Federal Commissioner of Taxation v. Miranda.

Judges:
Rath J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 8 July 1976.

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Rath J.: This is an appeal by the Commissioner of Taxation from part of the decision of a Taxation Board of Review (Case G30, 75 ATC 170) upholding the objection of the respondent against an assessment to income tax based upon income derived during the year ended 30th June, 1970. The appeal relates to the sale by the respondent of certain rights in a new issue of shares in December 1969. The appellant claims that the proceeds from the sale of these rights should be brought to tax pursuant to the provisions of sec. 26(a) of the Income Tax Assessment Act 1936 as amended.

Only the first limb of sec. 26(a) is relied upon by the appellant. Thus the relevant provision of the Act is ``The assessable income of a taxpayer shall include - (a) profit arising from the sale by the taxpayer of any property acquired by him for the purpose of profit-making by sale''.

The shares which gave rise to what may be conveniently termed the rights issue and other shares forming part of the history of share dealings were owned by the taxpayer and his sister in partnership and were registered in part in the name of the taxpayer and in part in the name of his sister. Nothing in this appeal turns upon the partnership arrangements or upon the particular name in which shares were registered and for the purpose of stating the relevant facts the shares and associated rights issues may be treated as belonging to the respondent.

All the transactions related to shares and rights issues in Barrier Exploration N.L. Between 2nd February, 1968 and 23rd April 1968 the taxpayer and his sister acquired 3,500 shares in the company. Some of these were acquired pursuant to a rights issue on 14 April, 1969. 1,400 of the shares were disposed of on 7 October, 1969. In December 1969 the company made a rights issue on a one for one basis, thus giving the respondent and his sister 2,100 rights corresponding with the 2,100 shares then held by them. On 5 January, 1970 100 shares were disposed of and then on 8 January 1970 the remaining shares and the rights were sold.

Before the Board of Review there were two issues arising under sec. 26(a), one relating to the profit on the sale of the shares and the other relating to the proceeds from the sale of the rights. The Board of Review unanimously found that the shares had been acquired for the purpose of profit-making by sale and it therefore held that the assessable income included the profit arising from the sale of the shares. By a majority the Board of Review held that the proceeds from the sale of the rights did not form part of the assessable income. No appeal has been made by the respondent in regard to that part of the decision of the Board relating to the sale of the shares.

The appellant has submitted that the rights created by the company in December 1969 form part of the bundle of rights constituting the shares themselves with the result that these rights form part of the property acquired by the respondent for the purpose of profit-making by sale. Alternatively the appellant submits that the acts of the respondent in relation to the rights issue in December 1969 amounted to an acquisition itself of property and that that acquisition was for the purpose of profit-making by sale. This alternative submission was primarily based on the reasons of the minority member of the Board of Review, though in his reply counsel for the appellant made some additional submissions on the matter.

Counsel for the respondent contended that the right relied upon by the appellant, namely the right to participate in future rights issues, was not property within the meaning of sec. 26(a). Alternatively he submitted that if that initial right was property it was not the same property that was subsequently disposed of. As I understood the contentions of the parties, it was common ground that for a

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transaction to fall within sec. 26(a) it was necessary that the property acquired and the property sold should be identical. In rebuttal of the appellant's alternative submission the respondent contended that there were no acts on his part that could constitute an acquisition of property. The submission of counsel for the respondent was that the acts in relation to the December rights issue were all acts of disposition and not of acquisition. Counsel for the respondent also submitted that whether the rights disposed of were part of the original property acquired or were themselves property acquired for the purpose of profit-making by sale, nevertheless no profit within the meaning of sec. 26(a) resulted from the sale of the rights.

In order to determine which of these rival submissions is correct, it is necessary to examine in some detail the basis upon which the December rights issue was made and the nature of the rights involved in the issue itself.

Articles 4 and 5 of the articles of association of Barrier Exploration N.L. are as follows: -

``4. Subject to the provisions of these articles and to sec. 17 and 68 of the Act all shares shall be under the control of the directors who may allot or otherwise dispose of the same to such persons on such terms and conditions and either at par or at a premium or at a discount and at such times as the directors think fit and with full power to give to any person the call of any shares either at par or at a premium during such time and for such consideration as the directors think fit.

5. Notwithstanding anything in these articles: -

• (a) no shares shall be issued to transfer a controlling interest in the company unless the shareholders in general meeting have previously approved of the specific issue;
• (b) no director shall participate in any issue of shares to employees unless the shareholders in general meeting have previously approved of the specific issue to be made to such director and unless such director is employed by the Company in an executive capacity; and
• (c) no shares shall be allotted issued or otherwise disposed of otherwise than to existing shareholders on a basis pro rata to shares held unless such disposal has been previously approved by the shareholders in general meeting or unanimously approved by all the directors.''

It is of course art. 5(c) upon which the appellant places particular emphasis.

