Fraunschiel & Ors v. Federal Commissioner of Taxation

Judges:
Lee J

Court:
Federal Court

Judgment date: Judgment handed down 30 June 1989.

Lee J.

These matters are three appeals under subsec. 189(3) of the Income Tax Assessment Act 1936 (``the Act'') by separate taxpayers against the decisions of the respondent disallowing objections to income tax assessments issued by the respondent to the respective taxpayers in respect of the year of income ending 30 June 1985.

The appeals relate to the interpretation of sec. 26AAC of the Act pursuant to which the respondent included in the assessable incomes of the respective taxpayers certain benefits said to arise under a scheme for the acquisition of shares in a company by employees of the company.

The appeals involved, in the main, a common set of facts and by consent the appeals were heard together and the evidence given in each was received as evidence in the others to the extent that it was relevant.

In these reasons I will deal with the common facts and common issues of law before dealing with any separate questions arising in the individual appeals.

Each of the taxpayers was employed by Wesfarmers Limited (``the company''). In 1985 the company sought to establish an ``employee investment plan'', a proposal approved by shareholders of the company at a general meeting. On 24 May 1985 the company executed a deed made between itself and Orrmand Limited (later known as Share Nominees Limited) (``the trustee'') pursuant to which the company established a scheme known as the employee share plan (``the plan'') for acquisition of shares in the company by employees. The trustee agreed to act as trustee for and in respect of the plan.

The relevant parts of the deed were as follows:

``WHEREAS:

A. The Company is a company duly incorporated in Western Australia and its authorised capital is four hundred million dollars ($400,000,000.00) divided into, inter alia, three hundred and ninety nine million nine hundred and thirty nine thousand nine hundred and ninety nine (399,939,999) ordinary shares of one dollar ($1.00) each.

B. The Company has determined to establish an Employee Investment Plan on the terms and conditions approved in general meeting and herein detailed.

C. The Trustee has agreed to act as trustee for and in respect of the Plan.

D. The Company paid to the Trustee prior to the execution hereof the sum of one thousand dollars ($1000.00) to be settled to

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constitute the Wesfarmers Employees Investment Trust.

E. The Company may from time to time pay to the Trustee moneys to be held and dealt with by the Trustee on the Trusts set out herein and may issue or grant to the Trustee or to Employees or their Associates ordinary one dollar shares, options conferring the right to acquire ordinary one dollar shares and convertible notes carrying a right of conversion into ordinary one dollar shares, in the capital of the Company pursuant to the Plan as hereinafter described.

1. INTERPRETATION

1.1 In this Deed unless there be something in the subject or context inconsistent therewith the following words or expressions shall have the meaning respectively ascribed to them, namely:

(a) `Acceptance Date' means the date specified in the Offer Notice as the latest date upon which the offer comprised in such Offer Notice may be accepted by the Selected Employee or his Relevant Associate;

(b) `Acceptance Notice' means a notice in or substantially in the form set out in the Fourth Schedule hereto and given by the Selected Employee and, where applicable, his Relevant Associate pursuant to Clause 5.1 hereof;

(c) `Associate' means, in respect of a Selected Employee:

(i) in the case of a Selected Employee who is not an Executive, the spouse of [sic - or] any dependent relative of such Selected Employee; and

(ii) in the case of a Selected Employee who is an Executive, any one or more of the following persons or corporations:

(A) the spouse or any dependent relative of the Executive;

(B) the trustee of any trust where the Executive has any interest, vested or contingent, in the capital or any income of such trust; and

(C) any corporation where the Executive holds or has any interest in any share in the capital of such corporation;

...

(m) `Employee' means a person who is, and for a continuous period of one (1) year (or such shorter period as the Board may determine in any particular case) has been, an employee of the Company, of Westralian Farmers Co-operative Limited or of a Related Corporation and includes a Director in the full-time employment of the Company or of a Related Corporation;

(n) `Executive' means a Selected Employee identified to the Trustee by the Board as an executive who has been chosen by the Board having regard to his contribution or potential to the growth of the Wesfarmers Group and to whom the provisions of Part 20 shall apply;

(o) `Loan' means a loan made to a Selected Employee or his Relevant Associate in accordance with Clauses 5.5, 8.3 or 8.6 and on the terms and conditions of a Loan Agreement;

(p) `Loan Agreement' means a loan agreement in or substantially in the form set out in the Fifth Schedule (or in such other form as the Company and the Trustee may agree) providing for a loan of money by the Trustee to a Selected Employee or his Relevant Associate to be used to make payment (in whole or in part) to the Company of the moneys due upon the issue or grant of the Relevant Securities pursuant to Clause 6.1, upon the exercise of an Option or right of conversion attached to a Convertible Note pursuant to Clauses 8.1, 8.2 and 8.3 or upon the acceptance of a rights issue pursuant to such rights issue and Clause 8.6;

(q) `Offer Notice' means a notice in or substantially in the form set out in the Third Schedule hereto and given by the Company to a Selected Employee pursuant to Clause 4.1;

(r) `Option Exercise Price' means, in relation to an Option, the price per share specified in the Offer Notice or the Notice given pursuant to Clause 20.3 (as the case may be) as the Option Exercise Price and being the difference between the greater of one dollar ($1.00) or such

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price as the Board may determine in its absolute discretion (being not less than 90% of the market price for fully paid Shares posted on the Perth Stock Exchange on the last business day on such Exchange before the date of the relevant Offer Notice) and the Option Fee;

(s) `Option Fee' means, in relation to an Option, the amount (expressed as an amount per Share for the number of Shares the subject of the Option) which the Board may determine in its absolute discretion and specify in the Offer Notice or the Notice given pursuant to Clause 20.3 (as the case may be) as being the price at which such Option comprised in the Relevant Securities may be acquired from the Company;

(t) `Options' means options issued by the Company to subscribe for Shares on the terms and conditions set out in the First Schedule hereto or on such other terms and conditions as the Company and the Trustee may agree;

(u) `Plan' means the Employee Share Plan constituted by this Deed;

(v) `Principal Amount' means, the amount of the Loan to be made by the Trustee to the Selected Employee or his Relevant Associate;

(w) `Purchase Price' means, in relation to a Share, the price per share specified in the Offer Notice or the Notice given pursuant to Clause 20.3 (as the case may be) as the Purchase Price and being the greater of one dollar ($1.00) or such price as the Board may determine in its absolute discretion (being not less than 90% of the market price for a fully paid Share posted on the Perth Stock Exchange on the last business day on such Exchange before the date of the relevant Offer Notice);

...

(y) `Relevant Securities' means, in respect of a Selected Employee, the number and type of Securities offered in the Offer Notice to be issued or granted to the Selected Employee or his Associate;

(z) `Relevant Associate' means, in respect of a Selected Employee and Relevant Securities, the Associate nominated by the Selected Executive [sic - Employee] in the Acceptance Notice as the person to whom the relevant Securities are to be issued or granted;

(aa) `Securities' means Shares, Options and Convertible Notes;

(bb) `Selected Employee' means the Employee designated as such in the Offer Notice;

(cc) `Shares' means ordinary shares in the capital of the Company;

(dd) `Trust' means the bare trust hereby constituted and to be styled the Wesfarmers Employee Investment Trust;

...

2. THE PLAN

2.1 The Company may with the prior approval of the Board as part of and pursuant to the Plan in its discretion from time to time issue or grant Securities on such terms and conditions as the Board sees fit to Employees and their Associates and to the Trustee under Clause 20.5 or under any deed or agreement entered into to give effect to the additional rights referred to in Clause 20.2 provided that at no time shall the number of Shares issued under the Plan or taken up or liable to be taken up pursuant to Options and Convertible Notes issued under the Plan exceed five per cent (5%) of the issued capital of the Company outstanding from time to time.

2.2 The Company may with the prior approval of the Board as part of and pursuant to the Plan in its discretion from time to time settle upon the Trustee in its capacity as trustee of the Wesfarmers Employee Investment Trust moneys and other property and may lend money to the Trustee in its capacity as trustee of such Trust to be held and dealt with by the Trustee in the manner and on the trusts set out herein.

2.3 The Company may with the prior approval of the Board as part of and pursuant to the Plan in its discretion from time to time settle money and other property upon, and lend money to, the Trustee to be

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held by the Trustee under any deed or agreement entered into to give effect to the additional rights referred to in Clause 20.1.

2.4 The Company may with the prior approval of the Board as part of and pursuant to the Plan provide loans or other financial assistance as permitted by law from time to time for the purpose of, or in connection with, the acquisition or proposed acquisition of Securities upon terms and conditions to be determined by the Board from time to time.

