Commissioner of Taxation v Sara Lee Household & Body Care

Commissioner of Taxation v Sara Lee Household & Body Care - [2000] HCA 35 - HCA 2000 case summary — Zoe

[13]

The company which acquired the assets transferred by the respondent was Nicholas Products Pty Ltd, a subsidiary of Roche. That company was not in existence on 31 May 1991. It was incorporated on 25 June 1991. Roche did not take up shares in Nicholas Products Pty Ltd until 28 August 1991. By a letter dated 30 August 1991, Roche advised Sara Lee Corporation that it had assigned some of its rights and obligations under the purchase and sale agreement to certain subsidiaries and affiliates, and that they had agreed to be bound by the terms and conditions of the purchase and sale agreement. One such assignment was to Nicholas Products Pty Ltd, in relation to the sale of assets by, and assigned liabilities of, the respondent.
There were a number of amendments to the purchase and sale agreement insofar as it related to Australian assets and liabilities. These amendments were the subject of an "Amendment Agreement" executed on 30 August 1991 by Sara Lee Corporation, on its own behalf and on behalf of the other sellers, and Roche. The total purchase price payable under the purchase and sale agreement was originally US$597,681,000. In addition, an amount of US$200,000,000 was payable as consideration for a covenant not to compete. The amendment agreement varied the overall purchase price. The price originally allocated to the assets sold by the respondent was US$61,461,000. By the amendment agreement, the price allocated to those assets was increased by US$1,000,000 to US$62,461,000. The purchase and sale agreement obliged the Buyer to offer employment to fifty-four employees of the respondent. The amendment agreement varied this. The Buyer was obliged to employ only fourteen of the employees and to reimburse the respondent in respect of certain redundancy payments. The price allocation schedule was said to be "amended and restated in its entirety". The price allocated to the Australian assets was altered as above. Nicholas Products Pty Ltd was named as the purchaser of those assets.
Section 11 of the amendment agreement provided:

[20]

There was some disagreement between the parties concerning the legal consequences of certain aspects of the transaction. It is convenient to deal with those matters before turning to the central issue in the case, which involves the application of Pt IIIA of the Act to the facts.
First, there is the question of Mr Patten's lack of authority, on or before 31 May 1991, to sign the purchase and sale agreement, and the ratification of his act by resolution of the board of directors of the respondent on 20 August 1991. North J, and the Full Court, applied the general rule that, where a principal ratifies the earlier act of a person acting as agent without authority, the ratification relates back to the date of the unauthorised act, and the principal is bound as if the agent had had authority at the earlier time[3]. They were correct to do so. This is not a case in which the rights of third parties have intervened. Although the principle is sometimes described as operating upon the basis of a fiction, it is a well settled rule of common law, and is part of the background against which the taxation legislation operates. There is no reason to deny its application in the present case.
Secondly, there is an issue as to the effect of the amendment agreement of 30 August 1991 upon the purchase and sale agreement of 31 May 1991. The variations to the rights and obligations of the contracting parties made by the amendment agreement were not insubstantial. The purchase price was altered by US$1,000,000. The obligations of Roche in relation to employees of the respondent were significantly modified. Nicholas Products Pty Ltd was identified as the company which was to acquire the Australian assets, although it was not itself a party to the amendment agreement.
When the parties to an existing contract enter into a further contract by which they vary the original contract, then, by hypothesis, they have made two contracts. For one reason or another, it may be material to determine whether the effect of the second contract is to bring an end to the first contract and replace it with the second, or whether the effect is to leave the first contract standing, subject to the alteration. For example, something may turn upon the place, or the time, or the form, of the contract, and it may therefore be necessary to decide whether the original contract subsists. In the present case, if the effect of what occurred on 30 August 1991 had been to rescind the agreement of 31 May 1991, then that would go a long way towards providing an answer to the appellant's argument that the assignment which occurred on 30 August was pursuant to the agreement of 31 May, with whatever that entails for the application of Pt IIIA of the Act.
In Tallerman & Co Pty Ltd v Nathan's Merchandise (Victoria) Pty Ltd[4] Taylor J said:

[22]

