Coppleson v. Federal Commissioner of Taxation.

Judges:
Hunt J

Court:
Supreme Court of New South Wales

Judgment date: Judgment handed down 2 February 1981.

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Hunt J.

This is an appeal brought by Dr. Malcolm Coppleson (``the taxpayer'') against the disallowance by the Commissioner of Taxation of a claim for a deduction amounting to $39,990, made by the taxpayer pursuant to the Income Tax Assessment Act 1936, sec. 78(1)(a)(i), in relation to his income for the year ended 30 June 1976. That subsection allows as a deduction gifts to a public hospital of the value of $2 and upwards of property purchased by a taxpayer within 12 months immediately preceding the making of the gift.

On 25 June 1976 the taxpayer by his attorney signed a transfer in favour of the Royal Prince Alfred Hospital (``the Hospital'') of 39,990 redeemable preference shares of $1 each in Wirrawanda Limited for ``nil'' consideration. This is the transaction which the taxpayer claims was a gift and which is the subject of his claim for a deduction pursuant to sec. 78(1)(a)(i). The shares had been purchased by the taxpayer two days earlier for $39,990.

The Commissioner accepts that the Hospital is one to which sec. 78(1)(a)(i) applies. What he disputes is that the transaction was a gift. He also disputes the value of the redeemable preference shares which were transferred. He disclaims reliance upon sec. 260. What the Commissioner contends for is that the transaction was a sham. Before dealing with that contention, however, it is necessary to detail the background to the transaction itself.

Evidence of the transaction was given by the taxpayer, his accountant and financial adviser (Mr. Joye) and Dr. Child, the Hospital's Chief Executive Officer. The following account is principally based on the taxpayer's evidence, which I accept in its entirety. His recollection of detail, however, was not good, and those details are, where necessary, taken from the contemporaneous documents and from the evidence of Mr. Joye and Dr. Child.

The taxpayer is a well-known gynaecologist and obstetrician and an Honorary appointed to the Hospital. He has operated, conducted outpatients' sessions, confined and taught at the Hospital for some 20 years. He has for some time been deeply involved in gynaecological and cancer research.

Towards the end of the financial year in question, a discussion took place between the taxpayer and Mr. Joye concerning the former's taxation liabilities for that financial year, his income being substantially higher than it had been the previous year. Mr. Joye advised the taxpayer that he was in a position to make a donation to an institution if he so wished. The taxpayer calculated that he had $40,000 available in cash or by way of overdraft accommodation. He was enthusiastic about the idea of a gift to the Hospital, where it could be directed to cancer research.

Mr. Joye told the taxpayer that it would produce a taxation benefit if the gift were in the form of shares rather than in cash. The proposal was that a company would be incorporated with a share capital of $40,000, of which 39,990 shares of $1 each would be redeemable preference shares. These preference shares would be allotted to the taxpayer's family company, Copston Securities Pty. Limited, which would then sell them to the taxpayer for $39,990. (Section 78(1)(a) requires the property to have been purchased by rather than allotted to the taxpayer.) The taxpayer and his wife were, together with the Hospital's nominee,

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ATC 4021

to be directors of the company to be formed, and would thus be able to influence directly the investment of the company's funds. The rights attaching to the shares were discussed, a matter to which some attention will have to be paid later in this judgment. What Mr. Joye told the taxpayer was that the Hospital had the right to redeem the shares within six months if it wished to have the gift in cash, and that if it remained a shareholder it was entitled to a dividend of 10% per annum, a dividend which could be achieved by investing the company's funds in shares to which the rebate allowed by sec. 46 applied.

To the taxpayer, however, the proposal produced another advantage which was, I infer, to him the more important. He was fearful that a gift which permitted the Hospital itself to invest the funds would not produce the same income to be available for research as one in which the control of such investment was retained by the donor. The Hospital, he said (and I accept), did not have a great reputation as an investor amongst those who worked for it, donations having been lost somehow or other in its huge and complex financial structure.