2.5 The Trustee shall as part of and pursuant to the Plan provide loans in the manner and upon the terms and conditions set out in this Deed and where the Trustee is so required to provide a loan, the Company shall ensure that the Trustee is able to do so by providing the Trustee with a loan under Clause 2.4 in an amount sufficient to cover the principal amount of the loan to be provided by the Trustee.

2.6 Any loan made by the Company to the Trustee as part of or pursuant to the Plan shall be made on the basis that the Trustee shall not in any circumstances whatsoever be personally liable in respect of such loan and the Company shall only have recourse to the security (if any) granted to it by the Trustee in respect of such loan.

3. THE TRUST FUND

3.1 The Trustee hereby admits and declares that it will henceforth hold the sum of one thousand dollars ($1000.00) and all other moneys and property forming part of the Trust Fund upon the trusts herein declared.

3.2 With the consent of the Trustee other moneys and property may be paid or transferred to vested in and accepted by the Trustee as an addition to the Trust Fund and to be held by the Trustee as part of the Trust Fund.

3.3 Subject to compliance with the terms of this Deed, the Trustee shall hold the capital and income of the Trust Fund in its name subject to the terms and conditions of this Deed UPON BARE TRUST for the holders of ordinary shares for the time being in the Company in the same proportion as their respective entitlements to participate in a return of capital upon the liquidation of the Company, to be dealt with in the manner set out in this Deed.

3.4 The Trust shall begin on the date hereof and continue until the Vesting Date being the first to occur of the following dates, namely:

(a) the date on which shall expire the period of eighty (80) years from the date hereof; and

(b) such earlier date (if any) which the Trustee may in its absolute discretion appoint as the Vesting Date.

Notwithstanding any other provisions of this Deed no variation of the Deed shall be effective to create trusts or discretionary powers which would or might operate after the Vesting Date other than trusts for the immediate disposition of the trust property on the Vesting Date among persons then absolutely entitled thereto.

3.5 Subject to compliance with the terms of this Deed, upon termination of the trusts herein declared the investments of the Trust Fund shall be realised and the proceeds of realisation and other available cash then remaining shall be distributed to the holders of ordinary shares for the time being in the Company in the same proportion as their respective entitlements to participate in a return of capital upon the liquidation of the Company.

4. OFFER NOTICE

4.1 The Company may at any time and from time to time by an Offer Notice in writing in or substantially in the form set out in the Third Schedule to an Employee:

(a) designate that Employee as a Selected Employee in accordance with the Plan;

(b) offer to issue or grant to the Selected Employee or an Associate of the Selected Employee the number and type of Relevant Securities specified in the Offer Notice;

(c) specify in relation to the Relevant Securities the subject of the Notice in the case of Shares the Purchase Price, in the case of Options the Option Fee and Option Exercise Price and in the case of Convertible Notes the face value thereof and the Conversion Price, and the total amount payable to the Company upon

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the issue or grant of the Relevant Securities pursuant to Clause 6.1;

(d) specify the amount (if any) the Selected Employee or his Relevant Associate may borrow from the Trustee by way of Loan in order to pay to the Company the moneys due upon the issue or grant of the Relevant Securities pursuant to Clause 6.1;

(e) specify the Acceptance Date in respect of the offer comprised in such Offer Notice; and

(f) specify such other terms and conditions as the Board may require in respect of such offer.

4.2 If the Offer Notice specifies an amount which may be borrowed from the Trustee by way of Loan pursuant to Clause 4.1(d), the Offer Notice shall be accompanied by the Loan Agreement (with the name of the borrower and the Principal Amount left blank) to be entered in respect of the Loan.

4.3 The Company shall as soon as practicable after giving an Offer Notice to an Employee pursuant to Clause 4.1 provide to the Trustee a copy of such Offer Notice.

4.4 The Company may give one or more separate Offer Notices under this Part 4 at the same time or on different occasions in relation to the same Employee.

5. ACCEPTANCE NOTICE

5.1 If a Selected Employee or an Associate of the Selected Employee desires to accept the offer contained in an Offer Notice, the Selected Employee and, where applicable, such Associate shall not later than the Acceptance Date or such later date as may be agreed by the Board by an Acceptance Notice in writing in or substantially in the form set out in the Fourth Schedule to the Company:

(a) accept in whole or in part the offer contained in the Offer Notice (provided that if such offer is accepted in part, the number of the Relevant Securities so accepted is 100 or a multiple of 100);

(b) specify the person (being the Selected Executive [sic - Employee] or an Associate of the Selected Executive [sic - Employee]) to whom the Relevant Securities are to be issued or granted by the Company; and

(c) where applicable, specify the Principal Amount being an amount not greater than the amount specified in the Offer Notice pursuant to Clause 4.1(d) which the Selected Employee or his Relevant Associate wishes to borrow from the Trustee by way of Loan.

The Acceptance Notice shall be signed by the Selected Employee and his Relevant Associate (if any) and, where applicable, shall be accompanied by the Loan Agreement duly executed by the Selected Employee or the Relevant Associate (as the case may be), and by payment of the balance remaining after deduction of the Principal Amount (if any) from the amount specified in the Offer Notice as the total amount payable to the Company upon the issue or grant of the Securities pursuant to Clause 6.1.

5.2 The offer contained in the Offer Notice shall be deemed to be accepted when the conditions of Clause 5.1 have been satisfied and shall not be capable of being accepted in any other manner. No entitlement or right in favour of any person to any Securities offered in the Offer Notice shall arise prior to acceptance of the offer contained in the Offer Notice in accordance with Clause 5.1 and upon such acceptance the only person who shall have or be deemed to have any entitlement or right to such Securities shall be the person specified in the Acceptance Notice as the person to whom the Relevant Securities are to be issued or granted by the Company.

5.3 The Company shall as soon as practicable after receiving an Acceptance Notice pursuant to Clause 5.1 provide to the Trustee a copy of such Acceptance Notice and any Loan Agreement duly executed by the Selected Employee or the Relevant Associate (as the case may be).

5.4 The Trustee shall as soon as practicable after receiving a Loan Agreement duly executed by the Selected Employee or the Relevant Associate (as the case may be) complete the Loan Agreement by inserting the name of the borrower and the Principal Amount and shall itself execute the Loan Agreement. The Trustee shall forward the

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executed original thereof to the Company and a copy thereof to the Selected Employee and shall retain a copy thereof for its own records.

5.5 Upon executing the Loan Agreement, the Trustee shall make the Loan and shall pay the proceeds thereof to the Company for and on account of the moneys due to the Company pursuant to Clause 6.1.

5.6 The Company shall cause the Loan Agreement to be duly stamped and shall pay all stamp duty (including fines or penalties for late lodgement) in respect of the Loan Agreement.

6. ISSUE OF SECURITIES

6.1 Subject to this Part 6, the Company shall issue or grant the Securities to the Selected Employee or his Relevant Associate (as the case may be) in accordance with the Acceptance Notice or the Notice given in accordance with Clause 20.3 (as the case may be) upon payment of the following amounts:

(i) in the case of each Share, the Purchase Price;

(ii) in the case of each Option, the Option Fee; and

(iii) in the case of each Convertible Note, the face value of such Convertible Note.

6.2 Where the person to whom Securities are to be issued or granted in accordance with Clause 6.1 has paid the amounts referred to in Clause 6.1 without obtaining any Loan from the Trustee, the Company shall deliver or cause to be delivered the certificates or other muniments of title relating to such Securities to such person.

6.3 Where the person to whom Securities are to be issued or granted in accordance with Clause 6.1 has obtained a Loan to pay all or any part of the amounts referred to in Clause 6.1, the Company shall deliver or cause to be delivered the certificates or other muniments of title relating to such Securities to the Trustee to be held as security for the repayment of the Loan and the payment of all such other amounts due to the Trustee under the Loan Agreement until the Loan has been repaid and such other amounts have been paid in full to the Trustee.

6.4 Where the Trustee exercises an Option or a right of conversion attached to a Convertible Note comprised in the Securities which the Trustee holds as security pursuant to this Deed, the Company shall deliver the certificates for the Shares arising upon such exercise to the Trustee to be held as security in the same regard.

6.5 Where the Trustee receives Bonus Securities in respect of Securities held by the Trustee as security pursuant to this Deed, the Company shall deliver the certificates for such Bonus Securities to the Trustee to be held as security in the same regard.

6.6 Upon repayment of the Loan and the payment of all such other amounts due to the Trustee under the Loan Agreement, the Trustee shall deliver or cause to be delivered the certificates or other muniments of title relating to such Securities and any Bonus Securities held by it pursuant to Clause 6.3, 6.4 and 6.5 to the Selected Employee or his Relevant Associate (as the case may be).

...