Some difficulty has been experienced in assembling the documentary material relating to the December rights issue. There was not available a copy of the minutes relating to the December one for one rights issue, but it was agreed that the directors' minute in relation to this issue was in a form corresponding to the minute relating to a prior two for five rights issue in February 1969. The resolution in February 1969 so far as material reads as follows: ``Resolved that registered shareholders at 5 p.m. on Wednesday 19 March 1969 be offered a two for five issue of ordinary shares, of 50 cents each, payable 10 cents on acceptance (being one cent application and nine cents pre-payment of call) with applications not later than 5 p.m. on Wednesday 30 April 1969: fractions of shares to be adjusted to whole numbers and rights to the issue to be renounceable. Further resolved that Patrick & Company, members of the Stock Exchange of Sydney, be appointed underwriters to the issue at a fee of $1000 and application be made for official quotation of the shares comprised in this issue on the stock exchanges of Melbourne, Sydney, Brisbane, Adelaide, Perth''. The date of the December meeting authorising the new share issue does not appear but there was an extraordinary general meeting of the company on 1st December at which it was resolved that the capital of the company be increased from $3,000,000 to $6,000,000 by the creation of 6,000,000 additional shares of 50 cents each.

On or about 17 December 1969, a letter of offer of the one for one issue of ordinary shares was forwarded to each shareholder in the company. Under the heading ``Entitlements'' this letter of offer stated ``registered shareholders at 5 p.m. on Tuesday, 2nd December, 1969 will be entitled to participate in the issue in the proportion of one new share for each one share (both 30 cents paid and 10 cents paid shares) then registered in their names on the terms and conditions stated herein. Your entitlement to new shares is shown on the enclosed acceptance form. Rights to the issue will be renounceable.'' It was further stated that the shares created by the

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issue would be listed for official quotation on the Stock Exchanges of Melbourne, Sydney, Brisbane, Adelaide and Perth. Under the heading ``Rights Trading'' the following appears: ``By arrangement with the Stock Exchanges of Melbourne, Sydney, Brisbane, Adelaide and Perth quotation of rights commenced on Tuesday 2 December 1969, and will cease on Tuesday 27 January 1970''. This document also contains instructions for lodgment of acceptance and renunciations. These instructions read in part as follows:

``Acceptance of your entitlement in full:

If you are accepting your entitlement in full, please complete and return the attached acceptance form, together with your remittance for the amount payable as stated on the form so as to reach the company's office... not later than 5 p.m. on Tuesday, 27 January 1970, otherwise the offer herein contained shall be deemed to have lapsed.

Sale of your entitlement in full by your sharebroker:

If you are selling all of your entitlement the acceptance form must be forwarded to your sharebroker and the panel titled `Instruction to your sharebroker' completed. Your sharebroker will then forward to you the appropriate security renunciation form/s (yellow), covering the rights sale, for completion and prompt return to him.

Acceptance in part and sale of the balance of your entitlement by your sharebroker:

If you are accepting part of your entitlement and selling the balance the acceptance form must be signed and forwarded to your sharebroker, with your cheque for the amount due on that portion of the entitlement that you are accepting, and the panel titled `Instruction to your sharebroker' completed. Your sharebroker will lodge your acceptance and forward to you the appropriate security renunciation form/s (yellow) covering the rights sold for completion and prompt return to him.''

The portions of these instructions of particular significance in the present case are those relating to sale of the entitlement in full because the respondent here did in fact sell the whole of the relevant entitlement.

The acceptance form produced on the hearing was not the actual form completed by the respondent but was merely the general form relating to the rights issue as a whole. It contained a portion in which details of the entitlement could be shown and it would appear, having regard to the letter of offer, that the form received by the respondent would have had the entitlement set out in it. It appears that in a case where the shareholder intended to renounce all his rights no part of this form would require any filling in by him other than the instruction to his sharebroker. In such a case there would be nothing further for the respondent to do than insert in the proper box a number equal to the number of rights to which he was entitled. No signature by him would in this case apparently be required upon the acceptance form. After the despatch of the acceptance form and its receipt by the broker the respondent would have received from his broker an instrument of renunciation under the Marketable Securities Act. It did not appear whether the relevant Act was the Victorian Act (Victoria being the place of incorporation) or the New South Wales Act, but it was agreed that whichever Act was applicable the document received from the broker would be to the effect of the document or documents referred to in para. (b) of sec. 3 of the Marketable Securities Act, 1967 (New South Wales). The document that would be thus received by the respondent would have provided for his signature as authorising a renunciation of rights and a transfer of the rights in favour of a transferee. At the time of his execution of the document, however, it would not appear to have been necessary that particulars relating to the transferee should be given or indeed that the transferee at that point of time should have been ascertained. After the document was signed and returned to the respondent's broker no further act was required from the respondent himself to complete the renunciation and transfer. His broker would of course have to carry the matter through to the point of sale if that had not already been done and the acceptance form, the broker's transfer form and the security transfer form signed by the respondent would have to be lodged with the company. Presumably this lodgment could be and would ordinarily be effected by the transferee's broker.