The taxpayer instructed Mr. Joye to implement the proposal and he then proceeded overseas, leaving Mr. Joye to act under a Power of Attorney. Before leaving, the taxpayer spoke to Dr. Child and expressed his wish to make the gift to the Hospital. On 2 June Mr. Joye further outlined the proposal to Dr. Child who, upon being reassured that the Hospital would not be under any liability in doing so, stated that the Hospital would be happy to accept the gift. Wirrawanda Limited was incorporated in the Australian Capital Territory on 17 June. 39,990 redeemable preference shares were allotted to Copston Securities Pty. Limited on 23 June at 10 a.m., and were transferred to the taxpayer two hours later. Mr. Joye signed the transfer to the Hospital as the taxpayer's attorney on 25 June.

The Commissioner attacks the transaction as being a sham. According to the particulars stated on his behalf during the hearing, he relies upon what happened after the transfer had been signed as being entirely inconsistent with there having been a gift. No acknowledgment of the gift was, he says, ever made by the Hospital. The dividends to which the Hospital was entitled under the Articles were never paid in full. The Hospital never obtained the benefit of the gift and the taxpayer did not intend that it should obtain beneficial ownership of the shares. In cross-examination of the taxpayer, it was also suggested that he had intended ultimately to recover the legal title to the shares, but in the meantime the income from those shares was to be disposed of in such manner as he personally saw fit and that he had never intended the Hospital to receive the dividends the Articles entitled it to receive.

The Commissioner's principal submission was that the legal transfer of the shares to the Hospital by way of gift was a mere facade behind which another transaction took place which was not a gift:
Scott v. F.C. of T. (No. 2) (1966) 40 A.L.J.R. 265, at p. 279. Just precisely what was the ``real'' transaction for which the transfer by way of gift was said to be a facade could not be identified by the Commissioner, who submitted that I should not be concerned to know what that ``real'' transaction was. He relied upon the onus cast upon the taxpayer by sec. 190 to negate whatever transaction may be thought to lurk there. Notwithstanding that legal onus placed upon the taxpayer, however, where no dispute exists as to the legal form of the transaction (as here) the Commissioner, in my view, remains under some factual obligation to identify the ``real'' transaction for which he contends the legal transfer is but a disguise: cf.
F.C. of T. v. Casuarina Pty. Ltd. 70 ATC 4069 at pp. 4075, 4076; (1970) 127 C.L.R. 62, at p. 72;
Bailey & Ors. v. F.C. of T. 77 ATC 4096 at p. 4103; (1977) 136 C.L.R. 214, at p. 227. His inability to do so in this case, although irrelevant to any question of onus of proof, serves to confirm the opinion I have formed upon the evidence taken as a whole that the gift was indeed the real transaction and that no sham existed.

The definition of a sham expressed by Windeyer J. in Scott's case (No. 2) (supra) was that which was contended for by the Commissioner. His Honour's propositions (stated at p. 279) bear repetition:

``But it is not enough to say that a fund governed by the provisions of a deed such as that we have here could be a superannuation fund within the meaning of the Act. For it to be so in fact the parties concerned must have intended that

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ATC 4022

the deed should take effect and operate according to its tenor... On the other hand, if the scheme, including the deed was intended to be a mere facade behind which activities might be carried on which were not to be really directed to the stated purposes but to other ends, the words of the deed should be disregarded... A disguise is a real thing: it may be an elaborate and carefully prepared thing; but it is nevertheless a disguise. The difficult and debatable philosophic questions of the meaning and relationship of reality, substance and form are for the purposes of our law generally resolved by asking did the parties who entered into the ostensible transaction mean it to be in truth their transaction, or did they mean it to be, and in fact use it as, merely a disguise, a facade, a sham, a false front - all these words have been metaphorically used - concealing their real transaction.''

