Case U183

Members:
PM Roach SM

Tribunal:
Administrative Appeals Tribunal

Decision date: 2 October 1987.

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P.M. Roach (Senior Member)

On 30 July 1982 the applicant, a married woman, by her attorney completed her income tax return to 30 June 1982 and lodged it with the Commissioner. She disclosed assessable income by way of dividends ($43,076) and interest ($9,422) - a total of $52,498. After claiming deductions for bank charges ($33) and gifts to public institutions ($20), she declared a taxable income of $52,445. Not surprisingly, schedules to the return disclosed a substantial investment portfolio. In answer to the question in the return:

"SALE OF PROPERTY Did you, during the year of income, sell any stocks, shares, real estate... or other property...?,"

the applicant answered in the affirmative by providing a statement which acknowledged non-taxable bonus shares received from several companies; and a number of "share transactions". Prefacing the details with a note: "All shares held as investments - no shares acquired for resale", she acknowledged sales of Petersville shares (held over 13 years taken over by H.C. Sleigh); rights to EZ Industries shares ("original shares acquired 1970, new shares (issue) taken up since - all shares held over 2 years"); rights to MIM Holdings acquired as beneficiary to an estate; shares in Swan Brewery sold following takeover. Then she acknowledged two further transactions: first, that she had "sold all shares in Mauri Bros & Thomson following takeover by Burns Philp & Co. - all shares other than 1,875 shares held 10 years as investment - in respect to the 1,875 shares, such were acquired by Burns Philp by compulsory acquisition. Such shares were taken up by me following an issue at par - 50 cents - were compulsory (sic) acquired at $1.35 per share within one year of issue - resulting in a profit of $1,593.75". The $1,593.75 profit is taxable unless the Commissioner has now deemed the compulsory acquisition is not a "sale"; secondly, she acknowledged on the same basis a profit of $4,136.90 in relation to 1,500 shares in Containers Limited compulsorily acquired by Australian Paper Manufacturers (APM) following a takeover. The shares had been held under one year.

2. By that description she was asserting that she was not in either case one of those shareholders who had made the "takeover" possible by agreeing to sell their shares. Instead she claimed to be one of the non-sellers who had suffered the loss of their shares by no voluntary act, or any other act of theirs, but by compulsory acquisition.

3. On 15 December 1982 the Commissioner issued an assessment of income tax against the applicant attributing to her a taxable income of $58,174, increasing the taxable income returned by "profit from sale of shards (sic) $5,729". On 17 December 1982 the applicant objected to the assessment and on 15 November 1983 the objection was wholly disallowed. The notice of disallowance was attended by a letter of explanation stating that:

"The question of the assessability of a profit on the sale of property sold within 12 months of purchase falls for consideration under the provisions of s. 26AAA of the Income Tax Assessment Act. Under those provisions any profit arising from the sale of property purchased and sold within 12 months, regardless of the intention at the time of purchase, is required to be included in assessable income. You are advised that there is no provision in this section to exclude profits from the sale of shares that are subject to compulsory acquisition by a company."

The letter went on to refer to exceptions as being only where the assets sold were part of a business; were of depreciable property; or constituted a residence and the sale took place as a result of a change in the taxpayer's place of employment or place of business.

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4. In 1981, when takeover proceedings were on foot, the applicant had expressed her concern to APM "regarding the taxation aspects of disposing of (her) shares within 12 months of purchase" as a result of which she was advised that:

"Whilst there do not appear to be any decided cases on the matter we have obtained advice from one of the leading taxation accounting firms in Melbourne whose opinion... is that compulsory acquisition of shares (as opposed to acceptance of a takeover offer for such shares) does not amount to a sale of shares for the purposes of s. 26AAA of the Income Tax Assessment Act."

However, by 23 December 1982 the company, in response to advice that tax had been assessed on the profit arising from its acquisition of the shares, said that it was then "aware that their (sic) have been court decisions in the interim period which may have had a bearing on the treatment of the monies received".