8. EXERCISE OF OPTIONS, RIGHTS OF CONVERSION AND RIGHTS ISSUES

8.1 A person who has been issued or granted a Security being an Option or Convertible Note may, subject to the terms and conditions applicable to such Option or Convertible Note, at any time by notice in writing addressed to the Trustee request the Trustee to exercise the Option or right of conversion attached to the Convertible Note on behalf of that person and the Trustee shall on payment to the Trustee of the moneys due to the Company on the exercise of the Option or right of conversion, so exercise that Option or right of conversion and pay such moneys to the Company for and on behalf of such person or corporation. It is acknowledged that in the case of an Option, such Option shall be exercisable over a period not exceeding five (5) years on the terms and conditions set out in Schedule One.

8.2 The Company shall upon exercise of an Option or right of conversion attached to a Convertible Note allot to the person entitled to the same the number of Shares in respect of which the Option or right of conversion is

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exercised upon payment in full of the moneys due upon the allotment of the Shares the subject of the Option or right of conversion PROVIDED THAT the provisions of Clauses 6.2, 6.3 and 6.5 shall apply in respect of such Shares and any Loan made pursuant to Clause 8.3 mutatis mutandis.

8.3 A person requesting the Trustee to exercise an Option or right of conversion attached to a Convertible Note pursuant to the provisions of Clause 8.1 may by notice in writing addressed to the Company and to the Trustee apply to the Company and the Trustee for financial assistance in connection with the acquisition by such person of all or any of the Shares the subject of such Option or right of conversion attached to such Convertible Note and if the Board agrees to such request, the Trustee shall enter into a Loan Agreement on the terms and conditions set out in the Fifth Schedule with such person for a loan of an amount approved by the Board.

8.4 Unless the Board determines otherwise, an Option or right of conversion attached to a Convertible Note comprised in the Relevant Securities may only be exercised where at the time of exercise thereof the Employee who was the Selected Employee in relation to the Relevant Securities is an Employee or has within the immediately preceding six (6) months ceased for whatever reason to be an Employee.

8.5 The Trustee will not exercise any Option or any right of conversion attached to a Convertible Note granted by the Company under this Deed except in accordance with the provisions of this Part 8 or in accordance with the Loan Agreement upon a default by the Borrower thereunder.

8.6 If at any time any ordinary share should be offered for subscription by members of the Company by way of right in respect of any Share issued by the Company in accordance with this Deed or in the circumstances contemplated in Clause 6 of the Option set out in Schedule One or in Clause 6 of the Convertible Note set out in Schedule Two in respect of an Option or Convertible Note issued by the Company in accordance with this Deed, the following provisions shall apply:

(a) the Company shall give notice in writing to the person entitled to such Share, Option or Convertible Note (as the case may be) of such rights issue;

(b) the person so entitled may within seven (7) days of receiving such notice from the Company by notice in writing advise the Trustee that he intends to exercise such rights and may in such notice apply to the Trustee for financial assistance in connection with the acquisition by such person of all or any of the ordinary shares the subject of such rights issue;

(c) if the Board agrees to such request, the Trustee shall enter into a Loan Agreement on the terms and conditions set out in the Fifth Schedule with such person for a loan of an amount approved by the Board;

(d) if the person so entitled fails to give a notice to the Trustee within the aforesaid period or in such notice indicates that he does not intend to exercise such rights, the Trustee shall be at liberty to sell and realise such rights and to apply the proceeds thereof firstly towards the payment of interest on any Loan by the Trustee to such person and then towards payment of all other amounts due to the Trustee by such person;

(e) to the extent that such proceeds exceed the total amount required for repayment of any such Loan and the payment of all other moneys due to the Trustee by such person, the Trustee shall pay the balance remaining after repayment of such Loan and the payment of all such other moneys to the person so entitled.

...

17. NOTICES

17.1 Any notice required to be given to any person hereunder shall be deemed to have been duly given if it is in writing and either delivered or sent by post in a properly prepaid envelope addressed to such person:

(a) if such person is a Selected Employee or an Associate of a Selected Employee, at his address as appearing in the Register, and

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(b) otherwise, at the principal place of business or residence of such person.

Any notice given by post shall be deemed to have been served on the third day following the day when it was posted and in proving such service it shall be sufficient to prove that the letter containing the notice was properly addressed and posted by prepaid post and a statement signed by the Trustee that it was so posted and when shall be conclusive of those facts.

...

20. PROVISIONS APPLICABLE TO SENIOR EXECUTIVES

20.1 The provisions of this Part 20 shall apply only to Executives and their Associates.

20.2 Executives and their Associates shall be entitled to additional rights under the Plan, namely:

(a) the additional rights specified in this Part 20; and

(b) the right, if nominated by the Company with the approval of the Board and selected by the Trustee, to participate in a section of the Plan permitting the Executive or his Associate to benefit from increments in the value of Shares,

upon the terms and conditions set out in this Deed and any other deed or agreement entered into with the approval of the Board to give effect to the additional rights referred to in Clause 20.2(b).

20.3 The Company may at any time and from time to time by notice in writing to the Trustee in or substantially in the form set out in the Sixth Schedule:

(a) designate a Senior Executive as an Executive to whom the provisions of this Part 20 shall apply;

(b) nominate the Securities to be issued and granted in relation to the Executive or his Associate;

(c) specify in the case of Shares the Purchase Price, in the case of Options the Option Fee and the Option Exercise Price and in the case of Convertible Notes the face value of such Convertible Notes and the Conversion Price (as the case may be),

and the Company shall upon payment by or on behalf of the Trustee of the amount due to the Company in respect of such Securities under Clause 6.1 issue or grant to the Trustee the Securities nominated in such Notice to be dealt with by the Trustee in accordance with Clause 20.5.

20.4 The Company may give one or more separate Notices under Clause 20.3 at the same time or on different occasions in relation to the same Employee.

20.5 As soon as practicable after receipt of a Notice given under Clause 20.3 the Trustee shall upon payment by or on behalf of the transferee of the amount paid by the Trustee to the Company in respect of such Securities under Clause 20.3 transfer the Securities specified in such Notice to such of the Executive designed in such Notice or his Associates as the Trustee may in its absolute discretion determine.

20.6 In determining any transfer of any Securities in accordance with Clause 20.5 the Trustee shall act in its absolute and unfettered discretion. In the exercise of such discretion the Trustee may have regard to but shall not be bound in any way by the wishes or any direction of the Selected Employee [sic - Executive] notified to the Trustee in relation to such Securities.

20.7 Any stamp duty assessed or charged in respect of a transfer of Securities by the Trustee pursuant to Clause 20.5 shall be borne and paid by the Trustee.

20.8 The Trustee may enter into a Loan Agreement with, and make a Loan to, the person to whom any Securities are or are to be issued or granted pursuant to Clause 20.5 for the amount due to the Company upon the issue and grant of the Securities and the provisions of Parts 6, 7, 8, 9 and 10 of this Deed shall apply in respect of such Loan and such Securities.

...

THIRD SCHEDULE

OFFER NOTICE

TO: [Name of Selected Employee]

[Address of Selected Employee]

The Board of Wesfarmers Limited takes great pleasure in advising that you have

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been selected to participate in the Wesfarmers Employee Investment Plan constituted by a Deed made the day of 1985 between Wesfarmers Limited and Orrmand Limited (`the Plan').

The Company hereby offers to issue or grant to you or to your spouse or a dependent relative [ ] [*shares/options/convertible notes] (`the Securities') upon and subject to the terms and conditions of the Plan. The person accepting this offer is referred to in this Offer Notice as `the Offeree'.

This offer may be accepted in whole or in part but if it is accepted in part, the number of Securities so accepted must be 100 or a multiple of 100.

The price at which the Securities will be issued or granted to the Offeree by the Company is [*dollars/cents] ($ ) each and therefore should this offer be accepted in whole the total amount payable by the Offeree will be dollars ($ ).

[^* [^* The Option Exercise Price applicable to the Options/Conversion Price applicable to the Convertible Notes] comprised in the Securities is dollars ($ ).]

Should you or your spouse or a dependent relative wish to accept this offer, the attached Acceptance Notice should be completed by you and by the Offeree and returned to the Secretary of the Company at 21st Floor, Allendale Square, 77 St. George's Terrace, Perth on or before 19

[^* The Offeree is entitled to borrow from the Plan Trustee an amount up to dollars ($ ) towards payment of the amount owed to the Company in respect of the issue or grant of the Securities. The loan from the Plan Trustee will not result in any personal liability to the Offeree. The Trustee may only have recourse to the Securities which will be held by the Trustee to secure payments owing by the Offeree under the loan.

Should the Offeree wish to exercise the entitlement to a loan, the Offeree should execute the attached Loan Agreement and return it to the Company with the attached Acceptance Notice.]