Windeyer J. cites as authority for these propositions the cases referred to by Jordan C.J. in
Perpetual Trustee Co. v. Bligh (1940) 41 S.R. (N.S.W.) 33, at p. 39;
Hawke v. Edwards (1947) 48 S.R. 21, at p. 23; and
Collis v. Magroarty (1913) S.R.Qd. 25 (at pp. 31-32), affirmed (sub nom.)
O'Sullivan v. Collis (1913) 15 C.L.R. 692. The cases referred to by Jordan C.J. in the first mentioned case are:
Re Watson; Ex parte Official Receiver (1890) 25 Q.B.D. 27 (at pp. 32-33, 38, 41);
Boydell v. James (1936) 36 S.R. 620, at p. 627;
Maas v. Pepper (1905) A.C. 102 (at p. 104); and
Barton v. Bank of N.S.W. (1890) 15 App. Cas. 379, at pp. 380-381. There are, of many other cases which may be cited as authority for the same propositions. All which I have here cited, as well as those others which I have read, emphasise that it is the intention of the parties to the transaction which determines the question whether the act or document was never intended to be operative according to its tenor at all, but rather was meant to cloak another and different transaction. It is also clear, as Diplock L.J. (as he then was) put it, ``in legal principle, morality and the authorities'' that all the parties to the act or document must have a common intention that it (the act or document) was not to create the legal rights and obligations which it gives the appearance of creating:
Snook v. London and West Riding Investments Ltd. (1967) 2 Q.B. 786, at p. 802;
R. v. M. (1979) CLC 40-565 at pp. 32,408-32, 410; (1979) 4 A.C.L.R. 610, at pp. 627-628;
Ure v. F.C. of T. 80 ATC 4264 at p. 4279; (1980) 30 A.L.R. 277, at p. 298.

In this present case, the matters relied upon by the Commissioner, although some are possibly consistent with the existence of such a common intention, nevertheless taken singly and in total fail to persuade me that the transaction was not the gift it purported to be. By putting it in that way, I do not intend to suggest that the Commissioner bears any onus of satisfying me that the transaction was a sham. But where, as here, I accept the taxpayer's intention was to make a gift of the shares and that the Hospital's intention (as expressed by Dr. Child both orally and in writing) was to accept them as a gift, the matters relied upon by the Commissioner must in the end be discarded. The possible consistency of some of them with the existence of a sham is, of course, an important matter to be considered when deciding whether the evidence of the parties to the transaction as to their intention should be accepted, in that they may throw light on what the ``real'' intention of the parties was. But once that evidence of intention is accepted (as it is), the matters relied upon by the Commissioner become irrelevant to this issue of whether the transaction was a sham.

The submissions on behalf of the Commissioner appear, however, to proceed upon the basis that these matters have some independent existence and value of their own; so that, if I were not to be satisfied by the taxpayer in relation to any one or more of them, I would be obliged to hold that the taxpayer had not discharged his onus of negating the existence of the sham which is alleged by the Commissioner.
Albion Hotel Pty. Ltd. v. F.C. of T. (1965) 115 C.L.R. 78, at pp. 91-92, was quoted in support of such an approach but, in my opinion, that case does not lend any support to it. Those submissions are rejected. I repeat that I have considered each and every one of the matters relied upon by the Commissioner (to which further reference is made shortly) in determining whether I should accept the evidence of the parties to the transaction as to their intentions. But, having accepted that evidence of intention, I discard those matters as having any further relevance on this issue.