5. Upon the evidence placed before me (which was not in dispute) she was invited by the offerors to sell her shares. Had she agreed to do so, a "sale" could have followed. Had such a "sale" occurred, the profit would have been assessable income. But in those circumstances she refused to agree to a "sale". I am well satisfied that the shares in question were lost to the applicant, not by reason of any decision of the applicant to sell, but by the action of the acquiring companies in compulsorily acquiring the shares pursuant to the appropriate legislative provisions:

• • in the case of Burns Philp & Co. Limited - sec. 42 of the Companies (Acquisition of Shares) Code (N.S.W.); and
• • in the case of Australian Paper Manufacturers Limited - sec. 180X of the Companies Act (Vic.).

The Commissioner contends that despite her refusal to be party to a "sale", there has none the less been a "sale" by the taxpayer for the purposes of the Act.

Consideration of decided cases will show that such a proposition is not always as unsound as it might first be thought to be. It was mentioned in evidence without objection that the applicant's daughter had suffered the loss of her shares in the companies in similar circumstances and that her objection to assessment had been allowed. In the course of argument the applicant's representative (her husband) sought to establish that he too had derived profits in similar circumstances and had not been assessed to income tax. I declined to receive any evidence in that regard, simply making the point that how others had been assessed was not relevant in the determination of the question as to whether the applicant had been correctly assessed.

6. Accordingly, the question to be resolved is whether the term "sale" as used in sec. 26AAA of the Income Tax Assessment Act 1936 ("the Act") is to be considered as a term limited in its application to a voluntary disposition of property; or whether it is to be construed more broadly as the Commissioner contends. It is common ground that it can be appropriate to consider the term "sale" broadly in one context and more strictly in another. It can also be said in favour of the Commissioner's view that, since the plain objective of the Income Tax Assessment Act 1936 is to lay a foundation for the imposition of a tax liability so as to increase the revenue, the section ought to be broadly construed because such a construction will favour the revenue. However, such a view has never found favour with the courts. As Lord Russell of Killowen said in
I.R. Commrs v. Duke of Westminster (1936) A.C. 1 at pp. 24-25:

"I confess that I view with disfavour the doctrine that in taxation cases the subject is to be taxed if, in accordance with a Court's view of what it considers the substance of the transaction, the Court thinks that the case falls within the contemplation or spirit of the Statute. The subject is not taxable by inference or by analogy, but only by the plain words of a Statute applicable to the facts and circumstances of his case. As Lord Cairns said many years ago in
Partington v. Attorney-General (1869) L.R. 4 H.L. 100 at 122:

• `As I understand the principle of all fiscal legislation it is this: if a person sought to be taxed comes within the letter of the law he must be taxed, however great the hardship may appear to the judicial mind to be. On the other hand, if the Crown, seeking to recover the tax, cannot bring the subject within the letter of the law, the subject is free,

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  however apparently within the spirit of the law the case might otherwise appear to be'."

However, for this Tribunal it is not enough to seek to merely apply a principle of construction such as found expression in that case. It is also necessary to have regard to how the term in question has been considered and applied in other cases, particularly those decided in the High Court of Australia.

7. The starting point for such a consideration is the decision of the High Court in
Smith v. F.C. of T. (1932) 48 C.L.R. 178. That case involved the construction of an exception in the taxing statute. The exception favoured the taxpayer. As such, it fell to be interpreted in accordance with the principle expressed by Barton J, in
Burt v. F.C. of T. (1912) 15 C.L.R. 469 at p. 482 where his Honour said:

"The several deductions allowed by sec. 30 are exceptions to the general rule of taxation prescribed by the Act. Where the construction of such exceptions is seriously in doubt, the interpretation should favour those whose claims are based upon the exceptions. For that position there is the highest authority, if authority be necessary. In
Armytage v. Wilkinson (1878) 3 A.C. 355 at p. 369, the Judicial Committee expressed their dissent from the principle that in a taxing Act provisions establishing an exception to the general rule of taxation are to be construed strictly against those who invoke their benefit."

8. In Smith, "the general rule of taxation" was that stated in sec. 16(b) of the Income Tax Assessment Act 1922-1927 which provided:

"The assessable income of any person shall include...

• (b)...
  • (i) dividends,... credited, paid or distributed to the member or shareholder from any profit derived from any source by the company;"

The exception was by way of a proviso which stated:

"Provided also that where a dividend... is paid wholly and exclusively out of the profits arising from the sale of assets which were not acquired for the purpose of resale at a profit a member or shareholder shall not be liable to tax on that dividend..."