The arguments in support of the appellant's first submission were put in a summary form in writing, and it will be convenient here to set out this written argument. It is as follows: -

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``1. It is right to say that a shareholder has no right to force the directors to make an issue of bonus shares or to make a new issue.

2. At the same time a shareholder has the right to require the directors to effect any capitalisation of profits or revaluation of assets by the issue of shares to existing shareholders in accordance with the Articles.

3. This right is one which a shareholder acquires at the time of acquisition of his shares whether by allotment or by transfer following upon purchase from an existing holder.

4. This right is `property' in the relevant sense.

5. When the company determines on an issue of bonus shares or on a new issue to shareholders the right crystallizes in that the shareholder's right becomes quantified in relation to number of shares and the date when they are to be issued to him.

6. It is, however, not a new right which he acquires, nor is this the first time that it is property which is acquired. The analogy of a floating charge which crystallizes into a fixed charge is not complete but is helpful by way of illustration.

7. The point is most clearly illustrated by reference to a bonus issue. The shareholder is at all times entitled to an `interest' in the profits reserve or in the asset to be revalued. A hypothetical ten shares in a company with an issued capital of 100 shares gives him a 1/10 `interest' in the assumed undistributed profit reserve.

8. If the company then decides to issue ten for one bonus shares, his 100 shares will still only give him a 1/10 `interest' in the newly inflated issued capital of 1,000 shares. All that he now has is more pieces of paper, but he cannot be said to have acquired any new property.

On the other hand the transaction may be reflected on the stock exchange so as to throw up additional `profit'. Before the issue the shares were worth $10 each, i.e. the ten shares were worth $100. Arithmetically the 100 shares should still only be worth $100, i.e. $1 each. But if because of market forces, e.g. the availability of extra scrip for trading, the shares are $1.50 each, the extra $50 which the shareholder could collect by selling his 100 shares would not come to him because he acquired any new property. He will still make available to any purchaser of his shares in the company the same 1/10 interest in the company.

9. The `right' which this hypothetical shareholder had at all times is represented by more pieces of paper evidencing an entitlement which has remained constant throughout.

10. In a pro rata new issue to shareholders the position is the same except that the company's assets in which the shareholders have an interest has also grown by the amount subscribed for the shares but of course subscribed pro rata.

11. Another illustration of the `pieces of paper' notion is a share split. If the ten shares previously referred to were $1 shares and were split into 10 cent shares, once again the shareholder would have 100 shares in lieu of the 10 he previously had. The `property' which the shareholder `acquired' for the purposes of resale at a profit should now be viewed as 100 shares and not just the original 10.''

The appellant relied upon three cases in which the nature of shares in companies has been discussed. They are
Bradbury v. English Sewing Cotton Company (1923) A.C. 744,
Borland's Trustee v. Steel Brothers & Co. Limited (1901) 1 Ch. 279 and
The Bank of New South Wales v. The Commonwealth (1948) 76 C.L.R. 1.

In Bradbury v. English Sewing Cotton Company Lord Wrenbury said (at p. 767): ``The English Companies Acts contain provisions under which a company limited by shares is to have `a capital divided into shares'... A share is, therefore, a fractional part of the capital. It confers upon the holder a certain right to a proportionate part of the assets of the corporation, whether by way of dividend or of distribution of assets in winding up. It forms, however, a separate right of property. The capital is the property of the corporation. The share, although it is a fraction of the capital, is the property of the corporator. The aggregate of all the fractions if collected in two or three hands does not constitute the corporators the owners of the capital - that remains the

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property of the corporation. But, nevertheless, the share is a property in a fractional part of the capital''.

In Borland's Trustee v. Steel Brothers & Co. Limited Farwell J. said (at p. 288): ``A share, according to the plaintiff's argument, is a sum of money which is dealt with in a particular manner by what are called for the purpose of argument executory limitations. To my mind it is nothing of the sort. A share is the interest of a shareholder in the company measured by a sum of money, for the purpose of liability in the first place, and of interest in the second, but also consisting of a series of mutual convenants entered into by all the shareholders inter se in accordance with sec. 16 of the Companies Act, 1862. The contract contained in the articles of association is one of the original incidents of the share. A share is not a sum of money settled in the way suggested, but is an interest measured by a sum of money and made up of various rights contained in the contract, including the right to a sum of money of a more or less amount.''

In The Bank of New South Wales v. The Commonwealth Latham C.J. said (at p. 209): ``A share in a company is described as a share in the capital of a company. The capital of a company is expressed by a sum of money, but a shareholder does not become a part owner of property owned by the company or of a balance of assets over liabilities. A share in a company, regarded as property, consists of the rights to which the shareholder is entitled by reason of the provisions of the articles and memorandum of association and any relevant statute: Borland's Trustee v. Steel Brothers & Co. Limited''.

