Ord Forrest Pty. Limited v. Federal Commissioner of Taxation.
Judges:Stephen J
Court:
High Court
Stephen J.: By a default assessment the Commissioner of Taxation has assessed to gift duty Ord Forrest Pty. Limited (the Company) in an amount of $772,743.92 following upon the allotment by it of eight ordinary shares of $1 at a premium of $99 per share each of which shares the Commissioner asserts to have been worth $323,910.
The Commissioner supports his assessment on the footing that the allotment was a disposition of property by the Company accompanied by an inadequacy of consideration and hence a dutiable gift; the Company denies the existence of any dutiable gift, asserting that an allotment of shares for cash at par, with or without a premium, cannot constitute a dutiable gift regardless of the value of the shares to the allottees.
The Company was incorporated in March 1969 under the Companies Ordinance 1962 of the Australian Capital Territory; a few days later it borrowed from one of its two shareholders, who was also beneficially entitled to the only other issued share in its capital, the sum of $1,050,000. at call free of interest. On the same day it bought from that shareholder for cash two large parcels of shares in listed companies for $1,035,055. On 23 April 1969 it borrowed from that same shareholder a further $1,450,000, again at call free of interest, which it immediately lent, on the same terms, to two other proprietary companies. Five minutes after the holding of the board meeting at which these three transactions were resolved upon a further meeting was held at which it was resolved that, that shareholder having now called for repayment of $2,480,000 of her loan moneys, that sum be repaid to her. At that same meeting she then applied for 24,800 ordinary shares of $1 each in the Company's capital at a premium of $99 per share, accompanied by a cheque for
ATC 4024
$2,480,000, and those shares were then allotted to her and a resolution passed that a general meeting be convened on short notice to convert all the then issued capital of the Company into preference shares. This general meeting then followed, only twenty minutes after the commencement of the preceding board meeting, and the appropriate resolutions were carried; all that need be noted is that the rights of preference shares were limited to a fixed preference dividend of 4% and to priority as regards capital (not including premium moneys) and dividends on a winding up or reduction of capital but with no right to further participation in profits or assets; the preference shares conferred no voting rights.Then, at a further board meeting held twenty minutes after that general meeting, it was noted that application had been received by allottees for eight ordinary shares of $1 each at a premium of $99 per share, accompanied by cheques for a total of $800, and it was resolved that the eight shares applied for should be allotted. These shares thus constituted the only issued shares having any voting rights, and because of the very limited other rights attached to the existing preference shares, would obviously be of great value in a company owning such valuable assets. The Commissioner, in applying sec. 18(2)(c) of the Gift Duty Assessment Act to ascertain their value, has arrived at a total value of $2,591,280 for these eight shares.
It is in these circumstances that the Commissioner invokes the provisions of the Gift Duty Assessment Act as justifying his assessment of the Company to duty. The critical question is, of course, whether the allotment of these eight shares constituted a gift for the purposes of the Act. If it did then, no evidence having been called to show that the amount of the assessment, a default assessment, is, in point of valuation of the property the subject of the gift, excessive, this appeal will fail and the assessment will stand - sec. 23 of the Act.
A ``gift'' is defined in sec. 4(1) of the Act; the effect of that definition, so far as presently relevant, is to make any disposition of property a ``gift'' if the consideration in money or money's worth passing from the disponee to the disponor is not fully adequate.
Two issues arise for determination; was the allotment a ``disposition of property'' and, if so, was the consideration passing from each allottee, a disponee, to the Company, the disponor, ``fully adequate''?
``Disposition of property'' is defined, first by giving it a meaning encompassing all types of alienations of property and then by adding six additional meanings which are to be included within its defined meaning the first of which is
``(a) the allotment of shares in a company''.
That phrase describes accurately enough what took place on 23 April 1969 when the eight shares were allotted; what then occurred was no more and no less than ``the allotment of shares in a company''. Paragraph (a) of the definition of ``disposition of property'' has not hitherto been judicially considered and appears to have no counterpart in any analogous legislation either in Australia or overseas. However, its words are, I think, clearly applicable to the present case; the meaning they convey cannot be confined, as was suggested, to the procuring by a third party of the allotment of shares by a company; whether or not they would include such a transaction I need not now determine. No statutory context has been suggested as requiring any departure from ordinary meaning. The fact that reference is made to the allotment of shares ``in'', rather than ``by'', a company seems to me of no significance, an allotment of a company's shares will be effected by resolution of a meeting either of its directors or of its members, depending upon the terms of its articles, and in either event is perforce an allotment ``by'' the company; in describing an allotment of shares, if shares in a company rather than in some other enterprise are intended to be referred to, the only likely ambiguity lies in that which is allotted rather than the entity making the allotment; the words ``in a company'' thus add a useful measure of precision to what goes before by making it clear that it is only the allotment of shares in companies, and not in other joint ventures, that is being dealt with.
