gift is made to a trustee for the benefit of another person, includes both the trustee and beneficiary''. Light is thrown on the proper meaning of sec. 18(1)(a) if one reads the definition of donee into the paragraph. So read it becomes: ``any contingency affecting the interests of any person who acquires any interest in property under a gift''. In my opinion the word ``interest'' should be given the same meaning as in the phrase from the definition of donee. The natural meaning of the words in para. (a) so read is that it is referring to interests in property. Moreover, the phrase ``interest in property'' is defined in sec. 4(1) of the Act to mean ``any estate, interest, right or power whatsoever, whether at law or in equity, in or over any property''. There seems to me to be no basis for reading the expression as including the value of property. In my opinion para. (a) of sec. 18(1) on its proper construction applies to contingencies which affect the proprietary rights of the donee in the property given. In the present case it is clear that the proprietary rights of the ordinary shareholders would not be affected by the exercise of the power to reconvert. It was argued for the Commissioner that the word ``interest'' was not confined to legal or equitable interest of a proprietary nature in the subject matter of the gift and that it was used in the sense of a ``commercial interest''. It was said that the power to reconvert affected the commercial interest of the donee in that it would reduce the value of its commercial rights, its effect being not upon title but upon value. This argument was rejected by Sheppard J. He relied on the decision of Gibbs J. in
Bray & Anor. v. F.C. of T. (No. 2) 71 ATC 4060 ; (1971) 123 C.L.R. 348 . That case concerned an agreement by which an amount of £ 88,000 was lent to a company repayable on demand. A month later the parties entered into an agreement which provided that the amount should be repayable at the rate of £ 2,200 per annum without interest unless the lender gave 90 days' written notice that the amount should become repayable in full. The Commissioner relied on sec. 18(1)(a) and assessed gift duty on the basis that the value

ATC 4078

of the promise to repay at that rate per annum was only £ 22,350 and assessed gift duty on the difference, i.e. £ 65,650. It was held by Gibbs J. that the taxpayer's appeal should succeed on the ground that sec. 18(1)(a) did not apply because the possibility that the lender might call for repayment of the total amount did not affect the interest of the donee within the meaning of the Act, but he held that there was a gift of the amount of £ 1,283, being interest for the 90 day period at 6%.

Gibbs J. said (ATC at p. 4066; C.L.R. at pp. 357-58):

``I am prepared to assume that in an appropriate case the possibility that a demand or notice requiring payment will be given may properly be regarded as a contingency within sec. 18(1)(a) but in the present case the possibility that the deceased might give the notice under cl. 2 of the loan agreement was not a contingency which affected the interest of the company within the meaning of the subsection. The phrase `the interests of the donees' in sec. 18(1)(a) must refer to their interests in the property the subject of the gift. Whether in a case like the present the interest of the donee should be regarded as an interest in the entire sum lent, or as an interest in the amount by which the consideration is inadequate, it is impossible to say that any interest of the company would be affected by the giving of written notice under cl. 2 of the loan agreement. The company had received the amount of the loan and the giving of such notice would not divest it of its interest in the money which it had received or in any part of that money. On the other hand, whether or not the notice was given, the company was obliged to pay the debt in full and the giving of the written notice would affect only the time of repayment and not the existence of the obligation to repay. Section 18(1)(a) has no application to the present case and did not require the promise contained in cl. 2 of the loan agreement to be disregarded or treated as worthless for the purpose of making a valuation of the consideration for the loan.

In advancing their submissions as to the effect of sec. 18(1)(a), counsel for the respondent relied on some remarks in
Gorton v. F.C. of T. (1965) 113 C.L.R. 604 at pp. 615 and 626 , the authority of which it was said was not affected by the fact that they appear in a judgment that was reversed and a dissenting judgment. Those judgments were concerned with the possibility that a shareholder might exercise her overwhelming voting power and convert her cumulative preference shares to ordinary shares and thus affect the amount which other shareholders would receive on a winding up. The circumstances of that case are quite unlike those of the present, and the passages to which counsel referred do not assist in determining the present question.''

I respectfully agree with the views there expressed, and regard them as going a substantial distance toward resolving this point. I should add that there is no basis on which one point in the judgment of a primary court should be regarded as authoritative where the judgment is reversed on other grounds. I am unable to agree with the observations of McTiernan J. in his judgment at first instance in
Gorton's case (113 C.L.R. at pp. 614-15 ) which were relied on by the Commissioner in the present appeal.

In the alternative it was argued that the term ``interests'' did not refer or was not confined to interests in property but included value of property. Reliance was placed on
Way & Ors. v. Commr. of Stamp Duties (N.S.W.) (1949) 79 C.L.R. 477 , a case concerning death duties on notional estate. The question there was whether a discretion conferred on the settlor under a deed of settlement exercised during his life was ``an interest in or benefit out of or connected with (the trust funds), or the proceeds of sale thereof''. In a joint judgment Dixon, McTiernan, Williams and Webb JJ. said (at pp. 494-95) that the right which the settlor had was -

``... at most a right to have his real or personal property purchased with trust moneys or exchanged for trust property on terms advantageous to the trust and only when the settlor in the exercise of a fiduciary power thought it proper to direct the trustees to acquire his property on these terms. This is not an interest in or benefit out of or connected with the settled funds within the meaning of the

ATC 4079

paragraph. It is simply a power to alter the investment of the trust funds for the benefit of the trust. The power does not confer on the settlor any beneficial interest in or the right to receive any payment out of or connected with the income or corpus of the trust as it exists from time to time. To fall within the paragraph such an interest in or benefit out of or connected with the trust fund must confer on the settlor some legal or equitable right to obtain some benefit in money or money's worth for his own advantage out of or connected with the trust property.''

The statutory expression there dealt with was ``an interest in or benefit out of or connected with (the trust funds), or the proceeds of sale thereof''; one would expect that expression to be wider than the word ``interest'' in the context of sec. 18(1)(a). The Court treated it as confined to a legal or equitable right to obtain a benefit in money or money's worth ``out of or connected with the trust property''. Even if such an expression could be transferred to sec. 18(1)(a), it would not assist the Commissioner because that provision speaks only of the interest of the person who acquires any interest in property under a gift. The statutory provision there in question dealt with an interest in or benefit out of or connected with the trust funds or the proceeds of sale thereof and it was held not to cover the provision in the settlement referred to in the passage quoted. The subsequent statement (at p.495) that ``the interest or benefit must be such that the beneficiaries under the settlement would derive an advantage from the death of the settlor or some other person'' does not warrant the conclusion sought to be drawn by Counsel for the Commissioner.

The Commissioner also relied on
Craig & Anor. v. F.C. of T. (1945) 70 C.L.R. 441 , in which a settlor had conveyed to trustees Treasury Loan Bonds on trust during the joint lives of himself and his wife to pay the income to his wife for her sole and separate use and after the death of either of them to pay the income to the survivor for life. The settlor was survived by his wife and on his death the Commissioner sought to include the bonds in the settlor's dutiable estate as being property ``comprised in a settlement made by the deceased person under which he had any interest of any kind for his life'' within the meaning of sec. 8(4)(c) of the Estate Duty Assessment Act 1914 (Cth.). It was held that that provision was not limited to interests in possession or a vested interest but extended to contingent interests. There is a passage in the judgment of Latham C.J. (at p. 446) upon which reliance was placed where he said that the word ``interest'' is frequently used in taxing Acts in a popular sense but he pointed out that other Acts cannot be relied upon in the construction of a particular Act where the context is different. However he concluded that the natural meaning of the expression ``interest of any kind for his life'' included a contingent interest for life. I do not regard that case as assisting the argument for the Commissioner in any way. The ``interest'' there referred to was an ``interest under a settlement'', i.e. an equitable interest in the trust property. The general observations warning against the use of decisions on other legislation to aid the construction of a different Act are well known. Here the warning may be heeded by confining one's attention to the words of sec. 18(1)(a) and of the definitions, which demonstrate that the word ``interest'' in that context means an interest in property.

Accordingly those cases do not assist the Commissioner's argument. Moreover it is apparent from para. (f) of the definition of ``disposition of property'' that the draftsman had in mind the distinction between interests in property and effect on the value of property.

It is now convenient to deal with the separate argument to which I adverted earlier. In Ceedon it was argued in relation to the operation of sec. 18(2)(c) that the power to call an extraordinary general meeting and cause a special resolution to be passed so as to reconvert the preference shares was one which could be exercised only for the benefit of the company as a whole and not merely for the benefit of one particular shareholder. Whatever the generality of that proposition may be it cannot be regarded as having an automatic operation. As Sheppard J. pointed out, no hypothetical purchaser, whether a member of the family or not, should be presumed to ignore the existence of the power upon the assumption that he would succeed in litigation designed to restrain or set aside its exercise. No sensible hypothetical

ATC 4080

purchaser would be likely to approach the matter otherwise than upon the basis that the power might be validly exercised and that any challenge to the exercise might involve expensive and unsuccessful litigation. Those considerations would exercise a powerful influence upon his decision as to what price he would be prepared to pay. In truth it seems to me that no comfort can be obtained from the possibility that it might be established that the power had been wrongly exercised. Moreover control of the company would still remain wholly in Mr. Donald's hands whatever might be the outcome of such litigation unless proceedings under sec. 186 of the Companies Ordinance 1962 (A.C.T.) were launched and were successful.