The essence of the appellant Commissioner's argument is that the rights sold are part of the fasciculus or bundle of rights that constitute the shares that were acquired for the purpose of profit-making by sale. In support of this argument he relies upon
Archibald Howie Pty. Limited v. Commr. of Stamp Duties (N.S.W.) ((1948) 77 C.L.R. 143). In that case the company, pursuant to a resolution (duly confirmed) to reduce capital, distributed to shareholders certain assets of the company, being shares held in other companies. The capital reduction was the amount of nineteen shillings and sixpence on shares of £1 each, to be effected by a distribution in specie. Assets were transferred at their book value. The question for the court was whether stamp duty on the transfer should be at the rate for conveyances without consideration, or at the rate for conveyances made upon a consideration in money or money's worth of less than the unencumbered value of the property conveyed, or at the rate for conveyances made upon a consideration in money or money's worth of not less than the unencumbered value of the property conveyed. It was held by the High Court (Rich, Dixon and Williams JJ.) that the last mentioned rate was the appropriate one. Rich J. agreed with the judgments of Dixon and Williams JJ. Dixon J. (as he then was) said (p. 152):

``In a distribution in specie in consequence of a reduction of capital brought about because of the possession of surplus assets there are in my opinion two aspects of the transaction in which an adequate consideration in money or money's worth may be seen. They are perhaps two sides of the same thing, but for clearness I shall distinguish between them in stating reasons for my conclusion.

(1) A reduction of capital involving the payment off of any paid up share capital, or what is in essence the same thing, the distribution of assets in specie in satisfaction of paid up share capital, is a transaction which must be provided for by the articles of association. We have not been furnished with the articles in the present case, but they must contain the requisite clauses. While a shareholder has not a proprietary right or interest in the assets of an incorporated company, his `share' is after all an aliquot proportion of the company's share capital with reference to which he has certain rights. He is entitled among other things to have share capital applied in pursuance of the memorandum and articles of association and, so far as assets are available for the purpose, to have his paid up capital returned in a liquidation or upon a reduction of capital if that method of returning it is decided upon pursuant to the articles of association. These rights all arise out of the contract inter socios.

It is not unimportant that sec. 158(1) of the Companies Act 1936 (N.S.W.) (which is based on sec. 55(1) of the English Companies Act 1929) empowers a company to reduce its capital only `if so authorized by its articles'. The reduction involving the payment off of part of the paid up share

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

The conclusion expressed in the last sentence was of course particularly pertinent to that case. It does not necessarily imply that in all circumstances the money paid on the allotment of a share is adequate consideration for the allotment. The conclusion is dealing, not with that aspect, but with the adequacy of the consideration given on allotment when regarded as consideration for the transfer of assets in specie pursuant to a resolution for reduction of capital. Attempts have been made to persuade the court in later cases that the Howie case is authority on the question of adequacy of consideration for the allotment itself, and these attempts have failed. I shall be referring to these cases later. In the passage I have quoted from the judgment of Dixon J., the important matter for the issues before me is the stress that is laid upon the contractual nature of a share. There is a causal connection between the right conferred by a distribution in specie on a reduction of capital and the right attaching to the share itself to participate in any such distribution (should it occur), with the result that the consideration for the allotment of the shares is adequate consideration for the distribution.

The judgment then proceeds to the second ``aspect'' of the transaction, as follows: -

``(2) From the standpoint of company law the division of the capital of a company into shares and the payment up of shares issued are regarded as respectively significant and real. The shareholder contributes the amount of the share to the capital of the company. This contribution measures his right to any return of capital which the company may make either as a going concern or in a winding up. Subject to any regulations the articles may make as to the basis upon which assets in excess of share capital may be distributed, the amount of the share determines the proportion in which he shares with other shareholders in a distribution of excess assets.

Thus when the amount of the issued shares in the case of this company was reduced from £1 each to 6d. each, it meant that if any of the unissued £1 shares were afterwards issued the proportion in which the respective holders of a share of the former issue and of one of the subsequent issue would in a winding up share in any funds exceeding the share capital would be as 1 is to 40. This is but an illustration of the significance of the division of the share capital into shares, shares now of a different denomination.

The truth is, however, that the return of 19s. 6d. of the amount paid up is the discharge pro tanto of a claim of the shareholder upon the assets of the company. If the transaction had taken the form of a reduction pursuant to para. (c) of sec. 158(1) of the Companies Act" - now sec. 64(1)(c) of the 1961 Act - "the resolution must have been expressed as a payment off of part of the share capital. If that had been followed by a requirement that assets should be accepted in satisfaction of the amount paid off, it would have doubtless been regarded as the acquisition of assets for a consideration expressed in money.

But sec. 158(1) confers a power of reduction which, if the authorization in the articles is sufficiently wide, may go outside the three paragraphs of the sub-section... The direct allocation of assets for distribution in reduction of the amount of the shares is doubtless within the provision. But that means that the shareholder in satisfaction of his proportionate `interest' in the assets, an interest consisting of a congeries of rights in personam, takes an aliquot part of the assets. There is an equivalence not only from a logical but from a realistic point of view. The reduction in both the amount and value of the share affords an adequate consideration in money and in money's worth.''

