Gregory v Commissioner of Taxation

Stonnington was incorporated in Victoria in 1957, apparently for the purpose of acquiring from the deceased shares which he held in Myer Investment. The memorandum of association provided that the share capital of the company was £100,000 divided into 100,000 shares of £1 each with power to divide the shares into several classes to which different rights might be attached (cl. 4). The articles provided for the shares to be grouped as A, B, C and D shares (art. 3 (b)) and gave the directors power, with the sanction of a general meeting, to declare and pay dividends to the holders of any group of shares to the exclusion of the holders of any other group or in amounts varying among the groups (art. 112). The articles contained provisions restricting the transfer of shares (art. 36), which it is not material to mention in detail. At the date of death the paid-up capital in Stonnington comprised 35,165 A shares, 2,000 B shares and 2,000 C shares. The deceased held 35,160 A shares, 600 B shares and 1,000 C shares, and 5 A shares where held in the names of Alfred B. Elvish and Harry L. Richardson as nominees for the deceased. The remaining issued shares were held by the widow of the deceased (1,400 B shares) and by his daughter (1,000 C shares). The directors of the company were the deceased, Elvish and Richardson. It is apparent that the deceased completely controlled the company. In the circumstances the parties were content to treat A, B and C shares as of equal value. At the date of death the main asset of Stonnington comprised 13,055 shares in Myer Investment. In addition there were current assets of £4,514. Current liabilities amounted to £557.

Myer Investment and Barclay were incorporated in Victoria as private companies in April 1925. It appeared that they were formed as holding companies for the purposes of Sidney Baevski Myer and members of his family. Sidney Baevski Myer had established in Victoria a business which proved to be very successful and which in 1925 was taken over by a public company formed for that purpose, The Myer Emporium Limited ("Myer Emporium"). He died in 1934. By his will he expressed the desire that the business known as "Myer's" and all enlargements and extensions thereof and all companies and undertakings promoted or established in relation thereto and his share and other interests therein should be continued and carried on either in their present form or in an altered form "so long as my trustees in their discretion think prudent to the end that the said business and enlargements and extensions companies and undertakings may continue as an abiding and visible memorial of my efforts in establishing and developing the same". He further expressed the desire that certain named persons should, after his decease, act as managing directors of the business and he empowered his trustees when necessary to procure or arrange to appoint persons to act as their successors in the office of managing director and also in the office of trustee. His will went on:

I wish my trustees and executors in furtherance of these my desires expressed above to use employ and exercise the voting power of my estate in respect of shares in any of the Myer companies including The Myer Emporium Limited or in any company controlling the same or related thereto or subsidiary to or associated with the Myer business or undertakings i further desire that it shall be in the discretion of such managing directors (after conferring with their colleagues therein) to decide and determine what proportion of the net profits of the said company or companies and undertaking or undertakings ought to be divided among members thereof and what proportion should be held in reserve or remain undivided or be set aside or used or employed for developmental or contingency or equalization amortization or superannuation or other purposes or for otherwise increasing the financial strength of such company or companies undertaking or undertakings and that the voting power in respect of the shares held or controlled by my estate or by my trustees shall be used exercised and employed so as to support and uphold such determination. The dispositions which he made of his estate are elaborate but it is enough to say that the corpus will not finally be distributed until after the death of his widow and children, all of whom are still alive.

The articles of association of Myer Investment were put in their present form in 1937. The nominal capital in that company consisted of 1,500,000 shares of £1 each. The articles contain certain restrictions on the transfer of shares. No transfer shall be registered unless approved by the directors, who may refuse to give their approval without assigning any reason therefor, provided that such approval may not (with certain exceptions) be refused in the case of a transfer to an existing director or member of the company or to the legal personal representatives of any deceased member or of a transfer by a member or his legal personal representatives to a child or other relative of the kinds specified of the member or deceased member (art. 26). By art. 28 (a) it is provided that no share shall be transferred (except in the case of a transfer within the proviso to art. 26 or a transfer to a new trustee on a change of trusteeship) until the rights of pre-emption set out in art. 28 have been exhausted. Put briefly, the intending vendor notifies the directors of the price at which he intends to sell, and the directors then notify all members of the company and any other persons they think proper inviting them to purchase at that price. If there are willing buyers, the directors allocate the shares to or amongst them. If all the shares are not sold, the directors are given a further opportunity to find approved persons to buy them. If the directors are unable to sell the shares, the vendor himself may find a buyer, subject to art. 26. The directors are appointed by name (art. 62) but provision is made for the office of director to be vacated if (inter alia) the director is removed by a resolution of the company in general meeting (art. 72 (c)); if a vacancy does occur in the board the company in general meeting may fill it (art. 65). By art. 86 the directors may declare dividends out of the company's profits "provided always that the exercise of this power shall be subject to the control of the company in general meeting and any declaration of dividend by the directors may be overridden and nullified by a resolution of the company in general meeting passed at any time before actual payment of the dividend so declared". By art. 50 (b) it is provided: "During such time as Margery Merlyn Baillieu Myer" (Dame Merlyn Myer is the widow of Sidney Baevski Myer) "or any person appointed by her (together with her co-trustees) to be her successor as a trustee of the estate of the late Sidney Baevski Myer shall hold office as a trustee of such estate no resolution shall be capable of being carried or passed by the company in general meeting unless members entitled to vote in respect of not less than one-half of the issued shares of the company vote either in person or by proxy in favour of such resolution".

At the date of death of the deceased there were 898,440 issued shares in Myer Investment. All were fully paid. Stonnington's holding therefore amounted to 1.45% of the issued capital in Myer Investment. Of the remaining shares 603,419 were held by the estate of Sidney Baevski Myer deceased. Since this amounted to considerably more than one-half of the issued shares, the effect of the rather special provisions of the articles was that a resolution could not be passed at a general meeting of Myer Investment unless the trustees of the estate voted in favour of it. The directors of Myer Investment at the date of death of the deceased included the trustees of the estate of Sidney Baevski Myer and other persons concerned with the conduct of the business of Myer Emporium.