The next question which arose in Ceedon's case was the effect of the escalator clause quoted above. Sheppard J. held that this agreement involved an impossibility because under the Act the Commissioner would not proceed to issue an assessment unless he took the view that the consideration was inadequate. If however there were an obligation to pay the difference between the stated price and the true value there would be no gift and the Commissioner would not be authorized to determine any such value. Sheppard J. concluded that for that reason the agreement had from its inception been void and of no effect. He concluded that the only consideration moving from Nodeec was the $600 payable by way of application money and premium and that the escalation agreement was of no effect. It was submitted on behalf of Ceedon both before Sheppard J. and before this Court that that agreement was a fundamental part of the arrangement between the parties and that if it were impossible of performance the whole arrangement including the allotment failed whereas Sheppard J. held that the escalator provision in the agreement was severable. He concluded that in fact the shares were allotted for a consideration amounting to $600 and a promise impossible of performance. Accordingly he held that the agreement was impossible of performance because whatever amount of premium might be fixed there could never be full consideration after taking into account the value of the ``surplus assets'', i.e. after taking into account the amount of preference capital, because however large the premium might be it would never catch up with full value. This would be so because any increase in the premium would simply increase the assets of the company. That argument was considered briefly in Ord Forrest by Gibbs J. 74 ATC at pp. 4044-45; 130 C.L.R. at pp. 153-54 and by Mason J. ATC at pp. 4047-48; C.L.R. at pp. 157-58. The observations made in that case do not deal with precisely this point but only with the general effect of the issue of shares at a premium and do not assist in the resolution of the present point.

I am of opinion that Sheppard J. was right to treat this provision as severable. The parties plainly intended that shares should be issued and paid for. Failure of part of the provision as to price which was intended to eliminate any risk of gift duty does not in the very unusual circumstances of this case appear to be so fundamental as to render the balance of the agreement void though in normal commercial dealings it might do so.

The next question in Ceedon was whether sec. 18(2)(c) should be applied. Sheppard J. concluded that the case was not appropriate for the application of sec. 18(2)(c). Sheppard J. took the view that the case was a much stronger one against the application of sec. 18(2)(c) than was St. Helens Farm . He pointed out that the average expectation of life of a man of Mr. Donald's age was approximately 15 years and that the value of $1 payable at the expiration of that period at a discount rate of 12% was 18c. He agreed with submissions made on behalf of Ceedon that if the matter were approached by valuing the assets it would need to be discounted by 82% to take into account the powers of Mr. Donald and that other discounts would need to be taken into account because of lack of negotiability on the shares. He added a further reason against the application of this provision, namely that Art. 112 of the Articles of Association dealing with a winding-up provided that the liquidators with the sanction of a special resolution could make a division of the property otherwise than in accordance with the legal rights of the contributories in the winding-up so that Mr. Donald could, immediately prior to a voluntary winding-up, procure a special resolution directing the assets away from Nodeec to himself. He therefore concluded that the winding-up basis would lead to an unfair and unreal

ATC 4081

result and that the appropriate method would be an earnings basis. In this case he again preferred the valuation of Mr. Bagnall who took into account the possibility that the preference shares could be converted into ordinary shares and the effect of that on the period during which the ordinary shareholders could expect to receive substantial dividends. Mr. Bagnall had concluded that the uncertainties were such that the hypothetical willing but not anxious buyer would not be prepared to pay more than 5,000 for the shares. Mr. Goddard who adopted a somewhat similar approach arrived at a figure of $9,216, the primary difference in the reasoning being that Mr. Bagnall did not attribute the same effect to the possibility that the preference shares might be converted into ordinary shares. Sheppard J. preferred the reasoning and conclusion of Mr. Bagnall and accordingly valued the 6 shares at $5,000.

Counsel for the Commissioner argued that once a winding-up begins there could be no alteration of the Articles though he conceded that there was no direct authority for that proposition. He also contended that in the case of a hypothetical winding-up the possibility of there being a special resolution changing the rights of the preference shares into ordinary shares should be disregarded but if that mode of valuation is rejected or abandoned this point disappears. Primarily he relied on the valuation of Mr. Robinson but his valuation ignored the powers given by the Articles to Mr. Donald. Sheppard J. rejected these arguments and regarded the existence of those powers as showing that the winding-up basis was not appropriate. He also said that the possibility of the preference shares being converted into ordinary shares would influence a hypothetical willing but not anxious purchaser.

There is no basis for interfering with his conclusion on those points.

Gwynedd Pty. Ltd., Lucinda Investments Pty. Ltd., Q.A.W. Pty. Ltd.

It is necessary to say something briefly about the position of these companies. Gwynedd Pty. Ltd. (Gwynedd) was incorporated in New South Wales. Its Articles of Association contained a variation provision not distinguishable from that in Ceedon . This power was very generally expressed but was limited in duration to the lifetime of Isobel Rebecca Rawlings. The Articles provided that if the share capital were divided into different classes of shares at the date of her death the rights attaching to any class might be varied by consent in writing of the holders of three-fourths of the issued shares or as the result of a resolution passed by a three-fourths majority at a separate meeting of the shareholders of that class. After her death there was a sliding scale of voting rights depending upon the number of shares held, reducing as the holding increased.

After a series of director's meetings of Gwynedd held on 18 November 1971, Mrs. Rawlings had effectively transferred to the company assets valued at $122,500 and became a registered holder of 6,849 ordinary $1 shares, 6,848 of which were issued at a premium of $19. The remaining subscriber's share was held in trust for her.

The conversion of all issued ordinary shares into cumulative preference shares took place at an extraordinary general meeting also held on 18 November. The rights which were resolved to attach to those shares were substantially the same as those quoted above for the Ceedon shares.

Later on that day, separate agreements were entered into (with the approval of the Board of Directors) between the company and Gilian Pty. Ltd., Camurra Pty. Ltd. and Mrs. Rawlings respectively. Taking the agreement with Gilian Pty. Ltd. as an example, it provided that Gilian Pty. Ltd. would apply for 5 ordinary shares at $1 each to be allotted at a premium of $19 ``or such if any greater sum as will constitute the consideration passing from the said Gilian Pty. Ltd. to the Company in respect of the said allotment fully adequate within the meaning of that expression as used in the definition of `gift' in sec. 4 of the Gift Duty Assessment Act 1941 (as amended)''. The other agreements were in a similar form. The assets and liabilities of the company as at 18 November 1971 showed that the shareholders' funds totalled $136,962 after taking account of the balance owing to Mrs. Rawlings in her loan account. It was agreed between the parties that, at the date of the allotment of the shares, a woman of Mrs. Rawlings' age had a life expectancy of 10.3 years.

ATC 4082

The escalator clause in this case differed in form from that used in Ceedon and the company being incorporated in New South Wales was one to which the provisions of sec. 18(2)(a) were capable of being applied. There was no provision for a governing director to be appointed. However given the number of preference shares which Mrs. Rawlings held and to which were attached full voting rights she could always exercise ultimate control, notwithstanding that the issue of shares was under the control of the directors; without Mrs. Rawlings' consent no further preference shares carrying voting rights could be issued. I do not need to deal with the question of the Stock Exchange provisions as that was not pursued in this Court though I note that Sheppard J. formed the view that it was not appropriate to apply that provision. Sheppard J. took the view that in Gwynedd it would not lead to a fair valuation but rather would lead to an unfair and unreal valuation.

In dealing with the escalator clause in these agreements Sheppard J. adopted the same view that he had taken in relation to Ceedon , regarding the relevant considerations as being precisely the same. Accordingly he treated the clause as inoperative but severable. He concluded that sec. 18(1)(a) did not apply, that sec. 18(2)(c) should not be applied. He rejected the argument that there was no gift because the issue of shares was made pursuant to a binding contract and that the gift duty payable in respect of the gift had to be taken into account in arriving at a valuation. In the result he adopted Mr. Bagnall's valuation which was that the shares were worth $20 per share, i.e. the face value plus the premium. He agreed with Mr. Bagnall that the company appeared to have been established as a repository for freehold property previously owned by Mrs. Rawlings but that the ordinary shareholders might never realize or enjoy the potential value because Mrs. Rawlings had a power of converting her shares into ordinary shares and thus effectively ``swamping'' the holders of the ordinary shares held by persons other than herself. He therefore concluded that there was no gift duty payable. He observed that in his view there would be no scope for the operation of the escalator clause even if valid and operative, because there was no inadequacy of consideration.

Again I can see no sound reason for interfering with his rejection of sec. 18(2)(c) or the valuation which he adopted.

The fourth company was Lucinda Investments Pty. Ltd. (Lucinda) which was incorporated in the Australian Capital Territory on 7 July 1964. The subscribers to the memorandum were five in number, Mr. T.A. Field held one share and those held by the other subscribers were held upon trust for him. Subsequently, two of the ordinary shares held upon trust for Mr. T.A. Field were transferred to him.

The Articles of Association of Lucinda were altered to include a provision similar in effect to Art. 7 of the Articles of Ceedon. Moreover by a further amendment to the Articles Mr. Field was made governing director during his life.

In this case, at the completion of a procedure to the same effect as that outlined above for the other companies, Mr. Field was the registered holder of 14,500 cumulative preference shares which were entitled to a cumulative preference shares which were entitled to a cumulative preference dividend at a rate of 6% per annum or such other rate as may from time to time be determined by the directors. The remaining rights attached to these shares were, with one minor exception, in much the same terms as those previously described. That exception was that, in this case, the power of reconversion of the cumulative preference shares into ordinary shares could, at Mr. Field's election, be exercised by the delivery by him of a written notice to the registered office of Lucinda together with the certificate for such shares. From the date of delivery of the notice, the cumulative preference shares were stated to become ordinary shares and to rank pari passu with all other ordinary shares of the company and all rights or restrictions attached to preference shares were to cease: Thus no meeting of Lucinda was required in order to enable the reconversion of the preference shares held by Mr. Field.