In this passage the consideration is expressed, not as the allotment money, but as

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the reduction in the amount and value of the share. There is ``an equivalence'' between this reduction and the value of the assets transferred in specie. The emphasis is upon the fact that the transfers are made by way of return of capital to the shareholders (
Davis Investments Pty. Limited v. Commr. of Stamp Duties (N.S.W.) (1958) 100 C.L.R. 392 per Taylor J. at p. 419). The shareholder is receiving part of the capital in specie in discharge of his corresponding aliquot interest in the capital.

Williams J. in the Howie case said (at p. 157):

``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. Amongst the most valuable of these rights are the rights to share in the distributions of moneys and assets already mentioned. The declaration of a dividend and the taking effect of a special resolution to return capital create debts because the shareholders have acquired the legal right to be paid these moneys for valuable consideration. If the moneys were not payable as debts but as gifts the shareholders would have no legal rights to sue for them. The authorities already cited show that the shareholders have these legal rights. They are legal rights which flow from the original issue of the shares. They are ingredients in the chose in action which each original shareholder purchased from the company.''

Later cases show that this passage should not be taken as meaning that the allotment money is necessarily adequate consideration for the allotment for the purpose of stamp duty law. But for the purposes of this case, the significance of the passage lies in its insistence that the right to a distribution in specie upon an appropriate resolution for reduction of capital is one of the rights that constitute the shares. As Taylor J. said in the Davis Investments case, referring to the judgments of Dixon and Williams JJ. (at p. 418): ``Both sets of reasons disclose that the decision rested upon an examination of the nature of the rights created by the issue of a share in the capital of a company and upon the conclusion that a distribution of assets upon a reduction of capital is directly and expressly in satisfaction, pro tanto, of the rights of the shareholders as such.''

The reasoning in Howie's case obviously cannot be pressed to the extent of saying that any of the rights which constitute the share as such is equivalent to or identical with a dividend received or an asset transferred. In Howie's case it was not held that there was an identify of a right comprised in a share in the company with any asset transferred pursuant to the resolution to reduce capital. What was said, by both Dixon and Williams JJ. was, firstly, that the consideration for the allotment of a share was adequate consideration for the transfer in specie. More directly relevant to the present case is the second view of Dixon J., namely that the reduction in both the amount and value of the share affords an adequate consideration in money and money's worth. No reduction in value is effected by the resolution itself to reduce capital. That resolution (as Williams J. pointed out) brings into existence a legal claim attaching to the share itself. It is that claim which is discharged by the transfer of assets.

This analysis shows that the legal rights which constitute a share are not static, but may vary from time to time. But the variation is always referable to the contract inter socios that came into being on the allotment of the shares. On the allotment of a share, the shareholder becomes contingently entitled to dividends, and to participation in distributions of capital. The entitlement becomes a legally enforceable right in circumstances arising under and by virtue of that contract. The legal right then takes the place of the contingent right, and is one of the rights in the ``congeries'' of rights that then constitute the share. For the purposes of sec. 26(a) of the Income Tax Assessment Act it seems to me that the share is the same property both before and after the change in the form of the right. The share in substance remains what it always was, namely ``an aliquot proportion of the company's share capital with reference to which (the shareholder) has certain rights''. But if the share is sold, it is the same share that is sold as the share that was allotted.

If this reasoning is correct, it follows that if a dividend is declared upon a share acquired by the taxpayer for the purpose of profit-making by sale, then the profit arising from the sale by the taxpayer of that share with the dividend

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right attaching to it would be included in the assessable income of the taxpayer under sec. 26(a). A similar position would arise if a share to which distribution in specie rights attached by virtue of a resolution and order to reduce capital was sold at a profit, where the share was acquired, before those rights arose, for the purpose of profit-making by sale. But this identity or ``equivalence'' between the property acquired and the property sold seems to me to exist only whilst there is no severance in the congeries of rights that constitute the share. If a dividend is declared and paid, that dividend is not the share, or part of it, though the right to the dividend was such a part. If a share or bonus dividend is declared (Stiebel, Company Law, 2nd ed., vol. 1, p. 355), the bonus shares are not portion of the bundle of rights of the old shares, but are distinct and separate property. If a dividend was paid by the distribution of specific assets (pursuant, for example, to art. 104 in Table A), those assets so distributed are different property from the shares that gave rise to the right to distribution. If profit on a sale of such bonus shares, or assets so distributed, is to be brought to tax, the basis must be found elsewhere than in the circumstance that the shares giving rise to the issue of the bonus shares, or the distribution of assets, were acquired for the purpose of profit-making by sale.