The Acceptance Notice should be accompanied by a cheque for the [*balance (if any) of the] total amount payable to the Company by the Offeree calculated at the rate mentioned above [^*after deducting the amount to be borrowed from the Trustee in accordance with the last paragraph.]

Dated this day of 19

Signed for and on behalf of Wesfarmers Limited....

Secretary

Wesfarmers Limited

^*Delete if inapplicable.

FOURTH SCHEDULE

ACCEPTANCE NOTICE

To: The Secretary,

Wesfarmers Limited,

21st Floor,

Allendale Square,

77 St. George's Terrace,

PERTH. W.A. 6000

From: [Name of Selected Employee]

In accordance with the Wesfarmers Employee Investment Plan constituted by a Deed dated the day of 1985 and made between Wesfarmers Limited and Orrmand Limited (`the Plan') the Offeree mentioned below hereby accepts the offer set out in your Offer Notice dated to subscribe for or purchase the Securities mentioned below and requests that you issue or grant such Securities to the Offeree in accordance with the Plan.

Name of Offeree:....

Address of Offeree:....

Number and Type of Securities:....

The total amount payable to you in respect of the issue or grant of the Securities (as specified in the Offer Notice) is dollars ($ - ) in respect of which:

(a) the Offeree wishes to borrow $ - from the Trustee upon the terms and conditions of the Plan; and

(b) The Offeree attaches a cheque for $ -.

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The Offeree agrees to be bound by and to comply with the terms and conditions of the Plan.

DATED this day of 19.

SIGNED:........

Selected Employee Offeree

SIXTH SCHEDULE

The Secretary,

Orrmand Limited,

21st Floor,

Allendale Square,

77 St. George's Terrace,

PERTH. W.A. 6000

Designation of Senior Executive

Pursuant to Part 20 of the Deed made the day of 1985 between our respective companies, Wesfarmers Limited hereby designates of as a Senior Executive to whom the provisions of Part 20 of such Deed shall apply.

The number of Securities to be issued or granted to you in relation to the Senior Executive and other relevant details are set out below.

Securities:

[^*Purchase Price/Option Fee/Face Value of

Convertible Note]:

[^*Option Exercise Price/Conversion Price]

Dated this day of 19.

Signed for and on behalf of

Wesfarmers Limited by:

Secretary

Wesfarmers Limited

^*Delete whichever is inapplicable''

In respect of the taxpayer Fraunschiel, the minutes of a meeting of the board of directors of the trustee held on 29 May 1985 show that the trustee had been advised by the company pursuant to subcl. 20.1 of the deed that Fraunschiel had been nominated as an executive pursuant to that clause.

It may be seen from the relevant clauses in the deed set out above that the deed provided no machinery for the trustee to give notice to any member of the class of persons described by cl. 20 from which the trustee may select a person to whom it would offer to transfer the relevant securities upon payment of the price paid to the company for the shares by the trustee. Apparently an officer of the company informed Fraunschiel that he was a selected executive under the plan. The company prepared a formal ``Memorandum of Wishes'' to be signed by Fraunschiel after he advised that officer that he would like to acquire the relevant securities as trustee of the Fraunschiel Family Trust. The ``Memorandum of Wishes'' was in the following form:

``MEMORANDUM OF WISHES

The Secretary

Orrmand Limited

21st Floor

Allendale Square

77 St George's Terrace

PERTH WA 6000

Wesfarmers Limited - Employee Investment Plan

I acknowledge that I have no proprietary or other right in, nor any claim demand or entitlement in respect of, any Securities to be allocated by Orrmand Limited pursuant to Clause 20.5 of the Deed between Wesfarmers Limited and Orrmand Limited dated 24 May 1985 constituting the Wesfarmers Employee Investment Plan.

I further acknowledge that Orrmand Limited has an unfettered discretion in the allocation of such Securities and any wish expressed by me in relation to the allocation of such Securities is in no way binding upon Orrmand Limited.

Subject to the foregoing and for the purpose only of providing information to Orrmand Limited, I hereby record that it would be my wish that any such Securities be allocated to Erich Fraunschiel in his capacity as trustee of the Fraunschiel Family Trust (being a trust in which I have an interest, vested or contingent, in the capital or income).

Yours faithfully,.''

According to the minutes of the meeting of the board of directors of the trustee referred to above it was noted that the trustee had an absolute and unfettered discretion to transfer relevant securities to executives nominated by the company or to associates of those executives pursuant to subcl. 20.5 and 20.6 of the deed. The ``Memorandum of Wishes'' signed by Fraunschiel was tabled at that

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meeting together with similar memoranda from other selected executives. The board of directors of the trustee resolved to exercise the trustee's discretion under the deed by transferring the relevant securities to associates of the various selected executives and by discharging the consideration to be paid for such a transfer from the proceeds of loans to be advanced by the trustee to the respective associates. In each case the associate was the trustee of a family trust in which the selected executive held an interest as a possible beneficiary and in each case the choice of the proposed transferee by the trustee accorded with the wishes of the selected executive.

By a notice dated 6 June 1985 addressed to the taxpayer McNee, the company offered to grant 5,000 shares to McNee, his spouse, or a dependent relative. The notice stipulated that the acceptance of the offer was to be returned to the company by 28 June 1985. On 17 June 1985 the wife of the taxpayer McNee signed an acceptance notice as offeree. The acceptance form was also signed by the taxpayer. Mrs McNee was granted a loan by the trustee for the full amount of the purchase price stipulated in the offer notice. The loan was advanced by paying to the company the price of the shares.

Two offer notices dated 10 June 1985 were addressed to the taxpayer Brasington offering to grant in total 35,000 shares to Brasington, his spouse, or a dependent relative pursuant to the terms of the plan. Acceptance of the offers was required to be notified by 12 June 1985. Mrs Brasington signed two acceptance notices on 10 June 1985. The purchase price for the shares was paid by the trustee as an advance of a loan to Mrs Brasington for that purpose.

Each of the taxpayers signed an authority prepared by the company authorising the company to deduct a sum from their respective salaries each month and to remit that sum to the trustee. The authority recorded that the deduction was in respect of a loan repayment and that the authority could not be withdrawn without the prior approval of the trustee.

In respect of the year ended 30 June 1985, the taxpayer McNee and Brasington lodged income tax returns to which were attached notices of advice informing the respondent that their respective spouses had acquired shares in the company as part of an issue of shares by the company to employees or their associates. The notices contended that sec. 26AAC of the Act (subsec. 5 and 6) did not apply to the taxpayers. The notices were in standard form and were apparently provided to the taxpayers by the company.

Mrs McNee and Mrs Brasington lodged income tax returns for the same year which included, as part of the assessable income of each of them, the difference between the value of the shares at the time of acquisition and the consideration paid for the shares, as provided by subsec. 26AAC(5). Again, it would appear that a standard form for the disclosure of the receipt of assessable income was provided for the spouses by the company.

With regard to the taxpayer Fraunschiel, the income tax return lodged by him for the year ending 30 June 1985 included a statement apparently prepared by his employer in which the taxpayer contended that he had not acquired the relevant shares pursuant to subsec. 26AAC(6) of the Act and, therefore, no further assessable income was required to be included in his return under subsec. 26AAC(5) of the Act.

In due course the respondent issued assessments to the taxpayer McNee and to Mrs McNee in which the respondent excluded from Mrs McNee's assessable income the sum returned by her pursuant to subsec. 26AAC(5) and included that sum in the assessable income of the taxpayer McNee.

In respect of the taxpayer Brasington and Mrs Brasington, the respondent issued assessments which assessed Mrs Brasington to income tax by accepting as assessable income the amount included by her pursuant to subsec. 26AAC(5) of the Act. No such amount was included in the assessable income of the taxpayer Brasington. Subsequently, however, the respondent issued amendment assessments which decreased the assessable income returned by Mrs Brasington by omitting from it the amount described in her return as assessable income pursuant to subsec. 26AAC(5) and increased the assessable income of the taxpayer Brasington by including in it the same amount as an item of assessable income pursuant to subsec. 26AAC(5) of the Act.

With regard to the taxpayer Fraunschiel, the respondent issued a tax assessment calculated upon an amount of assessable income which included a sum that represented the difference

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between the consideration paid for the shares by the trustee of the Fraunschiel family trust and the market value of those shares at the time of transfer of the shares to the trustee of that trust.

At the relevant time the material parts of sec. 26AAC were as follows:

``26AAC(1) For the purposes of this section, a taxpayer shall be taken to have acquired a share in a company, or a right to acquire a share in a company, under a scheme for the acquisition of shares by employees if -

(a) in the case of a share, the share was acquired by the taxpayer -

(i) in respect of, or for or in relation directly or indirectly to, any employment of, or services rendered by, the taxpayer or a relative of the taxpayer; or

(ii) as a result of the exercise or operation of a right to acquire the share, being a right that was acquired by the taxpayer in respect of, or for or in relation directly or indirectly to, any employment of, or services rendered by, the taxpayer or a relative of the taxpayer; or

(b) in the case of a right, the right was acquired by the taxpayer in respect of, or for or in relation directly or indirectly to, any employment of, or services rendered by, the taxpayer or a relative of the taxpayer.