In that case a shareholder in a company had received a dividend which the Commissioner sought to include in the computation of the shareholder's taxable income. He objected. The evidence established that the dividend in question was paid out of a profit arising from the resumption by the Council of the City of Brisbane of real estate which the company had not acquired for the purpose of resale at a profit. The Commissioner's argument that there had been no sale by the company paying the dividend found favour with Gavan Duffy C.J. and Evatt J. who constituted a minority in the Court. They said (inter alia) at p. 184:

"We do not think that the expression `sale' in the proviso is sufficiently elastic to include the compulsory taking of the appellant's (sic) land by the Council. There was no agreement between the parties prior to the taking. The property became vested in the Council by force of the publication of the notice, not by force of any conveyance or transfer. After Gazette notification, the appellant retained no interest whatever in the land, and his sole right was to have compensation paid to him. The subsequent arrangement between the parties as to the amount of that compensation was directed solely to avert the litigation which otherwise would have taken place. For a `sale', there must be a seller or vendor, a purchaser or a buyer, and a transfer of the thing sold - for a price. These predominant features are absent from the transaction here, where there was never a vendor, never a purchaser, and never a price."

The majority took a different view of the matter. Starke, Dixon and McTiernan JJ. in a joint judgment said (inter alia) at p. 190:

"It is an exchange of land, made under legislative enactment, for money. Substantially the Act has provided the price at which the land is to be taken or resumed... The Act looks to the substance of the matter, and is not concerning itself with technical definitions of the word sale."

Rich J. acknowledged what is undisputed, namely that the meaning of the word can vary according to the context in which it is used, saying at p. 188:

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"The common speech of lawyers in Courts of Equity justifies the assertion that the word (sale) is capable of the more extensive meaning (which would favour the taxpayer, so that) the only question remaining is whether in this statute it should receive the more restricted construction. The subject with which the statute is dealing points unmistakably in the direction of the more extended meaning. It is directed to the discrimination between income profits and capital profits, but the object is to leave dividends derived from income or trading profits arising from the disposal of stock-in-trade and the like subject to tax and to exclude from taxation dividends derived from money into which property has been converted although not acquired for the purpose of resale... The fact that the fixed capital is recovered by a compulsory conversion as distinguished by a voluntary conversion of the asset into money is quite irrelevant to the purpose of the Legislature."

Having already said that "sale is not a word of precise technical import", his Honour went on to say:

"In many contexts the essential idea it conveys is an agreement to transfer property for a valuable consideration. Often the valuable consideration intended is restricted to money. In other contexts agreement is not of the essence of the conception but the conversion of property into money or its realisation is the notion sought to be expressed."

His Honour concluded that, in the context of construing one of the exceptions to the general rule of taxation, the term should be given its broader meaning and the taxpayer should have the benefit of that construction.

9. The next decision of the High Court to be mentioned is the unanimous decision of the Court in
Henty House Pty. Ltd. (in vol. liq.) v. F.C. of T. (1953) 88 C.L.R. 141. In that case the Commonwealth had compulsorily acquired a building in Little Collins Street, Melbourne, together with all fixtures and fittings. Many of the fixtures and fittings had been depreciated. The Commissioner increased the income returned by the company by adding back "excess depreciation", contending that he was entitled to do so because the depreciated chattels had been "disposed of, lost or destroyed..." within the meaning of sec. 59 of the Income Tax Assessment Act 1936. Fullagar J. thought the case to be "not free from difficulty". He said at p. 156:

"The term `disposed of' is not a technical term, and its `ordinary or popular' meaning does not, to my mind, cover a case in which a person is deprived of his property against his will or without his consent."

He went on to say at p. 157:

"However I would not deny that the words `disposed of' may, in an appropriate context, properly be given a wider meaning than what I regard as their normal meaning. In the present case we have a provision for adjustment which may operate either in favour of the taxpayer or in favour of the revenue. One would certainly expect to find all cases of alienation covered. No reason suggests itself for distinguishing between a voluntary alienation and a compulsory acquisition."

Having found no basis for any such distinction, he concluded that Smith's case was not to be distinguished.

