Bray and Anor. (No.2) v. Federal Commissioner of Taxation.

Judges:
Gibbs J

Court:
High Court

Judgment date: Judgment handed down 8 April 1971.

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Gibbs J.: These appeals by the executors of the will of Thomas Henry Bray, now deceased (``the deceased''), against three assessments to gift duty under the Gift Duty Assessment Act 1941-1963(Cth) (``the Act'') are heard together by consent. In March 1960 the deceased was the owner of a grazing property near Forbes known as Vychan. He was aged about 86 years but was in good health. He was a married man and had two sons, Thomas Leslie Bray and Ralph Douglas Bray, who are the present appellants. Another son who had

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died had left two children, Noel Raymond Bray and Angus John Bray. The family was a united one. On 24 March 1960 T.H. Bray Pty. Ltd. (``the company'') was incorporated. The deceased held one share in the company - a management share which gave him no right to participate in any dividend declared or, in the event of a winding-up, to anything more than the return of capital (£1) paid up on the share, but which constituted him the governing director with wide powers to control the company. The other directors of the company were the appellants and Noel Raymond Bray and Angus John Bray. The first meeting of the directors of the company was held on 30 March 1960. Shares were allotted to the directors (other than the deceased who already held his management share) and to four grandchildren of the deceased, children of Thomas Leslie Bray and Ralph Douglas Bray respectively. At the same meeting it was resolved that the company's solicitor be instructed to prepare the necessary instruments for the purpose of purchasing the property Vychan. A further meeting of the directors was held on 31 March 1960. It was resolved that the company approve the purchase of Vychan at a valuation of £87,675 and otherwise in accordance with the terms of a contract produced by the company's solicitors, and that Thomas Leslie Bray be authorised to sign such contract on behalf of the company. It was further resolved that the company apply to the deceased for a loan of £88,000. The deceased was present at both these meetings. In accordance with the first of the resolutions passed on 31 March 1960 a contract was on the same day signed for the sale of Vychan by the deceased to the company for a price of £87,675. Payment of the purchase price was made by the company on 1 April 1960 by a cheque, the payment of which rendered the company's bank account overdrawn by about £84,673. However, the account was put into credit again on or about 2 April 1960 when a cheque for £88,000 drawn by the deceased was paid into the company's bank account. This was the loan by the deceased to the company which had been contemplated by the resolution of 31 March 1960. There is no evidence that there was any agreement or discussion as to the repayment of the loan and it was common ground that it must be regarded as having been repayable on demand.

On 3 May 1960 an agreement (``the loan agreement'') was made between the deceased and the company with regard to the sum of £88,000 which had been lent to the company on or about 2 April 1960 and none of which had been repaid. This transaction has been treated by the Deputy Commissioner as giving rise to the gift the subject of the assessment in appeal No. 92 of 1970. The material provisions of the loan agreement (which refers to the deceased as ``the lender'', the company as ``the borrower'' and the principal sum of £88,000, or so much as for the time being remains owing, as ``the loan debt'') are as follows -

``(2) The loan debt shall be paid in full by the Borrower to the Lender upon the expiration of ninety (90) days written notice given by the Lender under his own hand to the Borrower requiring the Borrower to pay in full the amount of the said loan debt.

(3) If the Lender by assignment made in accordance with sec. 12 of the Conveyancing Act 1919-1954 of the State of New South Wales should assign the said loan debt to any person then the assignee shall be entitled to obtain payment in full of the said loan debt in the same manner as the Lender could have obtained payment thereof in pursuance of Clause 2 hereof.

(4) Subject to Clauses 2 and 3 hereof the Borrower shall pay to the Lender or his assignee in reduction of the said loan debt annual instalments of not less than two thousand two hundred pounds (£2200.0.0) the first of such annual payments to be paid on the thirty first day of December 1961 and subject to Clauses 2 and 3 hereof each subsequent annual payment is to be paid at the end of each succeeding year ending on the thirty first day of December.

(5) If default be made in payment of the first or any subsequent annual payment payable in pursuance of Clause (4) hereof for a period of more than sixty (60) days after the date hereinbefore fixed for the payment of any such annual payment then simple interest at the rate of five per centum (5%) per annum shall be payable on the loan debt in respect of the period during which such default continues.

