Case V156

Members:
PM Roach SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 24 October 1988.

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P.M. Roach (Senior Member)

The issues for determination in this reference had their origins in events which took place on Christmas Day 1983 in a small town not far from a capital city. On that day a mother visited her married son and his family to celebrate Christmas with them. Her Christmas gift to her son was the scrip to the only shares she had ever owned: a parcel of 2,000 partly-paid 25 cent shares (paid to 10 cents each) in Broken Hill Metals N.L. (BH Metals). She had purchased the shares in January 1982 at a cost of $210 (including $10 brokerage). Her son - a transport inspector - was no more experienced with shares than she was. They were the first shares he had ever had claim to. In time the shares came to be of some greater value and some years later, during a boom period on the stock exchange, the applicant sold 1,000 of the 2,300 shares he then held in the company at a price of $4.65 per share. Unfortunately for him his mother's gift was to prove a mixed blessing. The Commissioner sought to include the ``profit'', calculated by the Commissioner at $3,894, in assessing the taxable income of the applicant. Further, according to the argument presented before me on behalf of the Commissioner, he would later be entitled to tax the applicant on any profit or assessable capital gain to arise on any later disposition (by sale or otherwise) of any of the remaining shares. However, for the present, the only question before me for determination is whether the action of the Commissioner in increasing the assessment of taxable income of the applicant for the year of income ended 30 June 1987 by $3,894 gave rise to an excessive assessment of the applicant.

2. The question only arises because ``Capital Gains'' only came to be assessable from 19 September 1985; the share transfer from mother to son was not registered with BH Metals until November 1986; and because the sale was effected in April 1987. That arose in the following way.

3. When the mother had delivered the share scrip to her son on Christmas Day 1983 as her Christmas gift, she had advised him to ``put them in a drawer'' on the basis that they ``might be handy one day''. He did just that. He placed the scrip in an envelope and placed the envelope in a drawer in the kitchen. Some weeks later, not later than 1 March 1984, the mother delivered to him a form of share transfer in blank all but for her signature. He placed it with the scrip. He thereupon forgot all about it for a long time. He did not even consider the market value of the shares.

4. Then, at some time during the calendar year 1985, the mother received correspondence from BH Metals offering her the opportunity to establish the shares as fully paid 25 cent shares upon payment of a further 10 cents per share. She brought the correspondence to her son for his attention. She did so because she regarded the shares as being his. By reason of receiving the correspondence from the company, she realised that he had failed to effect the

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ATC 1007

registration of the transfer into his own name with the company and it was probably then that she chided him for his neglect. The son then elected to subscribe the further capital rather than risk forfeiture. He outlaid a further $200, with the result that the shares, although still registered in the name of his mother, came to be fully paid. He still did nothing about the scrip, but left it in the drawer with the blank signed formal share transfer.

5. Then, in the latter part of the calendar year 1986, the mother received further correspondence from the company in relation to a proposed bonus issue. Registered holders of shares were invited to subscribe for a bonus share issue by taking up fully-paid 25 cent shares at 50 cents per share with entitlement being to one share for each four shares held. She again brought the correspondence to the attention of her son on the basis that the shares were his and that, therefore, the correspondence was a matter for his attention: not hers. At her instigation, on this occasion he acted by going to a broker with both the scrip and the signed form of transfer which had been given him by his mother. He arranged with the broker that all of the rights would be taken up in his name with the consent of his mother as registered holder; that the 2,000 shares would then be transferred on the register of the company to himself; that 200 rights would be sold at 62 cents each; and that thereby the applicant would be able to take up the remaining 300 rights at 50 cents. He had the necessary forms relating to the rights issue signed by his mother. That was done and, in November 1986, he came to be registered with BH Metals as proprietor of 2,300 shares in that company.

6. At that point, the applicant was conscious that the market value of the shares was substantially in excess of their face value and from that point he took a keen interest in the movement of the share price in the market. To his surprise and delight the shares continued to rise in value. At first he thought that he would sell them if they got to $3 and, later, if they got to $4. Ultimately, in April 1987 he resolved those uncertainties by taking action. He sold 1,000 shares and retained 1,300 shares. The 1,300 so retained were sold in April/May 1988 at a price of approximately $4 per share.

7. Before effecting the sale, he had considered the possibility of being liable to capital gains tax by reason of amendments to the Income Tax Assessment Act 1936 (``the Act'') which took effect from 19 September 1985, the effect of which is to treat certain ``capital gains'' derived after that date as ``assessable income''. He conferred with an officer of the Department in a regional office and, understood from him that he would not have to pay capital gains tax. At the principal office he was told that he ``may have to''. He then spoke to an accountant who said he would not have to pay.