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ATC 4023

The Commissioner relies as evidence of a sham upon the taxpayer's choice of a complex and elaborate procedure whereby the gift to the Hospital consisted of redeemable preference shares instead of cash. However, I accept that the taxpayer's intention in giving shares in lieu of cash was to control the investment of the assets the shares represented. (It was conceded by the Commissioner that such control by itself did not deny the character of the transaction as a gift.) That the shares were redeemable preference rather than ordinary shares appears to have been dictated by the understandable need to give them as high a value as possible for the purposes of the taxation deduction to be claimed by the taxpayer. That fact does not translate a genuine gift of the shares into a sham. Whilst the circumstances which surrounded the taxpayer's decision to make the gift (by whatever means) suggest that he was impelled to do so in order to obtain the advantage of a taxation deduction, such a motive does not destroy the character of the transaction as being a gift:
I.R. Commrs. v. Duke of Westminster (1936) A.C. 1, at pp. 8, 19;
Mullens & Ors. v. F.C. of T. 76 ATC 4288 at p. 4292; (1976) 135 C.L.R. 290, at p. 298. See also the dissenting judgment of Jordan C.J. in In the
Estate of William Vicars (Decd.) (1944) 45 S.R. 85, at pp. 93-94; and the judgment of Street C.J. in
R. v. Cahill & Anor. (1978) 2 N.S.W.L.R. 453, at pp. 455-456. The fact that, in order to obtain those advantages, the transaction became complex and elaborate rather than simple and straightforward does not seem to me to affect its true nature if in legal form it is a gift and if the parties thereto intended it to be operative according to its tenor: cf. F.C. of T. v. Casuarina Pty. Ltd. (supra), ATC at p. 4077; C.L.R. at p. 73.

The Commissioner submits that the complex and elaborate transaction has permitted the taxpayer to retain ``control and the use of the $39,990'' he gave to the Hospital. I assume that it was intended to assert such a retention of control in the 39,990 shares which the taxpayer gave to the Hospital. The control is said to have been exercised by withholding from the Hospital the benefits which the shares purported to give it. I have some difficulty in appreciating the logic of this submission. Granted that the Hospital has never received the 10% dividend to which it is entitled under the Articles (a matter to which I turn shortly), I do not follow how this fact evidences a common intention on the part of both the taxpayer and the Hospital to effect some different transaction to the gift which it purported to be. What possible advantage would such different (but still unidentified) transaction be to either of them? The Commissioner relies upon the suggested absence of any convincing explanation for what is said to be this disregard of the Hospital's rights as a shareholder as demonstrating that the transaction was not in truth a gift. But the absence of identification in the evidence of any specific motive or purpose of benefiting one or other of the parties by way of some other and different transaction makes it, in my view, unlikely that a common intention existed at the time of the transaction to use the gift as a cloak for that other and different transaction.

The taxpayer's evidence is wholly in conflict with the intention now suggested by the Commissioner. Without wishing in any way to invite invidious comparisons, my view of the taxpayer as a witness was that of a man of pellucid probity and sincerity. The unfortunate failure of those who advised him to ensure that both he and Wirrawanda Limited fulfilled the latter's obligation to pay dividends to the Hospital amounting to 10% per annum does not, in my judgment, affect the honesty of the taxpayer's evidence in any way.

An alternative argument put on behalf of the taxpayer was that the different transaction for which the gift is said by the Commissioner to be a cloak must be or must include an agreement between the Hospital, as the holder of the shares, and Wirrawanda Limited itself whereby the Hospital would not exercise the rights it held by virtue of its shareholding, including the rights to a dividend of 10% per annum. Other than the Hospital's non-exercise of whatever rights it may have under the Articles of Association, there is simply no evidence of any such collateral agreement on the part of either the Hospital or Wirrawanda Limited.

The failure of Wirrawanda Limited (and of the taxpayer as a director seeking to control the investment of the assets its shares represented) to pay to the Hospital the 10% dividend to which it was entitled under the

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ATC 4024

Articles I have already described as unfortunate. But I do not accept the Commissioner's submission that this was deliberate on the part of the taxpayer. He gave evidence, which I accept, that such was the time he spent in his medical work that he relied entirely upon Mr. Joye for advice as to what to do in relation to his own and any other financial affairs. That total reliance may mean that the taxpayer has failed, even that he has egregiously failed, to fulfil his duties as a director of Wirrawanda Limited. But it does not, in my view, detract from the taxpayer's clear intention to which he has sworn that the Hospital was to receive proper dividends.

