What was the cost base of the JAH shares?
91 This is the second issue on the appeal.
92 Ms Healey contends that, if CGT event E2 applies (as I have concluded it does), the general rule in s 110-25(2)(a) ITAA 97 is affected by the 'market value substitution rule' in s 112-20(1)(c) ITAA 36. She also argues that the market value of the JAH shares at the relevant time was $18,509,250 - meaning that the cost base of the JAH shares was the same as their eventual capital proceeds and there was accordingly no net capital gain.
93 It is also necessary for Ms Healey to prove that Newcode did not 'deal at arm's length' in acquiring the JAH shares. Section 112-20(1)(c) ITAA 97 provides:
(1) The first element of your cost base and reduced cost base of a CGT asset you acquire from another entity is its market value (at the time of acquisition) if:
…
(c) you did not deal at arm's length with the other entity in connection with the acquisition.
94 By s 995(1) ITAA 97 it is provided that in determining whether parties deal at arm's length, one must consider any connection between them and any other relevant circumstance.
95 The parties accept that the authorities establish these principles:
1. Whether the parties dealt at arm's length is a question of fact: Trustee for the Estate of the late AW Furse No 5 Will Trust v Commissioner of Taxation (1990) 91 ATC 4007 (at 4017); Granby Pty Ltd v Federal Commissioner of Taxation (1995) 129 ALR 503 (at 507); Commissioner of Taxation v AXA Asia Pacific Holdings Ltd (2010) 189 FCR 204 (at [106]).
2. There is a distinction between dealing at arm's length and an arm's length relationship: ACI Operations Pty Ltd v Berri Ltd (2005) 15 VR 312 (at [224]). Whether the parties did not deal at arm's length is not to be decided by answering whether the parties were not in an arm's length relationship. The fact that the parties are themselves not at arm's length does not mean that they have not, in respect of a particular dealing, dealt with each other at arm's length: Re Hains; Barnsdall v Commissioner of Taxation (1988) 81 ALR 173 (at 177); Trustee for the Estate of the late AW Furse No 5 Will Trust (at 4014-4015).
3. Whether the parties dealt at arm's length involves an analysis of the manner in which the parties to a transaction conducted themselves in forming that transaction: Granby (at 506).
4. At issue is whether the parties have acted separately and independently in forming their bargain: Granby (at 507); ACI Operations Pty Ltd (at [226]) (did the parties apply 'independent separate wills'); AXA Pacific Holdings Ltd (at [105]). There should be an assessment of whether the parties dealt with each other as arm's length parties would be expected to behave so that the outcome is a matter of real bargaining: Trustee for the Estate of the late AW Furse No 5 Will Trust (at 4015); Granby (at 506 and 507); AXA Pacific Holdings Ltd (at [105]).
5. It is relevant to consider the nature of any relationship between the parties: Trustee for the Estate of the late AW Furse No 5 Will Trust (at 4015); Granby (at 506).
6. If the parties are not at arm's length the inference may be drawn that they did not deal with each other at arm's length: Granby (at 506); ACI Operations Pty Ltd (at [225]).
96 The identity of the guiding minds and will of the transacting corporations may be relevant considerations. At the relevant time the officers of the contracting entities were:
1. in the case of Newcode, a Mr Davis (until 18 October 2005) and a M/s Kuhnert (from 18 October 2005). (Mr Davis was also the sole shareholder in Newcode);
2. in the case of Allswan, Ms de Hollander (for the whole period) and Mr Rino Camari (until 28 May 2004). (Ms de Hollander was a shareholder in Allswan);
3. in the case of Jayport, Ms de Hollander and Mr Versteeg (for the whole period). (The shares in Jayport were held 50:50 as between Ms de Hollander and Hanscon).
97 Newcode was acting as trustee for Esteem as trustee of The Esteem Trust. Ms de Hollander was the sole director and shareholder of Esteem. However, the transacting parties, i.e. Newcode/Allswan and Newcode/Jayport had different officers.
98 Accordingly, on its face there was no self-dealing. There was no commonality as between the officers of Newcode (as acquirer) and Allswan and Jayport (as seller).