ATC 4025
It follows that in my view the allotment of eight shares on 23 April 1969 fell within the meaning of a ``disposition of property'' as defined in sec.4 of the Act.
I pass now to the second issue, concerned with adequacy of consideration. For the Company it was contended that the allotment of a share at par or at any premium above par is inherently incapable of constituting a transaction for other than fully adequate consideration, at least so long as the par value is paid in cash by the allottee. Because the payment of par value entitles the successful applicant for allotment to have his shares treated as fully paid up and invests him with all the rights conferred upon a member by virtue of his holding of a share it must follow, it is said, that in such a case there can never be any inadequacy of consideration. The Company has received all that, as a matter of law, it is entitled to and the proper test of adequacy of consideration in such a case is whether or not the shares may properly be described as fully paid up.
To my mind this confuses the legal effect of the contract between company and allottee with the quite distinct question whether the consideration in that contract is adequate. The legal effect of the contract is to entitle the company to receive no more and no less than the amount per share stipulated for, be it par or par plus a premium; in this respect it does not differ from any other contract by which a price becomes payable, save for the restraint imposed by the law upon the issue of shares at a discount except in accordance with sec. 59 of the various Australian Companies Acts. To regard the full extent of the actual contractual obligation of a contracting party as necessarily constituting a fully adequate consideration is erroneous; yet this is, in effect, what the Company's submission amounts to.
It is, I think, irrelevant to the present question that directors are not, in all circumstances, obliged to exact from applicants for shares in a company the full premium that market demand would make possible. Likewise it seems to me not to the point to say, even if it were true, a matter to which I will return later, that a company suffers no detriment to itself in failing to demand of applicants for its shares as great a premium as those shares could command. The definition of ``gift'' in sec. 4 of the Act does not concern itself with detriment to the disponor but rather with whether or not the consideration passing to it from the disponee is ``fully adequate''.
The test of adequacy of consideration passing from disponee to disponor required by the definition of ``gift'' necessitates some criterion against which it is to be measured. In the ordinary case of a disposition of property by way of alienation of property by the disponor in favour of a disponee the criterion must, I think, be the value of the property received by the disponee; the consideration in money or money's worth passing from the disponee is to be contrasted with the value of that property, there being made ``a comparison of the value of what was promised or paid with the value of what was given'' -
McGain v. Federal Commissioner of Taxation (1966) 116 C.L.R. 172, at p. 176. The result of that comparison will determine the adequacy of the consideration. Quite apart from the inference arising from the words of the definition of ``gift'' that this is the appropriate process for the testing of adequacy of consideration, sec. 18(1)(c) and (2), sec. 31(4)(a)(i) and sec. 33(8) make clear the relevance in this regard which the Act assigns to the value of the property comprised in the gift and which is the subject of the disposition of property in question.
I see no reason for adopting any different view where a disposition is not by means of an ordinary alienation of property but, instead, takes the form of an allotment of shares; only in this way can effect be given to the requirement, implicit in the definition of ``gift'', that the adequacy of the consideration, which must be in money or money's worth, is to be determined by comparing it with some comparable yardstick.
It was argued that the fact that it is the act of allotment of shares which paragraph (a) designates as the relevant disposition makes it proper to disregard the value of the shares allotted when determining the adequacy of the consideration and, instead, to adopt, as the standard with which the consideration from the disponee is to be contrasted, the par value of those shares.
ATC 4026
I find no justification, either in the Act or as a matter of general principle, for doing this. There is, I think, to adopt Sir Cyril Radcliffe's expression used in argument in
Humphrey v. Gold Coast Selection Trust, Ltd. (1946) 30 Tax Cases 209, at p.223, no ``lawyers' mystery'' which requires that the par value of shares should be taken to be their actual value - and see
Murphy v. Australian Machinery and Investment Co. Ltd. (1947) 30 Tax Cases 244, at p.255 per Atkinson J. who, earlier, at p.253, had said of Humphrey's case that that whole case negatived any suggestion that the shares there in question had to be taken at their par value; instead their value was a question of evidence. Those two cases each involved the ascertainment of the cost to promoters of mining companies of shares allotted to them so that on the subsequent sale of those shares their profits and gains might be computed for income tax purposes; the problem for the Court was therefore different from the present but the rejection of par value as indicative of actual value is noteworthy.
