Glennon v Commissioner of Taxation

On 22nd June 1967 nine transfers were executed, each transferring a parcel of shares in Carrigans Pty. Ltd. (Carrigans). Each was expressed to be for a consideration of $2 per share. In three of those transfers the transferee was Therese Mary Glennon, who was the wife of John Francis Glennon, and the transferor was John Francis Glennon, who was expressed to be transferring as trustee for a named son of Mr. and Mrs. Glennon. In two of the transfers the transferee was Beverley Norma Carrigan, wife of Brian Vernon Carrigan, who transferred as trustee for his son or for his daughter. In three transfers the transferor was Mr. Glennon as trustee for a named child of his and the transferee was John Francis Glennon. In another transfer the transferor was Brian Vernon Carrigan as trustee for his son Bradley Dwight Carrigan and the transferee was Brian Vernon Carrigan.

On 12th July 1967 six transfers were made of parcels of shares in Jaygee Pty. Ltd. (Jaygee), stated to be in consideration of $2 per share. Each of these transfers was made by J. F. Glennon as trustee for one of his children. In some he was the transferee and in some his wife was the transferee.

At the relevant dates the value of the shares so transferred greatly exceeded the stated consideration. An agreement has been reached as to the amount of that excess. Seven appeals have been brought against assessments of gift duty in respect of the transfers, made under the Gift Duty Assessment Act 1941-1967 Cth (the Act), and by consent the appeals have been heard together. The question which is in dispute is whether the transfers were "dispositions of property" for a consideration which was not fully adequate and were accordingly liable to gift duty calculated upon the amount by which the consideration stated in the transfers was less than the agreed value of the shares. The respondent contends that they were and relies on s. 11, read with s. 17 and with the definitions in s. 4 of the Act, of "disposition of property" and of "gift". The appellants have made three submissions in support of the appeals. The first is that those transfers in which the transferor and the transferee were the same person were void and had no effect of any kind as a disposition of property. The second is that the transfers made to the wife of a transferor, although not devoid of any effect, did not have any greater operation than the substitution of a one trustee for another, leaving the beneficial interests of the children unchanged, with the consequence that it cannot be said that the consideration for these transfers was inadequate. The third submission relates only to the transfers of shares in Carrigans and is based on an alleged contravention of s. 67 of the Companies Act of 1961 Q..

At various times from December 1961 onwards deeds were executed by each of which a trust was declared in favour of a child of J. F. Glennon or of B. V. Carrigan, the trustee being in each case the father of the beneficiary. The trustee declared that he held a sum of £10 and any real or personal property purchased therewith and any other real or personal property afterwards acquired by the trustee pursuant to the provisions of the deed, upon the trusts therein declared. Each deed gave the trustee power to sell any property forming part of the trust and power to accept from any part a gift of any real or personal property subject to the trusts therein declared.

Carrigans carried on a retail business in soft goods. It had been operated originally by the Carrigan family and the Glennon family had later acquired and interest in it. Jaygee was an investment company in which both families had interests. Prior to the transfers with which these appeals are concerned, most of the shares in Carrigans which had a dividend entitlement were held by B. V. Carrigan or by J. F. Glennon in trust for their children upon trusts declared by the deeds described above. This had not come about by means of a formal declaration that the shares were so held nor were entries to record that the shares were held in trust made at the time when they were first so held. But subsequently, appropriate notations were made to record that the shares had been held upon such trusts. Although the formal recording of the entitlement to the shares was not in all respects complete and accurate, there is evidence, in addition to that provided by the transfers themselves, that the shares were held in trust for the children. They were so treated in income tax returns, in annual returns made under the Companies Act and in books of account which were kept in respect of each trust. On the evidence, the shares must be regarded as having really been owned beneficially by the children, and that is not disputed by Mr. Carrigan or Mr. Glennon. It appears that both Mr. Glennon and Mr. Carrigan had acted upon the advice of the accountant to the companies, Mr. O'Hare, in creating the trusts and in arranging how the shares were to be held. Subsequently, the business began to expand in a spectacular way. The profits increased greatly and there were prospects of still greater growth. Mr. O'Hare pondered upon this development and realized that the children would get a great preponderance of the large profits which were likely to come from the business. Previously the substantial salaries paid to the parents had been sufficient, in Mr. O'Hare's view, to provide what he called an "equitable spread of income", but this would no longer be so. So it was thought that there should be a "readjustment" of the share holdings. He discussed the matter with Mr. Glennon and Mr. Carrigan who agreed that this should take place. It appears that none of the three men, all of whom impressed me as completely honest, felt that there was anything strange or irregular about the transactions that then took place. They do not appear to have been troubled by any thought that as trustees they were not free to do exactly as they pleased with the trust property. It did not occur to them that if the trustees, or their wives, were to take over shares which had become subject to trusts in favour of the children, there ought at least to be a valuation of the shares. They believed and intended that the shares were to become the property of themselves, or of the wives, freed of the trusts. The transferees were subsequently treated as beneficial owners when dividends were declared and these were credited to them. It may be thought extraordinary that the appellants contend now through their counsel that they laboured in vain in attempting to take away from the children what they had given to them and assert that the shares, which they have since treated as their own, have always continued to be the property of the children. However odd this may be, it becomes necessary to consider whether the transfers did make effective "dispositions of property" for an inadequate consideration and were, therefore, gifts within the meaning of the Act, upon which duty was payable.