99 The relevant entities also had different directing minds so far as the acquisition of the JAH shares was concerned. The directing minds of the relevant entities were:
1. in the case of Newcode, Mr Chiera. It was Mr Chiera who signed the share transfers. (Mr Chiera also signed the declaration of trust on behalf of Newcode); and
2. in the case of Allswan and Jayport, Ms de Hollander; she signed the share transfers.
100 Again, there was no commonality as between the directing minds of Newcode (as acquirer) and Allswan and Jayport (as seller).
101 In ACI Operations Pty Ltd, Dodds-Streeton J held (at [223]) that the authorities indicated that:
an arm's length relationship is that of strangers, or parties who are unaffected by existing mutual duties, liabilities, obligations, cross ownership of assets, or identity of interests which present a capacity in either party to influence or control the other, or an inducement to serve that common interest, which might operate to modify the terms on which strangers would deal.
102 Further, her Honour went on to say (at [225-[226]) (footnotes omitted):
225 Where the parties are not in an arm's length relationship, it is recognised that the inference may be drawn that they did not deal with each other at arm's length. It may further be inferred that the resultant transaction is not arm's length.
226 Related parties may nevertheless, in some circumstances, demonstrate a dealing which displaces the inference based on their relationship. They may engage in the disinterested bargaining characteristic of strangers, applying independent separate wills. The circumstances of the impugned transaction may be such that, despite the parties' connection or common interest, the interposition of some independent process (such as the sale of shares on the stock exchange) ensures that the transaction itself is arm's length, in the sense that it could equally have been concluded by unrelated parties, consulting their own self-interest and uninfluenced by any particular association or interest in common.
103 Hill J noted in Trustee for the estate of the late AW Furse No 5 Will Trust (at [4015]):
What is required in determining whether parties dealt with each other in respect of a particular dealing at arm's length is an assessment whether in respect of that dealing they dealt with each other at arm's length as arm length parties would normally do, so that the outcome of their dealing is a matter of real bargaining.
104 Ms Healey says that the only conclusion open is that the relationship between Newcode, Allswan and Jayport was not at arm's length and critically that they did not deal at arm's length in connection with the acquisition by Newcode of the JAH shares from Allswan and Jayport. She points to the fact that Ms de Hollander was:
the sole director and shareholder of Esteem;
a beneficiary of The Esteem Trust;
a director and shareholder of Allswan; and
a director and shareholder of Jayport.
105 Newcode acquired the JAH Shares for, and held them on trust for, Esteem as trustee for The Esteem Trust.
106 Ms Healey argues that Ms de Hollander was an 'associate' of each of Jayport, Allswan and Esteem as trustee of the Esteem Trust within the meaning of that term in s 318 of the ITAA 36 and that Jayport, Allswan, Newcode and Esteem were 'connected entities' within the meaning of that term in s 995-1 of the ITAA 97.
107 Ms Healey also sought to argue that as at 13 March 2009, the Commissioner adopted the position that Jayport and Newcode were 'connected entities per the definition of s 995-1 of the ITAA 97 in that they are associates per the definition in s 318 of the ITAA 36'. At 13 March 2009, the Commissioner adopted the position that 'the acquisition of the JAH shares [by Newcode] was from associate companies Allswan Holdings Pty Ltd (Allswan) and Jayport Holdings Pty Ltd (Jayport)'.
108 In the Commissioner's notice of decision dated 21 May 2010 the Commissioner stated:
in the present case, one of the identified beneficiaries of the Esteem Trust was a director and shareholder of each of Allswan, Jayport and Esteem Holdings during the period December 2003 to 30 June 2006. It was the beneficiary, in her capacity as the sole director of Esteem Holdings, who directed that the proceeds from the sale of the JAH shares be distributed to Ms Healey [the Applicant] on 23 June 2006. This individual had the necessary connection with all related parties in the JAH share transaction and an influential role in the distribution of the capital proceeds to be regarded as an associate. It is on this basis that the Commissioner considers that the transferor and transferee were connected and that therefore CGT event E2 is the more specific event in the circumstances.