8. As a result of those uncertainties, before submitting his income tax return to the Commissioner he wrote to the Commissioner on 1 June 1987 setting out a detailed account of his circumstances and supporting it with a written statement from his mother. The Commissioner replied to that enquiry by letter of 22 June 1987 stating (inter alia):

``On the information supplied in your letter it is considered that the shares were acquired by you at the time they were transferred to your name in October 1986. Accordingly any profit on the subsequent disposal of those shares will fall for consideration under Part III of the Income Tas [sic] Assessment Act 1936, as amended. (i.e. Capital Gains Provisions).

As the shares were transferred to your [sic] for no consideration they are deemed, by section 160ZD of the Act, to have been acquired by you for a consideration equal to the market value of those shares at the date of transfer [sic].''

The Commissioner provided the applicant with a copy of the Commissioner's booklet entitled ``Income Tax and Capital Gains''.

9. He then retained the services of a tax agent to prepare his income tax return to 30 June 1987. In presenting it, he answered in the affirmative question 22 relating to ``Sale or other transfer of property'' and the agent recorded the following information:

``22 - Sale of Property

      Description           1,000 Broken Hill
                            Metals
      Date of Aquisition
      [sic]                 25/12/1983
      Date of Disposal      29/10/86.
        

The above shares were the subject of a gift by........ (taxpayers mother) to the taxpayer on the 25/12/1983.

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ATC 1008

The taxpayer did not aquire [sic] the shares with the intention of making a profit on their disposal.

Nor were the shares aquired [sic] after the 19/9/1985.''

10. When the assessment issued on 18 November 1987 the taxable income returned had been increased by $3,894. The explanatory advice memorandum stated:

``The profit on sale of BH Metal shares is assessable under Capital Gains Tax as advised in our letter of 22 June 1987.

   Deemed acquisition costs
      62c x 1,000                  =         $620
   Proceeds from sale as advised
      by you                       =       $4,514
   Capital Gain                    =       $3,894''
          

11. The applicant took upon himself the task of preparing his objection and, in doing so, quoted extensively from passages in the Commissioner's booklet which, in his view, supported his claim that the ``profit'' was not taxable.

12. The Commissioner gave consideration to the objection and, on 28 January 1988, replied. In doing so, the Commissioner did not use any of his standard form letters. Instead, he addressed the problems raised by the applicant and said (inter alia):

``Reference is made to Case
Patrick Corp. Limited & Ors v. F.C. of T. 74 ATC 4149 where it was established that:

• `A beneficial holder of shares... who... has not, been entered in the register as the holder of those cannot accurately be described as a `shareholder' or a `member' of the company within the meaning of the Assessment Act.'

This principle has been used to establish that you did not acquire the... shares for the purpose of the... Act until you transferred the shares into your name in October 1986.

Given this date of acquisition the subsequent sale of 1,000 shares on 13 April 1987 brings the profit made on sale firstly under section 26AAA of the Income Tax Assessment Act (sale of property within twelve months) and failing that section's [sic] application the profit should be considered under capital gains legislation.''

13. The applicant determined to challenge a decision which he considered to be unjust and to seek an independent review of that decision. To that end he raised the $240 required as the price of any challenge to the Commissioner - a figure which he ruefully observed during the hearing exceeded the initial cost of the shares - and requested reference to this Tribunal for determination. On 16 June 1988 the Commissioner complied with the request - spurred no doubt by a desire to effect the transmission to the Tribunal before sec. 37 of the Administrative Appeals Tribunal Act 1975 (``the Tribunal Act'') came into force. In the course of effecting the transmission the Commissioner revised his appreciation of the situation and formally advised the Tribunal that:

``THE COMMISSIONER'S REASONS FOR DISALLOWING THE TAXPAYER'S CLAIM:

The amount of $3,894 was correctly included in the assessable income of the taxpayer for the year ended 30 June 1987 under sub-section 25(1), section 25A, section 26AAA or section 160ZO of the Act.''

14. At the hearing, the position of the Commissioner came to be further revised and counsel sought to uphold the assessments by reason only of the provisions of sec. 26AAA and 160ZO.

15. It has been said on innumerable occasions that there is no equity about taxation. As one judge put it, ``equity and tax are strangers''. Yet, in this instance, it is the Commissioner who argues for the application of a particular principle of equity to justify the imposition of a tax on the ``profit'' derived by the applicant on the sale of his mother's Christmas gift. It is argued for the Commissioner that the Commissioner is entitled - and, therefore, under obligation - to tax the applicant because of the delay on the part of the applicant in perfecting the form of a transaction: he failed to perfect his mother's gift by having the shares registered in his name. Such arguments lay a foundation for saying that there is no equity about tax. But as one of the maxims of equity put it: ``Equity looks to the intent, rather than to the form''. As Romilly M.R. said in
Parkin v. Thorold (1852) 16 Beav 59 at p. 66:

``Courts of Equity make a distinction in all cases between that which is matter of substance and that which is matter of form; and, if they do find by insisting on form, the

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ATC 1009

substance will be defeated, they hold it to be inequitable to allow a person to insist on such form, and thereby defeat the substance.''