Although no occasion has arisen in the past for any judicial consideration of paragraph (a) of sec. 4(1) of the Gift Duty Assessment Act there are to be found dicta treating the allotment of shares at less than market value as involving inadequacy of consideration on the allottee's part.
In
Mendes v. Commissioner of Probate Duties (Victoria) (1967) 122 C.L.R. 152, Kitto J. with whose reasons and conclusions Taylor J. agreed, in describing the circumstances of that case, spoke of the allotment by a company of certain shares to the appellant, the son of the deceased, and said of them, at p. 156:
``The 'B' shares were worth at all material times £1.19s.4d. each but the son paid for them only £1 per share, so that they were all issued to him otherwise than for a full consideration in money or money's worth.''
Again, at p. 159, his Honour said:
``In the first place, it is a case in which an issue of shares by a company otherwise than for full consideration in money or money's worth, and therefore wholly or partly in the nature of a gift to the person who takes them up, may be assimilated to a gift inter vivos by the deceased for the reason that the deceased held shares in the company at the time of the issue, so that the issue for less than full value necessarily reduced the value of the deceased's property at that time.''
In the first of these passages his Honour saw nothing inappropriate in describing an allotment at par of shares worth more than par as involving an absence of full consideration. In the second his Honour was concerned to explain the way in which what he earlier had called ``a share transaction in circumstances which gave it a practical resemblance to a gift by'' the person controlling the company in question was, by the Victorian probate duty legislation, assimilated to an actual gift by that person and thus included in that person's notional estate for purposes of assessment of probate duty; he clearly regarded the issue of shares at an issue price less than their value as involving an absence of full consideration and as being in the nature of a gift to the allottee.
In
Gorton v. Federal Commissioner of Taxation (1965) 113 C.L.R. 604, gift duty was not sought to be assessed against the companies whose shares were allotted to nephews of the deceased, she having procured those allotments; instead her estate was assessed, reliance being placed upon paragraph (f) of the definition of ``disposition of property''. In rejecting this approach the Chief Justice and Taylor J., in a joint judgment, said at p.624:
``There was no moment of time when any change in the value of the shares in the hands of the nephews took place. All that can be said is that the transaction into which the deceased entered ensured that when the nephews acquired the property in the shares, they should have a value beyond the actual consideration which the nephews would pay for them.''
Their Honours thus recognised that the allottees of shares thereby acquired assets worth more than the consideration which they had paid for them, namely par value plus a set premium. In his dissenting judgment Windeyer J., at p.627, said that the views of the majority appeared to leave
ATC 4027
open the very question now before me, whether there were gifts made by the allotting companies to the nephews.In
Lowry v. Consolidated African Selection Trust Ltd. [1940] A.C. 648, the respondent sought to treat as an outgoing deductible from its profits and gains the premium foregone by it when it allotted shares to its employees at par, those shares having a much higher market value; it failed because the foregoing of a premium on the issue did not involve it in any expense for the purpose of its trade. In arriving at that conclusion Viscount Maugham, at p.666, described what the company had done, saying that it ``has made a present to its employees''.
In the absence of authority to the contrary I would conclude that there was here a gift by the Company to each of the allottees. But it is said that there are decisions of this Court to the contrary; counsel for the Company relies principally upon
Archibald Howie Pty. Ltd. v. The Commissioner of Stamp Duties (N.S.W.) (1948) 77 C.L.R. 143. In that case the appellant company, following confirmation of a resolution for reduction of capital and distribution of surplus assets, transferred to two shareholders, who together held all but one of the issued shares in its capital, certain shares of other companies by way of a distribution in specie. The question was whether those transfers were dutiable as on a conveyance without consideration, with inadequate consideration or with a bona fide consideration of not less than unencumbered value of the property conveyed. Dixon J. was able to discern two aspects of the transaction, which he described as ``perhaps two sides of the same thing'', whereby an adequate consideration might be seen. First, the reduction of capital and the distribution in specie was an effectuation of a provision of the contract of membership of the company; allotment and payment up of shares conferred upon their holder a right to have the company's assets dealt with in accordance with the various ways required or authorized by the articles; the distribution in specie was one such way; it was a realization of the rights obtained by the acquisition of shares and the consideration given was ``the payment up of the share capital in satisfaction of the liability for the amount of the share received on allotment'' - p.153. Secondly, a member's contribution of the amount of his share measured his right to any return of capital which the company might make and determined the proportion in which he shared with others in a distribution of excess assets. A return of capital in cash would be a discharge pro tanto of the shareholder's claim upon the company's assets and where, instead, a shareholder took, on a reduction of capital, an aliquot part of the company's assets, in which he had had an interest consisting of a congeries of rights in personam, the consequent reduction in amount and value of his share afforded an adequate consideration in money and money's worth.