(6) Should the Borrower having been required to pay the loan debt pursuant to either Clause 2 or Clause 3 hereof fail so to do then simple interest at the rate of five per centum (5%) per annum shall be payable on the amount of the loan debt outstanding at the date when the Lender or his assignee shall have given written notice to the Borrower in pursuance of Clauses 2 or 3 hereof and shall be payable in respect of the period commencing on the date of the expiration of the aforesaid written notice and ending on the date when the loan debt is paid in full to the Lender or his assignee.

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(7) Subject to the foregoing provisions of this agreement the Borrower shall have the right to repay the loan debt in full at any time or to anticipate the payment of any one or more of the aforesaid annual payments and for the purposes of the foregoing provisions of this agreement the payment in anticipation of any such annual instalment shall be treated as the payment of that instalment on the date fixed for the payment thereof by Clause 4 hereof.

(8) If requested in writing by the Lender or by an assignee to whom or to which the loan debt has been assigned in accordance with the foregoing provisions hereof the Borrower shall execute a floating charge over its undertaking and property for the amount of the loan debt.''

The Deputy Commissioner on 24 July 1969 assessed duty on the basis that this transaction gave rise to a gift valued at £65,650. (The assessment was in fact made in decimal currency but for convenience I shall continue to give the figures in pounds.) He arrived at this value as follows. He treated the consideration for the payment as being the right to have the sum of £88,000 repaid by annual instalments of £2,200, commencing on 31 December 1961, without interest, and assessed the present value as at 3 May 1960 of this right, based on an interest rate of 9% per annum compound interest, at £22,350 and deducted this sum from the face value of the debt (£88,000).

On 5 April 1960 the deceased made gifts in cash totalling £22,600 to Thomas Leslie Bray, Ralph Douglas Bray, Noel Raymond Bray and Angus John Bray and on 8 June 1960 he made a gift of shares valued at £1,000 to Thomas Michael Bray, a son of Thomas Leslie Bray. Neither the fact that these gifts were made, nor their value, was disputed and the appellants did not object to assessments to gift duty originally made by the Deputy Commissioner or to an amended assessment in relation to the gift of £22,600 rendered necessary by the fact that the later gift had the effect of increasing the rate at which duty was payable on the earlier gifts. However on 24 July 1969 the Deputy Commissioner issued two amended assessments in respect of the gifts made on 5 April 1960 and 8 June 1960 respectively, by which he assessed duty on these gifts at a higher rate. The rate of duty is fixed by reference to the ``value of all gifts'', which is to be determined by aggregating the value of the gift in question with the value of all other gifts made within eighteen months previously or subsequently (see the Schedule to the Gift Duty Act 1941-1966 (Cth)) and in his amended assessments the Deputy Commissioner included for the purpose of this aggregation the amount of £65,650 which, as I have already mentioned, he claims was the value of a gift made by the deceased to the company on 3 May 1960. Appeals No. 91 of 1970 and No. 93 of 1970 are brought against these amended assessments. The only question that arises in those appeals is whether the Deputy Commissioner was right in including the amount of £65,650 in the ``value of all gifts'' adopted for the purpose of determining the rate of duty under the Schedule to the Gift Duty Act 1941-1966. All three appeals, therefore, depend on the questions whether on 3 May 1960 the deceased made a gift within the meaning of the Act and, if so, what was the value of that gift.

It is necessary to mention certain further facts on which the respondent relied although some of them are of doubtful relevance. The deceased lent other moneys to the company and to members of his family as follows: to the company, £3,000 on 11 October 1960 and £3,000 on 13 September 1961; to Noel Raymond Bray and Angus John Bray, £3,000 on 14 September 1961; and to Thomas Leslie Bray, £4,000 on 25 June 1962. The last mentioned of these loans carried interest at 5%; the others were apparently free of interest. On 31 October 1961, the deceased made a gift of £200 to Angus Hon Bray. On 17 July 1964 the deceased transferred his share in the company to Angus John Bray and ceased to be a member of the company. The deceased died on 20 September 1964. He had not during his lifetime given any notice under cl. 2 of the loan agreement requiring payment of the full amount of the debt nor had he made any assignment under cl. 3. The three annual instalments of £2,200 each that had fallen due during his lifetime under the provisions of cl. 4 had been paid. The other loans which I have mentioned had not been repaid. The deceased left a will made on 18 March 1961 by which he bequeathed £5,000 to his grandson Thomas Michael Bray and gave the residue of his estate to his trustees in trust, as to one-third for such of the children of Thomas Leslie Bray as should attain the age of twenty-one years in equal shares as tenants in common, as to one-third for such of the children of Ralph Douglas Bray as should attain the age of twenty-one years in equal shares as tenants in common and as to the remaining one-third to Noel Raymond Bray and Angus John Bray in equal shares as tenants in common. At the date of his death his assets totalled £48,440 and his liabilities £159. A substantial part of his assets (£40,022) comprised debts due to the estate. These debts were made up of the debt due under the loan agreement (which was valued at £24,938) and other debts totalling £15,084 which included the loans already mentioned and included also a further debt of

