Robertson v Federal Commissioner of Taxation

86 CLR 463
1952 - 1218A - HCA

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(Judgment by: Taylor J)

Between: Robertson
And: Federal Commissioner of Taxation

Court:

Judges: Williams J
Kitto J

Taylor J

Subject References:
Taxation and revenue
Estate duty
Assessment
Shares in company
Valuation
Division of shares
Depression in value of shares

Legislative References:
Estate Duty Assessment Act 1914 No 22 - s 8(4)(e); s 16A(1)(a)

Hearing date: MELBOURNE 27 October 1952; 28 October 1952; 29 October 1952
Judgment date: 18 December 1952

SYDNEY

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Judgment by:
Taylor J

TAYLOR J. This is an appeal pursuant to the Estate Duty Assessment Act 1914-1947 with respect to the assessment of estate duty payable by the executors of Sir MacPherson Robertson deceased.

As appears from the very full admissions of facts agreed upon by the parties, the deceased at the time of his death on 20th August 1945 was the holder of 561,667 shares in the capital of MacRobertson Pty Ltd  At this time a number of other persons were the holders of the balance of the shares in the company, namely, 465,536 shares.

Before the death of the deceased all of the shares in the company were of the one class and were considered by the commissioner to be of the same value, but the deceased, pursuant to the articles of association, had during his lifetime wide and exclusive powers of management and control and, indeed, was invested by article 30 with the right at will to purchase all or any of the shares held by any other member or members of the company.

Article 6, however, contained special provisions designed to create two classes of shares upon the death of the deceased. This article was in the following terms:6 (i) "Upon the death of MacPherson Robertson the whole of the then issued shares of the Company shall be divided into and become and thereafter be of two classes to be known respectively as No. 1 class shares and No. 2 class shares. (ii) The No. 1 class shares shall be all those shares in the Company other than those standing in the register at the date of his death in the name of the said MacPherson Robertson otherwise than as trustee executor or administrator of the estate of a deceased person. The No. 2 class shares shall be all those shares in the Company standing in the register at the date of his death in the name of the said MacPherson Robertson otherwise than as trustee executor or administrator of the estate of a deceased person. (iii) The rights following shall as from the date aforesaid be attached to such No. 1 class shares and No. 2 class shares inter se that is to say-

(a)

The No. 1 class shares shall confer the right to receive out of the profits of the Company a cumulative preferential dividend at the rate of 10 per cent per annum on the capital for the time being paid up or credited as paid up on such shares respectively.

(b)

Whenever the profits of any year shall be more than sufficient to pay the preferential dividend aforesaid with any arrears to the close of such year then the surplus profits after payment of such preferential dividend shall be applied in payment of a dividend for such year at the rate of 5 per cent per annum on the capital for the time being paid up or credited as paid up on the No. 2 class shares and thereafter the holders of the No. 2 class shares shall be entitled to participate pari passu in any further sum which may be distributed in dividend for such year according to the capital paid up or credited as paid up on such shares respectively.

(c)

In the event of the winding up of the Company the holders of the No. 1 class shares shall be entitled to have the surplus assets applied, first, in paying off the capital paid up or credited as paid up on the No. 1 class shares held by them respectively; secondly in paying off the arrears (if any) of the preferential dividend aforesaid to the commencement of the winding up and thereafter they shall be entitled to participate pari passu with the holders of the No. 2 class shares in the residue (if any) of such surplus assets remaining after paying off the capital paid up or credited as paid up on such No. 2 class shares.

(d)

The rights attaching to the shares of the Company aforesaid inter se from and after the death of the said MacPherson Robertson upon and by reason of the operation of this Article shall take the place of and be to the exclusion of the rights theretofore attaching to such shares or any of them by reason of the conditions of issue or otherwise howsoever.

(e)

In certifying the price of any share or shares under Article 30 hereof the Auditor shall not in arriving at the price which he proposes to certify pay any regard to the provisions of sub-clauses (a) (b) (c) and (d) of this Article or to the provisions of any previous Article of the Company embodying the provisions now contained in such sub-clauses and shall arrive at the price which he proposes to certify on the assumption that such sub-clause or any previous Article of the Company as aforesaid is not and has never been incorporated in the Articles of the Company".

In assessing the estate of the deceased for duty the commissioner took the view that it was necessary to apply s. 16A (1) (a) of the Act in valuing the deceased's shares and, by virtue of its application, to ignore article 6 and treat all the shares in the company as being of one class "at the date of death". On this basis he valued the shares at 21s. 10d. each, but he agrees with the appellants that if s. 16A (1) (a) should not be applied or that, if upon its application, there is no warrant for ignoring article 6 completely and treating all the shares as being of one class, the shares should be valued at 14s. 5d. each. Alternatively, the commissioner takes the view that any benefit, by way of increased value, to the holders of No. 1 class shares resulting from the operation of article 6 constituted pursuant to s. 8 (4) (e), "a beneficial interest in property which the deceased person had at the time of his decease, which beneficial interest, by virtue of a settlement or agreement made by him, passed or accrued on or after his decease to, or devolved on or after his decease upon" the other shareholders.