There were 1,013,941 issued shares in Barclay and of these 1,013,835 were held by Myer Investment. It was clearly right to treat Barclay as, in effect, a wholly-owned subsidiary of Myer Investment and it was the practice of the two companies to produce each year a consolidated balance-sheet and consolidated profit and loss account. Barclay was the holder of 7,947,960 5s. 0d. stock units in Myer Emporium, which represented 43.99% of that company's total issued capital. Although this was less than a majority interest it gave Myer Investment effective control of Myer Emporium and the power to defeat any attempt at a take-over. Having regard to the wishes of the testator as expressed in his will, to which it appears the trustees have endeavoured to give effect, it is unlikely that the trustees, as holders of the majority of the shares in Myer Investment, and directors of that company, would permit that company to dispose of the shares in Myer Emporium which it held through Barclay except for some real necessity. The evidence shows that it has in fact been the settled policy of the directors of Myer Investment to continue to hold the shares in Myer Emporium. Viewing the situation as at the date of death, the probability was that notwithstanding any fluctuations in the market Myer Investment would continue to retain the shareholding in Myer Emporium as a permanent asset.

The market value at the date of death of the shares in Myer Emporium held by Barclay was over £9,000,000. Barclay also held shares in about eighty listed companies of a total value of over £300,000. It owned two properties, whose total value was shown in the books as £281,789, which had been bought in case they might be needed by Myer Emporium as sites for regional shopping centres, and neither of which was income-producing. In addition Barclay had cash on deposit with Myer Emporium (£442,298) and with a subsidiary of that company (£28,850) and cash in the bank (£2,040). Myer Investment directly owned some shares in the Broken Hill Pty. Co. Ltd. whose market value exceeded £177,000. The only current liability shown in the balance-sheet was the amount of a dividend (£292,442). There exists room for some small difference of opinion as to the total net value of the assets of Myer Investment (including Barclay) but the figure reached by Mr. Adamson, who gave evidence for the respondent, was £10,473,673 which gives an asset backing of £11 13s. 2d. per share.

The appellants, in support of their case, called three witnesses to give their opinions as to the value of the shares. The first witness was a chartered accountant, Mr. Hancock. The valuation which he produced had been prepared in 1961 by his father but he had assisted in its preparation and said that it represented his opinion. He considered that Myer Investment and Barclay were in reality a family private investment group. The assets held by that group were, in his opinion, not well balanced since so large a proportion of them comprised shares in Myer Emporium. Indeed, he said that the funds invested in or for Myer Emporium (including the properties and moneys deposited) represented about 84% of the total investments of the group at book values and a higher proportion of that total at market values. Mr. Hancock considered that since Stonnington had only a small proportion of the shareholding in Myer Investment and had no power to control it or to bring about a winding up, the dividend yield was a matter of paramount importance in assessing the value of the shares. An analysis of the dividends paid by Myer Investment for ten years before the date of death showed that the average rate of dividend was 18.7% over the ten-year period, 26.2% over the last five years and 30.7% over the last three years. These figures show a progressive increase in the dividend rate, and because of this Mr. Hancock selected the last three years as providing a basis for the consideration of the question what return a prospective purchaser in the company might expect to receive. Although the profits of Myer Emporium had been increasing and economic conditions were booming there were some danger signals in the economy and on the whole Mr. Hancock thought that a prudent buyer of shares in Myer Investment would expect that company to maintain a dividend representing about the same as that averaged over the last three years and would therefore expect a shareholding of 13,055 shares in that company to provide him with an income of £4,000 per annum. He then compared this expected return with the return provided by seven public investment companies listed on the stock market - these showed returns ranging from 5.1% to 7.2% and an average of 5.6%. Mr. Hancock considered that an investor would be able to obtain 5½% from investing in public investment companies at the date of death. He admitted that none of the seven public investment companies which he considered had a growth possibility comparable with Myer Investment but nevertheless was of opinion that an investor in a company such as Myer Investment would require a return of at least 10% made up as follows:

1. A basic dividend at the rate of at least 6% 2. An addition for lack of negotiability of at least 3% 3. A further addition in respect of the disabilities of a minority holder in a family - at least 1% Total: 10%

He capitalized the estimated maintainable dividend of £4,000 at 10% and concluded that a purchaser would be prepared to pay £40,000 for the investment in 13,055 shares - that is, £3 1s. 3d. per share. Mr. Hancock then turned to value Stonnington. He considered that although a purchaser of the deceased's holding in Stonnington would have power to put that company into liquidation he would have no assurance of becoming listed as a shareholder in Myer Investment, because of the restrictive provisions in the articles, and would be inclined to continue to hold shares in Stonnington. He would therefore expect to receive an income of £4,000 per annum from the shares in Myer Investment. Mr. Hancock again capitalized at 10%, and thus concluded that the value of each of the shares would be £1 0s. 5d. However there were the accumulated profits of £4,000 and this meant, in effect, that a purchaser would be buying with a dividend of 2s. 0d. per share. This made the total value of each share in Stonnington £1 2s. 5d.

The second expert witness called for the appellants, Mr. Baker, who is also an accountant, had Mr. Hancock's valuation before him when he commenced to consider the matter and took it as his starting point. His approach is very similar to that of Mr. Hancock, but he used a different capitalization rate. He considered that the combined effect of the restrictive provisions of the articles and of the precatory provisions of the will was that there was no practical possibility that Myer Investment would be liquidated and its assets realized so that the shares in that company ought to be viewed as a "locked in" investment for which there would be a very limited market. He considered that a prudent purchaser, seeing that his capital would be well secured by tangible assets, would look mainly to the dividends he could reasonably expect to receive on the shares. Mr. Baker adopted 9% as the rate of return which an investor in these shares would be likely to require. He arrived at this figure by adopting a basic dividend requirement of 6% (which he chose after considering the rate ruling in respect of first mortgages at that time) and added about 4% to 5% for lack of negotiability and 2% for the disadvantages of a minority shareholder and then made an allowance of from 3% to 5% for the strong growth factor attributable to the company. All these figures represented opinions based on experience rather than on the result of any statistical process. Mr. Baker said that if the difficulties of obtaining registration in the company (due to the restrictive provisions of the articles and the provisions in the will) were removed he would probably reduce the total rate by 1%. He accepted the figure of £4,000 as the maintainable dividend and capitalizing this figure at 9% arrived at a value of the shares in Myer Investment of £3 8s. 1d. He considered that if the trustees of the estate of Sidney Baevski Myer were not in control of Myer Investment and that company were listed on the stock exchange its shares would be worth a great deal more - at least twice as much. He valued the shares in Stonnington by deducting from the estimated maintainable income of £4,000 an amount of £100 as the estimated cost of administering the company and by capitalizing the balance of £3,900 at 9%, which resulted in a value for the 39,165 shares of £43,333 or £1 2s. 1d. for each share. He omitted to add anything to this amount to represent the value of the accumulated profits in hand.