26AAC(2) Where a taxpayer who has acquired a right to acquire a share in a company in respect of, or for or in relation directly or indirectly to, any employment of, or services rendered by, the taxpayer or a relative of the taxpayer disposes of, and re-acquires, the right on one or more occasions, each such re-acquisition of the right shall be taken, for the purposes of this section, to be an acquisition of the right in respect of, or for or in relation directly or indirectly to, that employment of, or those services rendered by, the taxpayer or that relative of the taxpayer, as the case may be.

26AAC(3) A reference in this section to a share in a company, or a right to acquire a share in a company, having been acquired by a taxpayer in respect of, or for or in relation directly or indirectly to any employment of, or services rendered by, the taxpayer or a relative of the taxpayer includes, but is not limited to, a reference to such a share or right having been acquired by a taxpayer -

(a) in pursuance of an agreement, arrangement or understanding under which a company was to issue shares in the company to employees of the company or of another company or to relatives of those employees; or

(b) in pursuance of the terms of a trust deed under which a trustee is required or authorized to sell, or otherwise to transfer, shares in a company to employees of the company or of another company or to relatives of those employees.

26AAC(4) This section applies to and in relation to an acquisition by a taxpayer of a share in a company, or of a right to acquire a share in a company, if, and only if -

(a) in the case of a share, the share was acquired by the taxpayer after 17 September 1974 otherwise than as a result of the exercise or operation of a right that -

(i) being a right that had not previously been acquired and disposed of by the taxpayer - was acquired by the taxpayer on or before that date; or

(ii) being a right that had previously been acquired and disposed of by the taxpayer, as first acquired by the taxpayer on or before that date; or

(b) in the case of a right to acquire a share -

(i) where the right had not previously been acquired and disposed of by the taxpayer - the right was acquired by the taxpayer after 17 September 1974; or

(ii) where the right had previously been acquired and disposed of by the taxpayer - the right was first acquired by the taxpayer after that date,

and a reference in this section to the acquisition by a taxpayer of a share or a

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right to acquire a share shall be construed accordingly.

26AAC(5) Where a taxpayer has acquired during the year of income a share in a company under a scheme for the acquisition of shares by employees, the assessable income of the taxpayer of the year of income includes the value of that share at the time when it was acquired by the taxpayer less the sum of -

(a) the amount, if any, paid or payable by the taxpayer as consideration for the share; and

(b) if the taxpayer acquired the share as a result of the exercise or operation of a right (whether that right was unconditional or subject to conditions) to acquire the share - the amount, if any, paid or payable by the taxpayer as consideration for the right.

26AAC(6) Where -

(a) a taxpayer has acquired a right (whether that right was unconditional or was subject to conditions) to acquire a share in a company under a scheme for the acquisition of shares by employees;

(b) as a result of a disposition or successive disposition of the right, the right was subsequently acquired by an associate of the taxpayer without having been, at any time since it was first acquired by the taxpayer, in the ownership of a person other than the taxpayer or an associate of the taxpayer; and

(c) as a result of the exercise or operation of the right, that associate of the taxpayer acquired a share in the company,

the taxpayer shall be deemed for the purposes of this section -

(d) to have acquired the share under a scheme for the acquisition of shares by employees and to have so acquired the share at the time when it was acquired by the associate; and

(e) to have paid as consideration for the share the amount, if any, paid or payable by the associate as consideration for the share.

26AAC(7) Where -

(a) a taxpayer has acquired a right (whether that right was unconditional or was subject to conditions) to acquire a share in a company under a scheme for the acquisition of shares by employees;

(b) as a result of a disposition or of successive disposition of the right, the right was subsequently acquired by an associate of the taxpayer without having been, at any time since it was first acquired by the taxpayer, in the ownership of a person other than the taxpayer or an associate of the taxpayer; and

(c) the associate has disposed of the right to a person, not being the taxpayer or another associate of the taxpayer,

the assessable income of the taxpayer of the year of income during which the associate disposed of the right as mentioned in paragraph (c) includes the amount, if any, received by the associate as consideration for the right less the amount, if any, paid or payable by the taxpayer as consideration for the right.

26AAC(8) Where a taxpayer -

(a) has acquired a right (whether that right was unconditional or was subject to conditions) to acquire a share in a company under a scheme for the acquisition of shares by employees (including a right that has been previously acquired and disposed of by the taxpayer but not including a right that has, at any time since it was first acquired by the taxpayer, been in the ownership of a person other than the taxpayer or an associate of the taxpayer); and

(b) has disposed of that right to a person not being an associate of the taxpayer,

the assessable income of the taxpayer of the year of income during which the taxpayer disposed of the right as mentioned in paragraph (b) includes the amount, if any, received by the taxpayer as consideration for the right less the amount, if any, paid or payable by the taxpayer as consideration for the right.

26AAC(9) Where -

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(a) the trustee of the estate of a deceased person has acquired a share in a company as a consequence of the exercise or operation of a right to acquire the share, being a right owned by the deceased person at the time of his death; and

(b) an amount would have been included in the assessable income of the deceased person under this section if he had not died and had acquired the share on the day on which it was acquired by the trustee for a consideration equal to the consideration, if any, paid by the trustee for the share,

the amount that would have been so included in the assessable income of the deceased person shall be included in the assessable income of the trust estate of the year of income during which the trustee acquired the share and shall be deemed to be income to which no beneficiary is presently entitled.

26AAC(10) For the purposes of paragraph 26(e), the acquisition by a taxpayer of a share in a company, or of a right to acquire a share in a company, under a scheme for the acquisition of shares by employees shall be deemed not to be an allowance, gratuity, compensation, benefit, bonus or premium allowed, given or granted to him.

26AAC(11) Where, as a result of a disposition of a right to acquire a share in a company -

(a) an amount would, but for this sub-section, be included by virtue of this section in the assessable income of a taxpayer of a year of income; and

(b) an amount has been, or will be, included by virtue of another section of this Act in the assessable income of any year of income of the taxpayer or of an associate of the taxpayer (including, in the case of an associate being a trustee, the assessable income of the trust estate),

the amount referred to in paragraph (a) that would, but for this sub-section, be included in the assessable income of the taxpayer shall be reduced by so much of that amount as does not exceed the amount referred to in paragraph (b).

26AAC(12) Where -

(a) as a result of the acquisition by a taxpayer or by an associate of a taxpayer of a share in a company, an amount has been, or will be, included by virtue of this section in the assessable income of the taxpayer of a year of income; and

(b) as a result of the first disposition of the share after the acquisition referred to in paragraph (a), an amount would, but for this sub-section, be included by virtue of another section of this Act in the assessable income of any year of income of the taxpayer or of an associate of the taxpayer (including, in the case of an associate being a trustee, the assessable income of the trust estate),

the amount referred to in paragraph (b) that would, but for this sub-section, be included in the assessable income of a person or of a trust estate shall be reduced by so much of that amount as does not exceed the amount referred to in paragraph (a).

26AAC(13) Where -

(a) an amount is included in the assessable income of a trust estate by virtue of sub-section (9) as a result of the acquisition by the trustee of a share in a company; and

(b) as a result of the first disposition of the share after the acquisition referred to in paragraph (a), an amount would, but for this sub-section, be included by virtue of another section of this Act in the assessable income of the trust estate of any year of income,

the amount referred to in paragraph (b) that would, but for this section, be included in the assessable income of the trust estate shall be reduced by so much of that amount as does not exceed the amount referred to in paragraph (a).

26AAC(14) A reference in this section to an associate of a taxpayer is a reference to any of the following persons: -

(a) a relative of the taxpayer;

(b) a trustee of a trust estate, where the taxpayer or any relative of the taxpayer benefits or is capable of benefiting under the trust;

(c) a partner of the taxpayer;

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(d) a company, where -

(i) the company is, or its directors are, accustomed or under an obligation, whether formal or informal, to act in accordance with the directions, instructions or wishes of the taxpayer or of a relative of the taxpayer; or

(ii) the taxpayer is, the persons who are associates of the taxpayer by virtue of paragraphs (a), (b) and (c) are, or the taxpayer and the persons who are associates of the taxpayer by virtue of those paragraphs are, in a position to cast, or control the casting of, more than 50% of the maximum number of votes that might be cast at a general meeting of the company.