The question then arises whether the rights sold in this case should also be regarded as severed and distinct from the shares. Shares purchased pursuant to such rights, whether by the shareholder himself (
Bristowe v. F.C. of T. (1962) 12 A.T.D. 520 (Kitto J.)) or by a purchaser of the rights would be different property from the original shares, and if profit on their sale was to be brought to tax under the first limb of sec. 26(a), the basis would have to be the purpose of the acquisition of the shares so acquired by exercise of the rights, and not the purpose of the acquisition of the shares giving rise to the rights. But the rights themselves, it was argued, fall within the ``congeries of rights in personam'' referred to by Dixon J. On the other hand, the company created the rights in such a manner and form as would enable them to be separately disposed of on the stock exchange. On 5th January, 1970 one hundred shares were sold, without the rights; and on 8th January, 1970 the 2,100 rights, and the remaining 2,000 shares, were disposed of as separate entities.

The rights so created by the company would appear to be ``rights'' within the meaning of the New South Wales Marketable Securities Act then in force (Act No. 30, 1967). In that Act ``marketable security'' was defined to include any share, and by sec. 3 a duly completed instrument in or to the effect of the forms in the Act renouncing rights in respect of marketable securities in favour of a named transferee, was for all purposes, whether at law or in equity, a proper instrument of renunciation and transfer of those rights in favour of that transferee, if certain conditions were fulfilled. The expression ``rights in respect of marketable securities'' was not defined. The 1967 Act was repealed by the Marketable Securities Act, 1970 (Act No. 72, 1970, sec. 2(1)). The 1970 Act did not commence until 1st July, 1971, but it contains a definition of ``right to marketable security'' which tends to confirm the view that rights such as I am concerned with did fall within the earlier Act. That definition is: ```right to a marketable security' means a right, whether existing or future, and whether contingent or not, of a person to have issued to him a marketable security, whether or not on payment of any money or for any other consideration.'' Whether a transferee of rights could have enforced those rights directly against the company by virtue of the Marketable Securities Act, 1967, or indirectly through his transferor is not a question which in this case requires decision. What is significant is that rights of this kind were recognised by the statute law, in particular the law relating to companies (the Marketable Securities Act, 1967 was to be taken to be ``part'' of the Companies Act, 1961: sec. 1(3)). Not only was provision made for the transfer of such rights, but also provision was made in respect of the effect of such a transfer. By sec. 9(1) the registration of an allotment of a marketable security to a person in whose favour a right thereto had been renounced and transferred, by an instrument under the Act, did not constitute a breach of the provisions of any memorandum or articles of association or trust deed or other instrument or enactment that related to the marketable security. Thus, in this case, the allotment of shares to a transferee of the rights would presumably not have been a breach of art. 5(c) (quoted above) even if such allotment had not been approved in accordance with that article. For these reasons I think that the rights sold by the taxpayer should be regarded as severed and

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distinct from the shares which gave rise to those rights.

I am satisfied that the rights were ``property'' within the meaning of sec. 26(a). That term is not defined in the Income Tax Assessment Act, but I see no reason to restrict its meaning. In Stroud's Judicial Dictionary (3rd. ed., vol. 3p. 2340) it is said that ``property'' is the generic term for all that a person has dominion over; and the following observation of Langdale M.R. in
Jones v. Skinner 5 L.J. Ch. 90 is quoted: `` `Property' is the most comprehensive of all terms which can be used, inasmuch as it is indicative and descriptive of every possible interest that a party can have.'' In the context of sec. 26(a) the word would include every source of profit by sale. But in this case the property that was sold, namely the rights to take up shares, was different from the shares originally acquired, and it accordingly does not follow from the fact that those shares were acquired by the taxpayer for the purpose of profit-making by sale that the rights were also so acquired. Nothing that is said in Howie's case as to the nature of a share requires a contrary conclusion; and the findings in that case as to the adequacy of consideration are in my opinion irrelevant to the present problem.

For completeness, and in particular to indicate the irrelevance of the special problem in Howie's case to this case, I shall consider further subsequent cases referring to the principle of Howie's case. In the Davis Investments case (above) Dixon C.J. said this of the decision in Howie's case (at p. 408): ``But there we dealt with a transfer made wholly in pursuance of a resolution and order for the reduction of capital. The resolution and order formed a method of effectuating the rights of shareholders. Under the resolution and order it became the duty of the company to distribute to the shareholders in specie the assets consisting in shares in other companies. There was no consideration, no transaction, except this. But the shares were to be distributed `at the value thereof appearing in the books of the company' and those values were only seventy per cent of the true values. We decided for reasons to which I adhere that the `consideration' was the full value of the assets because no more was done than to satisfy the absolute right of the shareholders arising from the resolution and order''. In
Ord Forrest Pty. Limited v. F.C. of T. (73 ATC 4022; 74 ATC 4034; 130 C.L.R. 124) Stephen J., after referring to the reasoning of Dixon C.J. in Howie's case said that the distribution of the shareholder's interest in the company ``involved no element of gift, no inadequacy of consideration'' (73 ATC p. 4027; C.L.R. p. 132). Gibbs J. said (74 ATC p. 4043; C.L.R. p. 151): ``The reasoning of the members of the Court in that case is in my opinion entirely apposite to the situation where a company uses undistributed profits to pay up bonus shares which are allotted to existing shareholders in proportion to their holdings, or offers rights which contain an element of bonus to its shareholders in proportion to their holdings.'' Thus, in the circumstances of the present case there was ``no element of gift, no inadequacy of consideration'' (to use Stephen J.'s language in the conferring of the rights by the company on its shareholders; but I do not think that it follows that the rights so conferred are for all purposes, part of the ``interest'' which the shares represented at the time of their acquisition. Howie's case was dealing with the consideration for a distribution of assets of a company to its shareholders, and an adequate consideration was found in the circumstance that distribution was found in the circumstance that distribution was in satisfaction of a pre-existing right in the shareholders arising from the resolution and order for reduction of capital. That right in its turn arose from the contract that constituted the share: but it does not follow that the right and the share were identical. In a case such as the present where the right and the share exist independently in the market place, I do not think that the reality of the situation is that the right is to be regarded simply as a part of the original share. The reality of the situation appears to me to be that the right is independent of the share, and that it is not an incident of the share. It has come into existence as a result of the actions of the company, and is not merely an internal or inherent development of the share itself.