The third witness on behalf of the appellants was Mr. Traxton, a member of the firm of J. B. Were and Son, stockbrokers. The valuation which Mr. Traxton produced had been prepared in 1961 by Mr. Clayton who was then a member of J. B. Were and Son but who had since retired. Mr. Traxton said that he agreed with Mr. Clayton's basis of valuation, although as will be seen the two were not completely in agreement. The valuation commenced with a statement that a holding of shares in Stonnington, Myer Investment or Barclay is fundamentally an investment of shares in Myer Emporium, which was described as one of the premier stocks in the Australian market. However, a shareholder in Stonnington would not be able to obtain possession of the underlying shares in Myer Emporium and would have suffered the disability of the lack of an open market. The income benefit from the shares would therefore be the paramount consideration, although the great attraction of Myer Emporium shares, and the increasing benefits those shares might be expected to confer, could not be overlooked. Mr. Clayton, in his valuation, said that the shares of such a private company lack the attraction of an equity investment in a market stock which holds prospects of capital gain and are more directly comparable to a fixed interest-bearing security. The ruling rate of interest for fixed interest-bearing securities was at the material time from 7% to 8%. Mr. Clayton thought that it was a fair assumption that the shares might be attractive to a purchaser if they yielded 8%. Mr. Traxton in his oral evidence admitted that in his opinion one could not compare fixed interest-bearing securities (which were always in danger of suffering an erosion of capital) with the shares in Myer Investment and would have preferred to take as his starting point the return to be expected from shares in publicly listed investment companies. However, he reached the same rate as Mr. Clayton; he considered that shares in investment companies would realize 5¾% but that he should add 3% for lack of negotiability and he rounded the result off at 8%. On this basis the value of shares in Stonnington would be £1 7s. 7d. each. This represented a capitalization of the estimated income of £4,000 at 8% and the addition of 2s. 0d. per share in respect of the accumulated profits. Mr. Clayton's valuation dealt with the shares in Myer Investment on two bases. First he valued the shares on the assumption that they might be transferred without restriction but even on this assumption he considered that a shareholding in the company ought to be regarded as an investment for income with little hope of realized capital appreciation, although the value of the underlying security is not static and it would be reasonable to expect further appreciation in its value. He assumed that the current rate of dividend, namely 31.7%, would be maintained and that the actual income from a holding of 13,280 shares would have been £4,219 15s. 0d. The shareholding of Stonnington in Myer Investment was 13,055 not 13,280 but the error is not important. He capitalized this at 8% and thus reached a value of £3 19s. 5d. per share. His second basis was on the assumption that the restriction on transfer imposed by the articles of Myer Investment was fully operative and on this assumption he considered that a return of 10% would be required. Capitalizing at this rate he reached a valuation of £3 3s. 7d. per share.

Mr. Traxton made an analysis of the figures relating to the public investment companies which he had considered in arriving at his expected yield, and found that the market price of the shares in the investment companies was consistently less than the net tangible asset backing per share based on the market value of the investments. On the average, the price of the shares in the investment companies was 74.7% of the net tangible asset backing.

The two expert witnesses called by the respondent, Mr. Mirams and Mr. Adamson, both accountants, adopted a method of valuation which they believed is required by the decision in Abrahams v. Federal Commissioner of Taxation [1] , which, they considered, lays down a principle that must be observed in determining the rate of capitalization to be applied in valuing shares in an investment company. This so-called principle is stated as follows by Mr. Adamson in his work on the Valuation of Company Shares and Businesses, 4th ed. (1966), at p. 188:

We may therefore accept the general principle that the appropriate rate of capitalization is the average applicable to the investments held. Where the investments are shares in other companies which yield various rates, this would be the percentage which the total dividends received by the investment company bear to the total market value of the investments. Mr. Mirams considered that the deceased was in a position to wind up Stonnington and take for himself an appropriate proportion of its shares in Myer Investment, namely 12,255 shares, and that, therefore, s. 16A (1) (c) of the Act ought to be applied in the valuation of the shareholding in Stonnington. However, he considered that s. 16A (1) (c) should not apply to the valuation of the shares in Myer Investment since that company was a going concern and the deceased had only a minority interest in it and was not in a position to cause it to be wound up. In valuing the shares in Myer Investment he adopted what he called the earning capacity basis of valuation, as applied to an investment company in the light of his understanding of Abrahams v. Federal Commissioner of Taxation [1] . This required him to estimate the future gross annual income likely to be derived from the assets held by Myer Investment at the relevant date, to express that income as a percentage of the market value as at that date of the company's assets and to use that percentage to capitalize the estimated future net annual income of the company after deducting from the gross annual income the expected annual outgoings, such as administrative expenses and income tax. Since the shares being valued represented only a minority interest in a private company, he then made allowance for the fact that the shares were not listed on the stock exchange and had only a limited market. He justified this method by saying that the demand for shares in an investment company holding shares in Myer Emporium would, if the investment company were listed and its shares could easily be disposed of, be just as strong as the demand for the shares in Myer Emporium itself, and that the value of the shares in an investment company is almost a direct reflection of the value of its underlying assets. He admitted that the value of shares in publicly listed investment companies does not in fact bear an exact arithmetical relation to the value of the underlying assets but is usually less than the value of those assets but said that this is partly due to the fact that usually such investment companies are smaller than the companies in which they hold shares. In applying his method he first proceeded to value the shares in Barclay. He calculated that the ratio which the estimated gross annual income derived by Barclay bears to the market value of its net assets was 3.3892% and when this was applied to the estimated net annual income of Barclay (£364,660) the result was to give a total valuation of £9,369,421 to the shares held by Myer Investment in Barclay. Then he calculated that the ratio of the estimated gross annual income of Myer Investment (£343,439) to its assets, including shares in Barclay (£9,513,403), was 3.61%. The estimated net income of Myer Investment was £340,233, which, capitalized at 3.61%, gave a capital value of £9,424,757 which equals £10 9s. 10d. per share. He allowed a discount of 15% for the fact that the shares were not quoted on a stock exchange and this produced a share value of £8 18s. 4d. To this he added an amount of 3s. 2d. per share representing the present value at the date of death of that part of the dividend payable out of the profits of the year ended 30th June 1958 which had accrued at the date of death (£292,170). This produced a total value for each share in Myer Investment of £9 1s. 6d. He then valued the deceased's shareholding in Stonnington on the basis that the company would be wound up and that the deceased would receive 12,255 shares in Myer Investment, together with a proportion of the other assets in the company. This gave a value of £3 2s. 6d. per share in Stonnington. 1. (1944) 70 C.L.R. 23. 2. (1944) 70 C.L.R. 23.