As part of the procedure 3 ordinary shares were allotted to a company called Springfield Pty. Ltd. (Springfield), at a premium of $98 per share (the same premium at which ordinary shares were allotted to Mr. Field prior to their conversion into cumulative preference shares). By a deed of trust dated 26 November 1969 Springfield, the registered

ATC 4083

holder of the shares, acknowledged that at all material times it had held those shares upon discretionary trusts for members of the Field family including Mr. Field himself.

The assets of Lucinda as at 30 June 1969 prior to the issue of the 3 ordinary shares to Springfield amounted to $1,449,204 after allowing for the balance of Mr. Field's loan account which was then $22,766. It was agreed between the parties that at the date of the issue of ordinary shares to Springfield Mr. Field ``had a life expectancy of almost 20 years''.

As the company was incorporated in the Australian Capital Territory no question of the application of sec.18(2)(a) arose, nor was there any escalator agreement.

The trial judge concluded for reasons which he had given in relation to other companies that sec. 18(1)(a) did not apply and that sec. 18(2)(c) should not be applied. He also rejected the argument that there was no gift because the issue of the shares was made pursuant to a binding contract and the submission that the gift duty payable should be taken into account in arriving at a valuation. Sheppard J. then concluded that he should adopt the approach of Mr. Bagnall and accepted the value arrived at by him.

Sheppard J. quoted para. 8-14 in that valuation which may properly be regarded as his reasons for adopting Mr. Bagnall's valuation in this case as well as in the other cases where rights of reconversion existed. Those paragraphs were as follows [79 ATC at pp.4191-4192]:

``8. Although the whole of the issued ordinary capital of the Appellant comprised the ordinary shares being valued, nevertheless the interest was a minority so far as control is concerned as the preference shareholder enjoyed overwhelming voting rights (Articles 4 and 74) and so far as equity is concerned as his shares could at any time until his death be converted into ordinary shares upon written notice being left at the registered office of the Appellant (Article 4(v)). On the death of the original preference shareholder, the voting rights attached to the preference shares will lapse, except in certain restricted circumstances which have no bearing on this valuation (Article 4(ii)). Consequently, the ordinary shareholder will then control the Appellant and its ordinary shares will be worth generally the realisable value of the Appellant's assets less all liabilities, costs of liquidation and the nominal value of preference capital (Article 4(iii)).

9. Doubt has been expressed whether Article 4(v) does in fact authorise the preference shareholder to exercise the power to reconvert his shares into ordinary shares. Whether or not the power can be exercised is critical in ascertaining the value of the ordinary shares. However, in the absence of a definitive opinion on the point, I believe that the reasonable investor would take the conservative view and assume that the preference shareholder's power of conversion was valid. Accordingly, I have adopted such assumption.

10. A minority interest in a company is normally valued with regard to the income that might be expected therefrom. The interest under examination differs from the usual minority interest in that it will ultimately become a controlling interest, if the preference shareholder does not elect to convert his investment into ordinary shares before his death. To what extent should this contingency affect the usual basis of valuing a minority interest, having regard to the very high value of the Appellant's net assets?

11. The Appellant does not appear to have been established for the purpose of providing income for the shareholders; out of assets amounting to approximately $1.5 Million transferred to the Appellant, only assets costing $56,871 were likely to be productive of income. The prime purpose of the Appellant appears rather to have been a repository for assets previously owned by the preference shareholder; on his death, the ordinary shares are evidently intended to be the mechanism whereby benefits will be conferred on certain individuals who might otherwise have received them under the terms of the preference shareholder's will. In the meantime his voting power enables the preference shareholder to retain indirect but effective control of his former assets, and just as he may at any time change the terms of his will, so he

ATC 4084

may divert those benefits away from the persons he had in mind in 1969 to others. He could for example achieve this by converting his preference shares into ordinary shares, liquidating the Appellant and re-possessing his former assets. These could then be transmitted by the more orthodox means of a Will.

12. The position of the ordinary shareholder as the holder of a minority interest is much weaker than is usually the case. It has the usual right to seek redress against repressive conduct by recourse to the courts; it could presumably seek an order requiring the directors to act in the interests of the Appellant as a whole by employing the assets for income producing purposes or even seek a winding up order on the grounds that the Appellant is not being properly conducted. One could not imagine behaviour more likely to cause a testator to drop a potential heir from his Will, or in the present case to cause the preference shareholder to convert his shares, thus removing from the ordinary shareholder the prospect of ultimately obtaining valuable assets from the Appellant. Effectively, therefore, the ordinary shareholder is unable to protect its rights except in a very limited sense during the lifetime of the preference shareholder.

13. I find it difficult to envisage circumstances in which a prospective bequest (without any rights in equity), made under the terms of a Will, could be said to have any value to the beneficiary while the testator lives. Similarly, although the ordinary shareholder holds rights of great potential value, that potential may never be realised because the preference shareholder may withhold it by converting his shares before he dies; accordingly it cannot be said to have any present significant value.

14. Having regard to the foregoing, I am of the opinion that the earnings basis of valuation of the ordinary shares should not be varied to take account of the assets held by the Appellant and not productive of income in 1969.''

Mr. Bagnall calculated that the ordinary shareholder in Lucinda might expect a dividend of some $2,720 per year. He capitalised that figure at a rate of 10.5% and on that footing the ordinary shares had a value of $16,400. He also said that if the preference shares were converted into ordinary shares the value would be reduced to approximately $7 and reached the final conclusion that the shares should be valued at $3,000. Sheppard J. accepted the figure of $3,000 as the value of the shares. The reduction from the value based upon the earning rate, i.e. $16,400 to a figure of $3,000 was due to the ease with which the preference shares could be converted into ordinary shares and the effect of that upon a hypothetical purchaser, along with other factors which are common to proprietary companies such as the absence of a market and the requirement for approval by the directors of any transfer of the shares.

In arriving at his valuation on an earnings basis, Mr. Bagnall concluded that it was not necessary to take into account assets of the company which were not productive of income in the year 1969 but para. 18 of his affidavit showed he took into account the income which might be expected to be derived from dividends on the listed shares held by Lucinda. Mr. Bagnall's reasons for arriving at the valuation of $3,000 which was accepted by Sheppard J. are set out in para. 22 and 23 of his affidavit and it is helpful to set them out in full:

``22. Having regard to the foregoing, I think that a return of 10 ½ % would be appropriate. On this footing the ordinary shares would have a value of, say, $16,400 but if the preference shares were converted to ordinary shares, the value would be reduced to, say, $7.

23. In resolving which value to opt for within this range I am influenced by the following matters:

  • (a) The right of the preference shareholder to convert his shares throws doubt on the length of time the ordinary shareholder can expect to receive the higher level of income.
  • (b) If the higher valuation is adopted, the ordinary shareholder could expect to receive much the same return elsewhere on the amount of $16,400, without the risk of losing most of its investment if the preference shares are converted.

    ATC 4085

  • (c) The uncertainty of the period that might elapse before the preference shares are converted, if ever, is such that I do not think a subscriber or purchaser of the ordinary shares would pay a high price for them. However, it is not an unreasonable inference that the preference shareholder will not convert his shares in the short term; were it otherwise, he would scarcely have involved himself in a corporate structure of this kind. Possibly the ordinary shareholder could count on a period of five years before conversion of preference shares would take place.
  • (d) If the preference shares were converted, the ordinary shareholder could then exercise its rights and require the Appellant to be operated in the interests of all members; in practice, the ordinary shareholder would probably seek to be bought out by the erstwhile preference shareholder.''

The remaining company was Q.A.W. Pty. Ltd. (Q.A.W.) which was incorporated on 14 April 1970 in New South Wales. The Articles of Association provided that a Mr. Wright should be governing director for life or until he became disqualified in accordance with the Articles. As governing director he had all the powers and authorities of the directors who were bound to conform to his directions. The Articles contained a voting scale somewhat similar to that which occurred in the Articles of Gwynedd and Ceedon. Article 7 provided for the variation of rights conferred on the holders of any issued shares and for the conversion of shares into shares with preferred, deferred or other special rights, a provision which was to remain in force only during the lifetime of Mr. Wright. Mr. Wright had been one of the subscribers and the share held by the other subscriber was held upon trust for him.

In this case, the issued ordinary shares, all but one of which were held by Mr. Wright, were converted by special resolution into cumulative preference shares carrying a 7% per annum fixed cumulative preference dividend as well as the other rights similar to those mentioned above. Here a subsequent allotment of 10 ordinary shares at the appropriate premium was made by Q.A.W. to a Mr. Quentin Alexander Wright. The shareholders' funds of Q.A.W. immediately prior to the issue of the 10 ordinary shares amounted to $133,002. It was common ground that on 6 May Mr. Wright had ``a life expectancy of a little more than 18 years''. In Q.A.W.'s case also, Sheppard J. concluded that sec. 18(1)(a) did not apply and that sec. 18(2)(a) and sec. 18(2)(c), although capable of applying, should not be applied. He also proceeded on the basis that the gift duty payable by reason of the allotment should not be taken into account in valuing the shares. There was no escalator agreement and there was no prior binding contract relating to the issue of such shares.