Apparently the commissioner did not endeavour to make any independent valuation of any such "beneficial interest" and assumed that if his view was right on either point the assessment of duty would be affected to precisely the same extent. The appellants have formally agreed to this proposition and the agreement of the parties is recorded in par. 36 of the admitted facts in the following terms:"36. On the 4th day of October 1949 it was agreed between the Appellants and the Respondent that for the purpose of the said Assessment the value of the said shares would be accepted by the Appellants as at 21/10d. per share if it should be held that the provisions of s. 16A (1) (a) should be applied and that in applying s. 16A (1) (a) all the shares in the said Company should be treated as being of one class for the purpose of such valuation or if it should be held alternatively that the provisions of s. 8 (4) (e) are applicable; but that if it should be held that s. 16A (1) (a) should not be applied, or that in applying s. 16A (1) (a) all such shares should not be treated as being of the one class, and that the provisions of s. 8 (4) (e) are not applicable, the value of the said shares would be assessed by the respondent and accepted by the appellants as at 14s. 5d. per share.

In dealing with the questions which arise in this matter in relation to s. 16A (1) (a), it is convenient, first of all, to consider some of the preliminary difficulties which present themselves upon a reading of the section. First of all, it was contended on behalf of the appellant-though the point was not unduly stressed-that the section upon being applied in a particular case, merely requires the assumption to be made that the articles of the company, in their existing form, in fact, satisfy the requirements of the relevant exchange authority. Such an assumption would in no way deal with the difficulties with which the section is so obviously designed to deal. I am in no doubt that this is not the true meaning of the section, but the mere statement of the proposition indicates the very real difficulties to which the language of the section gives rise. Although it may be asserted emphatically that the section requires an assumption that the articles are in some form other than that in which they actually exist, it is difficult to state exhaustively what may be involved in the making of this assumption. But upon the application of the section, it is left to the commissioner, and ultimately to the Court, to assume the existence of a form of articles which would, in fact, satisfy Stock Exchange requirements. This is not a simple task, nor one necessarily capable of a single solution. It is an easy matter notionally to delete a complete article where the article wholly offends against such requirements, but in some cases compliance with Stock Exchange requirements might be achieved by the making of minor amendments. Again, it may be necessary to assume a variation by the insertion of additional articles on particular matters. The problem, of course, is one which must be solved in each individual case, but from what I have said it is, I think, clear that s. 16A (1) (a) does not authorize the commissioner to ignore the existence of any article unless its exclusion is necessary to satisfy the requirements referred to in the section.

In the present case a further difficulty is presented by the use in the section of the expression "at the date of death". Counsel for the commissioner submitted that it was clear that until the death of the deceased article 6 was inconsistent with the Stock Exchange requirements and that, therefore, on the date of and until the death of the deceased on that date the article was so inconsistent. Accordingly, he contended, the article was inconsistent with those requirements "at the date of death". On the contrary, the appellant claimed, the presence of this article was not inconsistent with those requirements on that date, i.e., on and after the death of the deceased. I do not, however, think that either of these propositions resolve this particular difficulty. It is, I think, to be resolved upon a consideration of a number of the provisions of the Act. By s. 8 (1) estate duty is levied and paid upon the value, as assessed under the Act, of the estates of persons dying after the commencement of the Act. To my mind, this section contemplates a valuation being made as at death and not at any other time, though, obviously, a valuation made on this basis may in many cases coincide with a valuation made before or after death, either upon the day of death or upon an earlier or later day. Further, as far as notional property pursuant to s. 8 (4) is concerned, this is deemed for the purposes of the Act to be part of the estate of the deceased person and this means part of the estate at the time of death. Accordingly, such property can be valued only at that time. Other provisions of the Act, and notably those relating to the deduction of debts, leave no doubt that the value of the estate at death is the vital factor in assessing estate duty. Section 16A (1) (a) was not intended to create any notional estate or impose any new liabilities; its function is to prescribe the manner in which the value of estate assets, in some circumstances, may be assessed. Accordingly, it is also concerned with the assessment of value at death and at no other time. This being so, I am of the opinion that if the articles of association of a company, in which a deceased person held shares, satisfy the relevant stock exchange requirements at the death of such person, then in the words of the section they satisfy such requirements "at the date of death"

Again, it was contended that the article did not become operative until the day after the death of the deceased. This contention was based on the language of article 6 (ii) and (iii), but I think it ignores the plain words of article 6 (i) which provides that "Upon the death of MacPherson Robertson" the whole of the then issued shares of the company shall be divided into two classes and become and thereafter be of two classes to be known respectively as No. 1 class shares and No. 2 class shares.