It is convenient to deal first with a submission based on s. 67 of the Companies Act, that the transfers of shares in Carrigans were void. In order to sustain that submission the appellants must establish that the company Carrigans acted in a manner prohibited by the section and also that this operated so as to make void the transfers of the shares. Section 67 (1) provides:

Except as is otherwise expressly provided by this Act no company shall give, whether directly or indirectly and whether by means of a loan guarantee or the provision of security or otherwise, any financial assistance for the purpose of or in connection with a purchase or subscription made or to be made by any person of or for any shares in the company or, where the company is a subsidiary, in its holding company or in any way purchase deal in or lend money on its own shares. There is no evidence that before or at the time when the transfers were executed Carrigans entered into any agreement or arrangement to give any financial assistance towards the purchase of the shares. The transfers were not preceded by any actual agreement for the sale and purchase of the shares and consequently there was no agreement as to the manner in which the consideration of $2 per share was to be paid. As will appear later, I am of opinion that there were not any contracts for the sale and purchase of shares, in the ordinary sense in which a contract requires a bargain between two or more persons. But if the transactions are to be regarded for present purposes as sales and purchases of shares they must be treated, in my opinion, as having created an immediate liability in the "purchaser" to pay to the "vendor" the price of $2 per share. There is no evidence that Carrigans bound itself, either formally or informally, to provide funds for the discharge of that liability. There is evidence that Mr. Glennon and Mr. Carrigan left it to Mr. O'Hare to decide what entries were to be made in the books in relation to the consideration mentioned in the transfers and that it was understood or assumed that book entries would be made similar to those that had been made in relation to some earlier share transactions. Mr. O'Hare caused entries to be made in the books of Carrigans by which the loan account of each of the Trusts was credited with the price of the shares "sold" by that Trust and each of the transferees was debited in his or her loan account with the price. The result was in each case that the Trust did not receive any cash in exchange for the shares, but was treated as having lent money to the company, which in turn was treated, so far as the book entries were concerned, as having lent the like amount of money to the transferee of the shares. There is no evidence that the company, by means of any resolution of its members or of its directors or by any other act performed by an agent proved to have authority in that respect, authorized the making of such a loan. No money of the company was handed over to any borrower nor did it enter into any guarantee or provided any security for the payment of any money. If the book entries are considered from the point of view of the "vendors" of the shares the question arises, it has been submitted, whether the company has assumed a liability to them for the purchase price and whether this offends against the provisions of s. 67. I think that it is very doubtful whether such a liability could be enforced against the company. The entries do no more than to provide some evidence of a debt and it appears, I think, that they were made upon the direction, expressed or implied, of the persons who would seek to rely upon them. Notwithstanding that the credit entries in the loan accounts are in form in favour of the Trusts, the persons relying upon them would be the trustees, Mr. Carrigan and Mr. Glennon. It would be difficult for them to maintain that the company itself had really incurred any liability to them by reason of the fact that the entries were made. But if it did incur a liability, that was not done in order that share transactions might be carried out but was done subsequently to those transactions and after a liability to pay for the shares had already been incurred by the "purchasers".

In my opinion the evidence does not establish that Carrigans acted in contravention of s. 67. It is unnecessary therefore to consider the question whether a breach by that company of the section would have had any effect in the circumstances of this case upon the validity of the transfers. It is unnecessary, also, to decide whether the notices of objection to the assessments were so worded as to enable the appellants to rely upon s. 67.