In the case of Q.A.W., as in the other cases, Sheppard J. again preferred the evidence of Mr. Bagnall who valued each of the ordinary shares at $20. The consequence of that valuation was that there was no gift duty payable. Mr. Bagnall reached his valuation by substantially the mode of reasoning which he used in the case of Lucinda, namely by reliance on the power of the preference shareholder to convert the shares into ordinary shares and the effect of that situation upon the approach which would be adopted by the hypothetical purchaser.

Sheppard J. concluded his reasons for judgment by saying [79 ATC at pp. 4194-4195]:

``Each scheme was predicated upon a situation under which control, but not ownership, remained with the `donor' during his or her life. Thus the `donor' in each case set out to achieve, by the vesting of his or her property in a company, the same result as could have been achieved by testamentary disposition. If there were a change of mind, voting control and the power to effect reconversion were available to restore control to the `donor' either for the purpose of retaining it until his death or directing his bounty to other beneficiaries. The fact that those very powers may have been included in some schemes only for the purpose of achieving a situation in which the value of the ordinary shares would be kept low is not to the point.

Once those matters are understood, it follows that the placing of a comparatively low value on the ordinary shares in companies with such valuable

ATC 4086

assets is the only possible result in an exercise which the High Court has repeatedly emphasised involves the determination of the fair and real value of the property in question. It is true that sec. 18(2)(c) of the Act enables there to be applied in some cases a winding-up or assets-backing basis of valuation, but it will only be appropriate to apply such a basis if in truth its application will lead to a fair and real result. As I have said, when dealing with some of the cases, its application in them would, in my opinion, lead to a result which is neither.''

I have already dealt, in what I have said about St. Helens Farm, with the proper approach to sec. 18(2)(c) and in the case of each of the other four companies the same reasons appear to me to apply. I can see no ground upon which a winding-up basis could be regarded as ``necessary'' in order to arrive at a true and fair value of shares in any of the four other cases, any more than I can see such a necessity in St. Helens Farm . I am satisfied that the fact that a company has no income-earning assets but does have assets of substantial value is not of itself a reason why a winding-up basis should be regarded as necessary. The dominant feature of each of the companies other than St. Helens Farm is that the ordinary shareholders lack the characteristic which such shareholders usually have, namely ultimate control of the company's affairs by reason of the power to remove and appoint directors, and entitlement on a winding-up to the balance of the assets of the company after allowance for debts and the costs of liquidation and the nominal value of preference shares, without the risk of being ``flooded'' at any time chosen by the governing director by the conversion of a large number of preference shares into ordinary shares. No doubt they have in the case of each of these companies an expectation that if all goes well their shares will ultimately have those characteristics, but to value them upon the basis that the event upon which the achievement of that result depends has already happened is to depart from reality. It is of course true that the event is certain to happen but the time at which it will is uncertain and the probability that it will happen within a short time is low. In the case of a gift the subject matter of which is neither money nor some item of property for which there is a ready market and a readily ascertainable market price, the process of valuation cannot be expected to be easy. The basic principle by which that fair value is to be ascertained is by reference to a hypothetical market in accordance with principles which were established in Australia in
Spencer v. The Commonwealth (1907) 5 C.L.R. 418 , namely that the price which would be arrived at between a willing but not anxious vendor and a willing but not anxious purchaser, a method which was by no means new at that time. There are of course minor qualifications to deal with particular situations one of which is the well-known distinction between the approach in cases of compulsory acquisition and that in the case of the position of taxation by reference to value though it is probably no more than a slight difference.

There is one further point which should be mentioned because of its possible application in other cases and that is an argument which was put to Sheppard J. in relation to the application of sec. 18(2)(c). It was said that if that method, or any assets-backing method, of valuation were used it would be necessary that account should be taken of the liability of the company for gift duty on a gift in accordance with the decision in Ord Forrest . The Act provides in sec. 25(1) that gift duty becomes due and payable on the making of the gift and the effect of sec. 25(2) is that, in the absence of agreement to the contrary, there is an obligation as between donor and donee that each shall contribute one-half of the gift duty. The argument was that, in order to value the gift made by the company by reason of the ``allotment of shares'', account must be taken not only of the company's assets but also of its liabilities, including the liability to pay one-half of the gift duty. Thus the value of the gift would be reduced accordingly. Although it was not necessary for Sheppard J. to consider this argument because he rejected the contention that sec. 18(2)(c) should apply and also rejected a modified assets-backing basis, he did deal with it. I am however unable to accept his view on this point and, although it makes no difference to the result of these appeals, I think it desirable to express my own view since the point may arise in other cases. Sheppard J.'s view was that the gift

ATC 4087

was constituted by the ``allotment'' and not by the ``issue'' of the shares because the Act in defining disposition of property includes therein ``the allotment of shares in a company''.

The words ``allotment'' and ``issue'' though used in relation to incorporated companies for more than a hundred years are not technical terms with precise meanings. Their application in particular circumstances often depends on the context. Their meaning was considered in In
re Florence Land and Public Works Company (1885) 29 Ch.D. 421 (Nicol's case) . In that case at first instance Chitty J. said (at p. 426):

``What is termed `allotment' is generally neither more nor less than the acceptance by the company of the offer to take shares. To take the common case, the offer is to take a certain number of shares, or such a less number of shares as may be allotted. That offer is accepted by the allotment either of the total number mentioned in the offer or a less number, to be taken by the person who made the offer. This constitutes a binding contract to take that number according to the offer and acceptance. To my mind there is no magic whatever in the term `allotment' as used in these circumstances. It is said that the allotment is an appropriation of a specific number of shares. It is an appropriation, not of specific shares, but of a certain number of shares. It does not, however, make the person who has thus agreed to take the shares a member from that moment; all that it does is simply this - it constitutes a binding contract under which the company is bound to make a complete allotment of the specified number of shares, and under which the person who has made the offer and is now bound by the acceptance is bound to take that particular number of shares. In most cases the act of placing the person who has agreed to become a member on the register is a mere matter of form, and may be described as a mere ministerial act; but it appears to me that in point of law all that is done by the process I have just indicated, and all that was done in this case, was to make a complete and binding contract.''

His Lordship then quoted from Baggallay L.J. in In re Scottish Petroleum Company (1883) 23 Ch.D. 413, at p. 430 and continued by saying:

``There Lord Justice Baggallay used the term `allotment' in what appears to me to be the proper sense of the term. It is only as constituting one of the steps which go to form a complete contract. There have been other cases in which the term has been used by Judges, but I am satisfied that all they meant was that there had been, in the particular case before them, complete allotment; that is, that the name of the person who had `agreed to become a member,' to use the language of the 23rd section of the Act, had been entered upon the register.''

On appeal to the Court of Appeal Bowen L.J. said (at p. 443):

``It is said that he became a member by signing the list of subscribers, and by the act of the directors in sending him a letter of allotment. In considering a question of contract, as well with regard to shares as anything else, we must be careful not to adopt as a necessary legal definition the general business meaning of a term which in ninety-nine cases out of a hundred may be the proper meaning, and in the hundredth may not be applicable. Much litigation in company law has been caused by assuming that popular business terms always involve the same rights and liabilities. We must not treat business terms as if they were legal definitions in this way. We must not assume that all letters of allotment have the same effect. Taking the letter of allotment in the present case, I am by no means satisfied that it appropriated any shares to any subscriber of the subscription contract till something else had been done by him. But even assuming that it did, and that we have here a complete contract to take shares, followed by an appropriation of shares to him, still there was no entry on the register. Was the relation between the subscriber and the company still contractual? Was it still in fieri? or had he become a member of the corporation? According to the 23rd section of the Companies Act I think he had not become a corporate member.''

These terms and the cases dealing with them were later discussed by Dixon J. in

ATC 4088


Central Piggery Co. Ltd. v. McNicoll and Hurst (1949) 78 C.L.R. 594 which concerned the word ``issue''. There the question was whether a company had contravened an Act which provided that no company ``shall proceed to the issue to any of its employees any shares in the company...'' without the consent of the Industrial Court. Dixon J. said (at pp. 599-600):

``It thus becomes necessary to decide what the word `issue' means. It is a word which in other departments of the law has a definite meaning, but not in this. In
Levy v. Abercorris Slate and Slab Company (1887) 37 Ch.D. 260 , at p. 264 , Chitty J., in considering the nature of a debenture, said: `It must be `issued', but `issued' is not a technical term, it is a mercantile term well understood; `issue' here means the delivery over by the company to the person who has the charge.' In
Koffyfontein Mines Ltd. v. Mosely (1911) A.C. 409 the House of Lords affirmed the decision of the Court of Appeal sub. nom. Mosely v. Koffyfontein Mines Ltd . (1911) 1 Ch. 73. Fletcher Moulton L.J. (1911) 1 Ch., at pp. 82-83 deals with the creation of shares as distinct from the issue of shares. Farwell L.J. (1911) 1 Ch., at p. 84 points out that `the words `creation,' `issue' and `allotment' are used with three different meanings familiar to business people as well as to lawyers.' His Lordship says: `There are three steps with regard to new capital; first it is created; till it is created the capital does not exist at all. When it is created it may remain unissued for years... When it is issued it may be issued on such terms as appear for the moment expedient. Next comes allotment. To take the words of Stirling J. in
Spitzel v. Chinese Corporation (1899) 80 L.T. 347 , at p. 351 he says: `What is an allotment of shares? Broadly speaking, it is an appropriation by the directors or the managing body of the company of shares to a particular person.''