I accept the taxpayer's denials in cross-examination that he had intended ultimately to recover the legal title to the shares, that in the meantime the income from the shares was to be disposed of in such manner as he personally saw fit, and that he never intended the Hospital to receive the dividends which the Articles entitled it to receive. I do not accept the Commissioner's submission that the taxpayer did not intend the Hospital to obtain the beneficial ownership of the shares.

The Commissioner has argued in the alternative that, even if I accepted the taxpayer's evidence as to his intention to make a gift of the shares to the Hospital, I should nevertheless remain dissatisfied that the transaction was not a sham because the taxpayer is to be identified with the motives and intentions of Mr. Joye, which are said to support the transaction having the character of a sham:
F.C. of T. v. Bidencope 78 ATC 4222, at pp. 4224-4228; (1978) 52 A.L.J.R. 551, at pp. 552-553, 555. That was a case in which the taxpayer, it was argued, had by reason of his own ignorance of the operation of tax-loss companies instructed his accountant, a Mr. Geary, to proceed with the acquisition of shares in such companies without consciously himself adverting to the making of a profit in the repayment of the debts assigned in the course of that scheme, and had thereby in effect identified himself with the motives and purposes of Mr. Geary, who had adverted to making such a profit. In this way, it was sought to make that profit assessable in the taxpayer's hands, in accordance with sec. 26(a).

In the present case, the Commissioner points to the evidence to which I have already referred of the taxpayer's total reliance upon Mr. Joye in relation to his own and any other financial affairs. Reference is then made to the evidence that a number of Mr. Joye's other doctor clients had made similar gifts of redeemable preference shares to the Hospital at much the same time as did the taxpayer. Just what happened in relation to those other shares is not entirely clear from the evidence but, even assuming that the Hospital has not received the dividends to which it is entitled in relation to those shares too, I am not persuaded that the effect of such an assumption is attributable to the taxpayer in the way contended for by the Commissioner. (The taxpayer had suggested to Mr. Joye that he recommend the Hospital to his other clients who sought a taxation deduction. He never discussed the matter with any of the other doctors and, so far as the evidence I accept goes, he knew nothing of the other gifts except their existence. Mr. Joye's letter of 16 June 1976 (Exhibit R) does not accord with the facts as I find them to be.)

What the Commissioner argues is that, properly understood, the evidence establishes that the taxpayer did no more than instruct Mr. Joye to obtain for him a taxation benefit, by any means howsoever, and that he was prepared to ratify whatever Mr. Joye did to obtain that benefit, be it by way of gift or otherwise. That argument, in my view, cannot stand with the evidence as I have accepted it, and the argument is rejected. In this case, what the taxpayer said to Mr. Joye, after the need for a deduction was drawn to his attention, was that he wanted to make a gift to the Hospital. How that gift was to be effected he left to Mr. Joye, but a gift to the Hospital it had to be. What might possibly be a reasonable inference to be drawn in relation to the participation of an ignorant taxpayer in a scheme to purchase shares in tax-loss companies is, in my view, hardly applicable to the making of a gift to a Hospital. By leaving to Mr. Joye the details of how the gift to the Hospital was to be made, the taxpayer was not, in my opinion, placing himself in the hands of Mr. Joye so as to identify himself with whatever may have been Mr. Joye's motives and intentions.

In these circumstances, I do not propose to analyse the evidence given by Mr. Joye as to what happened after the gift had been made. It is obvious that in other appeals arising out

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ATC 4025

of the Commissioner's disallowance of all but one of these gifts by Mr. Joye's clients the situation may arise where Mr. Joye's motives and intentions will become relevant. It will not assist the trial Judge in those cases for me to express my own views on that issue, and I do not do so.

The remaining submissions by the Commissioner were directed to the Hospital's intentions in relation to the gift.