I proceed to consider the transfers from John Francis Glennon, as trustee for a named person, to John Francis Glennon and from Brian Vernon Carrigan, as trustee for a named person, to Brian Vernon Carrigan. In my opinion these transfers did not operate as dispositions of any property or of any interest in property, either at law or in equity. No proprietary right or interest was vested in any person as a consequence either of the execution of these transfers or of the resolutions, at meetings of the directors of the two companies, that they be accepted and be entered in the register of members.

I referred to many authorities, both old and new, concerning the effect of a purchase of trust property by a trustee. These included Ex parte Lacey [1] ; Williams v. Scott [2] , where it was said that it is "clear undisputed law that a trustee for the sale of property cannot himself be the purchaser of it" [3] ; and Holder v. Holder [4] , in which it was stated that the Court has a discretion as to setting aside such a transaction. In my opinion there is no need to consider in the present appeals whether that recent decision "seeks to reverse centuries of established law", as has been asserted in Jacobs' Law of Trusts in New South Wales, 3rd ed., p. 438, or is acceptable as a statement and application of the rule relating to a purchase by a trustee of trust property. I do not think that that rule is material in relation to the transfers now under consideration. There was not any purchase by a trustee to which the rule could be applied. The trustees did not purchase the shares themselves. They did not decide as trustees that the power of sale given by the trust deeds should be exercised and proceed then to give effect to that decision by a sale in which they became the purchasers. They decided "to readjust" the share holdings. They did not execute the transfers in order to carry out an agreement for sale and purchase but to free the shares from the trusts.

1. (1802) 6 Ves. Jun. 625 [31 E.R. 1228]. 2. [1900] A.C. 499. 3. [1900] A.C., at p. 503. 4. [1968] 1 Ch. 353.

It is necessary to consider whether what took place had any effect either as to the legal ownership or as to the equitable ownership of the shares and of the rights which they represented.

The transfers could have no effect at law unless some effect was given to them by some applicable statutory provision. Before the transfers, the transferors as holders of the shares had as between themselves and the companies all the rights attached to the shares, whether as to voting, entitlement to receive dividends, entitlement to receive benefits upon a winding-up, or otherwise. After the transfers they had precisely the same rights. Section 156 of the Companies Act of 1961 Q. contains provisions under which trustees may be registered as holders of shares as trustees. In particular, sub-s. (3) provides that shares held by a trustee in respect of a particular trust may with the consent of the corporation be marked in the register in such a way as to identify them as being held in respect of the trust. It appears that in the present case the shares in question were not so identified in the register at the relevant time. But if it be assumed in favour of the appellants that the shares ought to be treated as having been marked in the register so as to identify them as shares held in trust that has no consequence, in my opinion, in relation to the rights of the holders of the shares as between themselves and the companies. Section 156 (4) includes a provision that the corporation shall not be affected with notice of any trust by anything done in pursuance of the preceding sub-sections of that section. Assuming that by reason of notifications in the register the company had actual knowledge that the shares were held in trust, I have not been referred to any provision which gives to that fact any legal consequence concerning the mutual rights and obligations of the shareholders and the company. The articles of association were not put into evidence and I must proceed upon the assumption that they contained nothing material to this aspect of the case.

I think that there is no need to examine here the effect of legislation that has been enacted in various places providing that a person may convey, transfer or assure property to himself or to himself and others, such as s. 24 of the Conveyancing Act, 1919, as amended (N.S.W.), or s. 72 of the Law of Property Act 1925 Eng., which was considered in Rye v. Rye [1] . I was not referred to any legislation of this kind in force in Queensland, except s. 1 of the Mercantile Acts, 1867-1896 Q., which is limited to assignments of personal property by a person to himself and another or others. In my opinion such legislation does not affect the present problem.

As to the equitable ownership of the rights conferred by the shares, it is plain that no disposition was made by the children who were the beneficiaries of the trusts. In the absence of any disposition by them, the only way in which their equitable rights could be divested from them would be by an act of the trustee performed by virtue of his authority and powers as such trustee. Each trustee had a power of sale and he had a power to vary any of the investments for the time being representing the trust fund. There is no doubt that if the trustee had sold and transferred the shares to a third person who was a bona fide purchaser, that would have been effective to transfer the equitable, as well as the legal, ownership of the shares, assuming that the transaction complied with any relevant requirements of the articles of association. But, in my opinion, it is impossible to hold that the transfers by the trustees to themselves were effective to transfer to them the beneficial interest of the children. As I have said, there was not in reality any intention or any attempt to exercise the powers of sale vested in the trustees. What was the real intention of the trustees might well be immaterial in appropriate circumstances in deciding whether a transfer to a third party was, because of the existence of the power of sale, effective to transfer the full proprietary rights in the shares. But as the transfers were to the trustees themselves it is impossible, in my opinion, to hold that the power of sale gives any efficacy to the transactions or to hold that the trustees acquired the equitable interests but were merely at risk that the transactions might subsequently be set aside at the suit of a beneficiary.