I do not regard any part of the reasoning of his Honour as touching upon the present case. The stated case recited that the shares in question had been paid up in full and his Honour referred to and relied upon this fact in the course of his reasoning. However, neither the reasoning nor the case itself raised any question concerning the transaction involved in the original allotment of shares or the consideration therefor. It was enough that the shares were fully paid shares, as such they entitled the holder to a proportionate ``interest'' in the company's assets; that ``interest'' might come to represent in value far more than the original capital which had been contributed but its distribution involved no element of gift, no inadequacy of consideration. However, because fully paid shares confer such rights it by no means follows that for an allottee to pay up in full the shares allotted to him excludes the possibility that the consideration passing from the allottee to the company may not be fully adequate when the purposes of gift duty fall for consideration.
The arbitrarily fixed par value of a share, if paid up, must, under our system of shares having a par value, confer upon the holder his ``interest'' in the company's assets but that system says nothing about the adequacy of par value as consideration in the contract of allotment; it does no more, for presently relevant purposes, than, first, to assure those who deal with a company, if the shares be
ATC 4028
fully paid up, that at the time of allotment there was a contribution in cash to the company's capital of the par value of the share or a contribution otherwise than cash, details of which are available to the public for inspection; if the shares are only partly paid it ensures that the members may be made liable for the balance payable on their shares. Secondly it defines the extent of the allottee's total liability as a member of a limited liability company. It seems to me to have no legitimate function as a criterion of the adequacy of consideration passing from the allottee to the company; the very fact that shares may be allotted, as in the present case, at a large premium over par value in itself denies to par value the character of conclusive arbiter of adequacy of consideration unless it be said, contrary to reality, that whenever a premium is paid the allottee is paying in excess of an adequate consideration for the allotment to him of his shares.If, as Dixon J. says in Howie's case at p.154, it be proper to regard a shareholder's ``interest'' in a company's assets as a congeries of rights in personam having ``an equivalence not only from a logical but from a realistic point of view'' with an aliquot part of those assets it must, I think, follow that, because the value of his share will depend upon the value of that aliquot part, it will not bear any relationship to par value, nor will par value necessarily represent adequate consideration for the allotment of that share.
The judgment of Williams J. in Howie's case contains, at p.157, the following passage much relied upon by the Company on this appeal: -
``When the person to whom the shares are allotted pays or assumes the liability to pay for the shares in money or money's worth, full consideration in money or money's worth moves from him to the company for all the rights which he acquires under the memorandum and articles of association.''
Later in the judgment reference is again made to this aspect when, at p.159, His Honour says:
``The capital of a successful company is usually represented by assets which, after providing for the claims of creditors, exceed in value the amount of the paid up capital. But as I have said the amount payable to a company for a share is limited. Unless the share is issued at a premium it is the nominal amount of the share. The payment of that amount or the assumption of liability to pay it must therefore provide, in the absence of some special provision like that in the English Finance Act, full consideration for the right to receive any distributions of money or assets which the shareholder subsequently received from the company.''
His Honour goes on to refer to the wide repercussion which would result were this not so, referring specifically to the Gift Duty Assessment Act; I take his Honour to have in mind that the Act would otherwise render dutiable as a gift any distribution by a company of cash or assets of a value in excess of the paid up value of shares.
The first of these observations occurs as part of a train of reasoning by means of which his Honour supports the proposition which he states at the outset, that upon the taking effect of a special resolution for payment off of capital in excess of a company's wants the company becomes indebted to its members to the extent of their respective rights under that resolution. Having stated that proposition his Honour then goes on to say -
``A company obtains capital by the issue of its shares. These shares cannot be issued at a discount but may be issued subject to the payment of their nominal amount or at a premium. The amount payable may be satisfied by the payment of money or by some other proper consideration.''
Then follows the first passage set out above, followed in turn by the conclusion that a debt is created because members have, for valuable consideration, acquired the legal right to be paid.