Speaking generally the word `issue' used in relation to shares means, where an allotment has taken place, that the shareholder is put in control of the shares allotted. A step amounts to issuing shares if it involves the investing of the shareholder with complete control over the shares. In
re Ambrose Lake Tin and Copper Co. (Clarke's Case) (1878) 8 Ch.D. 635 makes that quite clear. Cockburn L.C.J. said: (1878) 8 Ch.D., at p. 638 `inasmuch as the term `issue' is used, it must be taken as meaning something distinct from allotment, and as importing that some subsequent act has been done whereby the title of the allottee becomes complete, either by the holder of the shares receiving some certificate, or being placed on the register of shareholders, or by some other step by which the title derived from the allotment may be made entire and complete.' Cotton L.J. (1878) 8 Ch.D., at p. 641 speaks of the steps by which the allottee becomes complete master of the shares. Thesiger L.J. (1878) 8 Ch.D., at p. 642 says that: `there is no magic to be attributed either to an allotment or to the issue of certificates, but in each case the Court must look at all the circumstances of the case, and see whether practically and substantially there has been an issue of shares at a time when there was not a contract registered.`''

The lack of precision in the use of these terms is well illustrated by the fact that Farwell L.J. states the order of events as creation, issue and allotment, whereas Dixon J. says issue ``generally speaking'' means putting the shareholder in control of the shares after allotment, a view shared by all members of the Court of Appeal in the last of the cases referred to by Dixon J. in the passage I have quoted.

It must be remembered that no person is a ``member'' of a company (i.e. the holder of shares therein) unless and until his name is entered in its share register - see per Bowen L.J. in Nicol's case in the passage quoted above. That may not be conclusive for the register may be rectified, but it is essential as appears from sec. 16(5) of the Companies Ordinance 1962 (A.C.T.), a provision found in the Companies Acts of all the States and having its origin in the Companies Act 1862 (Imp.). That however is a step which may in some cases occur before allotment is complete by, e.g. communication to an applicant for shares of acceptance of his offer by ``allotment'' of shares to him, as was the case in Central Piggery Co. Ltd. v. McNicoll .

ATC 4089

The process of allotment and issue, in the sense indicated by Dixon J. ``speaking generally'', involves the creation of property, a process the completion of which requires an entry in the share register of the company concerned. ``Unissued shares'' do not constitute individual items of property but indicate merely the number of shares which a company may issue without increasing its nominal capital in accordance with the Companies Acts or Ordinances. It is thus only upon issue, as distinct from allotment, that individual shares come into existence as separate items of property, a process which logically must include entry in the share register for without such entry there will not have been, to use the words of Dixon J., ``the investing of the shareholder with complete control over the shares''. The quotation from Cockburn L.C.J. indicates that ``allotment'' in the sense in which he uses it does not give to the allottee a complete title, though in some circumstances it may give him an enforceable contractual right to have title to shares ``completed''.

In what sense then are the words ``allotment of shares in a company'' used in para. (a) of the definition of ``disposition of property'' in sec. 4 of the Act? The meaning of that expression, whether used in relation to existing items of property, or shares newly created, must be ascertained in light of the provisions of the Act and in particular of sec. 12 and 25. Section 12(1) provides that ``a disposition of property made or taking effect in pursuance of or in performance or satisfaction of... of a contract or agreement...'' without adequate consideration shall be ``deemed to be a gift so soon and so far as the disposition has affected the property or any of the property to which the contract or agreement relates''. It is not necessary for this purpose to determine whether the gifts in the present cases were made or took effect pursuant to a contract. That subsection however is of importance because it shows that to be a gift the ``disposition'' must affect the property in question, which of necessity requires that the property must exist prior to, or come into existence ``simultaneously'' with, the disposition. Section 25(1) provides that gift duty shall be due and payable on the making of the gift and subsec. (3) provides that gift duty shall constitute a ``first charge on all property... comprised in the gift...''. The provision again necessarily requires that the property must exist either prior to or simultaneously with the disposition. Neither of these provisions could operate if the property were not in existence at the time of the making of the gift, however near to creation it might be.

In my opinion therefore the term ``allotment'' in the definition must be given the meaning which was suggested in argument by Counsel for the companies as ``complete allotment'', an expression derived from Chitty J. Thus allotment and issue (including entry in the share register) constitute the process of creating the share, which must be complete before the property can be the subject of the ``disposition'', notwithstanding that the incidence of gift duty is thus expressed to arise at the same time as the coming into existence of the property the subject of the gift.

This problem does not appear to have arisen before in relation to gift duty but problems in relation to death duties provide a useful analogy. In
Robertson & Ors. v. F.C. of T. (1952) 86 C.L.R. 463 the Court had to consider sec. 16A(1) of the Estate Duty Assessment Act 1914 (Cth.) which is the provision of that Act which corresponds with sec. 18(2) of the Act. The particular provision in question was para. (a) of that subsection dealing with the ascertainment of the value of shares upon the assumption that the Memorandum and Articles of Association of the relevant company satisfied the requirements of the Stock Exchange. The deceased had held shares in a company one of the Articles of Association of which provided in substance that until the death of the deceased all the shares should be divided into two classes, the rights attached to one of which would have precluded the listing of the company's shares by the Stock Exchange of Melbourne during the deceased's lifetime, but that would not have been so as from and after his death. It was held by the Court that the shares must be valued as at the time of death, taking into account the fact of death, and that on and from the death of the deceased the Memorandum and Articles did satisfy the Stock Exchange requirements so that no basis for the application of sec. 16A(1)(a) existed.

ATC 4090

In that case Kitto J. expressed the view that it was correct for the Commissioner of Taxation to insist that the conversion of the deceased's shares into the second of the two classes of shares provided for in the Articles of Association should be considered as if it were an event subsequent to the death since death was a condition precedent to conversion. In support of this view, he referred to In
re Augusta Magan (1922) 2 I.R. 208 . That case dealt with a similar question whether certain property was on the death of Magan, ``settled property'' and could, therefore, be aggregated with her individual property for duty purposes. The Court there held that the property, though it was settled until Magan's death, was not settled when it passed from her on her death. Palles C.B. (at pp. 211-212) observed that the instant of death so far as it was the end of the testatrix's life must precede in contemplation of law the same instant so far as it was the time at which the estate passed upon her death and therefore on the termination of her life and before the passing of the estate upon her death, the possibility of her having issue who would take under her will ceased.

Kitto J., applying by analogy the principle stated above, then said (86 C.L.R. at pp. 486-7):

``The answer, I think, is that the very method of reasoning which Magan's Case ((1922) 2 I.R. 208) supports requires the conclusion that the application of the Estate Duty Assessment Act itself to the particular case is a consequence of, and therefore is logically to be treated as subsequent to, the death of the deceased. It is not until there is an estate of a deceased person that the Act speaks. It follows that in the present case the estate must be valued as at the death, but on the hypothesis that the deceased has died. In valuing the shares on that hypothesis there cannot be a necessity to apply sec. 16A(1)(a) in order notionally to alter the articles in relation to article 6, for it is involved in the hypothesis itself that article 6 no longer presents any obstacle to listing. At no time while article 6 prevented listing did the Act require the shares to be valued. It was only when they had acquired the character of assets of a deceased person's estate that it became necessary to value them. As such, they were shares in a company whose articles no longer contained anything, so far as article 6 was concerned, which precluded listing;...''

Although the Act defines the gift as being effected by ``the allotment of shares'', it means as I have said ``allotment and issue'' by the creation and vesting of the share in the allottee. Although in one sense the complete allotment occurs simultaneously with the liability for gift duty, the valuation of the gift cannot be made prior to the creation of the subject matter and must take into account the liability which that creation of the property imposes upon the company itself. The matter was not discussed in Ord Forrest and so far as I have been able to ascertain has not been discussed elsewhere. I am however satisfied that the reasoning of Kitto J. in Robertson's case is equally applicable in the present case and avoids the artificial conception that the property has to be valued before it has come into existence. To adapt the words of Kitto J. it is only when the shares have come into existence by reason of the ``allotment and issue'' that it becomes necessary to value them for the purposes of gift duty and at that point of time liability for gift duty has also come into existence. It is for those reasons that I am unable to agree with the views of Sheppard J. on this point.

There remains for consideration the argument put on behalf of St. Helens Farm and other companies that we should not follow the decision in Ord Forrest . It was said that the decision was not binding as it was that of an equally divided court. The case was heard at first instance in this Court by Stephen J. who found in favour of the Commissioner. On appeal it was heard by a Court comprising Barwick C.J., McTiernan, Gibbs and Barwick C.J. and McTiernan J. were of the contrary opinion. It is well settled that a decision of an equally divided Full Court is not a binding authority in subsequent cases in this Court. See The State of
Tasmania & Anor. v. The State of Victoria & Anor. (1934-1935) 52 C.L.R. 157 at p. 173 per Rich J. and at pp. 183-5 per Dixon J.;
The State of Western Australia v. Hamersley Iron Pty. Ltd. (No. 2) (1969) 120 C.L.R. 74 at p. 82 per Kitto J. and p. 85 per Menzies J. and
Milne v. F.C. of T. 76 ATC 4001 at p. 4005;

ATC 4091

(1975-1976) 133 C.L.R. 526 at p. 533 per Barwick C.J.

There have from time to time been occasions where an appeal from a decision of a single Justice of this Court sitting in its original jurisdiction has been upheld by an equally divided Full Court, one example being
Armco (Australia) Pty. Ltd. v. F.C. of T. (1948) 76 C.L.R. 584 and Ord Forrest is of course another. However most cases of equal division appear to have arisen on demurrers or appeals from State Courts.