The other Judges in a joint decision reached the same conclusion saying (inter alia) at pp. 150-151:

"The suggested distinction (between voluntary and involuntary alienation) would rest upon no logical foundation, for the rationale of the section applies as much to dispositions of the kinds just mentioned as it does to dispositions made voluntarily by or by the authority of the taxpayer himself. The apparent object of the section is clear... (in that depreciation having been allowed in relation to the use of the property)... the section provides for the converse case: if it turns out, when the property ceases to be available to the taxpayer for the production of assessable income, that his deductions for depreciation have been greater in total than that portion of the cost which he has failed to recover, then the excess amount shall be brought back into assessable income under sub-s. (2). (In the case of a gift, the value of the property is treated as if it had been recovered by the donor.) No distinction in any way material to these purposes can be drawn between a sale by the taxpayer in the

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market, or exchange or a gift made by him, and a transfer of the title effected by the act of another to whom the law gives the requisite authority... Nothing but quite intractable language could justify us in placing upon provisions of the character which s. 59 exhibits a construction producing so capricious a result as its inapplicability to cases of involuntary alienation."

In those circumstances, the claim of the Commissioner was upheld.

10. Before Henty's case was next considered in the High Court of Australia, the House of Lords had occasion to consider a similar problem in
Kirkness v. John Hudson & Co. Ltd. (1955) A.C. 696. The question at issue was whether a balancing charge should be made by reason of compensation moneys having been received following the acquisition of coal wagons previously used and depreciated by coal merchants under requisition by the Minister for Transport. Section 17 of the Income Tax Act 1945 (U.K.) provided for the making of a balancing charge if the relevant machinery or plant:

• (a) was "sold";
• (b) ceased to belong to the trader by reason of a foreign concession coming to an end;
• (c) was destroyed; or
• (d) (in favour of the taxpayer) if it came to be worn out or obselete or otherwise useless or no longer required before the trade was permanently discontinued.

Viscount Simonds and Lords Reid, Tucker and Somervell of Harrow (Lord Morton of Henryton dissenting) held that there had been no "sale" such as would allow the balancing charge to be made. Viscount Simonds said (at p. 707):

"My Lords, in my opinion, the taxpayers' wagons were not sold, and it would be a grave misuse of language to say that they were sold. To say of a man who has had his property taken from him against his will and been awarded compensation in the settlement of which he has had no voice, to say of such a man that he has sold his property appears to me to be as far from the truth as to say of a man who has been deprived of his property without compensation that he has given it away. Alike in the ordinary use of language and in its legal concept, a sale connotes the mutual assent of two parties."

Lord Reid acknowledged (at p. 728) that:

"It is true that `compulsory purchase' has long been a familiar phrase (but qualified that by saying) it has certainly not been common to use the words `purchase' or `sale' by themselves to describe compulsory acquisition."

He also said:

"I find nothing in the Income Tax Act, 1945, to justify giving to the word `sale' a meaning wider than its ordinary meaning. In a taxing Act, and particularly in a charging section, one assumes that language is used accurately unless the contrary clearly appears, and, in my opinion, s. 17 is a charging section. It is the only section which could authorise the assessment in this case. It is true that its provisions may sometimes favour the taxpayer by entitling him to a balancing allowance. But that does not prevent it from being a charging section as regards those whom it makes liable to pay tax, and no tax can be imposed on the subject without words in an Act of Parliament clearly showing an intention to lay a burden on him. [Per Lord Blackburn in
Coltness Iron Co. v. Black (1881) 6 A.C. 315.]"

Although their Lordships acknowledged that the word "sale" might be given different constructions in different contexts, contrary to the view taken by the High Court in Henty House, they held that the balancing charge could not be imposed.

11. The issue then arose in yet another context and came before Windeyer J. in the High Court of Australia in
Coburg Investment Co. v. F.C. of T. (1960) 12 A.T.D. 242. That case related to a profit which a company had realised on the loss of lands which had been compulsorily acquired.

The Commissioner had assessed the profit against the company and the company had challenged that assessment contending that the land had not been acquired for the purpose of profit-making by sale and, secondly, that in any event compulsory acquisition was not a "sale" within the meaning of the section. Having resolved the first question against the taxpayer,

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his Honour addressed the question of "sale" and, in particular, a submission that the decision of the Court in Smith had been displaced by the decision of the House of Lords in Kirkness. Of the latter decision his Honour said at p. 248:

"That case has little resemblance to this. There, there was a general statutory expropriation of chattels with compensation to be paid at a scheduled rate irrespective of the actual value of the particular chattel. Here there was a resumption of particular land by the ordinary procedure of notice to treat and a price thereafter arrived at by negotiation."