109 Ms Healey argues that given that Newcode, Allswan and Jayport were not in an arm's length relationship, there is a strong inference to be drawn that they did not deal with each other at arm's length when Newcode acquired the JAH Shares: Granby (at [17]); ACI Operations Pty Ltd per Dodds-Streeton J (at [225]); AXA Asia Pacific Holdings Ltd per Dowsett J (at [26]).
110 Ms Healey also contends (as noted at [47]) that the following facts further support that Newcode, Allswan and Jayport did not deal at arm's length in connection with the acquisition by Newcode of the JAH Shares from Allswan and Jayport:
The acts of Newcode (as trustee of The Esteem Trust), Allswan and Jayport were performed under the effective direction of Ms de Hollander.
Save for the 'Standard Transfer Form' there was no agreement, oral or written, entered into between Allswan and Newcode imposing any legal rights or obligations on either party for the transfer of the 858,334 ordinary shares in JAH from Allswan to Newcode.
Save for the 'Standard Transfer Form' there was no agreement, oral or written, entered into between Jayport and Newcode imposing any legal rights or obligations on either party for the transfer of the 341,320 ordinary shares in JAH from Jayport to Newcode.
Newcode did not pay Allswan for 858,334 ordinary shares in JAH in cash or in any other manner, rather the obligation to discharge the consideration was through a series of book entries resulting in a $3,000,000.00 unsecured indebtedness from Newcode to Allswan.
Newcode did not enter into an agreement, oral or written, with Allswan regarding the terms upon which the $3,000,000.00 indebtedness was to be paid.
Newcode did not pay Jayport for 341,320 ordinary shares in JAH in cash or in any other manner, rather the obligation to discharge the consideration was through a series of book entries resulting in a $1,318,750.00 unsecured indebtedness from Newcode to Jayport.
Newcode did not enter into an agreement, oral or written, with Jayport regarding the terms upon which the $1,318,750.00 indebtedness was to be paid.
111 As will be noted, with the exception of the first point, I do not consider these facts to have been proven. I do not consider that it is open to Ms Healey to support her contended finding that the parties did not deal at arm's length simply by reference to hearsay observations adopted by the Commissioner in 2009 audit reports of the companies. I would not regard those observations by the Commissioner in audit reports as being materially contemporaneous facts relevant to the Court's assessment of the parties' dealings as they were evidenced by contemporaneous events in 2004 and 2005. I declined to permit reliance upon case statements made by the Australian Taxation Office (ATO) as constituting admissions which could satisfy Ms Healey's burden of proof: see for example Rangdon Pty Ltd v Federal Commissioner of Taxation (2006) 62 ATR 583 (at [11], [12], [14], [15] and [25-[29]).
112 Ms Healey also sought to rely upon evidence contained in an affidavit of Mr Metcalf, her accountant and, more specifically, documentary evidence contained in that affidavit. However, it is common ground and beyond dispute that Mr Metcalf, who introduces the documentary evidence, has no personal knowledge of the events concerned. His first involvement was in March 2008, well beyond the date of the transactions under consideration.
113 In my view there is a real difficulty with Ms Healey's argument that the parties were not at arm's length. There was just insufficient evidence on which a conclusion is capable of being reached one way or the other. It is not permissible to speculate as to these matters. Nor is there any basis for a view to be formed that evidence which may have assisted Ms Healey in proving this point was unavailable to her. The lack of evidence as to the parties' relationships, dealings and motivations in entering into the transaction precludes any sound finding on the balance of probabilities as to the true nature of the relationship between the relevant parties.
114 The identities of the officers and members of the corporate entities reveal different individuals in control. It is known that the transacting parties, that is, Newcode/Allswan and Newcode/Jayport had different officers. There is no commonality between the officers of Newcode as acquirer and Allswan and Jayport as seller. There were also different directing minds and wills so far as the acquisition of the JAH shares were concerned. Mr Chiera signed the share transfers. Neither Mr Davis, Mr Chiera nor Ms de Hollander were called to give any evidence to support the contention of the absence of an arm's length transaction.