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£1,840 due by the company. The debt due under the loan agreement was valued at £24,938 on the assumptions (upheld as correct in
Bray v. F.C. of T. (1968) 117 C.L.R. 349) that the right to give a notice under cl. 2 was personal to the deceased and could not be exercised by his executors and that after the death of the deceased the only obligation owed by the company was to pay the debt by the instalments fixed by cl. 4. The debt was accordingly valued by discounting £81,400 (the balance due at the date of death) at compound interest at 9% per annum.

It is settled by the decision of this Court in
McGain v. F.C. of T. (1966) 116 C.L.R. 172 that the payment of money by a lender to a borrower constitutes a disposition of property within the definition contained in sec. 4 of the Act. In fact, in the present case, no money was paid on 3 May 1960, but the parties in their submissions were in agreement that the effect of what was done on that day was the same as if the deceased had demanded and received repayment of the sum of £88,000 lent on or about 2 April 1960 and had relent it to the company on the terms of the loan agreement. It was accordingly not contested by the appellants that there was a disposition of property on that day. The question that then arises is whether the consideration for the disposition was fully adequate, for the combined effect of the definition of ``gift'' in sec. 4 of the Act, and of sec. 17, is that if the consideration was not, or, in the opinion of the Commissioner, was not, fully adequate, there was a gift whose value was the extent of the inadequacy. Section 18(1)(b) of the Act provides -

``For the purpose of computing the value of a gift - (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;''

There is no other provision of the Act that would require the gift in the present case to be valued at any other time than the time of its making. Since the value of the gift is to be measured by deducting the value of the consideration for the disposition from the value of the property the subject of the disposition, it is necessary for the purpose of determining the value of the gift to value the consideration as at the time of the making of the gift, that is, as at the time the disposition took effect (see McGain v. F.C. of T. (supra) at pp. 174-5). In the present case the consideration consisted of the promises of the company to pay (see McGain v. F.C. of T. (supra) at p. 175). It is therefore necessary to value as at 3 May 1960 the promises by the company contained in the loan agreement.

The Deputy Commissioner, in valuing the consideration at £22,350 in the manner already mentioned, adopted a method of valuation which was approved in McGain v. F.C. of T. (supra) as appropriate to a case in which the borrower of an interest-free loan undertakes to pay it by annual instalments. He has treated the promise by the company to pay the amount of the debt in full upon the expiration of ninety days' notice as adding nothing to the value of the consideration.

On behalf of the respondent it was submitted that the Deputy Commissioner was correct in attributing no value to the promise contained in cl. 2 of the loan agreement. Two different lines of argument were advanced in support of this contention. First, it was said that the evidence showed that the deceased intended that action under cl. 2 should never be taken to require repayment of the debt. It was submitted that the loan agreement formed part of the action taken to implement a scheme by the deceased to pass his estate to other members of his family during his lifetime. Particular reliance was placed on the evidence that the family was a united one and the company a family company, that the deceased during 1960 and subsequently made various gifts and loans to the members of his family and to the company, and that as a result at his death he had comparatively few assets, except the moneys that were out on loan. However, there is no evidence that any of these loans were, in truth, intended to be gifts. In particular, it seems to my mind impossible to hold that the loan agreement was a sham designed to cloak a real arrangement that the moneys were never to be repaid. It is true that at 3 May 1960 it was improbable that the deceased would give written notice under cl. 2 requiring payment in full, but there is no justification for holding that it was not intended that the annual instalments under cl. 4 should be paid. In fact, the instalments due during the lifetime of the deceased were paid. After his death it became the duty of his executors to obtain repayment from the company in accordance with cl. 4. Not all the shareholders in the company were beneficiaries under the will and those who were beneficiaries took interests in the estate which were not proportionate to their shareholdings in the company. Of course, the beneficiaries, if they were all sui juris, could have released the executors from their obligation to get in the debt, but there is no evidence that they have done so or were likely to do so. To say that a substantial part of the estate of the deceased consisted of debts arising from loans does not assist the respondent's case when the evidence does not support the conclusion that the loans would not be repaid. There is no evidence that the deceased engaged in any scheme to divest himself