Mr. Adamson valued separately the shares in Stonnington (which he wrongly described as "Stonningham") and Myer Investment and it is convenient first to refer to his valuation in respect of the latter company. For the purpose of that valuation he used the consolidated accounts of Myer Investment and Barclay. As I have said, he calculated that the total value of the combined net tangible assets amounted to £10,473,673. He observed that the dividends out of each year's consolidated profits were not paid to the shareholders in Myer Investment until 21 or 22 months after the end of each financial year since there was a delay in distribution, first on the part of Barclay and then on the part of Myer Investment. Although he gave attention to the profits earned and dividends paid in respect of the years ended 30th June 1957 and 30th June 1958, he regarded the later year as affording the best guide to current maintainable profits. In that year the gross income from investments was £389,721 and net profit after expenses and income tax was £377,332. He allowed a retention for reserves of about 10% of the net profits which left the sum of £340,000 available for dividend. He then capitalized the expected maintainable dividend at a rate which he described as "relevant to the type of investments held by the company" but which was, in truth, derived arithmetically from the earnings of the company's investments. This method was based on his understanding of the decision in Abrahams v. Federal Commissioner of Taxation [1] but it agreed with his own view for he said:

If I have an investment directly which returns a certain yield, but if I hold that investment through some other interposed companies it is still worth the same provided I allow for the disabilities of the interposition of the companies. An annual gross income of £389,721 derived from investments valued at £10,473,673 represents an overall yield of 3.72%. He added 0.48% to take account of the disabilities of a minority holder and the lack of negotiability of shares not listed on the stock exchange and concluded that the rate of yield to be expected by a minority shareholder from dividends on his shares in Myer Investment was 4.2%. He said there were very few investment companies which were comparable to Myer Investment, which was a family holding company, whose main asset comprised a large block of shares in one company, whereas the public investment companies were composed of several hundred shareholders and had widespread holdings through the market. He did refer to the case of Hardie Holdings Ltd. which had a large shareholding in James Hardie Asbestos Ltd.; the dividend yields as at 3rd June 1958 in Hardie Holdings Ltd. were 3.86% and in James Hardie Asbestos Ltd. 4.16%. In cross examination Mr. Adamson was asked whether shares in Myer Investment would be an attractive proposition at a yield of 4.2%. He replied: I should think they would to the people who wanted them. One has to assume a buyer willing but not an anxious buyer. I think he would be interested in having them. He went on to say that he considered that there would be buyers to whom the shares would be attractive at 4.2%. When asked to suggest what sort of buyers would be interested at that yield he was in some difficulty, but finally suggested that possibly other members of the Myer family or those associated with the company or the group would be interested and added that there could be others who would be glad of an opportunity to fit into the picture if they could do so with the blessing of the other shareholders. He therefore adopted his rate of 4.2% and capitalized the expected maintainable dividend of £340,000, thus arriving at a value of £9 per share. Turning to Stonnington, he considered that s. 16A (1) (a) of the Act should be applied, and ignored the restrictive provisions of the articles, but he did not regard it as appropriate to apply s. 16A (1) (c), because, although the deceased held sufficient shares to control and wind up that company, there was no evidence of any intention to wind it up. In this case also he valued the shares on the basis of capitalized earnings. He took the value of Stonnington's holding in Myer Investment, calculated at £9 per share, as £117,495. The dividends received by Stonnington from Myer Investment amounted to £4,138, which represents a yield of 3.52%. The net income of Stonnington in the year in question was £4,089 and this sum capitalized at 3.52% produces a capital value of £116,165. He added £2,045 (cash available for distribution as a dividend less income tax) and thus arrived at £118,210 as the total value of 39,165 issued shares. This gave £3 0s. 4d. per share which he rounded off to give a valuation of £3 per share. 1. (1944) 70 C.L.R. 23.

In determining, for the purpose of his calculations, the market value of the assets of Myer Investment, Mr. Adamson did not make a reduction to take account of the very large size of the holding by that company of shares in Myer Emporium. Mr. Cox, a sharebroker called on behalf of the appellants, gave evidence that if the holder of about 8,000,000 shares in Myer Emporium wished to realize them on the market he could not hope to do so without allowing a substantial discount because of the size of the parcel. In his opinion the discount would not be less than 20% although under cross examination he said that 15% might be the very lowest discount that would have to be allowed. Mr. Adamson said that ordinarily he would be inclined to discount the value attributed to the very large holding of shares in Myer Emporium and that in his opinion the stock exchange quotation merely shows the price at which buyers and sellers of comparatively small quantities of shares have completed their bargains and is not an adequate guide in the case of a holding of nearly 8,000,000 shares. If he had been free to do so he would have considered that the holding of Myer Investment in Myer Emporium ought to be valued at 21s. 0d. per share, rather than at the market price of 23s. 3d.; in other words he would allow a discount of about 10% for what he described as "blockage". He said that he based this opinion upon normal market happenings in relation to large parcels of shares. However he took the view that he was precluded from allowing any discount of this kind by the decision of Williams J. in Kent v. Federal Commissioner of Taxation (Martin's Case) [1] .