I pass now to the alternative submission made on behalf of the Commissioner. It was this alternative that was the argument before the Board of Review, and it found favour with one member, Mr. Fairleigh, but not with Mr. Burke and Mr. O'Neill. Mr. Fairleigh's view is expressed in the following paragraph of his reasons: -

``21. In taking the positive steps of completing appropriate forms and instructing a broker to sell the rights it seems to me that the taxpayer `acquired' property and achieved two results; first he

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thereby vested a right to shares in himself (without going on the share register) and secondly he assigned for a price that right to shares to another who would then go on the share register. In the circumstances I regard what is called a `sale of rights' as being a composite transaction comprising an obtaining of property by positive action (i.e. an acquisition) and a sale of that property.''

Mr. Burke relied upon the opinion of a Board of Review in another case (Case F41,
ATC 227). The relevant passage reads: -

``The difficulty confronting the Commissioner lies in the fact that in this case, as in most cases, shareholders of Murchison played a completely passive role in the acquisition of the rights. The taxpayer did not have to exercise his mind in any way to acquire rights. They simply came to him because he was a shareholder. Certainly he could have renounced them after he had acquired them, but that is not the point. If he had exercised his right to take up the shares offered it may have been possible to spell out some purpose of acquisition of such shares, but he did not do so.''

(74 ATC at p. 230)

Mr. O'Neill said (75 ATC at p. 178):

``15. So here it seems to me that the taxpayer and his sister were merely passive recipients of rights bestowed on them at the will of Barrier to take up new shares on the terms and conditions announced by it...

16. I cannot see how it can reasonably be said in the ordinary usage of language that by thus renouncing and transferring rights to new shares there has been `property acquired' by the vendor/shareholder. But even if I were to concede that point in favour of the Commissioner I would still think that it is wrong to say that the rights were properly acquired `for the purpose of profit-making by sale' in light of such observations as those quoted from the cases I have cited.''

Among the cases cited by Mr. O'Neill is
F.C. of T. v. N.F. Williams (72 ATC 4188; 127 C.L.R. 226). In that case the facts were that the husband of the taxpayer purchased an interest in land which he subsequently gave to the taxpayer, and that the land, after development, was sold Barwick C.J. said (ATC p. 4190; C.L.R. p. 241): -

``Further, the acceptance of the gift was not, in my opinion, an acquisition of the interest in the land with the purpose of profit-making. I find it difficult to conceive of the unsolicited receipt of a gift as purposive in any relevant sense on the part of the beneficiary. But in particular, I am unable to accept the submission that the acceptance of such a gift can be held to be an acquisition for the purpose of profit-making, however much the receipt or the prospect of the receipt of the donation might excite in the mind of the donee a vista of money-making by its subsequent sale. Also, having had the benefit of the argument in this case, including consideration of the advice of their Lordships in
McClelland v. F.C. of T. (70 ATC 4115; 120 C.L.R. 487), I remain of the opinion that the realization of a gift, however elaborately made, can neither yield a profit nor in itself be a profit-making scheme.''

Menzies J. said (ATC p. 4192; C.L.R. p. 245): -

``It is my opinion that it could only be in very special circumstances that what has been given can be regarded as acquired by the donee for the purpose described in the section and that the difference between the value of the gift when given and the price received upon the sale of the gift is a profit.''

Gibbs J. said (ATC p. 4194: C.L.R. p. 248): -

``It is not a natural use of language to say that a person who becomes the owner of property as the result of an unsolicited and unconditional gift has acquired that property for the purpose of profit-making by sale, even if he intends to sell the property after he gets it. In applying the first limb of sec. 26(a) it is necessary to determine what was the main or dominant purpose actuating the acquisition of the property (see the cases cited in
Jacob v. F.C. of T. 71 ATC 4192 at pp. 4193-4194; 45 A.L.J.R. 568 at p. 569). If a donee who passively receives property the subject of a gift can be said to acquire that property within sec. 26(a) (which is doubtful), the main or dominant purpose with which he acquires that property (as distinct from any purpose for which he may later hold it) is simply to accept the bounty of the donor.''