It followed, in his Honour's view, that although in the case of a successful company its assets would probably be worth more than the total paid up capital, nevertheless fully paid shares entitled their holders to participate in a distribution of those valuable
ATC 4029
assets of the company, the payment up of the shares providing full consideration for any distribution received from the company.If applied literally and taken out of the context of the facts in Howie's case and of the question raised for decision in that case the passages from the judgment of Williams J. relied upon do support the company's submissions. To so understand them is, I think, to disregard what it was with which his Honour was there concerned. His Honour's concern was with the adequacy of consideration for a transfer of shares upon a distribution in specie and his Honour held that by paying up a share in full, or assuming liability therefor, full consideration was given for the right which found its consummation in the distribution. If so understood the references made to full consideration do not, I think, bear upon the present question. What I have already said concerning the judgment of Dixon J. in Howie's case does, I think, apply equally to that of Williams J.
Davis Investments Pty. Ltd. v. Commissioner of Stamp Duties (N.S.W.) (1958) 100 C.L.R. 392, was also relied upon insofar as the judgments in that case applied or explained Howie's case. For present purposes they take the matter no further, I think, than does Howie's case, being wholly concerned, like it, with the search for adequacy of consideration on the occasion of the transfer by a company to its shareholders of assets in the form of shares.
It is not irrelevant to see how the Courts have, for other purposes, regarded the allottees of shares having a value greater than the price paid on their allotment. Those cases in which employees of companies have been rewarded by this means have, in the United Kingdom, turned upon questions of whether, and if so when, the financial advantage to the employee of such a transaction is taxable in his hands as an emolument of office and in some cases the question has been complicated by the introduction into the transaction of an option granted to the employee to take up, in the future, shares at a presently specified allotment price. The Courts have spoken of such an allottee as having derived a gift or extra remuneration for his services -
Abbott v. Philbin, 39 T.C. 82, at p. 130; as having made a profit -
Weight v. Salmon, 19 T.C. 174, at p. 194. Abbott v. Philbin at p.96; as having received something valuable beyond the par price at which the allottee was privileged to obtain the shares - Weight v. Salmon at p.190; the allotting company has been described as a donor - Abbott v. Philbin at p.113.
The Company's contentions appear to me to involve two misconceptions, each associated with what is said to be a leading case establishing a presently relevant proposition. The first is that payment of par value necessarily imports payment of fully adequate consideration for the allotment of a share; because that is the full price demanded for those rights and because by its payment the share thereby becomes fully paid up it must be a fully adequate price, payment of par value conferring upon the allottee all the rights which he is capable of acquiring as a shareholder. This proposition relies upon the reasoning of this Court in Howie's case; I have already sought to show that that decision does not in fact justify the proposition. Indeed the relevance of par value is, I think, quite limited. Its significance is confined to questions which may arise as between a shareholder and a company or its liquidator once he attains the status of shareholder; by payment of par value he satisfies his liability in respect of his share so that thenceforth neither the company nor its liquidator can require further payment from him; his liability is limited to par value and that liability he has paid. However, par value has no part to play in the measurement of the adequacy of the consideration passing from allottee to company in that particular instance of a disposition of property which is described in sec.4(1) of the Gift Duty Assessment Act as ``the allotment of shares in a company''.
The second misconception is involved in the proposition that a company which allots at par shares having a value greater than par does not thereby suffer any financial detriment. This proposition is said to be based upon
Hilder v. Dexter (1902) A.C. 474, but that case is, in fact, no authority for it. Their Lordships were there considering the terms of sec.8(2) of the Companies Act
ATC 4030
1900, which was concerned with transactions made at the expense of a company's shares or capital money. The Earl of Halsbury and Lord Robertson agreed in the judgment of Lord Davey and, at p.480, his Lordship does say that where shares of greater than face value are allotted at par the benefit to the allottee ``is not obtained by him at the expense of the Company's capital''. However, the emphasis here lies upon the reference to ``capital''; his Lordship had earlier said that such an allotment ``may or may not be at the expense of the Company''. He recognized that, in the absence of good reason dictating an issue of such shares at par, their issue at that price would be at the Company's expense, although not at the expense of its capital.ORDER:
If these two misconceptions be put aside there remains, in my view, no reason to view the transaction here in question as other than one falling within the terms of the Act and as properly involving the Company in liability to gift duty. The appeal will be dismissed with costs. There will be the usual order as to exhibits.
This information is provided by CCH Australia Limited Link opens in new window. View the disclaimer and notice of copyright.