Besides the opinion evidence as to the value of the shares there was evidence of the actual sales that were effected of shares in Myer Investment from January 1957 to June 1964. Most of these sales were from shareholders to private companies which the shareholders had set up for their own purposes and which they or their families controlled and in such cases the consideration affords no guide to the true value of the shares. There were, however, some sales in which the parties were apparently at arm's length. On 30th October 1958 Mr. Beresford J. Myer sold 2,000 shares to Warrender Estates (Aust.) Pty. Ltd. for £3 5s. 0d. per share and on 5th November 1958 he sold 1,934 shares to Maleela Pty. Ltd. at the same price. It appears that these two sales disposed of his entire shareholding. Warrender Estates (Aust.) Pty. Ltd. was a company in which Mrs. Simon Warrender, a sister of Mr. Beresford J. Myer, was interested and that sale may perhaps be put aside. Maleela Pty. Ltd. was, however, a company set up and controlled by Mr. Tolley who although a director and shareholder in Myer Investment was in no way related to Mr. Beresford J. Myer and it is difficult to conceive of any reason that would have led Mr. Beresford J. Myer to sell his shares to Maleela Pty. Ltd. at any price below the highest then obtainable. The evidence showed that on 14th August 1958 a communication was sent on behalf of Mr. Beresford J. Myer to Mr. Gregory, the secretary of Myer Investment, offering to sell 2,000 shares at 80s. 0d. per share. The letter concluded by saying, "Please place this before your Board and advise me the result. Perhaps a counter-offer could be made if the price is considered too high". Mr. Gregory said that he told the agent of Mr. Beresford J. Myer that the last transfer that had taken place was at a value of £3 (either Mr. Gregory's evidence or his statement to the agent was inaccurate, for the consideration for the last sale had been £3 5s. 0d.) and thereafter the agent sent another letter dated 25th August offering the shares for sale at 65s. 0d. A circular was sent to shareholders offering the shares at this price. Authorities in this Court establish that in determining the value of land or shares evidence of a price offered for the property in question, in the course of negotiations which do not result in a concluded contract, is not admissible: McDonald v. Deputy Federal Commissioner of Land Tax (N.S.W.) [1] ; James Patrick and Co. Pty. Ltd. v. Minister of State for the Navy [2] . The evidence in the present case is admissible because the offer was followed by a concluded contract and the fact that it was made throws some light on the extent to which the price finally arrived at may be regarded as an indication of the real value of the shares. All the sales of the shares in Myer Investment effected in 1957 were at a consideration of £3 and all those effected in 1958 and a number in 1959 were at a consideration of £3 5s. 0d. and although Mr. Gregory would not admit it, it is difficult to escape the conclusion that at the time of the sales by Mr. Beresford J. Myer the directors were not prepared to approve of a transfer at a price exceeding £3 5s. 0d. per share. On 25th May 1962, Warrender Estates (Aust.) Pty. Ltd. sold a parcel of shares to Culdares Investments Pty. Ltd. for a consideration of £5 per share, after first writing to the secretary of Myer Investment offering to sell at £6 per share. Culdares Investments Pty. Ltd. was a company controlled by Mr. Shaw, a solicitor who had no special relationship to the members of the Warrender family, and in this case also the sellers were not likely to have been actuated by a desire to make a gift to Culdares Investments Pty. Ltd. when they fixed the price for the shares. It may be noted that in 1961 there had been a bonus issue of shares in Myer Emporium and this may explain the rise in price of shares in Myer Investment that occurred after that date. Mr. Adamson referred to the sale by Mr. Beresford J. Myer to Maleela Pty. Ltd. but said that he considered that it did not furnish any guide to the real value of the shares. He gave a number of reasons for this conclusion. He said that the fact that Mr. Tolley was already a shareholder of Myer Investment was a reason for disregarding the evidence of the sale. I find it impossible to see why that should be so, when there is no evidence that Mr. Beresford J. Myer intended that his shares should be sold below their real value. He then said that the fact that the sale took place shortly after the death of the deceased would make him suspicious of it. In my opinion there is not the least ground for suspicion that the sale was anything but a genuine sale. Thirdly, he said that the sale was at a consideration so remarkably different from the valuation at which he had arrived that he felt that he could not consider it. He might with equal logic have said that his valuation was so remarkably different from the sale price that the latter cast doubt on the former. Mr. Mirams also disregarded the evidence afforded by these sales. He said:

The transactions in question are in respect of shares in a proprietary company, whereas the Act requires you to assume in this particular case that the proprietary provisions in the articles do not apply and, therefore, you do not really have a comparable company. I shall later discuss the provisions of the Act which he had in mind, those of s. 16A (1) (a), but I may say immediately that they do not require the Court to assume that the articles of the company in question satisfy the requirements of the stock exchange if that assumption would not lead to a fair valuation. Mr. Mirams gave the further reason that he did not know the circumstances of the sale and, in particular, whether it was a forced sale. It is true that no direct evidence was given on the question whether either the sale by Mr. Beresford J. Myer or that by Warrender Estates (Aust.) Pty. Ltd. was in any way forced or involuntary. However, once the evidence had been given that these sales were effected it was open to the respondent to call evidence on this issue and, if necessary, to call the vendors themselves to give evidence. There were some vague hearsay statements by Mr. Gregory as to the financial position of the vendors which I completely disregard. In the absence of any admissible evidence that the sales were forced or involuntary I propose to treat them as normal sales by owners of shares who for one reason or another wished to convert their shareholdings into cash. In my opinion an actual sale of unlisted shares, not shown to have been a forced realization, although not of the same value as a sale of listed securities on a stock exchange, provides some evidence of the value of the shares. At the very least it is evidence of the minimum value at the date of the sale but it seems to me that this is not its only evidential use and that the price actually obtained for shares sold at or near the material date provides some indication of the value of the shares in question at that date and may be used as a check on the valuations obtained by other methods. The fact that the sales were made after the date of death does not render them inadmissible: cf. McCathie v. Federal Commissioner of Taxation [1] . The sale by Mr. Beresford J. Myer was made about four months after the date of death of the deceased and it has not been shown that the shares in Myer Investment were likely to have materially changed in value during that period. The sale by Warrender Estates (Aust.) Pty. Ltd. was effected about four years after the date of death and is less useful as a guide to the value of the shares at the material date, although it does serve to indicate the potential for growth in value which the shares had at that date. 1. (1915) 20 C.L.R. 231. 2. (1944) 50 A.L.R. 254; (1945) 51 A.L.R. (C.N.) 501. 3. (1944) 69 C.L.R. 1, at p. 16.