Counsel for the Commissioner supplemented his reliance on the reasons of Mr. Fairleigh by the following argument: -

``1. It serves to confuse the issue to speak of a `right' or even `entitlement' in this context.

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2. What the company's resolution does is not to vest anything in the shareholder or even to `bestow' anything on him.

3. On its correct legal analysis on this approach all that comes into existence is an assignable offer or an offer made to the shareholder and/or his assignees or nominees.

4. In accordance with ordinary principles of contract law an acceptance of this offer is required before any enforceable legal right is created in anyone.

5. It is inapt to speak of a `vested' right or a `bestowed' right as lapsing.

6. It is thus more than a `mechanical formality' which is called for from the shareholder. The acceptance or renunciation/assignment are both acts of legal significance which alone can create the enforceable right to the new share.

7. The offer is not a property right. Nor is the acceptance of the offer to be regarded merely as turning an existing property right into shares or money.

8. What the transaction really does is not to sell a property right so much as to assign the offer. There is involved in this an acceptance of the offer by the shareholder and the transfer or assignment of it to a purchaser.

9. To effect the transaction the shareholder could: -

• (a) accept the offer
• (b) assign the benefit
• (c) accept the share on behalf of the purchaser
• (d) transfer the share to the purchaser.

10. `Renunciation' is in a sense inapt to describe what the shareholder does. He does not decline the offer, rather he says that he has availed himself of it and has sold it and wants the consequential share to be issued direct to the purchaser.

11. The notion of passive receipt is coloured by the concept of gift which is wrong.''

In substance this argument appears to be that the shareholder must do a positive act, amounting to an acquisition, to perfect his title to the ``right'', as a necessary condition of disposal of the right. The argument seems to me to be inconsistent with the analysis which Dixon C.J. made in Howie's case of the nature of rights arising in respect of shares by virtue of the acts of the company. The rights created in this case are in that class of rights which Gibbs J. referred to in the Ord Forrest case as containing ``an element of bonus'' (74 ATC p. 4043; 130 C.L.R. p. 151). The right of the shareholder in the new issue of shares is not simply an offer; it is a right that he holds by virtue of his shareholding and the actions of the company itself in accordance with the memorandum and articles of association. The acts performed by the shareholder are not in perfection of his right but are either acts of acquisition of new shares pursuant to his right, or acts of disposal of the right. It is true of course that in one aspect the right is an offer of shares; but its nature and effect is to be found in the law relating to companies rather than in the law relating to offer and acceptance in contract (though that law may be relevant in other circumstances).

I agree that the language of gift is inappropriate, having regard to Howie's case, but there is an analogy between what Barwick C.J. called ``the unsolicited receipt of a gift'' (Williams case, ATC p. 4190; C.L.R. p. 241) and the acquisition of a right in an issue of shares where the only action of the person acquiring the right is that he holds at the material time certain shares in a company. Indeed it could reasonably be said that at least in one sense the acquisition of the right is an a fortiori case, because the receipt of a gift requires an act of acceptance, whereas the right accrues simply by virtue of the shareholding. Though the acquisition of the shares in the first place may have been for the purpose of profit-making by sale, and though there may have then existed an intention to sell rights arising in the future, that purpose relates only to the acquisition of the shares, for on my analysis the rights did not then exist; and the existence of the intention to sell rights, even if it continued at the time of acquisition of the rights, does not constitute a purpose of acquisition for the purpose of profit-making by sale. To use the language of Gibbs J. (Williams' case, ATC p. 4194; C.L.R. p. 248) that purpose cannot be said to be the purpose actuating the acquisition. Nothing that the shareholder did (except mere retention of his shares) actuated the accrual of the right. Whether the accrual of the right is an acquisition of the right within the meaning of sec. 26(a) may be left an open question, as Gibbs J. left the analogous question in Williams' case (ATC p. 4194;

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ATC 4192

C.L.R. p. 248). Only the application of the total concept of acquisition by the taxpayer for the purpose of profit-making by sale has to be determined. In my view the mere holding or retention of shares at the time when the rights in this case accrued cannot be said to be a purposive acquisition. The following of the steps directed by the company as the mode of transfer of the rights did not amount to such a purposive acquisition. This would be the correct conclusion even if those steps took the form of acceptance of an offer with an assignment of contractual rights to the transferee, because the taxpayer's main or dominant (probably, only) purpose would be disposition, not acquisition. However, I do not think the directed steps did take that form. So far as one can determine from the documentation available, the company required to be expressly informed if the shareholder chose any option, other than abandonment of the rights; and if his choice involved a transfer of all or some of his rights, there had to be proper notification of the transfer (presumably in accordance with the Marketable Securities Act).

For these reasons I am of the opinion the appeal should be dismissed with costs.