With these observations in mind, I proceed to a consideration of article 6. It was pressed upon us on behalf of the commissioner that the effect of this article was to depress the value of the shares standing in the name of the deceased at the time of his death and that this, taking place on the death of the deceased, entitled the commissioner to apply s. 16A (1) (a) and to ignore the provisions of the article. Again, it was argued that there were other articles, and in particular those imposing restrictions upon the sale and transfer of shares, which were repugnant to the local Stock Exchange requirements and which also tended to depress the value of the deceased's shares, and that the existence of these articles justified the application of the section. But I should point out that it is quite clear from the terms of par. 36 of the admitted facts, that the operation or notional exclusion of article 6 is the only factor material to this branch of the case. No doubt the existence of articles which operate to depress the value of shares in a company, and, perhaps, the existence of articles which, in some respects, determine the character of shares, will form an appropriate basis for the application of s. 16A (1) (a) (see the observations of Williams J. in Federal Commissioner of Taxation v Sagar ^[F18] ), but such a basis having been found and the section having been applied, the only warrant for excluding or ignoring particular articles is that such a course is necessary in order to assume a form of articles which will satisfy Stock Exchange requirements and render the shares "listable". Accordingly, even if it was proper to apply s. 16A in the present case, the question is whether article 6 was repugnant to such requirements "at" or "upon" the death of the testator. The clear evidence is that the existence of the article at that time no longer precluded the company's listing at the appropriate stock exchange. This being so, I am of the opinion that the assumption which s. 16A requires to be made does not require or authorize the exclusion of article 6 in making a valuation of the shares held by the deceased at the time of his death and, for the reasons which I have given, I think the commissioner was wrong in ignoring or excluding the provisions of article 6 in assessing the value of the deceased's shares for the purposes of the Act.

The second branch of the appeal is concerned with s. 8 (4) (e) of the Act which provides that for the purposes of the Act the estate of a deceased person comprises property being a beneficial interest in property which the deceased had at the time of his decease, which beneficial interest, by virtue of a settlement or agreement made by him, passed or accrued on or after his decease to, or devolved on and after his death upon, any other person.

The submissions which were made on this branch of the appeal conceded that article 6 operated at the moment of the death of the deceased and that the exclusion of the provisions of that article by the application of s. 16A (1) (a) was not legally permissible. On this view it was said the article was testamentary in operation and, at one and the same time, brought about a decrease in the value of the shares standing in the name of the deceased at the time of his death and an increase, by a corresponding total amount, in the aggregate value of the somewhat lesser number of shares held at that time by the other shareholders. The value of this increase was said to be a beneficial interest within the meaning of s. 8 (4) (e), and it was claimed that the circumstances showed that it fell fairly within the operation of this sub-section. A "settlement", or rather an "agreement", it was said, ought to be implied "from the deceased and other shareholders agreeing to become members of MacRobertson Pty Ltd upon the terms of its Articles of Association" and the beneficial interest is claimed to have "passed or accrued" on or after the death of the deceased to the other shareholders.

Whilst conceding that the effect of the article at the time of the deceased's death might well have been to increase the value of the shares held by the other shareholders, I would find difficulty in holding that a "settlement" or "agreement" within the meaning of the Act could be implied from the circumstances mentioned, and even greater difficulty in holding that the increase in value to which I have referred should in any way be regarded as property or an interest in property or as a "beneficial" interest in property. The holder of shares in a company acquires his property upon registration and his property does not increase or decrease according to the increase or decrease in the value of his shares from time to time, and this, I think, must be true whether the increase or decrease in the value of the shares springs from fluctuations of the market in normal circumstances or from the effect upon the market value of the shares of some advantage or disadvantage arising from the operation of or amendment of the company's articles. The real ground for asserting that there has been a passing or an accrual of property in this case is, however, not merely that the deceased's shares decreased in value, whilst those of the other shareholders increased, but that article 6 operated to create two distinct classes of shares with different rights. But, whilst conceding that the expression "property" in the context in which it is found in s. 8 (4) (e) must be given the widest meaning, I am quite unable to regard as property, in any sense, the extent of the modification of the shareholders' rights accomplished by the operation of article 6. Moreover, even if the correct view be that the article did operate to strip the deceased's shares of some rights, in the nature of property, and to vest rights, in the nature of property, in the other shareholders, I could not agree that the former rights "passed or accrued" to, or "devolved" on the holders of the No. 1 class shares.

For the reasons given I am of the opinion that the appeal should be allowed and I agree with the terms of the proposed order.