That passage was cited with approval by Wilson and Dawson JJ in Dan v Barclays Australia Ltd[5]. It accords with principle and with authority[6].
It is clear that the parties to the agreements of 31 May and 30 August 1991 did not intend that the agreement of 31 May should be wholly rescinded. That is apparent from a number of the provisions of the 30 August agreement. In particular, it was made clear by s 11 of the 30 August agreement, which has been quoted above. This is hardly surprising. The agreement of 31 May had worldwide operation, and covered many dispositions and acquisitions that were unaffected by the alterations proposed in relation to Australia. It is also to be observed that the deed of assignment executed by the respondent and Nicholas Products Pty Ltd on 30 August 1991 recited that it was entered into pursuant to the agreement of 31 May 1991, as amended. The manifest intention of the parties was not that the agreement of 31 May 1991 should be wholly rescinded and replaced by a new agreement, but that the rights and liabilities under, and the mode of performance of, the agreement, should be varied in certain respects.
Thirdly, there was some argument as to the appropriate categorisation of the manner in which the disposal and acquisition of Australian assets occurred. The purchase and sale agreement of 31 May 1991 did not effect a change in ownership, legal or beneficial, of the assets[7]. Indeed, the agreement contemplated that the disposal of the Australian assets might be to a company other than Roche and, in the events that occurred, that turned out to be a company that was not in existence on 31 May. Both the agreement of 31 May, and the amendment agreement of 30 August, contemplated that the assignment of assets, and the assumption of liabilities, involved in the transfer of so much of the Australian business as was to be taken over by Roche or a Roche subsidiary or affiliate, would be effected by separate deeds, to be delivered at closing, as in fact occurred.
Nicholas Products Pty Ltd was not a party either to the purchase and sale agreement of 31 May or to the amendment agreement of 30 August. Its agreement to be bound by the terms and conditions of the agreement of 31 May was a necessary condition of the capacity of Roche to assign to it its rights. By reason of the provisions of s 12.3 of the 31 May agreement, Roche itself was not relieved of its obligations by such assignment. In the absence of novation, the reference in s 12.3 to "assignment" of obligations is curious, but the result which the parties intended to achieve is reasonably clear.
The change in ownership of the Australian assets occurred on 30 August 1991. That was the date of their acquisition by Nicholas Products Pty Ltd. It was also the date of their disposal by the respondent.
Fourthly, it was argued on behalf of the respondent that the disposal could not have occurred under a contract made during the year ended 30 June 1991 because the agreement of 31 May was subject to conditions which were not fulfilled until some time after 30 June 1991.
Section 9.1(c) of the purchase and sale agreement stipulated that the obligation of Roche to consummate the transactions contemplated in the agreement was subject to the fulfilment, prior to or at closing, of a number of conditions, which included the receipt of certain governmental approvals. Clearly, these were conditions precedent to performance of the contract. They were not conditions precedent to the formation or existence of the contract[8]. There was a contract in force on 31 May 1991. The central question is whether the disposal which occurred on 30 August 1991 was under that contract.
In order to examine that question it is necessary to turn to the relevant legislation.

[32]

Taking into account the later ratification of the signature by Mr Patten, on 31 May 1991 the respondent entered into a contract with Roche by which it was bound to transfer to Roche, on completion of the contract, the assets in question, in consideration for the payment of a sum of money and the assumption of certain obligations. The contract gave Roche the capacity, subject to certain conditions, (including the retention by Roche of its own liability under the contract), to assign its rights to a subsidiary.
The words "under a contract", in s 160U(3), direct attention to the source of the obligation which was performed by the transfer of assets which constituted the relevant disposal[10]. From 31 May 1991, until completion on 30 August 1991, there was a contractual obligation upon the respondent to dispose of its assets to Roche, or to an entity of the kind referred to in s 12.3 of the purchase and sale agreement. The content of that obligation did not change. The price was varied, as were certain other terms and conditions of the sale, but the agreement of 31 May 1991 was the source of the obligation which the respondent discharged by performance on 30 August 1991.
The Full Court accepted that the respondent's assets were disposed of under a contract. Subject to one argument, which was advanced for the first time in this Court, that conclusion appears inevitable. The transfer of ownership of the assets in question was, as is usual in such commonplace disposals as conveyances of real estate, effected pursuant to a contractual obligation which the respondent had previously undertaken. The transferor was acting in performance of a preexisting contract. Whether the same was true of the transferee is beside the point.
The new argument put by the respondent was to the effect that s 160U(3) can have no application to a case where there is more than one contract to which a disposal is potentially referable, and where there is no compelling reason to relate the disposal to one of those contracts rather than to another. Where s 160U(3) applies, it can only produce one result. The legislation does not countenance the possibility that there can be two different times of disposal. In a case where s 160U(3) cannot produce a single answer to the question as to the time of disposal, then s 160U(4) applies.
It is true that s 160U(3) assumes that, in a case to which it applies, there is a single time of disposal which can be established by reference to the contractual background to the change of ownership. Even so, the circumstance that, in a given case, there may be room for doubt about the correct conclusion does not make the task of reaching it impossible. If, in some case, it were impossible to relate a change of ownership to a contract in such a way as to produce a single time of disposal, then it may be necessary to apply s 160U(4). That is not this case. If it were, the practical operation of s 160U(3) would be seriously curtailed.
The Full Court emphasised that the legislation operates in relation to particular dispositions and on the basis of the consideration in respect of each particular disposition[11]. Their Honours said: "In the present case the disposition is a disposition from the [respondent] to Nicholas Products; the consideration in respect of that disposition is US$62,461,000."[12] That disposition, for that consideration, they held was referable to the amendment agreement. They said[13]:

[34]

It appears that it was the variation in the consideration effected by the amendment agreement that was seen as being of particular significance. As was noted, Nicholas Products Pty Ltd was not a party to the amendment agreement, and although it was identified in a schedule to that agreement as the purchaser of the assets, that was done pursuant to a right given to Roche by s 12.3 of the agreement of 31 May 1991. Insofar as the identity of the disponee can be related to a contract anterior to the deed of assignment of 30 August 1991, there is less reason to relate it to the contract of 30 August, than to relate it to the contract of 31 May, pursuant to which Roche acted in assigning its rights to Nicholas Products Pty Ltd. Both the deed of assignment and the deed of assumption of liabilities and contracts of 30 August 1991 were expressed to be pursuant to the agreement of 31 May, as amended.
There was an additional reason advanced by the respondent in support of the Full Court's conclusion. It was that the assumption of obligations by Nicholas Products Pty Ltd, by the further deed of 30 August 1991, was an important aspect of the acquisition of the respondent's Australian business, and that was only effective by reason of the contractual operation of the deed into which Nicholas Products Pty Ltd entered on 30 August. However, that assumption of obligations was referable to s 12.3 of the agreement of 31 May, (the concluding words of that provision having continuing importance), and, as was noted, it was said to be pursuant to the agreement of 31 May, as amended.
Where there are two or more contracts which affect the rights and obligations of the parties to a disposal of assets, the identification of the contract under which the assets were disposed of, for the purpose of applying s 160U of the Act, requires a judgment as to which of the contracts is properly to be seen as the source of the obligation to effect the disposal. In the present case, that contract is the purchase and sale agreement of 31 May 1991.

[35]

The appellant's contention is correct. The appeal should be allowed with costs. The orders of the Full Court of the Federal Court should be set aside. In place thereof, it should be ordered that the appeal to that Court be dismissed with costs.
CALLINAN J. The question in this case is, upon what date for the purposes of the capital gains tax provisions of the Income Tax Assessment Act 1936 (Cth) ("the Act"), did the respondent dispose of assets in Australia? There are only two possibilities, 31 May 1991, the date upon which Sara Lee Household & Body Care (Australia) Pty Ltd and others entered into a written agreement for the sale of various assets ("the businesses") in a number of countries ("the May agreement"), or 30 August 1991, the date upon which Sara Lee executed an agreement to vary the earlier one, ("the variation agreement").
It is convenient to refer to the reasons for judgment in the courts below in the context of the facts and the relevant provisions of the agreements.
Sara Lee and its subsidiaries carried on various businesses including the making and selling of medical and therapeutic substances and equipment in many countries of the world. There was goodwill associated with the businesses and the brand names controlled by Sara Lee. The Australian subsidiary was Nicholas Kiwi Pty Ltd ("NKA").
On 31 May 1991, by the May agreement, Sara Lee agreed to sell the businesses which I have described to Roche Holding Ltd ("Roche") of Switzerland. The named sellers were Sara Lee and twenty-four other corporations including NKA. The property which was to pass included assets of different kinds, for example, goodwill, machinery, intellectual property and shares in various companies. A recital to the May agreement stated that NKA "will be selling the Assets (as defined …) of the Health Care Group". "Health Care Group" was defined to mean, in effect, the business of manufacturing, marketing, selling and distributing products being carried on by NKA on 31 May 1991 or "as it [might] be changed in the ordinary course of business" until completion of the contract. The May agreement also made provision for the assumption by Roche of some of the liabilities of NKA and other subsidiaries of Sara Lee. Section 1.7 referred to the completion date of the contract:

[67]

Another document executed by NP and the respondent was a deed of assumption of liabilities. It recited, inter alia, that the appellant had "concurrently herewith sold, conveyed, assigned, transferred and delivered to Roche certain Assets and Intangible Rights …", [and] the Buyer agreed to assume the liabilities as contemplated by the May agreement.
Finally a receipt was given to the purchasers by the sellers. It was dated 30 August 1991 and acknowledged that NKA, as a receiving company, had received US$62,461,000.
The respondent made a capital gain as a result of the sale of the Australian assets which the appellant brought to assessment in the year of income ending 30 June 1991. The appellant made the assessment upon the basis that on the proper construction of s 160U(3) of the Act, the date of disposal of the Australian assets was the date of the May agreement, 31 May 1991. It was the respondent's contention that the disposal did not occur until the date of the variation agreement.
At first instance, the Federal Court (North J) held that the contract under which the disposal of the assets of the Australian businesses was effected, was made, for the purposes of s 160U, on 31 May 1991. His Honour was of the view that the language of the section recognised that the time fixed in accordance with the section might not reflect the time at which the actual transfer of the actual assets occurred[14]. It had also been argued by the respondent that because it was common ground that the signing of the agreement by Mr Patten was not done with the authority of the appellant, the earliest occasion upon which the agreement could be regarded as being completed and enforceable was the date of the ratification of Mr Patten's execution of it by the Board of Directors on 20 August 1991. In rejecting the respondent's submission, North J[15] relied upon Bolton Partners v Lambert[16] and Keighley, Maxsted & Co v Durant[17] and statements by Isaacs J in Davison v Vickery's Motors Ltd (In Liq)[18] in which it was held that ratification operated retrospectively to the original date of execution of a contract. Accordingly North J dismissed the appellant's appeals. (There were two appeals because the appellant amended the first assessment and the respondent challenged both the original and the amended assessment.)
The respondent appealed to the Full Federal Court (Hill, Finn and Sundberg JJ) who unanimously upheld the appeal[19].
The first question which the Full Court considered was whether the Australian assets had been disposed of under a contract. Their Honours held that they had[20]. In answer to the next question that the Full Court posed, whether the disposal had occurred under the May agreement or the variation agreement, the Court said that in the context of s 160U(3), the first time there was a contractual obligation on the part of the appellant to transfer assets for a consideration of US$62,461,000 was in August 1991, and then only as a result of the variation agreement.
It is against that decision that the appellant appeals to this Court.
It is the appellant's submission that the Full Court erred in two respects: by concluding that the variation agreement gave rise to a new contract; and, by focusing on the question when a particular provision of the agreement(s), that is the provision for the disposition of the Australian assets at the new price, was incorporated into the variation agreement.
There was no dispute, and the Full Court held that the variation agreement did not rescind the May agreement. Not only was this holding in accordance with a number of authorities[21] but it was also a reflection of the clear intention of the parties as expressed in cl 11 of the variation agreement which I have quoted and which affirmed the May agreement. There may be cases in which what is expressed to be a variation of an earlier agreement, as a matter of construction cannot be so regarded. However, this is not such a case.
It is important to place s 160U, which appears in Div 2 of Pt IIIA of the Act in context.
This was a transaction expressed in a foreign currency. Section 160K(5) provides that the Australian currency equivalent is to be calculated at the time of disposal of the assets. It should be noted that s 160K(6), a provision for the fixing of the time of the acquisition of an asset, focuses upon the actions or payments of the taxpayer in acquiring the asset and makes no reference to any disposition of it. On the other hand, s 160K(8) and s 160K(9) focus upon, and refer only to the disposition of an asset.
Division 2 is headed "Application" and the words "Part applies in respect of disposals of assets" appear before s 160L is set out in the Act. All of the subsections are concerned with the disposal of assets and not their acquisition.
Section 160M(1) provides as follows:

[85]