The principles to be applied in determining the value of shares forming part of an estate whose value must be assessed for the purpose of death duties have been discussed in this Court in a number of cases. What has to be determined is the real value of the shares at the date of death (McCathie v. Federal Commissioner of Taxation [2] ). In Commissioner of Succession Duties (S.A.) v. Executor Trustee and Agency Co. of South Australia Ltd. [1] , Latham C.J. and Rich and Williams JJ. said [2] that, broadly speaking, the courts have applied, although with caution, the same test as that applied in determining what would be the proper amount of compensation to be paid for the compulsory acquisition of property, where, as in the case of shares not listed on the stock exchange, there is no market for the property, and that this test may be expressed in its most practical form by saying that "the vendor is entitled to that which a prudent purchaser would have been willing to give for the shares sooner than fail to obtain them". However, Dixon J., as he then was, in a judgment with which with all respect I completely agree, added an important qualification. He said [3] :

I should like, however, to add for myself that there is some difference of purpose in valuing property for revenue cases and in compensation cases. In the second the purpose is to ensure that the person to be compensated is given a full money equivalent of his loss, while in the first it is to ascertain what money value is plainly contained in the asset so as to afford a proper measure of liability to tax. While this difference cannot change the test of value, it is not without effect upon a court's attitude in the application of the test. In a case of compensation doubts are resolved in favour of a more liberal estimate, in a revenue case, of a more conservative estimate. The matters to be considered in estimating the value of shares were discussed by Latham C.J. and Rich and Williams JJ. [4] in the following passage: The main items to be taken into account in estimating the value of shares are the earning power of the company and the value of the capital assets in which the shareholder's money is invested. But a prudent purchaser does not buy shares in a company which is a going concern with a view to winding it up, so that the more important item is the determination of the probable profit which the company may be reasonably expected to make in the future, because dividends can only be paid out of profits and a prudent purchaser would be interested mainly in the future dividends which he could reasonably expect to receive on his investment. Further, a prudent purchaser would reasonably expect to receive dividends which would be commensurate with the risk, so that the more speculative the class of business in which the company is engaged the greater the rate of dividend he would reasonably require. In order to estimate the probable future profits of a company it is necessary to examine its past history, particularly the accounts of those years which are most likely to afford a guide for this purpose. In order to estimate the rate of dividend that a prudent purchaser could reasonably require on his investment it is necessary to examine the nature of the business and the risks involved and to seek the evidence of business men, particularly members of the stock exchange and experienced accountants, who can testify to the appropriate rate from the prices paid for shares in companies carrying on a similar business listed on the stock exchange or from private sales of shares in such companies or from their general business experience. 1. (1944) 69 C.L.R., at p. 6. 2. (1947) 74 C.L.R. 358. 3. (1947) 74 C.L.R., at pp. 361-362. 4. (1947) 74 C.L.R., at pp. 373-374. 5. (1947) 74 C.L.R., at p. 362.

In Abrahams v. Federal Commissioner of Taxation [1] Williams J. dealt with the valuation of shares in an investment company. Counsel for the respondent produced a copy of the original judgment delivered by Williams J. and pointed out that the judgment as reported [2] omits one sentence which was contained in the judgment as originally delivered. The sentence is quoted by Mr. Adamson in Valuation of Company Shares and Businesses, at p. 61. I would prefer to regard the judgment as reported as expressing the reasons of Williams J. in the form which after revision he considered properly expressed his views, but in any case the sentence omitted does not, in my opinion affect the sense of what appears in the report. Williams J. said [3] :

Whether assets are owned by a company or an individual, they cannot be expected to produce a higher income than is appropriate to the nature of the particular assets; and, speaking generally, it can be said that the greater the risk that an asset will not produce the anticipated income or that the capital embarked in an asset may be lost, the higher the income yield an investor, whether a company or an individual, will expect from that asset. Although a company and not its shareholders is the legal and equitable owner of its assets, the value of its assets must necessarily be reflected in the value of its shares. I have already stated in Murdoch's Case (Perpetual Trustee Co. (Ltd.) v. Federal Commissioner of Taxation) [4] and McCathie v. Federal Commissioner of Taxation [1] , and indeed it is beyond dispute, that a prudent investor, while taking care to see that his purchase money is well secured by tangible assets, would look mainly to the dividends which he could reasonably expect to receive on the shares; but it is, to my mind, also beyond dispute that such a purchaser could only reasonably expect to receive such dividends as were appropriate to the nature of the business in which the company was engaged (Smyth v. Revenue Commissioners [2] ; Crossman's Case [3] ). In the case of companies engaged in various kinds of trade, it may be relatively simple to ascertain an appropriate rate of profit or dividend yield which a prudent investor could reasonably require on the price he paid for the shares, but in the case of companies engaged in investment businesses the profit and therefore the dividend yield must necessarily vary considerably according to the nature of the assets in which the shareholders' funds have been invested. Williams J. then turned to the case before him in which the deceased and his executor, who was his brother, held equal interests in the whole of the issued capital of the companies whose shares had to be valued. After discussing the yields produced by the shares held by the companies in question he concluded [1] : "I am unable to see how an investor could possibly expect a greater gross profit yield from these companies, assuming that they were public companies, than the percentages already mentioned," (that is the percentages actually yielded by the companies whose shares were held) "or a greater dividend yield than this amount less the amounts required to meet the reasonable expenses of running the companies, taxation, and such sums as the directors should consider necessary to allocate to reserves. I am also unable to see how an investor could expect to purchase such shares on the stock exchange for below par. Certainly he could not expect to obtain them at a price which would show a net profit yield of these amounts." Later in his judgment he said [2] : The final assessment of the value of the shares must be made principally on the basis of the income yield (including the strong probability of the distribution of accumulated profits in at least three of the companies) but where, owing to exceptional circumstances, the valuation on this basis presents "enormous difficulties" it is legitimate to rely more than usual on the assets value. 1. (1944) 70 C.L.R. 23. 2. (1944) 70 C.L.R., at p. 35. 3. (1944) 70 C.L.R., at pp. 35-36. 4. (1942) 65 C.L.R. 572. 5. (1944) 69 C.L.R. 1. 6. (1931) Ir. R. 643, at p. 656. 7. (1934) 152 L.T. 98, at p. 102. 8. (1944) 70 C.L.R., at p. 39. 9. (1944) 70 C.L.R., at p. 42.