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of his assets during his lifetime and none to suggest that the loan agreement was anything other than an agreement made in good faith which conferred rights and created liabilities in accordance with its terms. There is not the least evidence that the deceased made any arrangement with the company or with the other members of his family that he would not under any circumstances exercise the power given by cl. 2 of the loan agreement. It may be that he thought that it was most unlikely that he would ever exercise the power given to him by cl. 2, but it does not follow, and if it matters there is no ground for holding, that at the time he entered into the agreement he had formed an intention never to give the written notice. The most that can properly be inferred is that he intended not to give the notice if things remained as they were. However, even if he had intended never to avail himself of the right given by cl. 2, that would not have affected the existence of the right. The clause gave him the right to require the payment in full and he might have done so if a change had occurred in his own circumstances or in his relationship with his family, whatever his original intention may have been.

The respondent, however, submits that the evidence of the events that occurred subsequently to 3 May 1960 (which can be taken into account in order to determine the proper weight to attach to the circumstances existing at 3 May 1960 -
McCathie v. The F.C. of T. (1944) 69 C.L.R. 1 at p. 16) shows that the right given by cl. 2 was, in fact, valueless. The deceased did not before he died give the written notice contemplated by cl. 2 and, as I have said, at his death his executors had no right to require payment of the debt otherwise than by the annual instalments provided by cl. 4. Therefore, it was said, not only was it probable that the deceased would never give notice under cl. 2 requiring payment in full, but, in fact, he never did so, and the right given by cl. 2 never was and never can be exercised. This, however, does not mean that the right given by cl. 2 was of no value. Property is not valueless simply because it is not used and rights may be valuable at the time of their creation even if they are unlikely to be exercised and, in fact, never are exercised. For example, it could not be held that a sale of property was made without consideration because a cheque given for the price was never presented for payment, provided, of course, that the giving of the cheque was not a mere sham. In the present case the promise embodied in cl. 2 forms part of the consideration that must be valued as at 3 May 1960. As I hold, the giving of the promise was not illusory and the promise when it was made was binding and enforceable. The promise was of substantial value and it was wrong to treat it as adding nothing to the value of the consideration for the loan.

The conclusion at which I have arrived seems to me to be supported by the decision of this Court in
Fadden v. F.C. of T. (1945) 70 C.L.R. 555. In that case a father transferred shares to his children for a stated consideration which was the full value of the shares. The amount was not, in fact, paid but it was held that in the circumstances a promise to pay it could be implied. It was further held that the promise was immediately enforceable although, in fact, it had not been enforced for about three years. The Commissioner assessed the transaction to gift duty, but this Court set the assessment aside. Latham C.J. said (at p. 559) -

``In my opinion, it is impossible to say that such a promise is an inadequate consideration and it has not hitherto been suggested that a distinction should be drawn between such promises as consideration by reference to the financial capacity of the promisor to pay. Entry into such matters to determine the `real consideration' or the `adequacy' of the consideration under such provisions as those now under consideration would open up an entirely new field of inquiry, an inquiry which there appears to be no authority for making.''

That case establishes not only that a promise to pay may be good consideration for gift duty purposes but also that it is immaterial that the promise has not been enforced, and that there might be difficulty in fact in enforcing it, provided of course that the transaction was bona fide. It follows that what has to be valued is the promise itself, and, once it is decided that the promise is not merely colourable, questions whether the promisor will be required, or able, to fulfil it are not to the point.

The second branch of the respondent's argument was that sec. 18(1)(a) of the Act justified the Deputy Commissioner's valuation. That section provides -

``(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;''

It was submitted that the possibility that the deceased might give notice under cl. 2 of the loan agreement was a contingency - something that might or might not happen - and that it was rightly disregarded under sec. 18(1)(a). If that argument is correct, it would entail the somewhat surprising result that any interest-free loan repayable on demand would have to be treated for the purposes

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of the Act as a gift of the full amount of the money lent. However, I am unable to accept the argument. 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 done 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 divestit 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 rl. 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. (1964-65) 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.

For the reasons I have given I hold that the Deputy Commissioner was in error in regarding the promise contained in cl. 2 of the loan agreement as adding nothing to the value of the consideration passing from the company and that in consequence his valuation of the gift made on 3 May 1960 was manifestly excessive.

It remains to consider what value should be placed upon the promises of the company contained in the loan agreement. As I have said, the valuation is to be made as at 3 May 1960.