The operation of sec. 23 of the Judiciary Act 1903 (Cth.) which deals with most, but not all, cases of equal division in the Full Court was explained by Dixon J. in Tasmania v. Victoria where, after referring to the various solutions to the problems of equal division in other courts, he said (52 C.L.R. at pp. 184-85):

``In this Court the expedient to be adopted in such a case for pronouncing upon the rights of the litigants has been prescribed by sec. 23(2)(a) and (b) of the Judiciary Act 1903-1933 as follows: `If the Court is equally divided in opinion - (a) in the case where a decision of a Justice of the High Court (whether acting as a Justice of the High Court or in some other capacity), or of a Supreme Court of a State or a Judge thereof, is called in question by appeal or otherwise, the decision appealed from shall be affirmed; and (b) in any other case, the opinion of the Chief Justice, or if he is absent the opinion of the Senior Justice present, shall prevail.' But whether under this provision, the judgment of a Supreme Court, or of a Judge of this Court, is left unreversed or unimpaired, or in matters where no such judgment is called in question, the judgment of the Chief Justice or the Senior puisne Justice present prevails, the decision so arrived at does not, in my opinion, become a precedent which in this Court has authority. Courts other than the House of Lords do not regard a decision which they pronounce as a result of an equal division of opinion as binding authorities. In The Vera Cruz (No. 2) (1884) 9 P.D. 96 at p. 98 Brett M.R. referred to - `the question whether any Court is bound by a decision of its own, which decision was grounded on the fact that the members of the Court present were equally divided,' and said: `It was the custom for each of the Courts in Westminster Hall to hold itself bound by a previous decision of itself or of a Court of co-ordinate jurisdiction. But there is no statute or common law rule by which one Court is bound to abide by the decision of another of equal rank, it does so simply from what may be called the comity among judges. In the same way there is no common law or statutory rule to oblige a Court to bow to its own decisions, it does so again on the grounds of judicial comity. But when a Court is equally divided this comity does not exist, for there is no authority of the Court as such, and those who follow must choose one of the two adverse opinions. And if the books are examined I have no doubt it would be found, if authority there be, that when a Court is equally divided, if the case comes before it again, it will exercise an independent opinion and abide by one of the two views. The case may be different as regards the House of Lords, since it is the ultimate court of appeal, for if it is otherwise there exists an uncertainty as to the law.' This doctrine was repeated in
Hobson v. Sir W.C. Leng & Co. (1914) 3 K.B. 1245 , at p. 1248 , and is followed by the Supreme Court of Canada ( Stanstead Election Case (1891) 20 Can. S.C.R. 12). The House of Lords, as is well known, adopted an opposite rule (
Beamish v. Beamish (1861) 9 H.L.C. 274 ; 11 E.R. 735 ;
London Street Tramways Co. v. London County Council (1898) A.C. 375 ;
Inland Revenue Commissioners v. Walker (1915) A.C. 509 ). But this appears to be a consequence of the special view which the House took of the conclusiveness and finality of its rulings (see Pollock, First Book of Jurisprudence, 6th ed. (1929) c. VI., pp. 334-341).

For these reasons I am at liberty to act upon my own view of the matter unfettered by the decision pronounced in
Ex parte Nelson (No. 1) (1928) 42 C.L.R. 209 .''

I respectfully agree with that passage which draws no distinction between appeals coming from Supreme Courts of the States (and one may now add from Federal Courts)

ATC 4092

and those coming from a single Justice of this Court.

The ultimate court of appeal in Australia for all Federal and many State matters is the Full Court of the High Court of Australia, and it is only unanimous or majority decisions of the Full Court which have binding authority. There are practical as well as theoretical reasons why this should be so. It frequently happens that, when a case is argued at first instance and then subsequently on appeal, the argument presented for one or indeed both parties is not the same when the matter comes on appeal. In such a case it is a matter of speculation whether if the five Justices had sat together and heard the same argument their opinions would have been the same as those which they reached after hearing different argument at different times.

In these circumstances I am therefore unable to regard the decision in Ord Forrest as binding. I use the expression ``binding'', though noting that this Court regards itself as entitled to overrule its earlier decisions in what may conveniently, but imprecisely, be described as special circumstances. The same question having arisen in the present case it is properly to be considered de novo .

Since the decision in Ord Forrest in 1974, the Parliament has passed further legislation with respect to gift duty but not by way of altering the provisions which were construed in Ord Forrest . The Gift Duty Amendment Act 1978 has amended the Gift Duty Act 1941 by providing that it does not apply to gifts made on or after 1 July 1979. Once the taxing Act ceases to apply there is no scope for the operation of the Assessment Act. This is by no means an approval of the decision and shows no more than that the Parliament did not take the opportunity to amend the Act when dealing with the general subject matter of gift duty. The fact that gift duty is no longer exacted cannot be relevant to the consideration of the question whether the Court should now arrive at a different conclusion.

On the matters with which I have so far dealt the result is that the appeals by the Commissioner should be dismissed. The cross-appeals raise only the question whether there was in the relevant cases a gift at all. This question does not arise in the case of Gwynedd and Q.A.W. where Sheppard J. held that the value of the shares in question did not exceed the sum of the par value and the premium.

In the other three cases there was a difference between the value ascertained by Sheppard J. and the amount paid.

The argument presented on behalf of the three cross-appellants covered in part the same ground as the argument before the Full Court in Ord Forrest, there being no report of the argument before Stephen J. at first instance, but in addition raised what appear to me to be new points not argued in Ord Forrest or covered by the reasons in the various judgments. The argument that the payment of the par value was always ``fully adequate'' consideration, which was rejected in Ord Forrest by all members of the Court, was not relied upon.

I am in agreement with the reasons and the conclusions of the Chief Justice in Ord Forrest but in the circumstances it is desirable that I should express my own reasons for that concurrence and that I should deal with the new arguments which were put to the Court.

The language of the relevant provisions of the Act presents a number of problems. In particular the question of what is meant by para. (a) of the definition of ``disposition of property'' which must be read with the definition of ``gift''. The relevant definitions are those of ``disposition of property'', ``gift'', ``interest in property'' and ``property'' which I have already set out above.

It is necessary to set out the material parts of sec. 12 which are as follows:

``12.(1) A disposition of property made or taking effect in pursuance of or in performance or satisfaction, whether wholly or in part, of a contract or agreement entered into (whether before or after the commencement of this Act and whether with or without an instrument in writing) without adequate consideration in money or money's worth, shall, for the purposes of this Act, be deemed to be a gift so soon and so far as the disposition has affected the property or any of the property to which the contract or agreement relates.

ATC 4093

(2) For the purposes of this Act, a gift shall be deemed to be made after the commencement of this Act when the disposition of property comprised in the gift is made or takes effect after the commencement of this Act, notwithstanding that a contract or agreement or instrument of title which relates to the property or any part thereof was made or executed before the commencement of this Act.''

I have already said that I regard the expression ``allotment of shares'' as meaning the ``complete allotment''. It is a process by which a new item of property is created, i.e. the shares so ``allotted and issued'' and entered in the register. Unissued shares of a company are not existing property of the company which it may dispose of by allotting and issuing shares or at all; see In
re V.G.M. Holdings Ltd. (1942) Ch. 235 at pp. 240-241 . Unissued shares represent no more than the extent of the capacity of the company to allot and issue new shares without first having to increase its nominal capital pursuant to the Companies Act. A ``complete allotment'' involves the creation of a particular form of chose in action, involving rights and obligations defined by the Memorandum and Articles of Association and by the Companies Act itself. There being thus no transfer or disposition of property within the ordinary sense of either of those terms, it is no doubt clear that some special provision would be needed if a complete allotment of shares were to be brought in any way within the ambit of the legislation.

I am unable to agree with the suggestion that each of the particular items in para. (a) to (f) of the definition is mutually exclusive and that each of them represents something not falling within the opening words of the definition of disposition of property, though no doubt para. (f) is properly to be regarded as self-contained. For example para. (e) relating to the exercise of a general power of appointment would in most, if not all, cases involve the creation of a trust but in the end nothing seems to turn upon the view that these paragraphs may all be regarded as mutually exclusive.

The next feature of the definitions which is of importance for present purposes is the requirement derived from the definition of gift that it embraces dispositions of property ``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... fully adequate''. The Act is thus dealing with a very limited kind of consideration, which differs from the sense in which the word is used in relation to simple contracts and from the sense in which it is used in relation to conveyancing. The distinction between the latter two kinds of consideration is discussed in and well illustrated by the decision of this Court in
Archibald Howie Pty. Ltd. & Ors. v. Commr. of Stamp Duties (N.S.W.) (1948) 77 C.L.R. 143 (Archibald Howie). That case concerned sec. 66 of the Stamp Duties Act 1920-1940 (N.S.W.) which dealt (inter alia) with conveyances either without consideration in money or money's worth or upon a bona fide consideration in money or money's worth of less than the unencumbered value of the property. The company, pursuant to a resolution for reduction of capital duly confirmed by the Court, had returned capital to the holders of paid-up shares in the company to the extent of 19s 6d for each £ 1 share by distributing in specie paid-up shares in other companies on the basis of their value in the company's books. The actual value of the shares so distributed was greater than the value appearing in the books. It was held by this Court that the transfers were made upon a bona fide consideration in money or money's worth of not less than the unencumbered value of the property conveyed and therefore were not within either of those categories.