115 The Commissioner submits, and I accept, that the fact that an inference may be drawn does not mean that it must be drawn. Granby is an example of a case where no inference was drawn, and the parties were found to have transacted at arm's length, because there was no evidence that: (1) the parties acted in concert with an ulterior motive; or (2) one party accepted dictation or instruction from the other to the exclusion of the exercise of independent minds (at 507).
116 In the present instance, beyond documents and Australian Securities and Investments Commission (ASIC) searches Ms Healey adduced no evidence as to the dealings between Allswan and Jayport, on the one hand, and Newcode, on the other, whereby Newcode acquired the JAH shares.
117 The Commissioner also relies on the fact that there are two different prices on the two tranches. Newcode purchased Allswan shares at $3.4951 per share and Newcode purchased Jayport shares at $3.8637 per share which, it is contended, suggests a bargaining process. There would be no need for different prices unless there had been a bargaining process and the application of independent and separate wills having regard to differing circumstances and desires. For my part, I do not place weight on this submission. The parties' agreement to different prices on the two tranches is a neutral factor. It is a process which could occur whether the parties were at arm's length or were not at arm's length.
118 The other factor which the Commissioner relies on is the fact that Hanscon waived its pre-emptive rights in relation to Newcode's acquisition of the JAH shares. For the Commissioner, it is argued that in a normal commercial environment one would expect that if, due to the lack of a real bargaining process the price struck was at a significant undervalue, Hanscon would be expected to have exercised its pre-emptive rights to snap up a bargain as it were. I am more inclined to accept this submission for the Commissioner. There is no other explanation advanced or evidence called to throw light on why Hanscon might not exercise its pre-emptive rights.
119 On this key topic on which Ms Healey bears the onus, there was a general paucity of evidence as to the parties' relationships, dealings and motivations in entering into the transaction. No sound finding can be made on the balance of probabilities as to the true nature of the relationship between the relevant parties. The absence of evidence is particularly significant when it is noted that it was Ms de Hollander who entered the arrangement for the disposal or transfer of the shares from Allswan and Jayport to Newcode. Further, it was Ms de Hollander who was a director and member of Esteem. Additionally, it was Ms de Hollander who signed the resolution that distributed the income to Ms Healey. Ms de Hollander who is well known to Ms Healey and is someone with whom she has had previous property dealings, someone who she has known for 18 years, who would be capable of giving direct evidence in all these matters has not been called to give evidence.
120 Ms Healey has not proved that the dealing was not at arm's length.
121 The second question on this topic is whether Ms Healey established that the JAH shares had a market value of $18,509,250 as at 9 December 2005. This issue only arises if a conclusion is reached that Newcode, Allswan and Jayport did not deal at arm's length in connection with the acquisition by Newcode of the JAH shares from Allswan and Jayport. As indicated in the previous discussion, I am unable to be satisfied that Ms Healey has discharged the onus of proving that the relevant transactions were not at arm's length.
122 Nevertheless, if that conclusion is wrong and for completeness, I will deal with the market value question. The well established definition of market value comes from Isaacs J in Spencer v Commonwealth (1907) 5 CLR 418 (at 441) where his Honour states:
To arrive at the value of the land at that date, we have, as I conceive, to suppose it sold then, not by means of a forced sale, but by voluntary bargaining between the plaintiff and a purchaser, willing to trade, but neither of them so anxious to do so that he would overlook any ordinary business consideration. We must further suppose both to be perfectly acquainted with the land, and cognizant of all circumstances which might affect its value, either advantageously or prejudicially, including its situation, character, quality, proximity to conveniences or inconveniences, its surrounding features, the then present demand for land, and the likelihood, as then appearing to persons best capable of forming an opinion, of a rise or fall for what reason soever in the amount which one would otherwise be willing to fix as the value of the property.
123 Ms Healey points to the fact that the ATO on their website refers to an acceptable arm's length value as possibly being 'one based on recent arm's length commercial transactions involving the unlisted shares'. See also Australian Trade Commission v WA Meat Exports Pty Ltd (1987) 7 AAR 248 (per Beaumont, Wilcox and Burchett JJ (at [13]).