His Honour went on to say:

"In my view s. 26 of the Income Tax and Social Services Contribution Act can be taken as containing an example of such extended use (of the term `sale'). Section 26 reflects and should be read in the reflected light of a general principle: that is that if property be acquired for the purpose of profit-making by dealing in it by sale, as distinct from for the purpose of retaining it as an income producing capital asset, then a surplus received when it is realized is, in an economic sense, received on income account not on capital account. It matters not, for the application of the general principle, whether the actual realization occurred when it did and as it did as a result of compulsion or pressure or purely voluntarily: this is emphatically so when the actual amount obtained on realization is arrived at by mutual assent after negotiation."

12. Having regard to the decision in that case, I would have no doubt that, had the applicant in this reference acquired her shares for the dominant purpose of profit-making by dealing in them or by sale, I would have been obliged to uphold the assessment of the Commissioner. However, the issue does not relate to shares acquired for the dominant purpose of profit-making by sale or used in the course of carrying on any profit-making undertaking or scheme or in any way for use in the course of trade. The shares were capital assets held in order to generate income. Further, the question has to be determined by reference to the provisions of sec. 26AAA of the Act and not sec. 26(a) (as it was).

13. The Commissioner's representative supports the assessment by arguing that the assessment is to be upheld not only by reference to the terms of sec. 26AAA, but also upon the authority of the decision of Neasey J. in the Supreme Court of Tasmania in
Brettingham-Moore v. F.C. of T. 81 ATC 4658. In that case the taxpayer and his wife had bought land in Battery Point, Hobart. Within 12 months of them entering into an agreement to purchase the land they were served with a notice to treat under sec. 12 of the Lands Resumption Act 1957 (Tas.) and later, within the same period, compulsory acquisition of the land was completed by registration pursuant to sec. 14 of a notification under sec. 13 of the Act. To quote his Honour (at p. 4658):

"The effect of sec. 14 is that upon registration of such notification the land in question reverts to and revests in the Crown absolutely for the purpose specified in the notification, and the estate and interest of the person from whom it is acquired is converted into a claim for compensation."

Before the notification was registered the taxpayer and his wife agreed with the Crown upon the amount of the compensation to be paid. It was common ground that the profit in question would not have been assessable under the provisions of sec. 26(a) of the Act had they "sold" it by a voluntary act.

14. In addressing the question before him, his Honour was guided by three decisions of the High Court in which a loss of property by compulsory acquisition was held to be:

• (a) a "sale" by a company, in order to allow the shareholder-taxpayer the benefit of an exception to the general rule of tax as to the taxability of dividends. The High Court interpreted the provision in order to ensure that the same tax result would flow as would have arisen had there been a voluntary disposition (Smith - ante);
• (b) a "disposition" - construed in the context of the phrase "... disposed of, lost or destroyed...", in order to allow the revenue to have the benefit of the writing back of depreciation previously allowed, to an extent to which it came to exceed the depreciation actually incurred over the total period (Henty House - ante); and
• (c) a "sale" for the purposes of sec. 26(a) of the Act, in order to allow a profit

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  following acquisition to be taxed in circumstances in which, had the property been freely sold by the taxpayer at any time, the profit would have been taxable (Coburg Investment - ante).