Dixon J. said (at p. 152):

``In the context I think that the word `consideration' should receive the wider meaning or operation that belongs to it in conveyancing rather than the more precise meaning of the law of simple contracts. The difference is perhaps not very material because the consideration must be in money or money's worth. But in the law of simple contracts it is involved with offer and acceptance: indeed properly understood it is perhaps merely a consequence or aspect of offer and acceptance. Under sec. 66 the consideration is rather the money or value passing which moves the conveyance or transfer.''

ATC 4094

On the same page he said:

``The reduction involving the payment off of part of the paid up share capital must therefore be considered an effectuation of a provision of the contract of membership. The allotment of the share and the payment up of the liability thereon conferred upon the holder for the time being of the share a right to have the assets of the company used and applied in the various ways in which the articles expressly or impliedly require or authorize and this is one of them. It is an effectuation or realization of the rights obtained by the acquisition of the share in the same way as is the distribution of a dividend. The consideration given is the payment up of the share capital in satisfaction of the liability for the amount of the share incurred on allotment.''

He also said (at pp. 153-54):

``The direct allocation of assets for distribution in reduction of the amount of the shares is doubtless within the provision. But that means that the shareholder in satisfaction of his proportionate `interest' in the assets, an interest consisting of a congeries of rights in personam, takes an aliquot part of the assets. There is an equivalence not only from a logical but from a realistic point of view. The reduction in both the amount and value of the share affords an adequate consideration in money and in money's worth.''

Williams J. dealt with the matter in somewhat the same terms at pp. 156-59. Rich J. agreed with the judgments of both Dixon J. and Williams J.

Thus consideration in that sense may include no more than the discharge of an obligation. Thus a payment made in discharge of an obligation under a contract for the purchase of goods which have already been delivered is made for full consideration because what it does is to discharge an existing obligation. The sense in which the term ``consideration'' is used in the case of simple contracts is that the promisee must do or suffer or promise to do or suffer something but there is no requirement that such consideration shall move from promisor to promisee or vice versa. A simple contract may thus oblige A to transfer goods to B in consideration of a promise by B to make a payment to C. Moreover the common law was not concerned with the ``adequacy'' of consideration so long as it was real and not illusory and again in the case of consideration in the conveyancing context there was no requirement as to ``adequacy''. It may be noted that the Stamp Duties Act which was dealt with in Archibald Howie did have such a requirement, but did not have any requirement that consideration should pass from transferee to transferor.

The definition of gift in the Act requires that there should not merely be a disposition of property but that it should be made ``without consideration in money or money's worth passing from the disponee to the disponor'' or that the consideration so passing was not fully adequate. That which constitutes good consideration either in the conveyancing or in the simple contract sense may therefore not be sufficient to take a disposition of property outside the ambit of the definition of gift. The importance of this lies in the curious consequences which appear to me to flow in the case of the complete allotment of shares.

In Ord Forrest it was argued that the expression ``allotment of shares in a company'' did not mean that the allotment of shares by a company to a person who became a shareholder was deemed to be a disposition of property by the company. It was said that it meant an allotment of shares, at the direction of a person entitled to have the shares allotted to him, to the person so nominated, the amount due in respect of such shares being paid by the person giving the direction. This argument was rejected.

Such a nomination would involve no transfer of property to the allottee by the person entitled to have the shares completely alloted to him, unless there was a contract by which the right against the company was transferred to the nominee. That the former transaction would not involve any transfer of property is plain enough from the nature of a complete allotment of shares and it was in fact so held in In
re Pool Shipping Company Ltd. (1920) 1 Ch. 251 . It was there held that letters of renunciation in respect of bonus shares in favour of a nominee and acceptance by that nominee did not constitute a ``transfer of shares''. The directors had refused to issue the new shares to the

ATC 4095

nominees on the ground that it involved a transfer which they were entitled under the Articles of Association in their discretion to refuse to register. It was held that there was no transfer and that the directors could not refuse to complete the allotment by issuing shares to the nominee. The case would of course have had obvious consequences for stamp duty purposes.

It was argued in Ord Forrest that anomalous consequences would follow from treating para. (a) of the definition as covering an allotment of shares at an undervalue because of the effects it would produce upon the issue of bonus shares by public companies and the making of further issues to shareholders at par or at a premium lower than the market premium. This was dealt with by Gibbs J. where he said (ATC at p. 4042-43; C.L.R. at p. 150):

``I would agree that it would be a striking departure from existing notions if, for example, a bonus issue of shares in a public company were held to be a gift.''

And he then said:

``Where a company makes a bonus issue, or a new issue at a price below the real value of the shares, to persons who are already shareholders, there will ordinarily be no want of full consideration. In such a case, speaking generally (for of course there may be special circumstances that make a difference), the making of the new issue of shares is no more than `a fulfilment or satisfaction of the rights of the shareholder as such' (
Davis Investments Pty. Ltd. v. Commr. of Stamp Duties (N.S.W.) (1958) 100 C.L.R. 392 , at p. 409 ), and the payment up of the share capital when the original shareholding was alloted provided the consideration for the acquisition of the rights which the shares conveyed, and therefore for any subsequent distribution of capital or profits in satisfaction pro tanto of those rights.''

His Honour then referred to the judgments in Archibald Howie and said (at ATC p. 4043; C.L.R. 151):

``Of course, what has just been said is only applicable where the issue is made to existing shareholders, and would not apply, for example, 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.''

Gibbs J. however did not advert to the difference between the kind of consideration involved in Archibald Howid and that which is required by the Act. It is undoubtedly true that full consideration in the conveyancing sense would be given in the case both of a bonus issue and of a new issue at par or at a premium. In the latter case there would ordinarily be a separate market value for the ``rights''. In the former case it does not appear to me that it is possible to say that consideration moves from the shareholder to the company. It might be possible to say in the case of an original shareholder that his subscription for shares and payment of the par value or other issue price was consideration moving from him to the company in respect of all rights which might thereafter emerge from the company whether by way of dividend, return of capital, bonus shares or new issues at par or above par. It is difficult to see how the original consideration on the initial issue for shares could constitute fully adequate consideration passing from the subscriber to the company and also be fully adequate consideration passing from the shareholder to the company on a bonus issue many years later. Any diminution in value of the old shares could scarcely be said to pass from subscriber to company. Moreover whatever may be said of an original shareholder cannot be said of transferees from him. Nothing would pass from them to the company. Such subsequent shareholders would however be entitled to the bonus shares and to take up the new shares, or sell the rights thereto.

A transferee from one of the original shareholders becomes entitled to all the rights and interests to which that shareholder was entitled or would have become entitled if he had continued as a shareholder, but the consideration for which the new shareholder acquired the shares passed from him to the old shareholder and not to the company. It does not seem to me that in such a case Archibald Howie can be used for the purpose of demonstrating that full consideration in respect of the bonus share or the shares issued at a figure less than their market value had passed from the shareholder to the

ATC 4096

company. It is worth considering also the situation where a shareholder (whether original or otherwise) disposes of his entitlement to new issue shares by ``selling his rights'' to a stranger and receiving for those rights the current market price. In such a case the purchaser of the rights becomes entitled on application to the company and payment of the issue price to have the relevant number of shares allotted to him and entered in the register in his name. This is a commonplace transaction in the case of listed public companies. In that case shares are issued by the company to the purchaser of the rights at a price below the market value of those shares. The consideration passing from the purchaser of the rights to the company would be only the figure at which they were offered by the company to existing shareholders. The new shareholder would have paid separately for the rights of the existing shareholder and would pay to the company only the favourable price available to existing shareholders. Archibald Howie does not assist in such a situation to demonstrate that the complete allotment of the shares to a stranger by the company was made for fully adequate consideration passing from the allottee to the company. It would follow from Ord Forrest that a stranger who purchased rights on the open market and paid the existing shareholder for those rights and then applied for the shares would receive a ``gift'' from the company for an amount equal at least to that which he had paid for the rights. Such a gift might be of a larger value if at the time of the complete allotment of the shares the price of the rights had increased on the open market. Such a new shareholder would incur liability for gift duty, as would the company itself, each being obliged to indemnify the other to the extent of one-half of the gift duty.

In Ord Forrest Mason J. also dealt with this argument by reliance upon Archibald Howie. He said (ATC at pp. 4046-47; C.L.R. at pp. 155-156) that the issue of bonus shares or of shares having a value greater than the consideration payable for them to shareholders in proportion to their existing holdings was ``in a very real sense a satisfaction of their existing rights''. I would respectfully agree with that proposition, but it does not follow that the shareholder gives fully adequate consideration which passes from him to the company, nor that the purchaser of such rights who applies for the shares can be said to provide fully adequate consideration which passes from him to the company. With respect I agree with Mason J. when he says (ATC at p. 4047; C.L.R. at p. 157) that ``[t]he company receives full consideration in the form of the amount payable by the allottee and in the satisfaction of the rights of the existing shareholder''. However such full consideration does not flow from the allottee to the company; only part of it does. That observation is true in the conveyancing sense of consideration but that does not satisfy the requirements of the Act.

For those reasons I am satisfied that the anomalies which were relied upon in argument in Ord Forrest and in the present case do exist and that they are of a sufficiently serious character to call in question the interpretation of the statutory provisions which brings about those consequences. It is not a legislative intention which one would expect to find unless expressed in clear language and, if an alternative interpretation of the language is available which appears more rational and just, it is to be preferred, even if its consequence is that the entitlement of the Revenue is less than that for which the Commissioner contends.

A further argument was based upon an analysis of the transaction involved in the acceptance by the company of an offer to take shares, or the acceptance by an offeree of the company's offer to allot shares and the subsequent performance by both parties of their obligations under such a contract, i.e. the complete allotment by the company involving the entry of the applicant in the share register in respect of the shares the subject of the contract, and the payment by the allottee of the amount due to the company in respect of the complete allotment.

