Gorton v Commissioner of Taxation

Gorton v Commissioner of Taxation - [1965] HCA 1 - HCA 1965 case summary — Zoe

[14]

Article 7 regulated the modification of the rights and conditions attached to shares. The conversion of issued shares into shares with special rights or restriction attached in regard to dividends, voting, return of share capital and other matters and the alteration or extinguishing of such rights must, during Mrs. Abel's lifetime be brought about by special resolution. After her death, if the share capital is divided into classes, the rights attached to any class could be varied only with the consent of the holders of three-fourths of the issued shares of that class or with the sanction of an extraordinary resolution passed at a separate general meeting of the holders of the shares of the class. The directors, by virtue of art. 22, had an absolute and uncontrolled discretion to refuse to register any transfer of shares and cannot be required to assign any reason for such a refusal. Article 40 authorized an increase of the share capital by special resolution. Article 58 allowed shareholders one vote for every share held. However the article provided that after Mrs. Abel's death a shareholder shall have one vote for every five shares up to one hundred. Voting rights in respect of any additional shares held were reduced. Article 69 appointed Mrs. Abel governing director for life. She was authorized to exercise all the powers vested in the directors. All directors were subject to her control and were bound to conform to her directions in their conduct of the company's business. She was empowered by art. 70 to appoint a deputy governing director and by art. 71 to appoint or remove directors, to define, or restrict their power and duties, to fix their salaries and to call general meetings. Articles 75-78 defined the powers and duties of directors. Subject to the powers vested in the governing director the business of the company was to be managed by the directors, who may exercise all such powers other than those to be exercised by the company in general meeting (art. 75). They may determine who shall be entitled to sign cheques documents and instruments of all kinds on the company's behalf (art. 76). They could borrow or raise money for the company and arrange for the provision of security from its assets. The directors could also appoint a managing director.

[15]

Between 12th and 19th May, Lovell telephoned Richard Crebbin, and informed him that Mrs. Abel was forming two companies and that she desired him and his brother, Thomas, to take up shares. Richard Crebbin visited Lovell's office and was given two forms of application for ten £1 shares at a premium of £9 per share, one in Batnors Pty. Ltd. and the other in Leba Pty. Ltd. Lovell asked him to sign the application form for shares in Batnors Pty. Ltd., to obtain his brother's signature to the other, and requested that each brother give him their cheque for £100 in respect of the purchase price of the shares. Richard Crebbin agreed. He was further told that his presence at a meeting on 19th May was desired and that he was to be appointed a director of each of the companies but, however, could be dismissed by Mrs. Abel at any time. Richard Crebbin informed his brother of what Lovell had said and obtained his brother's signature and cheque. Thomas Crebbin noted that he was paying £10 for £1 shares but did not know or care to be told of the nature or purpose of the companies and the application. Richard Crebbin produced the two signed forms and the two cheques for £100 at the meeting on 19th May. He complied merely because his aunt had requested him to do so. On 19th May 1960, Richard Crebbin, Lovell and Mrs. Abel met at Mrs. Abel's home. Lovell brought with him all the documents to be used in the meetings and a set of minutes ready for signature. He explained the procedure to be followed. In the proceedings Lovell read out the documents and requested the assent of those present to their contents. Motions were moved by Mrs. Abel and seconded by Richard Crebbin. All documents to be signed were signed as the meetings proceeded. At this stage Mrs. Abel, as the governing director of each company was the sole director. Two series of meetings were held, the first in respect of Leba Pty. Ltd. and the second in respect of Batnors Pty. Ltd. At the commencement of each series her first act was to appoint Richard Crebbin director of the company then in question. Instruments of appointment were produced by Lovell for her signature.