15. In dealing with the contention for the taxpayer that "the omission from subsec. (1) of sec. 26AAA of any mention of compulsory acquisition means that it is not intended to be included within the meaning of sale", his Honour considered that there was nothing in subsec. (1) which threw any light at all on the question in issue before him. With respect, I disagree. Section 26AAA(1)(f) of the Act greatly extends the meaning of "sale" on any view. It establishes as a "sale" a transfer of property by way of exchange. It also establishes as a "sale" of property a transfer "without consideration". But it does not say anything to suggest that a sale or any other presently relevant consequence flows from anything other than a voluntary act. The circumstance that the draftsman has made provision for the term "sale" to have a meaning it would not bear in the ordinary use of language, itself suggests that the term was not being used broadly or loosely. Further, having extended the concept of "sale" by express words so that it embraces a gift (i.e. a voluntary disposition without consideration), as well as including transactions of barter and sales for undervalue, subsec. (4) also provides that, where the parties to the transfer were not dealing with each other at arm's length, then "profit" was to be measured by taking into account as against the transferor and transferee the amount that "in the opinion of the Commissioner, was the value of the property". In this way it can be seen that sec. 26AAA differs substantially in scope from sec. 26(a). Not only does it enlarge the concepts of "sale" and of "profit", but it also extends to make taxable all such profits, subject to the exceptions expressly provided, provided only that they flow from a "sale" to which the transferor has committed himself within the period of 12 months from purchase as defined by the section (26AAA(1)(g); 26AAA(3); 26AAA(3A)). In that way the section fixes on the date of the voluntary commitment to a contractual relationship as a critical factor, rather than the date on which title passes. In consequence it can be said of the section not only that "it is designed by its reference to a fixed time scale to avoid much of the difficult and time-consuming enquiry often made necessary by the application of sec. 26(a), to the taxation of profit realised on the sale of property", but that it brought to tax transactions not hitherto liable to tax.

16. However, a further most significant difference lies in this: whether a profit will be assessable pursuant to the first limb of sec. 26(a) depends upon the state of mind of the taxpayer at the date of acquisition. His state of mind at the date of sale or other disposition, whether by way of compulsory acquisition or otherwise, will be irrelevant except in so far as it sheds light on his purpose at date of acquisition. In contrast, liability under sec. 26AAA depends wholly on the timing of the commitment to sell.

All of those considerations are interrelated but with the following result:

• (a) if, in the circumstances of Coburg Investment, the company had sold by a voluntary act, its profit would have been assessable on any view whether the sale, or the commitment to the sale, had taken place in 11 months or 13 months from date of purchase. In those circumstances, the decision of the High Court was that it was appropriate to consider the compulsory acquisition as a "sale";
• (b) on the other hand, in Brettingham-Moore the situation was that, if the taxpayer had sold pursuant to voluntary act made after 11 months, the profit would have been assessable pursuant to sec. 26AAA but if the sale had been by reason of a commitment made after only 13 months, the profit would not have been assessable at all: sec. 26AAA not applying because of the time factor and sec. 26(a) not applying because there had been no purpose of profit-making by sale.

I am unable to share the view of his Honour that "no sound reason has been put forward or appears why the concept of a sale of property by the taxpayer should be treated differently as between sec. 26AAA and 26".

17. Further, I am unable to share his Honour's view that "it would be anomalous if in the former it should be construed to refer to a voluntary sale only, whereas the element of voluntariness is, as has been held, immaterial

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in the latter". In my view, there is a marked distinction. In relation to the first limb of sec. 26(a) voluntariness in relation to the divesting of the property and the derivation of the profit was quite unrelated to the purpose of acquisition which was the touchstone for liability. On the other hand, if his Honour is correct, this taxpayer has a tax liability imposed upon her only because of considerations wholly outside her control, namely, the timing by a third party dealing with her at arm's length of its decision to compulsorily acquire from her, in exercise of rights conferred by statute, shares which she had not agreed to sell.

18. With the greatest respect to his Honour I think the view expressed in Brettingham-Moore was incorrect. It is true that in Coburg Investments the broader view here contended for by the Commissioner was taken but, even there, it did not impose upon the taxpayer an obligation in tax which it would not have had if it had sold at a time of its own choosing. I cannot bring to mind any circumstances in which the unilateral act of a stranger dealing at arm's length with a taxpayer can expose that person to liability to income tax and, in so far as Brettingham-Moore is authority to the contrary, I consider that it is incorrect.

19. Even though the decision is a decision of the Supreme Court of one of the States and therefore persuasive, I do not consider that I am bound to follow it (see
Re Sterns Playland Pty. Ltd. and Collector of Customs (No. 1);
Re Mathey Garrett Pty. Ltd. and Collector of Customs (1981) 3 ALN N156 (21 October 1981, Decision No. 562)) and, having regard to the reasons I have expressed, I decline to follow it.

20. Accordingly, the decision of the Tribunal will be that the determination of the Commissioner upon the objection be varied and that the taxable income of the taxpayer for the year of income ended 30 June 1982 be reduced by $5,729.