The initial submission that the Hospital had never acknowledged the gift of the shares is plainly unfounded, as the shares were entered in the Hospital's Assets Ledger as a donation in July 1976 and again in the Coppleson Fund ledger card on 31 October 1976 (Exhibits AL and AM). There is also Dr. Child's letter to the taxpayer, dated 26 July 1976 (Exhibit O). The various reasons why the donation was not elsewhere recorded by the Hospital were explained by Dr. Child, whose evidence and explanations I accept. The record in the two ledgers, the primary points at which all such donations would normally be recorded, renders unnecessary an examination of those reasons, and I did not understand the Commissioner to have pursued this submission at the conclusion of the evidence.

No suggestion was put to Dr. Child in cross-examination that either he or the Hospital was a party to a sham:
Browne v. Dunn (1894) 6 R. 67, at pp. 70-71, 76-77;
Precision Plastics Pty. Ltd. v. Demir (1975) 132 C.L.R. 362, at pp. 370-371. In re-examination, Dr. Child was nevertheless permitted to deny any such participation. I accept the denial that he gave. In doing so, I have given consideration to the various matters upon which the Commissioner relies as demonstrating an intention on the part of the Hospital to the contrary.

The failure to affix the Hospital's seal to the share transfer was a result of the haste with which the transaction was to be effected. It was, of course, clear that the haste was created by the taxpayer's desire to obtain a taxation benefit from his donation for the then current financial year. Because the seal was not affixed, it was unnecessary to refer to the donation in the minutes of the Directors' Meeting; but it was in fact reported to the Finance Committee and also, it appears (Exhibit O), to the Board of Directors itself. No point was made in cross-examination of Dr. Child or in argument as to the Hospital's failure to nominate a director of Wirrawanda Limited as permitted by the Articles.

I am satisfied that the transaction in question was not a sham. I find that the taxpayer made a gift of 39,990 shares in Wirrawanda Limited to the Hospital and is thereby entitled to a deduction in accordance with sec. 78(1)(a)(i).

I next turn to the value of that gift. Section 78(2) fixes the value of such a gift as the value of the property at the time the gift is made or the amount paid by the taxpayer for that property, whichever is the less. My attention is thus directed to the value of the shares as at 25 June 1976. Their value is to be ascertained by reference to the same test as is applied to the valuation of land compulsorily acquired:
Abrahams v. F.C. of T. (1944) 70 C.L.R. 23, at p. 29. There must be assumed to exist on that particular day not only a willing but not anxious vendor but also a willing but not anxious purchaser, both of them alike uninfluenced by any consideration of sentiment or need: ibid., at p. 29;
Spencer v. Commonwealth (1907) 5 C.L.R. 418, at pp. 432, 436-437, 441. Thus far, the taxpayer and the Commissioner are in agreement, but only thus far.

The Commissioner asserts that the proper method of valuation of these shares is by means of a capitalization of their income yield. The taxpayer concedes that such a method is the general rule, but denies that it is of universal application. An exception to the general rule exists, he submits, where the hypothetical purchaser is in a position to compel a liquidation, in which case the real value of the shares is the value of the underlying assets which he will obtain upon such a liquidation.

That such exceptions to the general rule are possible is not, as I understand it, disputed by the Commissioner: Abraham's case (supra), at p. 42. (The relevant passage is quoted without criticism in
Gregory & Anor. v. F.C. of T. 71 ATC 4034 at p. 4044; (1971) 123 C.L.R. 547, at p. 567, notwithstanding the careful examination of other dicta in Abraham's case in that later decision.) What the Commissioner disputes is the proposition that the hypothetical

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ATC 4026

purchaser in this present case would be in a position to compel a liquidation.