No one could quarrel with the general statement of principle made by Williams J. [3] . However, in my opinion it is not right to regard him in that statement as laying down an inflexible rule that in the case of an investment company the appropriate rate of capitalization is the average applicable to the investments held. The value of the shares in a holding company or an investment company must certainly be influenced by the value of the shares which it holds. Whether that influence on the value is over-whelming or not depends on all the circumstances. If the shareholding to be valued is a majority holding the value of the underlying assets may assume great importance. Where, however, one is required to make a valuation of a minority shareholding in a company (Company A) which holds a very substantial parcel of shares in a public company (Company B), and when Company A is so controlled that it appears probable, if not certain, that it will, notwithstanding the fluctuations of the market, retain its shares in Company B, it would be quite unreal to say that a prudent purchaser of shares in Company A would necessarily expect to pay a price which would give a yield no greater than that produced by Company B, because on becoming a shareholder in Company A, he would not enjoy all the advantages available to a shareholder in Company B, and in particular would not be able to obtain the capital gain that would result from a favourable realization of the shares in the latter company. So to hold would be to substitute an artificial and arbitrary criterion for a test designed to establish a real value. However, in my opinion Williams J. did not intend to lay down any such rule. In the second passage which I have quoted from his judgment [1] , which is expressed more categorically than the earlier passage [2] , he is dealing, not with general principles, but with the facts of the case before him. In my opinion, Messrs. Mirams and Adamson were wrong in regarding the decision in Abrahams v. Federal Commissioner of Taxation [3] as requiring them slavishly to adopt a rate of capitalization derived arithmetically from the average yield of the investments held. The appropriate rate of capitalization cannot be fixed automatically, but requires a consideration of all the circumstances. I accept the evidence that a prudent buyer of shares in Myer Investment would be likely to expect a greater yield than that produced by the shares held by that company.

1. (1944) 70 C.L.R., at pp. 35-36. 2. (1944) 70 C.L.R., at p. 39. 3. (1944) 70 C.L.R., at pp. 35-36. 4. (1944) 70 C.L.R. 23.

The next question of law to be considered is whether any of the provisions of s. 16A of the Act should be applied in the valuation. As Williams J. pointed out in Federal Commissioner of Taxation v. Sagar [4] , the section does not operate automatically. In the first instance the Commissioner must be of the opinion that it is necessary to apply its provisions before it has any effect. However, sub-s. (2) provides that the Court may substitute its own opinion for any opinion of the Commissioner, and the Court would not allow the Commissioner's application of the provisions of the section to stand if it considered that a satisfactory value would not be reached by applying the section (see Commissioner of Taxes (Tas.) v. Perpetual Trustees Executors and Agency Co. of Tasmania Ltd. [1] ). In the present case the Commissioner in his assessment said: "The provisions of s. 16A (1) (a) of the Estate Duty Assessment Act have been applied to the valuation shares (sic) in Stonnington Investment Pty. Ltd." Before me it is contended on the behalf of the respondent that s. 16A (1) (a) should be applied in the case of all the shares being valued. Whether or not the Commissioner has formally applied the provisions of s. 16A (1) (a) I should not apply those provisions unless I consider that to do so is to adopt the method most calculated to place a fair value on the shares at the date of death (Federal Commissioner of Taxation v. Sagar [1] ). I do consider that if s. 16A (1) (c) were not applied in the valuation of the shares in Stonnington, it would be appropriate to apply s. 16A (1) (a), since the deceased completely controlled that company and a purchaser of the deceased's shareholding would have been in a position to bring about such alteration of the articles of that company as was necessary to satisfy the requirements of the stock exchange. It seems to me, however, that the application of s. 16A (1) (a) would not be calculated to give a fair valuation of the shares in Myer Investment. The shares in that company held by the deceased, and in which the deceased had an interest, were proportionately small in number. A purchaser of those shares would have acquired them with such disadvantages as the provisions of the articles entailed. It is true that the power given by the articles to the directors was a fiduciary power to be exercised bona fide for the benefit of the company (Abrahams v. Federal Commissioner of Taxation [2] ) but that does not mean that the presence of restrictive articles has no effect on the value of a minority holding. From a practical point of view, the possibility of obtaining redress in the courts against a wrongful exercise of a power given by the articles is not a substitute for articles under which the power is not conferred. In the present case it seems to me clear that a prospective purchaser would have been influenced to some extent by the provisions of the articles, and I can see no reason in justice to ignore this fact in making a valuation. It is true that the depreciatory effect of articles placing restrictions on the transfer of shares and giving a right of preemption may be exaggerated. They are not wholly detrimental to minority shareholders, who may derive the benefit of being able to purchase more shares in the company when the directors exercise their power of offering shares for sale to existing shareholders. Nevertheless there is no necessity to ignore their existence in the present case. I hold that it has not been shown that it is necessary, for the purpose of placing a fair value on the shares in Myer Investment, to apply the provisions of s. 16A (1) (a). It is perhaps unnecessary to add that if that provision were applied it would not require the valuation to be made on the assumption that the company was listed on the stock exchange - Federal Commissioner of Taxation v. Sagar [1] .

1. (1946) 71 C.L.R. 421, at p. 425. 2. (1969) 118 C.L.R. 325, at pp. 328-329. 3. (1946) 71 C.L.R., at p. 428. 4. (1944) 70 C.L.R., at p. 43. 5. (1946) 71 C.L.R., at p. 425.

The Commissioner did not formally determine that s. 16A (1) (c) should be applied in the valuation of any of the shares in question but, notwithstanding that fact, I have power to apply the paragraph if it seems to me necessary to do so to bring about a fair valuation of the shares (see Federal Commissioner of Taxation v. Sagar [2] ). No one contends that par. (c) has any application to the valuation of the shares in Myer Investment, but Mr. Mirams applied it in his valuation of the shares in Stonnington. That company was formed, and the deceased's shares in Myer Investment were transferred to it, less than eighteen months before the deceased died. Stonnington was simply a means by which the deceased held shares in Myer Investment. He had complete control of Stonnington and was able to put that company into liquidation and restore to himself the direct ownership of the shares in Myer Investment if he had wished to do so. A purchaser of his shares in Stonnington would not be deterred by the restrictive provisions in the articles of Myer Investment if he wished to realize the full value of his shares in Stonnington by putting that company into liquidation. It seems to me that to determine the real value of the shares in Stonnington, it is necessary to apply s. 16A (1) (c) and adopt as the value of the shares such sum as the holder would have received if that company were being voluntarily wound up on the date of death.