16. The same principle finds expression in another maxim of equity: ``Equity looks on that as done which ought to be done''. As Lord Macclesfield said in
Frederick v. Frederick (1721) 1 P. Wms. 710:

``Where one for valuable consideration agrees to do a thing, such executory contract is to be taken as done, and the man who made the agreement shall not be in better case than if he had fairly and honestly performed what he agreed to.''

17. But as Lindley L.J. said in
Re Anstis (1886) 31 Ch.D. 596 at p. 605:

``Equity, no doubt, looks on that as done which ought to be done; but this rule, although usually expressed in general terms, is by no means universally true. Where the obligation to do what ought to be done is not an absolute duty, but only an obligation arising from contract, that which ought to be done is only treated as done in favour of some person entitled to enforce the contract as against the person liable to perform it.''

18. That observation points indirectly to the basis of the Commissioner's argument. The Commissioner relies on a principle that equity does not assist volunteers: a phrase used to describe the effect of a series of cases commencing with the decision in
Milroy v. Lord (1862) 4 De G.F. & J. 264 in which the courts have refused to intervene in favour of prospective donees who have sought to compel putative ``donors'' to give effect to gifts once proposed but since resiled from. The principle is expressed by the phrase ``Equity does not assist volunteers''. The difficulty in application of the principle is to determine in such cases whether or not the proposed gift has been sufficiently perfected or carried into effect so as to make such assistance unnecessary. The line of authority has long been recognised as one in which it is difficult to determine precisely the extent of the principle. The problem in Milroy v. Lord (ante) was that a would-be benefactor had executed a voluntary deed - prior to the passage of the Judicature Act (1873 - U.K.) - purporting to assign 50 of his shares in the Louisiana Bank to the defendant to be held by him on certain trusts for the benefit of the plaintiffs. In the remaining three years of the benefactor's life the defendant received the dividends on the shares and remitted them to the plaintiffs. It was accepted at the time that the shares were transferable only by entry in the books of the bank. No such transfer was ever made. Turner L.J. (at p. 274) expressed the difficulty of doing justice by saying:

``Under the circumstances of this case it would be difficult not to feel a strong disposition to give effect to this settlement to the full extent and certainly I have spared no pains to find the means of doing so, consistently with what I apprehend to be the law of the Court; but, after full and anxious consideration, I find myself unable to do so.''

His Lordship then went on to say:

``I take the law of this Court to be well settled, that, in order to render a voluntary settlement valid and effectual, the settler must have done everything which, according to the nature of the property comprised in the settlement, was necessary to be done in order to transfer the property and render the settlement binding upon him. He may of course do this by actually transferring the property to the persons for whom he intends to provide, and the provision will then be effectual, and it will be equally effectual if he transfers the property to a trustee for the purposes of the settlement, or declares that he himself holds it in trust for those purposes; and if the property be personal, the trust may, as I apprehend, be declared either in writing or by parol; but, in order to render the settlement binding, one or other of these modes must, as I understand the law of this Court, be resorted to, for there is no equity in this Court to perfect an imperfect gift.''

His Lordship went on to consider what he considered to be ``the more difficult question''; whether the defendant had become a trustee of the shares but, in the particular circumstances of the case, his Lordship was satisfied that that had not occurred.

19. In Australia the general principle has been long recognised by the High Court of Australia although the Court has not spoken with one voice as to the precise extent of the application of the principle. In
Anning v. Anning (1907) 4 C.L.R. 1049 Griffiths C.J. held that in circumstances such as the present, had the mother sought to renege she would

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have been able to do so if and only if something remained to be done by the mother such that only she could do. Higgins J. seems to have thought that, for the claim of the donee to be upheld, the donor must have done everything within her power to do; and Isaacs J. is generally thought to have held that the gift would not have been perfected until registration with the company was effected.

20. So it is that the Commissioner contends that, if the applicant's mother had sought to renege at any time before the company effected registration of the shares in the name of the applicant or, at least, before the applicant was seised of all documents duly and fully completed, being all those necessary to achieve registration of his interest with the company, the courts would not have intervened to require the mother to do anything else which might have been necessary to achieve registration in the name of the applicant. That being so, the argument proceeds, the applicant did not ``acquire'' the shares until at least the date upon which he delivered the scrip up to the company with all attendant documents in registrable form.

21. In my view, in the circumstances of this case the argument fails for several reasons. First, it identifies the concept of ``acquisition'' with the concept of ``passing of property'' as a matter of substantive law, and with jurisdictional principles as the exercise of the power of the courts to compel action as between a reneging donor and a volunteer transferee who had given no consideration. In my view that is not an appropriate measure whereby to judge the date of acquisition between and ever-willing donor and her assenting, volunteer transferee. As between the mother as donor and the son as donee, no question of the perfecting of the gift ever arose as a problem.