The determination of this issue requires a consideration of the rights given to the holder of redeemable preference shares in Wirrawanda Limited by its Articles of Association. Article 1C(a) gives such shareholder the right to receive in a winding up the nominal amount of such shares in priority to the amount payable to the holders of any other class of shares in the company. Paragraph (b) denies the holder of the redeemable preference shares the right to vote at any general meeting of the company unless at that date any minimum dividend payable on his shares is more than 36 months in arrears. Paragraph (c) provides for a minimum cumulative preference dividend at the rate of 10% per annum. Paragraphs (d) and (e) are irrelevant for present purposes. The right to redeem the shares is dealt with in para. (f). The relevant parts of that paragraph are in the following terms:

``(1) Redeemable shares may be redeemed,

• (i) at the option of a holder thereof within six months of the date of allotment of the Redeemable Shares to be redeemed, by such holder giving to the Company not less than thirty days notice requiring redemption;...

(2) Any such notice as aforesaid shall be in writing and shall specify the number of Redeemable Shares to be redeemed and shall specify the time for redemption.

(3)(i) Subject to the provisions of the Companies Ordinance the Company shall be bound to redeem Redeemable Shares in respect of which notice as aforesaid has been given in accordance with such notice and as set out below;

• (ii) Upon redemption of Redeemable Shares as aforesaid the Company shall pay to the holder thereof,
  • (a) the nominal amount of the Redeemable Shares to be redeemed;...''

Paragraph (g) entitles a majority of the holders of redeemable preference shares to appoint one director.

The (A.C.T.) Companies Ordinance 1962, sec. 61(3), precludes the redemption of preference shares except out of profits which would otherwise be available for dividend or out of the proceeds of a fresh issue of shares made for the purposes of the redemption. Both the taxpayer and the Commissioner are agreed that this hypothetical purchaser in the present case would not envisage the existence of either the profits or the proceeds of a fresh issue; so that, it is common ground, Wirrawanda Limited would have had no power to redeem this hypothetical purchaser's shares should a notice requiring redemption have been given by him within six months of the date of allotment.

The Commissioner relies upon the provisions of sec. 61 as denying to this hypothetical purchaser the right to have the Company wound up for its failure to comply with the redemption notice. The taxpayer relies upon the decision of Waddell J., in
Re Marra Developments Ltd. (1978) 3 A.C.L.R. 798, in which his Honour held (at pp. 799-800) that the inability of a company by virtue of sec. 61 to redeem the shares does not avoid its contractual obligation to do so, thereby entitling the preference shareholders to have the company wound up.

The Commissioner has submitted that that case was wrongly decided. I am not prepared to say that it was. Although no authority directly on the point was cited to his Honour, the view he took is one previously expressed by legal writers: for example, Some Observations on Redeemable Preference Shares, Russell Fox (as his Honour then was), (1954) 28 A.L.J. 186, at pp. 187-188; Principles of Company Law, Professor Ford (1st ed., 1974), at p. 176; (2nd ed., 1978), at p. 191. The decision of Waddell J. in my view accords with basic principle and I propose to follow it.

The Commissioner's next stand was to distinguish that decision upon two bases.

He points, firstly, to the qualification upon what is said to be the obligation of Wirrawanda Limited to redeem imposed by para. (3)(i):

``Subject to the provisions of the Companies Ordinance...''

So far as the report of the decision in Re Marra Developments Ltd. reveals, that Company was under an absolute obligation to redeem; whereas here the contractual

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ATC 4027

obligation to redeem, it is submitted, exists only where in law the Company is permitted by sec. 61 to do so.