The sub-section, which is concerned with the amount of consideration in respect of a disposal of an asset does not require for its application only that the taxpayer has actually received the consideration but may apply if the taxpayer is entitled to receive it.
The importance of distinguishing between a variation that operates to rescind an existing contract and substitute a new one and a variation that was intended to amend an existing agreement whilst leaving the existing contract on foot first arose in cases dealing with parol variations of contracts required to be in writing. But as the appellant submits, there is no reason why those cases should not be regarded as being of general application[26].
As I have pointed out, the variation agreement affirmed the May agreement. The recital to the former stated that the parties desired only to amend, clarify, and supplement the provisions of the May agreement. In the overall scale of the transaction, however viewed, the changes were not large ones. The intention of the parties was only to amend the May agreement almost all of which was left on foot.
On 31 May 1991 on any view the respondent executed an instrument and entered into a transaction as contemplated by pars (a) and (b) respectively of s 160M(2) of the Act.
I do not take the language of the Act to require that in all cases and for all purposes there must be a simultaneous, or immediately consecutive disposition and acquisition of an asset. The Act is drawn up in such a way, as the sections to which I have referred indicate, as to deem an event or sequence of events a disposition and some other event or sequence of events an acquisition.
The respondent was bound to do all such acts and things as it reasonably could to carry into effect the May agreement. Its obligation in that regard would have been enforceable at least by mandatory injunction. Its and Roche's obligations (save as to a minor adjustment to the allocation of the sale price) remained unchanged. It had, therefore in my view, disposed of all of the relevant assets under a contract within the meaning of s 160U(3) of the Act.
I am also of the opinion that Tallerman & Co Pty Ltd v Nathan's Merchandise (Victoria) Pty Ltd [27] has application to this case. There the plaintiff wished to pursue an action in the Supreme Court of New South Wales. To do so it needed to show that a contract had been concluded between the parties in that State in circumstances in which the original contract had been concluded in Victoria and had been varied by subsequent correspondence originating in New South Wales. Dixon CJ and Fullagar J dealt with the plaintiff's contention that a new contract had been made in New South Wales in this way[28]:

[87]

There is no reason why their Honours' statement of principle should not apply to the date of the making of the contract in this case as well as to the place of the making of a contract.
If attention be directed, as I think it should be, to the disposition of the assets rather than their acquisition then it does not matter that the particular transferee did not come into existence until after 31 May 1991. But in any event, that is, in a sense an irrelevant consideration anyway. Section 12.3 of the May agreement, although contemplating the possibility of an assignment of rights or obligations under the agreement to some other legal personality, operated at all times to hold the respondent bound to the terms of the May agreement.
It may be, as I have said, that in some circumstances a variation may have the effect of rescinding an original contract and creating a new one. It is not without relevance however that an absolute principle, that any variation, however minor, should be regarded as creating a fresh agreement, would provide virtually unlimited scope for the manipulation of the date of disposal of assets for the purposes of assessment of capital gains tax.
True it may be that the first time that there was a contractual obligation on the part of the respondent to transfer assets for a consideration of US$62,461,000 was in August 1991 as a result of the variation agreement, but at all times there was a clear contractual obligation to transfer them for US$1,000,000 less than that amount by virtue of section 12.3 of the May agreement.
In summary therefore, the disposition in this case must be taken to have occurred on the making of the May agreement on the application of the principle preferred in Tallerman and by reason of the language of s 160K(5), s 160M(1), (1A) and (2), s 160U(1) and (2) and particularly s 160U(3) of the Act. On that date the respondent executed an agreement and entered into a transaction for the disposal of assets and became entitled (subject to the fulfilment of conditions precedent) to receive consideration which included a component of capital gain. The contract, although subsequently varied (albeit not very significantly in the overall scale of things) was made on 31 May 1991 and the relevant assets were disposed of under it on that date.
The respondent filed a notice of contention. For the most part I have dealt with the points that it raised, in discussing the appellant's grounds of appeal. The respondent points out that the variation agreement was an agreement between Roche and Sara Lee acting for various sellers including the respondent and on its own behalf. NP was not a party to this variation. But the variation agreement in no way altered the obligations of the respondent to sell and convey the Australian assets pursuant to section 2.2 and it did not impose any obligations directly upon NP. The obligation to dispose remained unchanged.
The Full Court was correct to the extent that it concluded as follows[29]:

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