In s. 4 of the Act the term "disposition of property" is defined so as to include any transfer of property. In my opinion this does not mean that the mere existence of any executed document which purports to transfer property is enough to attract duty. It is essential that the transfer should affect property, so as to bring about some change in some right or interest in it. In my opinion the transfers now under consideration brought about no change at all and for this reason they did not create any liability of gift duty. The circumstance that subsequently the trustees and the company acted as if a change had taken place is, in my opinion, of no consequence. The result is that the appeals against the assessment of gift duty on those transfers should succeed.

As to the transfers to the wives I have reached a different conclusion. After those transfers the transferees were fully entitled to all the rights attached to the shares. The transferors had divested themselves of those rights. As between the new holders of the shares and the companies, those holders alone had rights and they could enforce these rights as fully as if no trusts had ever attached to the shares. In my opinion these transfers did constitute disposition of property, and since the shares had an agreed value in excess of the amount of the expressed consideration, those dispositions were gifts within the meaning of the Act and prima facie the value of the gifts was to be ascertained, in accordance with s. 17 of the Act, by deducting the amount of the consideration from the agreed value.

The appellants contend that because the wives had knowledge of the trusts they would be compellable by the beneficiaries to hold the shares in trust for those beneficiaries. Therefore, it is said, what the wives obtained was of no value. In my opinion this submission should be rejected. In the first place it is not obvious and it was not proved that the legal ownership of the shares could be of no value to the wives. But a more important consideration is that it cannot be asserted, in my opinion, that no beneficial interest in the shares passed to the wives. I have said when dealing with the transfers to the trustees themselves that they were not exercising the powers of sale given by the trust deeds. But that does not mean that the existence of the powers of sale is necessarily irrelevant in considering whether the transfers to the wives effected any disposition of the equitable interests in the shares. If the transactions were later challenged, the powers of sale could provide a basis for a claim by the transferees that they did acquire the beneficial interest in the shares. It is probable, no doubt, that the transactions could be successfully challenged. But there is no absolute rule that a transaction of this kind is void or is forbidden by the law (see In re Douglas [1] ). I am not concerned in these proceedings to decide the question whether the transactions could be avoided. It is perhaps likely that no one will ever seek to avoid them. In the case of the transfers now being considered, the problem is different, in my opinion, from the problem as to the transfers to the trustees themselves. In the former case, there is, in my opinion, a passing of property by a transaction which is probably voidable and which may or may not be avoided at some time in the future. In the latter case, I am of opinion for reasons already given that there is no passing of any property at all.

In my opinion the Act does not require that in the circumstances which I have stated the transfers to the wives must be treated, not as dispositions of the property which they are expressed to transfer, but as dispositions only of a bare legal interest having no value. In my opinion the appeals against assessments of gift duty in relation to the transfers to the wife of the transferor should be dismissed.

When the conclusions which I have stated are applied to each of the appeals the following results are obtained. The appeals no. 10 and no. 11 relate solely to duty charged on transfers by a trustee to himself. These appeals should be allowed. The appeals no. 12, no. 13 and no. 15 relate solely to duty on transfers to the wife of a trustee and those appeals should be dismissed. The appeals no. 14 and no. 16 relate in part to duty on transfers to a trustee and in part to duty on transfers to the wife of the trustee and these should be allowed in part.

Each appeal is stated to be brought by the appellant Brian Vernon Carrigan or the appellant John Francis Glennon as trustee for one of the trusts. Presumably the trust is to be regarded as appealing in the capacity of a donor, who would be liable for gift duty jointly and severally with the donee, in accordance with s. 25 (2) of the Act. I do not know whether or not the trustees have any intention of asserting in this case the ordinary right of a trustee to be indemnified from the trust fund, so as to place upon the beneficiaries the expense of litigation arising out of "gifts" in which they took no part and by which it was intended that their property should be diminished in favour of the trustee or of his wife. In the present proceedings it is not appropriate, in my opinion, to deal with questions as to the ultimate incidence of the burden of costs as amongst the members of the families concerned. I propose in each appeal to deal with costs in the manner which seems appropriate as between the appellant and the respondent, without regard to the capacity in which the appeal is stated to have been brought.