[25]

The key inquiry now to be made in this case is to discover the effect of the transaction on the property of Mrs. Abel and her nephews. Before it commenced she was possessed of 80,000 £1 shares in a public company, Marrickville Holdings Ltd., worth £335,000 and her nephews of £100 each. At the conclusion of the transaction she had 15,000 £1 cumulative preference shares in Batnors Pty. Ltd., 15,000 £1 cumulative preference shares in Leba Pty. Ltd., and a credit in the books of each company for £17,520. On the other hand, Richard Crebbin had 10 £1 ordinary shares in Batnors Pty. Ltd. and his brother Thomas, 10 £1 ordinary shares in Leba Pty. Ltd. Thus it is clear that before it can be ascertained whether a disposition of property to Mrs. Abel's nephews within par. (f) has been effected, the shares must be valued. It was submitted by the appellants that the shares should be valued on the basis that a sale of the shares would be attempted and a willing purchaser would be found in preference to a valuation on the basis that the companies would be wound up and the assets distributed amongst the shareholders. It is my view that the most appropriate method of valuation in this case is one on a liquidation basis. These two companies are private "estate" companies set up not for the purposes of production, commerce or industry but as a means of holding certain assets, the shares in Marrickville Holdings Ltd., for the benefit of Mrs. Abel, her nephews and her sister by avoiding income tax and death duty. This was the declared intention of Mrs. Abel. The shares in the two companies were never intended to be sold and their value does not lie in the price they would fetch on the market. The assets of the companies are shares which can be freely bought on the stock exchange so a purchaser would gain no real advantage by buying into this company structure at a price reflecting the value of the assets. Rather the real value of the shares in the companies to Mrs. Abel and her nephews lies in the interest in the assets given to them by their ownership. The company structure was designed merely to enable Mrs. Abel to use the income arising from the assets and to provide for its succession whilst avoiding to a large extent the incidence of income tax and death duty. It is my view that a valuation based on a fictitious sale does not reflect the reality of the situation. The value of the shares in the companies is tied to the assets and is thus best assessed on a liquidation basis. If the companies were wound up immediately after the transaction on 19th May 1960 the cumulative preference shareholders pursuant to cl. 5 (iii) of the articles of association would be entitled to a return of capital equal to the amount paid up on each share, which was £1, and no more. Thus the value of Mrs. Abel's shares in each company, for which she had paid £149,982, would be £15,000. In addition to this as each company owed her £17,520, the value of her "property" in respect of each company would then total £32,520. As the value of the 40,000 shares in Marrickville Holdings Ltd. sold to each company was £167,500 it would appear that the transaction had decreased the value of her "property" by £134,980 in each case. At this stage the undistributed assets of the company total £135,080. This is calculated by adding to the value of the shares in Marrickville Holdings Ltd. the £100 cash paid in consideration for the allotment of the 10 ordinary shares and the £2 paid for the subscribers shares and subtracting from this total the £32,520 to be distributed to Mrs. Abel. The whole of this sum is attributable to the 10 ordinary shares. There are no limitations imposed on a return of capital to this shareholder and accordingly he would be entitled to receive the whole sum less the costs of the winding-up and the sale of the assets (unless they were distributed in specie) which would not be significant. Thus each share would be valued at £13,508 4s. 0d. The increase in the value of the property of the ordinary shareholder would be £135,082 less £100, which is £134,982. This would be the value of the gift.

[26]

The appellant says that this is an erroneous method of calculating the value of the shares because it does not take into account the possibility that, on a winding-up or a sale, Mrs. Abel (or her successor) would exercise her overwhelming voting power to reconvert her cumulative preference shares to ordinary shares in order to preserve the value of her investment. All the issued shares would then rank equally in respect of a return of capital. Each share would be worth just under £10 and Mrs. Abel's interest would return her just under £150,000. Whether or not this possibility can be taken into account in valuing the shares depends on whether it is a "contingency" within the meaning of s. 18 (1) (a) of the Gift Duty Assessment Act which provides that "For the purpose of computing the value of a gift - (a) no allowance shall be made in respect of any contingency affecting the interests of the donees or any of them ". It is said that as Mrs. Abel's power to effect a reconversion is contained in the articles of association it, and the possibility of its exercise, should be regarded as something in the nature of an encumbrance, inherent in the shares which reduces their value rather than as a contingency. I cannot accept this view. While the power of reconversion is always there, the mode of distribution of the assets and thus the amounts to be distributed can only be altered by an actual exercise of the power. Mrs. Abel may or may not choose to exercise her power. Thus whether or not the mode of distribution of capital on a winding-up is changed depends on an uncertain occurrence. It was something contemplated by Mrs. Abel as affecting or modifying the value of the shares and the effect is dependent on an event which may or may not happen in the future. Therefore I would regard it as a contingency falling within the subsection which I cannot take into account in computing the value of the shares. I hold that the transaction has reduced the value of Mrs. Abel's property from £167,500 to £32,520 in respect of each company, and that the value of the 10 ordinary shares in each case was £135,080. I am not prepared to make an allowance for the costs of winding-up the companies as relatively they would not be significant.