22. Secondly, the argument assumes that, at least at 19 September 1985 - the date from which Capital Gains Tax took effect - something was lacking in the capacity of the applicant to procure registration and that, had his mother sought to renege, the applicant could not have achieved registration without the intervention of the Court - and that such intervention would have been refused him as a volunteer. In my opinion, in the circumstances of this case, the better view is that no such assistance from the Court would have been needed in relation to the 2,000 shares from the time the applicant came into possession of the scrip and a form of transfer (in blank) signed by his mother as donor. In short, I favour the view expressed by Griffiths C.J. in Anning v. Anning (ante). I find support for that view in two cases in which an issue as to the efficacy of a proposed disposition was raised by a third party. I refer to the decisions of the Court of Appeal in
Rose v. I.R.C. (1952) 1 Ch. 499 and of the High Court of Australia in
Taylor v. D.F.C. of T. 69 ATC 4072; (1969) 123 C.L.R. 206. From at least March 1984 the applicant was in a position to complete the form of blank Transfer and deliver it to the company, together with the share scrip, and thereupon procure registration of the 2,000 [shares] in his own name. He would not have required the assistance of the courts. In the circumstances of the case it would have been the mother who would have needed to persuade the courts to exercise their authority to prevent the applicant from achieving registration of the shares in his name.

23. Thirdly, the argument fails to take into account a further circumstance. In reliance on representations from his mother that he was already the beneficial owner of the shares: a lawyer's words - not those of either the mother or the son - during 1985 the applicant advanced further moneys to the company on converting the hitherto partly paid shares to fully paid shares. In my view, in doing so, he acted to his detriment and, had his mother ever sought to renege upon her promise, she would not have been allowed by the courts to advance any evidence inconsistent with her son's claim been heard, in my view the Court would not have found the question of her trusteeship of the shares to be the ``difficult question'' it was said to be in Milner v. Lord (ante).

24. But in the circumstances of a case such as this all such considerations about litigation and the exercise of equitable jurisdiction, although interesting, are ``hypothetical''. The mother at all material times from Christmas Day 1983 clearly intended that her son should be the beneficial owner of the shares; thereafter she always acted as if he were the beneficial owner of the shares; and at all times he acted as if he were the beneficial owner of the shares, even though he was not the registered member of the company.

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ATC 1011

25. For those reasons I hold that the applicant ``acquired the property'' within the meaning of sec. 26AAA more than 12 months before the date on which the taxpayer sold the property. I am reinforced in that conclusion by reference to the provisions of sec. 26AAA(1) which state that:

``For the purpose of this section -

• (a)...
• (b) a reference to an agreement or option includes a reference to an agreement or option that is not enforceable by legal proceedings whether or not it was intended to be so enforceable;
• (c) an arrangement or understanding, whether formal or informal and whether express or implied, shall be deemed to be an agreement;
• ...''

26. Further, although the section was not relied on by counsel for the Commissioner, I hold that the property was ``acquired'' by the applicant within the meaning of sec. 25A(1) of the Act no later than March 1985 and that his ``dominant purpose'' at date of acquisition - whatever that date might have been - was not such a profit-making purpose as would render the applicant liable to have the ``profit'' treated as assessable income for the purposes of sec. 25A of the Act.

27. It remains to consider the application of the Capital Gains Tax provisions to the transaction because it was contended for the Commissioner that the assessment could be as much supported by reference to sec. 160ZO of the Act as by reference to sec. 26AAA. Section 160ZO provides:

``(1) Where a net capital gain accrued to a taxpayer in respect of the year of income, the assessable income of the taxpayer of the year of income includes that net capital gain;

(2)...''

Section 160ZO is but one of many sections contained in the several Divisions which make up Part IIIA - Capital Gains and Capital Losses - in the Act. The section which must be construed to determine whether or not the applicant is subject to the provision of that Part is sec. 160L in Division 2 - Application. It provides:

• (1) Subject to this section, this Part applies in respect of every disposal on or after 20 September 1985 of an asset... that -
  • (a)...; and
  • (b) was acquired by that person on or after 20 September 1985.

28. I find nothing in that provision or any other provision of the Division which persuades me that the term ``acquired'' is to be construed otherwise than in accordance with the principles I have previously stated. For that reason I am satisfied that the claim of the Commissioner is not to be supported by reference to the Capital Gains Tax provisions.

29. In my view the assessment of the applicant by the Commissioner was excessive. The order of the Tribunal will be that the determination of the Commissioner upon the objection under review shall be varied and that the taxable income of the applicant for the year of income ended 30 June 1986 should be reduced by $3,894.