Such a construction of para. (3)(i), however, in my view ignores the shareholder's unqualified right given in para. (1)(i) to give a redemption notice within six months of allotment. Such a right would, in the mutual contemplation of the parties to the contract constituted by the Articles (and as expressed in the Articles themselves), be available for exercise within six months. It was agreed on all sides (and indeed it was made clear in the evidence) that in no circumstances would Wirrawanda Limited have been empowered, foreseeably or in fact, by sec. 61 to redeem within that six months period. If the Commissioner's interpretation of para. (3)(i) is correct, this unqualified right solemnly given to the shareholder is rendered entirely valueless. To provide a right to give a notice of redemption without providing for the corresponding contractual obligation to redeem produces such a capricious result that I am not prepared so to construe Art. 1C(f) as a whole in the way contended for by the Commissioner unless its language is intractable. In my opinion, the language is consistent with the distinction drawn by the taxpayer between the Company's contractual obligation and its legal power to redeem, and it is not intractable. The expressed intention of the parties to permit the exercise of the shareholder's unqualified right to give a redemption notice within the period during which it could not be contemplated that the company would have the legal power to redeem requires such a distinction to be drawn. The situation that the company is legally unable to redeem is something within the contemplation of the parties at the relevant time and does not itself vitiate the contractual obligation which remains. In my opinion, therefore, the company would become contractually obligated to redeem upon the giving of the redemption notice provided for in para. (1)(i).

The Commissioner's second point of distinction in relation to Re Marra Developments Ltd. relies upon the limitation period placed by the Companies Ordinance, sec. 221(2)(a), upon the right of a preference shareholder, as a contributory, to commence proceedings for the winding up of the company unless his petition is based upon certain grounds of which, it is asserted, none is available in this case - whatever may have been the position in the case of Re Marra Developments Ltd. But the fact that the shareholder is a contributory does not, in my view, deny him also the character of a creditor. In that capacity, he is not similarly limited in the grounds upon which he may seek to have the company wound up. In any event, I do not agree with the Commissioner's assertion that Ground (f) - which is one of those available to a contributory - could not be made out in the circumstances contemplated in this present case.

In the result, I hold that the hypothetical purchaser would be in a position to compel a liquidation, and that the real value of his shares is thus the value of the underlying assets which he would obtain upon such a liquidation.

In assessing that value, I start with the figure of $39,445, shown in the company's balance sheet (as at 30 June 1976) as representing the excess of assets over liabilities (Exhibit N). It is reasonable, in my view, to deduct from that sum an amount which might well be expended from the fund by the company in seeking legal advice as to the right of the hypothetical purchaser as a preference shareholder to bring about a winding up. The Commissioner puts forward a figure of $1,000 as the cost of that advice (Exhibit 22). This leaves $38,445.

There would, however, be a delay in receiving this sum. The Commissioner has suggested a delay of three months - one month to enable the hypothetical purchaser to come to the decision to petition for the company's winding up, another month for the redemption notice required by the Articles to expire and a third month to enable the liquidator to pay out. This period of three months is not contested by the taxpayer. The costs of the liquidation, it is suggested by Mr. Lonergan (one of the valuers called on behalf of the Commissioner), would be met out of the proceeds of investing the company's assets during this three months period. Mr. Bagnall (one of the valuers called by the taxpayer) agreed with this suggestion.

The rate of discount to be applied in order

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ATC 4028

to assess the present value (that is, as at 25 June 1976) of that sum of $38,445 to be paid three months later was the subject of some dispute at the hearing. Mr. Wright (another of the valuers called by the taxpayer) assessed a reasonable return to the hypothetical purchaser on his investment (before tax) as 25% per annum. Mr. Bagnall (also for the taxpayer) suggested 20% per annum, although for reasons I do not entirely accept. I nevertheless propose to adopt Mr. Wright's assessment of 25% per annum as a reasonable return to the hypothetical purchaser on his investment.

Discounting $38,445 upon this basis over three months, I find that the value of the shares given by the taxpayer to the Hospital as at the date of the gift was $36,184.

A number of alternative arguments were presented by the taxpayer and disputed by the Commissioner which, in view of that finding, it is unnecessary for me to determine and I do not propose to do so.

I uphold the appeal. I remit the assessment to the Commissioner to be amended, in accordance with the terms of my judgment, to allow a deduction for the taxpayer's gift valued at $36,184. I order the Commissioner to pay the taxpayer's costs.