[28]

The final requirement of par. (f) is that the donor must have intended the transaction to have the effect prescribed by the paragraph. It is well established that the intention to be established is a subjective intention. It is not to be presumed that the donor had the necessary intention merely because the other requirements of par. (f) are satisfied. However if there is no evidence of what is in the donor's mind a court is entitled to draw inferences from his conduct and from the circumstances of the case. Mrs. Abel had instructed her solicitors to prepare a scheme which inter alia would lessen the incidence of death duty in respect of her shares in Marrickville Holdings Limited as well as providing for Mrs. Gorton and avoiding income tax. The provisions of the scheme were fully explained to her at the meeting on 19th May 1960 and she appeared to fully understand their operation. The conversion of the shares from ordinary to cumulative preferential shares was not necessary to provide for Mrs. Gorton or to avoid income tax. It would seem that the only purpose of the conversion could be to avoid death duty and that this would necessarily entail the transfer of some of Mrs. Abel's property out of her estate before her death. In my view the only purpose of the conversion was to achieve this end by increasing the value of the ordinary shares allotted to the nephews and by decreasing the value of the shares retained by Mrs. Abel. Thus the effect prescribed by par. (f) was within the contemplation of the designers of the scheme and, therefore, can be said to have been intended by Mrs. Abel. It is true that she retained the power to reverse the effect by either reconverting the cumulative preferential to ordinary shares or by bringing about a further issue of ordinary shares. However the fact that she could alter the value of the shares in the future does not mean that their present value on a liquidation basis is altered. The evidence points to the fact that she did not intend to reconvert the shares. She was on good terms with her nephews. To do so would frustrate her intention to avoid death duty. She may have wished to retain this power in order to deal with any major change in the family relationships or with the death of her nephews. However, there is no evidence that she intended to exercise it. I think that I can draw the inference that Mrs. Abel intended the transaction to have the effect on the values of the shares that it did have and that, therefore, she had the necessary intention to satisfy par. (f).

[61]

At two o'clock on 19th May 1960, Mrs. Abel was a woman of considerable wealth. Fifty minutes later she was not as well off as she had been, and each of her nephews was better off than he had been. That means, it seems to me, that the value of Mrs. Abel's property had been diminished and the value of the property of her nephews had been increased. I do not read par. (f) of the definition of "disposition of property" in the Act as confined to cases in which there has been a diminution of the value of some specific item of property belonging to one person and an increase in the value of some specific item of property belonging to another. Doubtless it would catch such a case, if one can be imagined that would not be caught by the earlier paragraphs of the definition. But it seems to me that it would do so because it deals with the value of a person's property in the sense of the value of all that is his. The word "property", to describe collectively a man's worldly wealth, his substance, is one of the oldest senses of the word in the English language. And it can bear that sense in the language of the law, for example when the property of the bankrupt is spoken of in bankruptcy legislation. The word "property" in par. (f), with which we are here concerned, has in my opinion much the same meaning as the word "estate" in the corresponding provision of the Death Duties Act 1921 of New Zealand, whence par. (f) was apparently derived. The view that I take accords, I think, with the statement in the judgment of Latham C.J. and Webb J. in Grimwade's Case [1] that: "Paragraph (f) is intended to cover cases of transactions entered into with the intent to diminish the value of the donor's own property in globo and to increase the value of the property in globo of another person". But I do not wish to be taken as founding my opinion simply on that judgment in that case. Indeed I am inclined to doubt the validity of some of the observations in it. I found my conclusion simply on the words of the Act. To read them as restricted in their application to a determination of the value of a specific item of property and the increase in the value of another item seems to me, with respect to those who think otherwise, to involve reading par. (f) as if the words were not "his own property" etc. but "some part of his own property" etc. or "any of his own property" or some such phrase. If as the result of a transaction one person is worse off and another person better off than they would have been if the transaction had not occurred, and if the transaction was entered into with intent to produce this result, then I consider the statutory description is satisfied.

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Before

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Judgment (68 paragraphs)

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