26AAC(15) Where -

(a) a taxpayer acquires a share in a company under a scheme for the acquisition of shares by employees; and

(b) by reason of any conditions or restrictions (being conditions or restrictions applicable only to shares in the company acquired under such a scheme) attached to, or to the issue of, the share (including conditions or restrictions in relation to the payment of moneys in respect of the share) the right of the taxpayer to dispose of the share is restricted or the taxpayer is liable to be divested of his ownership of the share,

the acquisition of the share by the taxpayer shall be deemed for the purposes of this section to have taken place at the time when the right of the taxpayer to dispose of the share ceases to be so restricted, the time when the taxpayer ceases to be so liable to be divested of his ownership of the share or the time immediately before the taxpayer disposes of the share, whichever first happens.

26AAC(16) Where a taxpayer who has a right to acquire a share in a company is to be taken to have acquired the right under a scheme for the acquisition of shares by employees by virtue of the operation of sub-section (2), a reference in this section to the amount, if any, paid or payable by the taxpayer as consideration for the right shall be read as a reference to the amount, if any, paid or payable by the taxpayer as consideration in respect of the first acquisition of the right by him.

26AAC(17) A reference in this section to the amount paid or payable by a person as consideration for a share or for a right to acquire a share includes a reference to any expenditure incurred by the person in the year of income or in any preceding year of income in connexion with the acquisition of the share or right other than expenditure allowed or allowable as a deduction from the assessable income of the person of any of those years of income.''

The respondent contended that the provisions of subsec. 26AAC(6) applied to the taxpayers in that the respective taxpayers had:

(a) acquired a right to acquire shares in the company;
(b) disposed of that right to an associate of the taxpayer; and
(c) the associate had acquired shares in the company.

In respect of the taxpayer Fraunschiel, the respondent also contended by way of alternative that the ``benefits of the said shares'' formed part of the taxpayer's assessable income pursuant to subsec. 26(e) of the Act.

Before turning to the interpretation of sec. 26AAC, it is appropriate to define the operation of the company's scheme for the acquisition of shares by employees, or certain persons associated with employees, and ascertain the nature of the rights, if any, provided to employees pursuant to that scheme.

The scheme was not a gift of shares to selected employees. It involved an offer to issue shares to a class of persons, the offer to be accepted within a prescribed period by notice in writing and by payment of a consideration for the shares as stipulated in the offer.

The deed made no provision for any steps to be taken to ascertain the members of the class who may accept the offer and no notice was required to be issued to any member of the class other than the employee. It was the apparent intention of the scheme that there be a single acceptance of the offer although the

ATC 4634

acceptance could be in respect of less than the number of shares on offer.

Subclause 5.1 of the deed provided that if the offer were accepted by an associate of the employee, both the employee and associate were to sign the acceptance notice. Subclause 5.2 stated that the offer was not capable of being accepted in any other manner.

The requirement for the employee to sign the acceptance notice raises the question whether the true intention of the deed was that the offer be accepted only by the employee or a person nominated by the employee and that in the absence of a nomination by the employee the offer was incapable of extending to any person other than the employee.

Paragraph 1.1(z) of the deed defined a ``relevant associate'' as a person nominated by the employee as the person to whom the shares are to be granted. That definition was not, however, reflected in any substantive part of the deed. Neither the form of the offer notice provided for in para. 1.1(q) and in the Third Schedule of the deed nor the acceptance notice defined in para. 1.1(b) and set out in the Fourth Schedule of the deed made any stipulation for nomination by the employee of a person competent to accept the offer in the event that the offer was not accepted by the employee.

If there were nothing more, perhaps the requirement that the employee countersign the acceptance of the offer by the employee's associate may raise a suggestion that the employee was empowered to nominate an acceptor of the offer and thereby dispose of the right of acceptance.

However, where an offer is made to a class of persons related to an employee and the members of that class are unknown to the offeror, the requirement imposed by the offeror that the acceptance of the offer by a member of that class other than the employee be countersigned by the employee may be taken to be a means of confirmation that the acceptor was within the class of persons to which the offer had been made.

The offer notice set out in the Third Schedule to the deed was an offer to a class of persons made through the employee and not an offer to the employee or his nominee. The right to accept that offer was possessed by all members of the class, notwithstanding that distribution of the notice of the offer was rather limited. The acceptance notice set out in the Fourth Schedule to the deed makes that clear. Similarly, the terms of the deed relating to the provision of loan funds indicated that the deed was directed at the person who accepted the offer and not the person nominated by the employee.

The substantive provisions in subcl. 5.1 of the deed prescribed the form of the offer and the form of the acceptance of the offer. Subclause 5.1 provided for either the employee or the employee's associate to accept the offer and it was not a requirement of subcl. 5.1 that the employee nominate who may accept or direct who may receive the issue of these shares upon acceptance.

Furthermore, subcl. 5.3 and 5.4 of the deed apparently recognised that the due acceptance of the offer may be effected by either the selected employee or the relevant associate, although subcl. 5.4 provided for a copy of the loan agreement executed by the relevant associate to be forwarded to the selected employee and not to the relevant associate.

The employee had a clear right to accept the offer, a right possessed in common with other members of the class of persons to whom the offer was directed. However, that right to accept must be distinguished from a right to acquire the shares.

A right to acquire shares would be a right such as that contained in an option to purchase. It matters not whether an option agreement is regarded as an irrevocable offer or a conditional contract (see
Laybutt v. Amoco Australia Pty. Ltd. (1974) 132 C.L.R. 57), the right to acquire the property the subject of the option is an enforceable right to acquire pending actual acquisition by exercise of the option. In contrast, the right to accept an offer has no enforceable quality attached to it. The offer may be withdrawn or revoked and the right to accept vanishes with the destruction of the offer. The fact that the property may be acquired by the acceptance of the offer does not make the right to accept a right to acquire. In addition, in the present example the right to accept the offer was a right possessed by all members of a class and acceptance by any member of that class terminated the rights of acceptance held by other members of the class. In the case of the taxpayer Brasington, the offer

ATC 4635

was required to be accepted within two days of the date of the offer. In that case there may have been little opportunity for disclosure of the offer to all members of the class of persons to whom the offer was made, but that circumstance did not alter the nature of the right created by the scheme.

The offer to issue shares did not involve the creation of any interest in property in any member of the class to whom the offer was made. The right to accept may have presented an interest in equity capable of transfer, but was not itself an equitable interest in the property on offer. (See
Palmarc Investments Pty. Ltd. v. F.C. of T. 85 ATC 4410 at p. 4413.) Certainly, the right to accept the offer was capable of being disposed of by assignment or declaration of trust, but any interest in property created by the acceptance of the offer at all times would have been the property of the assignee or object of the trust. (See Palmarc p. 4413.)

The respondent argued that the selected employees held a right of pre-emption. The requirement in the deed that the acceptance of the offer be signed by the employee and the stipulation that the offer was not capable of being accepted in any other manner may have suggested that the employee was provided with a pre-eminent right of acceptance in that no associate of the employee would be able to effect an acceptance of the offer unless the employee endorsed his signature on the form of acceptance. Even if this were so, a right of pre-emption would not involve any interest in the shares in respect of which it may have been granted (see
Manchester Ship Canal Company v. Manchester Racecourse Company (1901) 2 Ch. 37), and furthermore, the failure to exercise that right would not involve the assignment or disposition of such a right to any other member of the class of persons who may accept the company's offer.

In the full context of the deed, the requirement that the selected employee sign the form of acceptance was not the grant of a right to a selected employee intended to bind the company but was a provision serving the interests of the company by providing for the selected employee's confirmation that the acceptor was a person capable of accepting the offer. The company was always able to waive compliance with that requirement and indeed in respect of the taxpayer Brasington where Mrs Brasington's acceptance of the offer was not endorsed with her husband's signature, the requirement was waived and the shares on offer were duly allotted to Mrs Brasington.

Subclauses 2.4 and 2.5 of the deed made it clear that the company was to fund the purchase of shares in the company if the trustee were requested to provide a loan for the price of the shares. The subclauses provided that the trustee was to make loans available from the funds provided by the company. Although subcl. 2.4 acknowledged that the company's undertaking in that regard was limited to that which it was permitted to do by law, para. 4.1(d) of the deed expressly contemplated that a relevant associate of the selected employee may borrow from the trustee for the purpose of acquiring shares. Furthermore, cl. 7 of the loan agreement set out in the Fifth Schedule to the deed acknowledged that the borrower may be an associate of the selected employee and permitted the loan to the associate to be called up if the employee died or employment was terminated.

If the provision of finance by the company to persons other than employees contravened the prohibition in sec. 129 of the Companies (Western Australia) Code against a company giving any financial assistance in connection with the acquisition of shares in the company, that consequence would attract the operation of subcl. 2.4 and limit the opportunity for such persons to take up the shares, but it would not alter the nature of the right to accept an offer created by the deed.