I agree with the submission that the scheme of the Act is not to tax executory contracts for the disposition of property at an undervalue but only to tax the disposition itself. This general scheme is confirmed by the terms of sec. 12 Subsection (1) provides that where a disposition of property takes effect pursuant to a contract entered into without adequate consideration in money or

ATC 4097

money's worth it is to be deemed to be a gift ``so soon and so far as the disposition has affected the property to which the contract relates''. That recognizes that the executory contract is not a disposition of property and that in the case of a contract at an undervalue there is no gift until the disposition of property occurs. Subsection (2) is concerned only to ensure that subsec. (1) is not so read as to exclude dispositions of property taking effect after the commencement of the Act but pursuant to contracts made before the commencement of the Act. This section emphasizes that it is the ``disposition'' and not the executory contract which comprises the gift and that the performance of such a contract constitutes a gift notwithstanding that there may have been an enforceable legal obligation to transfer the property in existence prior to the coming into operation of the Act, or that the inadequate consideration had already passed to the disponor.

The question then arises as to how sec. 12(1) can operate when shares are allotted to the person who has subscribed for them. Section 12(1) assumes the existence of property which is the subject of a contract. A contract for the allotment of shares does not relate to or affect any property because unissued shares are not property. There cannot therefore be any scope for the operation of sec. 12(1) in such a case.

It was argued that para. (a) of the definition of disposition of property will only work where there is an allotment to a nominee, and that in such a case the company is not the disponor. It was said that this view serves a rational purpose in completing the scheme. In the case of an issue of shares by direction the disponor is the person giving the direction to the company. By so doing he effectively transfers to the allottee (the donee) his rights as against the company under its Articles to receive the shares by their complete allotment. If full consideration does not pass from the allottee to the directing party there will be a gift within the meaning of the Act. By its creation of the new shares on complete allotment the company transfers nothing. On the basis of Ord Forrest there would be two gifts, one by the directing party, and the other by the company.

It was submitted that the executory contract may be at an undervalue but that the conveyance of property in one case or its creation in the other is for full value because it is in satisfaction of the obligation to convey or create.

There are other anomalies involved in the definition of disposition of property which must qualify its operation. An example is the expression ``delivery'' of property. I do not think that the definition could be read so as to deem all deliveries without consideration to be gifts; consider for example the delivery of a chattel to a gratuitous bailee, whether for storage or use. Such deliveries do not ``dispose of'' goods and certainly would not fall within the expression ``other alienation of property''. That expression must qualify all the words which precede it in the opening part of the definition so that only such deliveries as constitute an alienation of property will be caught by the definition.

The problem presented by a contract for the sale of land for full consideration which is followed by the transfer at a time when the value of the land has risen in the meantime discloses another anomaly. The same difficulty arises where the benefit of a contract of sale is assigned by the purchaser to an assignee who then becomes entitled to have the conveyance executed in his favour. On settlement the property passes from the vendor to the assignee but no consideration or only part consideration will flow from the transferee of Blackacre to the vendor, depending on whether the original purchaser had paid the whole or part of the price prior to the assignment of the chose in action. Another example is the assignment of a debt arising from the supply of goods and payment made by the buyer to the assignee of the book debt. No consideration moves from the assignee of the book debt to the buyer. All these situations are of course covered by considerations adverted to in Archibald Howie but which do not apply to ``gifts'' as defined in the Act.

In Ord Forrest the judgments in favour of the Commissioner made no distinction between allotment, complete allotment or a binding contract to allot. Indeed, in some instances the words ``allotment'' and ``issue'' appear to be used without drawing any distinction between them.

ATC 4098

In
Grant v. F.C. of T. 76 ATC 4468 ; (1976) 135 C.L.R. 632 , shares were issued at par but were then worth less than par value and that was held to constitute a gift to the company. There the Court did advert to the distinction between allotment and a binding promise to allot. That distinction was also expressly referred to in
Commonwealth Homes and Investment Co. Ltd. v. Smith (1937) 59 C.L.R. 443 by Latham C.J. at pp. 453-54 where the passage from the judgment of Chitty J. in Nicol's case to which I have referred above was quoted. Dixon J. also referred to this point. He said (at p. 461):

``In the formation of a contract of membership it may be the acceptance of the offer constituted by the application or the making or authorization of an offer or counter-offer accepted by the subsequent assent of the allottee. But it is also the appropriation of a given number of shares to the allottee. Shares are personal property. Allotment, entry in the share register and the sealing and delivery of share certificates are matters of fact which constitute the issue of shares, considered as a form of property. The assent, whether prior or subsequent, of the shareholder, however evidenced, is enough for the purposes of forming the `agreement' which is necessary to membership.''

This case was not referred to in Ord Forrest. The same distinction appears from the judgment of Dixon J. in Central Piggery Co. Ltd. v. McNicoll in the quotations which he makes from Fletcher Moulton L.J. in Mosely v. Koffyfontein Mines, Limited (1911) 1 Ch. 73 and from Cockburn L.C.J. in In
re Ambrose Laker Tin and Copper Company (1878) 8 Ch.D. 635 at pp. 638 and 641-42 .

It was also submitted that an executory contract was not included in any part of the definition of disposition of property. Executory contracts, generally speaking, and perhaps always, create property in the sense that they create choses in action. When a complete allotment is made in discharge of an obligation there is necessarily full consideration because it is in satisfaction and discharge of the existing obligation and is the counterpart of the right of the subscriber to compel the company to make the complete allotment. Conversely there is the right of the company to compel the subscriber to pay. Such consideration could properly be regarded as passing from company to allottee and vice versa.

All these considerations point to the conclusion that the definition applies only to allotments by direction. If such a direction were given without consideration ordinary principles of equity would produce a resulting trust in favour of the shareholder giving the direction unless there were a presumption of advancement or evidence of an intention that the nominee should take the beneficial interest. Without some express statutory provision allotments by direction would not be dispositions of property at all because the shares allotted by direction do not exist as items of property until created by the company in the making of the complete allotment. However the direction plus the presumed or actual intention to make a gift would cause both the beneficial and the legal title in the newly created shares to arise at the same moment in favour of the allottee. There would be no moment of time when the beneficial interest in the shares was in the directing party and there would be no gift of money to the nominee and no gift of shares by the company.

The situation thus described is comparable to that dealt with by this Court in
Commr. for Probate Duties (Victoria) v. Mitchell & Ors. (1960) 105 C.L.R. 126 . That case dealt with the incidence of probate duty on the proceeds of insurance policies within the terms of the Married Women's Property Act 1928 (Vic.) and the provisions of the Life Insurance Act 1945 (Cth.) which in substance replaced it. Fullagar J. said (at p. 140):

``The chose in action created by the policy was, no doubt, `property', but the bringing into existence of that chose in action did not, in my opinion, amount or involve any alienation of property within any reasonable meaning of that expression. It is clear, I think, that every one of the transactions mentioned in para. (a) of the definition denotes an act done by the deceased in his lifetime. In and about the issuing of the policy there was no conveyance or transfer or assignment or delivery of anything by him. He created no power of appointment. `Payment' I take to mean payment of money to or in trust for a donee. There was no such payment by the

ATC 4099

deceased. He paid a premium on the issue of the policy, and he paid many subsequent premiums. But Sarah Grinblat took no interest of any sort or kind in any premium paid. It seems to me to be out of the question to suggest that the payment of the premium was a `disposition of property'. If it were, what ought to be brought into charge would be not the amount assured plus bonuses but the total sum of premiums paid. It may be said that the transaction involved a `creation of a trust' or of an `interest in property' - expressions which occur in the parenthesis in the definition. But the definition does not take into its scope creations of trusts or creations of interests in property. It takes in alienations of property by way of creations of trusts or of interests in property. There was no alienation of property by the deceased.''

Another anomaly involved in the view that the company is the donor in the case of an allotment is the gift and the gift duty both enter into the computation of the value of the shares, at least in a case where there is no market value as in the case of shares listed on a stock exchange. The amount payable upon allotment, or prior to complete allotment, will to some extent increase the assets of the company and therefore the total value of those assets, but one-half of the amount of the gift duty will be payable by the company because sec. 35 places the liability for payment of duty both upon the donor and the donee with the result that each must contribute half the amount. No doubt the company and the allottee might agree as to who should bear that burden, but that too might involve a gift. This is not an impossible calculation but it is a somewhat odd result and adds to the anomalies.

Such a transfer is however for full consideration within the ordinary meaning of that term because it is made in discharge of the obligation to transfer the property. Again in the case of a bill of exchange which is presented on maturity by the ultimate holder after having passed through many hands a situation is created in which full consideration is provided to the acceptor for the payment of the amount due on the bill by the discharge of the obligation on the bill though nothing moves from the holder in due course to the acceptor other than the delivery of the bill which discharges the acceptor's liability.

In the result therefore I am of opinion that the decision in Ord Forrest was not in accordance with principle and involved a misconstruction of the Act. With due respect to those who have thought otherwise I am unable to accept the decision as correct.

Accordingly I am of opinion that the cross-appeals by the taxpayer companies St. Helens Farm (A.C.T.) Pty. Ltd., Ceedon Pty. Ltd. and Lucinda Investments Pty. Ltd. should be allowed. I have already indicated that the appeals by the Commissioner in the cases of each of the five companies should be dismissed. We were informed by Counsel that it had been agreed that there should be no order as to costs.

 

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