A final question of law remains for consideration which, although important to the method of valuation adopted by Mr. Mirams and Mr. Adamson, is only peripheral if that method be rejected. That is whether in arriving at the value of the shareholding of Myer Investment in Myer Emporium it is proper to allow a discount from the ordinary market price because of the size of the parcel of shares held. In Myer v. Commissioner of Taxes [3] Martin J., who was called on to value for duty purposes the shares held in Myer Investment by Sidney Baevski Myer, made a valuation by reference to the assets of Myer Investment and for that purpose found it necessary to value the holding by that company of its shares in Myer Emporium. (Of course, the present case is, in that respect, distinguishable from that case, because Sidney Baevski Myer held the majority of the shares in Myer Investment.) In his valuation of the shares in Myer Emporium Martin J. allowed a reduction (from 26s. 0d. to 23s. 6d.) to take into account the depressing effect of a large parcel of shares being placed on the market. However, Mr. Adamson in his valuation relied upon the remarks made by Williams J. in Kent v. Federal Commissioner of Taxation (Martin's Case) [1] where that learned judge was required to value a large holding of shares in which the deceased had an interest. Williams J. there said:

Evidence was also given that it would be difficult to sell such a large parcel of shares, and several of the expert witnesses contended that their value as a whole should be reduced on this account. But the object of estimating the price that would be agreed upon between a reasonably willing vendor and a reasonably willing purchaser is to ascertain the full value of the property to the owner, and the Court therefore assumes a hypothetical purchaser or purchasers who will be ready and willing to purchase the whole parcel. Even if there is only one purchaser, he must still pay this full value. There is in fact no passing of the property in the shares at the date of death as there is in the case of a resumption. Even if the shares had to be sold, they could be gradually disposed of over a considerable period, and in the meantime the vendor (in the present case the trustee of the settlement) would be receiving the dividends from the unsold shares. If the contention were sound, it would mean that, on a resumption under a statute which provided for the payment of compensation, the resuming authority could acquire the undertaking of a company more cheaply by acquiring all the shares than by acquiring its assets. With the greatest respect to Williams J., whose experience in this branch of the law is well recognized, I am unable to agree with some of these remarks. No doubt the Court assumes the existence of a hypothetical purchaser who is ready and willing to purchase the whole parcel of shares, at their real value. The question to be determined however is whether the real value of the holding is reduced by its size. This seems to me to be a question of fact and not of law. In some cases the size of the holding may increase the value, as where the parcel of shares is sufficient to carry a special resolution: Perpetual Trustee Co. (Ltd.) v. Federal Commissioner of Taxation [2] . If, however, in fact the size of a parcel depreciates its real value, there is no principle of law that requires a fictitious and excessive value to be attributed to it for purposes of estate duty. The fears of Williams J. that a different view might enable a resuming authority to obtain an undue benefit would, I think, prove unfounded, for in the case of a valuation for compensation purposes any doubt would be resolved in favour of a more liberal estimate, as Dixon J. said in Commissioner of Succession Duties (S.A.) v. Executor Trustee and Agency Co. of South Australia Ltd. [1] . In the present case, the evidence supports the view that in valuing the assets of Myer Investment a reduction should be made to allow for the size of the holding in Myer Emporium. If this is done, the asset backing per share of Myer Investment is reduced by about one shilling. Since I reject the method adopted by Messrs. Mirams and Adamson, and regard the asset backing only in a general way the reduction is not of great significance. 1. [1937] V.L.R. 106. 2. Unreported, 22nd October 1945. 3. (1942) 65 C.L.R. 572, at p. 578. 4. (1947) 74 C.L.R. 358.

I now turn to the crucial question in the present case, namely, what yield would a prudent purchaser of shares in Myer Investment at the date of death have expected from his investment. That question is a very open one because there were no listed shares truly comparable with those in Myer Investment. However, I am unable to accept the opinions of Mr. Mirams and Mr. Adamson on this point and consider that the yields they suggested were much lower than a prudent purchaser would have required. In forming their opinions they were influenced by a view of Abrahams v. Federal Commissioner of Taxation [2] which I hold to be erroneous. The attempts made by Mr. Adamson in cross examination to suggest the kind of buyer to whom the shares would have been attractive at 4.2% was, I thought, completely unsuccessful and this fact detracts from the weight of his opinion on this matter. Moreover, when the values at which Messrs. Mirams and Adamson arrived are tested by comparing them with the prices actually obtained by Mr. Beresford J. Myer when he sold his shares in 1958 and by Warrender Estates (Aust.) Pty. Ltd. four year later they are seen to be far too high. Turning then to the evidence called for the appellants, I cannot agree with Mr. Baker, or with the written opinion of Mr. Clayton, that the rate obtained at the material date from investment on first mortgage, or in fixed interest securities, affords any useful comparison, but I do agree with Messrs. Hancock and Traxton that the yield obtainable from publicly listed investment companies provides some guide to that which a prudent purchaser of shares in Myer Investment would have sought. Taking that yield as a starting point, one must make allowance, on the one hand, for the fact that the shares would have been relatively difficult to market because the company was unlisted and because of the restrictive provisions in the articles and, on the other hand, for the strength of the asset backing. A prudent purchaser would have expected that the underlying assets would grow in value and that in consequence the shares in Myer Investment would produce a greater income and would themselves appreciate in value. However, such a purchaser would have recognized that it was likely that for many years to come Myer Investment would retain its shares in Myer Emporium in good times and in bad and would not in relation to those shares pursue the policy that one would expect of an ordinary investment company of keeping a close watch on its investments and realizing them when it was propitious to do so. In all the circumstances in my judgment a prudent purchaser of shares in Myer Investment would have expected a yield of about 8% - the figure suggested by Mr. Traxton. I would then accept Mr. Adamson's view that after allowance for reserves Myer Investment could have been expected to have £340,000 available for dividend. Capitalizing this sum at 8%, the value of each of the 898,440 issued shares was about £4 14s. 7d. Although this figure is low when compared with the asset backing per share it is supported by the evidence of the actual sales. I find that at the material date the value of each share in Myer Investment was £4 14s. 7d.

I would then value the shares in Stonnington on the basis that the company was put into liquidation. The net assets comprised 13,055 shares in Myer Investment each of which I value at £4 14s. 7d., together with a net cash balance of £3,957. There are 39,165 issued shares so that the value of each share was £1 13s. 7d.

I hold that for the purpose of the assessment of estate duty in the estate of the deceased each share in Myer Investment should be valued at £4 14s. 7d. and each share in Stonnington at £1 13s. 7d.

I allow the appeal and refer the matter back to the Commissioner with a direction to amend his assessment in accordance with my judgment. I order that the respondent pay to the appellants their costs to be taxed.