The plan was substantially different in several respects for selected employees who were executives of the company.

Subclause 20.2 of the deed stated that the executives and their associates were ``entitled to additional rights under the plan''. Subparagraph 1.1(c)(ii) of the deed defined an associate of an executive in wider terms than an associate of a selected employee by including the trustee of any trust in which the executive had an interest and any corporation in which the executive held a share in its capital.

In respect of executives, the plan operated by the company selecting executives to whom cl. 20 would apply, nominating the securities to be issued to that executive or associate of that executive and stipulating the price to be paid for the securities. The trustee was required to

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pay the company for the securities and to receive the issue of the securities from the company. Subclause 20.5 of the deed placed an obligation on the trustee to transfer the securities to a member of a class comprised of the selected executive and his associates. The choice of transferee was in the absolute discretion of the trustee. The transfer of the securities was to be subject to the payment to the trustee of the amount the trustee had paid to the company for the issue of the shares. Subclause 20.6 of the deed reiterated that the trustee was to act in its absolute and unfettered discretion, but further provided that the trustee may have regard to, without being bound thereby, the wishes or any direction of the selected executive in relation to the securities.

The deed made no provision for the trustee to give any notice of its offer to transfer the securities to a member of the class nor for any notification to the selected executive of its proposed action. Nor did the deed make any provision for the trustee to ascertain the members of the class of prospective transferees.

The range of possible transferees was potentially quite broad in that it may include any corporation in which the selected executive held an interest as a shareholder. No doubt, in exercising the absolute discretion of selecting the proposed transferee, the trustee would have regard to the fact that the obvious purpose of the scheme was to reward selected executives for services rendered, or to be rendered, to the company. The trustee may have been required to make some general enquiry to identify the parties in respect of whom the trustee could exercise the power to offer to transfer the securities. (See Hardingham and Baxt, Discretionary Trusts (2nd ed.), para. 209 at pp. 14-16;
McPhail v. Doulton (1971) A.C. 424 per Lord Wilberforce at p. 449.) The failure to do so and the failure to properly exercise the discretion to select a proposed transferee may render the actions of the trustee subject to attack, but would have no impact on the nature of the rights created by the deed.

The minutes of the relevant meeting of the board of directors of the trustee recorded that the directors noted that the trustee possessed an absolute discretion for the exercise of its power and that the directors had noted the Memoranda of Wishes provided by the various selected executives.

If the due exercise of a discretion by the trustee were placed in issue by contending that the Memoranda of Wishes were treated by the trustee as directions or nominations by the selected executives, a positive finding on that contention would give a right in equity for the objects of the trustee's power to seek relief but would not elevate the interests of the selected executive under the plan to a right to acquire the relevant securities.

I now turn to the application of sec. 26AAC.

The taxpayers contended that the shares acquired by Mrs Brasington and Mrs McNee were acquired in pursuance of an agreement, arrangement or understanding under which the company was to issue shares to employees or to relatives of those employees as described in subsec. 26AAC(3). Accordingly, pursuant to subsec. 26AAC(1) and (3) Mrs Brasington and Mrs McNee were each taxpayers taken to have acquired shares in the company under a scheme for the acquisition of shares by employees, the shares having been acquired in respect of or in relation to the employment of their relatives, to wit, Messrs Brasington and McNee. (See definition of ``relative'': subsec. 6(1) of the Act.)

If that contention were upheld, it would follow that pursuant to subsec. 26AAC(5) of the Act the assessable income of Mrs Brasington and Mrs McNee respectively had to include the difference between the value of the shares at the time of acquisition and the amount paid by them as consideration for the shares acquired.

The section makes no provision for election by the Commissioner in the event of duality of taxation liability under the section.

The respondent contended that neither Mrs McNee nor Mrs Brasington were liable to assessment pursuant to subsec. 26AAC(5) because neither had acquired a right to acquire shares in the company under a scheme for the acquisition of shares by employees in that neither person had acquired the right in respect of or in relation to the employment of their relatives but had acquired a right to acquire those shares by the disposition of that right to them by their respective spouses.

The respondent argued in respect of all three appellant taxpayers that each taxpayer had acquired a right to acquire a share under a

ATC 4637

scheme and had disposed of that right to an associate of the taxpayer. In the cases of McNee and Brasington, the associate was a relative and in the case of Fraunschiel, the associate was a trustee of a trust estate where the taxpayer was capable of benefiting under the trust.

In the cases of the taxpayers Brasington and McNee the right created by the scheme was not in the nature of an interest in future property in the manner of a right created by an option agreement. The right was an interest in present property, namely the offer. The equitable interest created was capable of assignment, but such an assignment would not be the assignment of an expectancy. The assignment would result in an obligation upon the assignor, enforceable in equity, to accept the offer if directed to do so by the assignee, but the worth of that assignment would be subject to the offer not having been accepted by any other member of a class of offerees. The assignee could not rely on the mere assignment of the right to accept to compel the assignor to refrain from signing the acceptance sought to be lodged by any other offeree.

For the respondent's argument to succeed it must show that the taxpayers Brasington and McNee acquired a right to acquire shares under a relevant scheme and respectively made dispositions of those rights. The respondent argued that sec. 26AAC should be given a broad interpretation where it refers to rights and disposition of rights, but even the application of an expansive construction to those words would not permit the respondent's argument to succeed.

It may be noted that in sec. 26AAC the legislature has not taken the opportunity to provide inclusionary or deeming provisions to extend the operation of the section to arrangements involving a right to acquire shares, or the acquisition or disposal of shares. By way of contrast, in subsec. 102E(2) and (4) it is provided that an arrangement under which a right or option to acquire units has been granted to a person includes a reference to an arrangement under which such a person was to be given a preference or advantage in relation to the allocation of units.

Similarly, pursuant to subsec. 160D(1), for the purposes of Pt IIIA of the Act, a taxpayer shall be deemed to have received property if the property has been applied in accordance with the directions of the taxpayer. Also for the purposes of Pt IIIA subsec. 160M(1), (2) and (3) deem an asset, being a chose in action, or any other right, or an interest or right in or over property, to be disposed of by any change of ownership constituted by the cancellation, release, discharge, satisfaction, surrender, forfeiture, expiry or abandonment, at law or in equity, of the asset. That breadth of definition is somewhat wider than the ordinary understanding of disposition which involves some alienation and transfer of property. (See
Australian Trade Commission v. Film Funding and Management Pty. Limited, unreported (Federal Court of Australia, Gummow J., 26 May 1989 at pp. 40-42).)

The absence of such provisions in sec. 26AAC makes it more apparent that the circumstances of the case of each taxpayer in these appeals are not within the ordinary meaning of acquisition or disposition of a right to acquire and that subsec. 26AAC(6) does not operate to deem the respective taxpayers to be taxpayers to whom subsec. 26AAC(5) applies.

If it were accepted that the taxpayers McNee and Brasington acquired rights to acquire shares in the company upon receipt of the notice of offer, a matter on which it is unnecessary to express an opinion, on no view of the circumstances could it be said that the respective taxpayers made a disposition of those rights within the meaning of subsec. 26AAC(6).

There was no change of ownership in any right the taxpayers may have possessed. The expiry of their respective rights did not have the effect of vesting a right in another or altering the nature of a right already held by another.

As may be anticipated in a scheme for the acquisition of shares by employees, there was a discernible intent that the scheme provide an opportunity for the reward of an employee and that the employee be involved in deciding how or if that reward was to be received. However, the anticipated realities as to the involvement of employees in controlling or directing the receipt of any benefits from the scheme do not become ``rights'' for the purposes of sec. 26AAC unless the words of the section show a clear intention to extend to such circumstances. Section 26AAC is concerned with the value of the exercise of rights under such schemes and

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not with the valuation of benefits conferred and in that regard it may be clearly contrasted with the provisions of subsec. 26(e) of the Act which requires the value of all benefits granted to a taxpayer in respect of, or in relation to, his or her employment to be included in his or her assessable income. Section 26AAC is not concerned with the value of any benefit but with the notional profit received on acquisition of a share or actual profit upon disposition of a right to acquire the shares under the employer's scheme.

The selected employees under the company's scheme had a right to accept an offer, but until acceptance it was a right with very limited correlative duties imposed upon the employer, unlike the nature of a right to acquire shares contained within an agreement providing an option to acquire shares. According to the terms of the employer's scheme, the right of acceptance was capable of being exercised by parties additional to the employee being parties in respect of whom the employee may have had financial obligations in law or in fact, namely a spouse or a dependent relative. Although the exercise of a right of acceptance by such additional parties may in some instances have provided a benefit of some value to an employee, in no sense could it be said that there had been a disposition of a right to acquire shares prior to the exercise of that right. The failure of an employee to exercise a right to accept an offer as a member of a class entitled to accept the offer does not involve any disposition of the right in law or in equity nor does it involve the acquisition of that particular right by another person.