In the present case, where there is no ground to hold that the loan agreement was a sham or that the promises in it were made other than bona fide, it is clear that the agreement contained in cl. 2 is the most valuable of the promises contained in the loan agreement. It conferred on the deceased the right to repayment upon the expiration of ninety days from the giving of the notice. That right is reinforced by cl. 8 and also, to some extent, by cl. 6, although the comparatively low rate of interest provided by cl. 6 in the event of default might not in itself operate as an inducement to a borrower to repay. However, in my opinion, one ought not to speculate whether a borrower would prefer that the lender should eventually recover judgment against him for the debt plus interest at 5% rather than that he should make payment in accordance with a notice. Speculation of that kind would involve enquiries similar to those which Fadden v. F.C. of T. (supra) at p. 559 indicated ought not to be made. Clause 2 conferred an effective right in effect to repayment after ninety days, and the value of that right has to be determined.

On behalf of the appellants, Mr. McCorquodale, a chartered accountant, valued as at 3 May 1960 the debt owing by the company to the deceased. He arrived at the value of the debt simply by deducting from the total amount payable (£88,000) an amount representing interest at the rate of 6% for ninety days (viz. £1,283). He accordingly valued the debt owed by the company to the deceased at £86,717, and the gift at £1,283. Alternatively he determined the value of the debt to a purchaser by deducting not only interest at 6% for ninety days, but also expenses (such as stamp duties and other fees) which would be incurred by a purchaser in getting the debt into his hands. I would reject this alternative method as tending unduly to inflate the value of the gift. It seems to me that when it becomes necessary to value the ``consideration in money or money's worth passing from the disponee to the disponor'', for the purpose of determining the extent of the inadequacy of consideration within sec. 17, one should consider the value of the consideration in the hands of the disponor. Where the consideration consists of a promise which is valuable to him, there is no justification for depreciating its value by assuming that he would have to incur the expenses of selling it to somebody else.

In the course of cross-examination Mr. McCorquodale was asked whether it was right to

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say that the valuation was made upon the basis that he had assumed that cll. 2 and 3 of the loan agreement would be implemented or acted upon and he gave an affirmative answer. It was submitted on behalf of the respondent that the evidence proved this assumption to be ill-founded and that the valuation was, therefore, not to be accepted. It was, in my opinion, irrelevant whether the rights given by cll. 2 and 3 of the loan agreement would be exercised because what had to be valued were the promises themselves. Although Mr. McCorquodale did, on his own admission, make an erroneous assumption as to an irrelevant matter, it is impossible to say that it caused him to place a smaller value on the gift than he should have done. The promises were to be valued on the footing that the rights which they gave could be exercised, although in fact they were never exercised.

On behalf of the appellant it was submitted that the rate taken by Mr. McCorquodale, namely 6%, was too high. Mr. McCorquodale, in fixing this rate, had regard inter alia to the small excess of the value of the security over the amount of the loan, and it was submitted on behalf of the appellant that Fadden v. F.C. of T (supra) shows that this was a matter that should not have been considered. The passage which I have already quoted from Fadden v. F.C. of T. (supra) at p. 559 shows that in valuing a promise to repay, it is not right to consider the financial capacity of the promisor to repay, but it does not follow that the value of the security is irrelevant in fixing an appropriate interest rate. Having regard to the rates of interest prevailing at the material time and to all the circumstances, I consider that 6% was an appropriate rate to select for discounting purposes.

I hold that the value of the gift made by the deceased to the company on 3 May 1960 and £1,283 ($2566). It follows that the amended assessment the subject of appeal No. 92 of 1970 must be amended by reducing the value of the gift from £65,650 ($131,300) to £1,283 ($2,566). The effect of this reduction will be that the rates of duty originally adopted by the Deputy Commissioner in his assessments of the gifts made on 5 April 1960 and 8 June 1960 were correct and no increase in those rates is required by reason of the gift made on 3 May 1960. It follows that the amended assessments the subject of appeal No. 91 and appeal No. 93 of 1970 should be allowed and that the assessments the subject of those appeals should be set aside.

ORDER:

In matter No. 91 of 1970 - Appeal allowed. Amended assessment dated 24 July 1969 set aside. In matter No. 92 of 1970 - Appeal allowed. Assessment made on 24 July 1969 set aside. Matter remitted to the Commissioner with liberty to re-assess in accordance with my judgment. In matter No. 93 of 1970 - Appeal allowed. Amended assessment dated 24 July 1969 set aside. Order that the Commissioner pay the appellants' costs taxed on the basis that the matters were heard together. Usual order as to exhibits.