124 The contention for Ms Healey is that the market value of the JAH shares as at 2 November 2005 was the price at which they were ultimately sold, namely, $18,509,250 on the basis that Ascot is an unrelated party to Newcode, that Ascot and Newcode agreed by the Ascot sale agreement of that date that Ascot would pay Newcode that sum for Newcode's JAH shares, that Ascot and Newcode dealt at arm's length in connection with the acquisition by Ascot of the JAH shares from Newcode and the Commissioner has treated the Ascot sales agreement as an arm's length transaction, accepting the $18,509,250 paid by Ascot for Newcode's JAH shares as being market value.
125 It follows, according to Ms Healey, that one should treat the Ascot/Newcode transaction as being a contemporaneous arm's length commercial transaction involving the JAH shares which would therefore fix their value as being no less than $18,509,250.
126 Ms Healey contends that as she has established that the capital value of the shares as at 9 December 2005 was no less that $18,509,250, there was no capital gain on their sale. As a result The Esteem Trust did not derive a net capital gain in the amount of $14,190,500 within the meaning of s 102-5(1) ITAA 97 for the year ended 30 June 2006.
127 There is a conspicuous absence of any expert evidence adduced by Ms Healey to support the argument that the market value of the shares as at 9 December 2005 was $18,509,250. The best evidence relied upon by Ms Healey is the transaction concerning Ascot and the submission that I should infer the capital value from the Ascot transaction.
128 Once again, Ms Healey adduced no expert evidence as to the market value of the JAH shares as at 9 December 2005. Rather, she sought to satisfy her burden of proof by inferring market value based on the sale price to Ascot. Again, other than as to limited documents, Ms Healey adduced no evidence as to the dealings between Ascot and Newcode whereby Newcode sold the JAH shares.
129 In the absence of any expert evidence or evidence as to the parties' dealings, it would be unsafe to conclude, on the balance of probabilities, that the market value of the JAH shares as at 9 December 2005 was $18,509,250.
130 To use the language of Isaacs J in Spencer (at 441), in the absence of evidence as to the parties' dealings it cannot safely be assumed that: (1) the sale was by 'voluntary bargaining' and not a 'forced sale'; (2) the parties were 'willing to trade' but neither 'so anxious' that they would overlook an ordinary business consideration; and (3) the parties (particularly Ascot) were perfectly acquainted and cognisant of all circumstances which might affect value.
131 There was no evidence at all in relation to the dealings between Ascot and Newcode. There is no basis on which I could safely conclude on the balance of probabilities that the market value of the JAH shares as at 9 December 2005 was $18,509,250 especially when one has regard to the fact that Hanscon was receiving a different price for its JAH shares than the price being received by Newcode. As to this, the total price of $43,500,000 was split 57.45%:42.55% between Hanscon and Newcode. This is reflected in cl 2.3 of the shares sale agreement (Mr Metcalf's affidavit of 15 August 2011 at 126). At this time, Hanscon held 1,300,348 shares and therefore its shares were priced at $19.2185 per share. The same mathematics in relation to Newcode shares indicates a price at $15.4288 per share. This marked difference in actual price specifically at the time of the events concerned does not add weight to the argument that the price received by Newcode was the market price. Rather, it asks more questions that it answers. In addition, also unexplained, is sch 5 of the share sale agreement under which JAH was to pay dividends to Hanscon and Newcode prior to completion, suggesting that Hanscon was to be receiving even more consideration arising from the commercial transactions than the already favourable price per share. Again, while I draw no strong conclusions one way or the other about this, it is necessary only to observe that the disparity in dealings does not add weight to the contention that the price received for the Newcode parcel was market value.
132 In relation to all these matters and all of the facts and circumstances surrounding the transaction, there is a distinct paucity of evidence on which to draw and from which an inference consistent with the argument advanced by Ms Healey might safely be drawn.
133 It is not open to make a finding as to the market value of Newcode's JAH shares based solely on inference by reason of the sale price to Ascot. Accordingly, Ms Healey has not satisfied her burden of proof in establishing that the market value of Newcode's JAH shares at the relevant time was $18,509,250.