If the employee acquired an enforceable right, any declaration of trust by the employee, or nomination of a party to receive the benefit of exercise of the right, or transfer of that right in equity, may amount to a disposition of the right for the purpose of sec. 26AAC, but the failure to exercise such a right and the destruction of that right by the exercise of a like but separate right held by another will not amount to a disposition of the former right. (See
Cowan v. F.C. of T. 72 ATC 4121.)

It may be noted that by insertion of subsec. 26AAC(4A) and (4B) by amendments to the Act effected in 1988, the legislature demonstrated its awareness that shares or rights to acquire shares may be acquired by persons other than permanent employees of a company under such share acquisition schemes without such acquisition being dependent upon a disposal of such a right by the permanent employee. (See subpara. 26AAC(4A)(d)(v).)

The conclusions so far expressed dispose of the matters raised in the appeals of McNee and Brasington.

In the case of the taxpayer Fraunschiel, the trustee of the Fraunschiel Family Trust may be said to have acquired the shares under a scheme of the type referred to in subsec. 26AAC(1) and may also be said to have done so in relation to, directly or indirectly, the employment of Fraunschiel, but subsec. 26AAC(1) does not extend to such an acquisition in that it is not an acquisition by a taxpayer in relation to the employment of the taxpayer, or a relative of the taxpayer. Subsection 26AAC(1) does not extend to an acquisition by a taxpayer in relation to the employment of an associate of the taxpayer. (See, for example, the definition of ``associate'' in para. 26AAB(14)(c) or subsec. 160E(c).)

Section 26AAC is limited in the extent to which it applies to associates other than relatives. If associates other than relatives directly acquire shares, or rights to acquire shares and exercise those rights under a scheme for the acquisition of shares by employees, sec. 26AAC of the Act does not apply to that acquisition. The limited application of sec. 26AAC to the actions of an associate of a taxpayer is found in subsec. 26AAC(6) of the Act which deems the acts of the associate to be the acts of the taxpayer if the associate acquired shares by the exercise of a right to acquire shares under a relevant scheme after the taxpayer had made a disposition of that right to the associate.

In respect of the matter of Fraunschiel, the respondent seeks to sustain the assessment by submitting that the terms of subcl. 20.5 of the deed were a sham and by arguing that in truth the taxpayer Fraunschiel had acquired a right to acquire shares under the deed and a right to dispose of those shares by direction upon acquisition of the shares.

The respondent called no evidence to support the contention that the deed, in part, was a sham and that an arrangement existed between the taxpayer Fraunschiel and his employer pursuant to which the taxpayer obtained a right to acquire shares. The respondent did

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cross-examine the deponents of several affidavits, but no material emerged to support the submission. The respondent did not include the contention in its formal response to the grounds of appeal filed pursuant to directions for the filing of such pleadings made in each appeal.

The nature of a sham as understood in the authorities was discussed at some length in the recent decision of the Full Court in
Sharrment Pty. Ltd. v. Official Trustee in Bankruptcy (1988) 18 F.C.R. 449 per Lockhart J. at p. 453 et seq. and per Beaumont J. at pp. 467-469 and it is unnecessary for me to restate the hallmarks there stated with which I respectfully agree.

An allegation of a sham cannot be made out by light proof when the essential matter to be proved is the existence of a mere facade or an intent that some spurious or counterfeit be mistaken for something that it is not. The structure must be shown to be false or deceptive by clear evidence.

In no respect can it be said that the deed was shown to possess such characteristics. As was stated by Megarry J. in
Miles v. Bull (1969) 1 Q.B. 258 at p. 264:

``a transaction is no sham merely because it is carried out with a particular purpose or object.

If what is done is genuinely done, it does not remain undone merely because there was an ulterior purpose in doing it.''

The deed may have been constructed with limited rights being granted to employees for an ulterior purpose, but it did not become a sham in so doing. It was not illusory. It created legal obligations for which the trustee was answerable and it was designed that the share acquisition scheme be administered according to the terms of the deed. There is no evidence of any other true arrangement contrary to the terms of the deed and for which the deed was to act as a smokescreen or facade. (See
Gulland v. F.C. of T. 83 ATC 4352 at pp. 4362-4363;
Albion Hotel Pty. Ltd. v. F.C. of T. (1964-1965) 115 C.L.R. 78 at p. 92.) The submission, therefore, must be rejected.

The respondent further submitted that the assessment issued to the taxpayer Fraunschiel could be supported by reliance upon subsec. 26(e) of the Act.

Subsection 26(e) provides as follows:

``the value to the taxpayer of all allowances, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted to him in respect of, or for or in relation directly or indirectly to, any employment of or services rendered by him, whether so allowed, given or granted in money, goods, land, meals, sustenance, the use of premises or quarters or otherwise, not being -

(i) an eligible termination payment within the meaning of Subdivision AA;

(ii) an amount to which section 26AC or 26AD applies;

(iii) an amount that, under any provision of this Act, is deemed to be a dividend paid to the recipient;

(iv) a fringe benefit within the meaning of the Fringe Benefits Tax Assessment Act 1986; or

(v) a benefit that, but for paragraph (g) of the definition of `fringe benefit' in sub-section 136(1) of the Fringe Benefits Tax Assessment Act 1986, would be a fringe benefit within the meaning of that Act;''

Pursuant to that subsection, it is the value of the benefit assessed when allowed, granted or given to the employee that is to be included in the assessable income of the taxpayer employee.

The nature of the benefit said to be granted to the employee Fraunschiel was either the benefit contained in the right to nominate a party to receive the shares under the scheme or the benefit derived by the taxpayer from the acquisition of the shares by the family trust.

Undoubtedly, a power to direct disposition of an asset may be of some benefit (see
Donaldson v. F.C. of T. 74 ATC 4192 per Bowen C.J. in Eq. pp. 4206-4207), but pursuant to the deed Fraunschiel held no power of direction. He had a general right to express his wishes in that regard, but he had no power to direct and the trustee had no obligation to consider those wishes, much less an obligation to act according to Fraunschiel's instructions. Furthermore, it is plain that although the object of a discretionary trust may have a right to see the trust properly administered, he or she obtains no interest in the property of the trust and, therefore, it cannot be said that anything of value accrues to a taxpayer who is a

ATC 4640

beneficiary of such a trust when the trustee acquires an asset.

Upon the acquisition of the shares by the trustee of the Fraunschiel Family Trust, the shares became part of the corpus of the trust. Pursuant to the terms of the trust deed in the Fraunschiel Family Trust, the trustee was empowered to apply the income of the trust, inter alia, for the maintenance, education, advancement and benefit of beneficiaries. The trustee was further empowered in his absolute discretion to apply the whole or part of the capital of the trust fund for the benefit of persons within classes of beneficiaries within which the taxpayer was included.

The taxpayer Fraunschiel had a right to be considered from time to time as a party entitled to receive a distribution of the income or capital of the trust, but that right was neither an interest in the fund nor in the income. (See
Gartside v. I.R. Commrs (1968) A.C. 553.) The fact that the taxpayer was also the trustee of the family trust was immaterial. As trustee, Fraunschiel had an obligation to duly administer the trust according to the terms of the trust deed. The objects of the trust possessed a right to have the trust duly administered. The fact that in the exercise of an absolute discretion Fraunschiel as trustee may have provided for his own preferment as a beneficiary would not in itself convert the taxpayer's right to be considered in any distribution of the trust fund or income into an interest in that fund or income.

It must follow that there can be no finding that there has been a benefit allowed, granted or given to the employee by the issue of the shares to the Fraunschiel Family Trust. (See
Constable v. F.C. of T. (1952) 86 C.L.R. 402 per Dixon C.J., McTiernan, Williams and Fullagar JJ. at p. 418.)

Furthermore, the inclusion of dependants of the taxpayer amongst the objects of the discretionary trust does not permit any benefit obtained by the trust upon acquisition of the shares to be regarded as the relief of any expenditure habitually incurred by the taxpayer. The absence of any vested right in the other objects of the trust to receive a distribution of income or capital prevents such prospect as they may have under the trust arising out of their right to be considered in any distribution being treated as the conferral of a benefit on the taxpayer for the purposes of subsec. 26(e).

The appeal of Fraunschiel also must succeed.

Accordingly, the following orders will be made:

1. The appeals of Brasington, McNee and Fraunschiel against the disallowance of their respective objections to the assessments of income tax issued by the respondent be allowed.

2. The respondent pay the appellants' costs of the appeal to be taxed as one set.

3. The respective assessments be remitted to the respondent for amendment in accordance with the terms of this judgment.

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