J C Williamson's Tivoli Vaudeville Pty Ltd v Federal Commissioner of Taxation [1929] HCA 33

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amount of stamp duty payable on a transfer of certain mining leases. The consideration stated in the agreement for sale was £400,000 whereof the sum of £300,000 was to be paid and satisfied by the issue of 300,000 fully paid-up shares in the capital of the company and £100,000 in cash on the completion of the transfer. The Court held that the consideration for the sale was £400,000 and not shares in whole or in part. Higgins J. said (1) : - * It is true that as to £300,000, part of the consideration, the vendors were to be paid and satisfied by the allotment and issue of 300,000 fully paid-up shares of £1 in the capital of the company ; and that as to the balance, £100,000, which was to be paid in cash on completion of the transfer of the leases, the vendors were to apply for 100,000 shares and pay for them on application in full. But these collateral stipulations are quite consistent with the consideration being, in truth and in fact, as expressed, a money price, £400,000. Shares cannot be issued at a discount; the capital, which they represent, has to be paid for in money or in kind; and in this case, it has to be paid in money - the money which was to come to the vendors for the leases." In that case, as in this, there was nothing to show that the consideration as stated in the agreement was fictitious or merely colourable. The contract in the present case was in substance that the Company should pay the vendor £170,000 as purchase-money of the leases and that the vendor should pay to the Company £170,000 in payment of £1 each on 170,000 shares in the Company to be issued to him as fully paid up. The transaction was carried out by appropriating the £170,000 payable to the vendor by the Company in payment of the £170,000 payable by him to the Company on the shares which he had agreed to accept in satisfaction of the amount payable to him as consideration for the sale of the leases. The £170,000 stated in the agreement as the consideration for the sale of the leases was paid by the Company by agreed set-off against the amount payable by the vendor on the shares allotted to him. That discharge of an obligation by set-off operates as payment, and even as payment in cash, is clear from the decision in Spargo's Case (2). In my opinion the facts agreed on in this case show that the taxpayer paid £170,000 for the transfer to it of the

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subscribed for contributing shares, and owed the company the whole subscription money, which could have been sued for. On the other hand, the company by an independent agreement bought his property and owed him the price in cash as a debt. The Court allowed the two pecuniary debts to be set against each other, and each debt was paid in cash without the form of passing the money backwards and forwards. That is the way also in which the Privy Council viewed the matter in Larocque's Case (1), namely, the existence of two independent agreements, each creating a liability to pay presently in cash. Such an agreement as the present, said Lord Macnaghten, he regarded as contravening a statute requiring shares to be paid for in cash. That pronouncement, which in itself is sufficient to exclude Spargo's Case (2), is only the recognition of a very distinct series of decisions dating back sixty years. In 1879 In re Government Security Fire Insurance Co. - White's Case (3) was decided by James, Brett and Cotton L.JJ., which, if sound law, leaves, as to both contentions, no loophole of escape in the present case. There a newspaper proprietor did work for a company, and made a money claim against the company in respect of part of which, £30, they issued to him by agreement six fully paid-up shares of £5 each. No contract was filed under sec. 25 of the Act of 1867, so that it became a question of whether in law there had been a cash payment for the shares. It would be impossible, I think, to find a case more directly in point, or more decisive. James L.J. said (4) : - * The bargain was that Mr. White should accept payment in shares, and must not look for cash. Therefore there never was that money demand which was capable of being, I do not say set off in the ordinary legal sense, but set off by the parties meeting and agreeing to put debt against debt. That being so, it seems to me utterly impossible to bring the case within Spargo's Case." Brett L.J- said (5) : - '' Now he has not actually paid for these shares in cash. He did not take any money out of his pocket in cash and pay for these shares. The only question, therefore, is whether there has been a transaction which is equivalent to a payment in cash in point of law." Then (6), having examined the contract and found that

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consider a question greatly canvassed in this case, namely, the effect of a promise to pay a stated sum of money to be paid by paid-up shares. Referring to what is in fact the doctrine of Spargo's Case (1), Cotton LJ. said (2): - ''In my opinion, it would be wrong to apply that principle to a case where the only transaction which is claimed to amount to a payment in cash is an agreement to be paid in shares, which is embodied in the same resolution as that which allots him the sum in respect of which he is to take the shares." Bowen L.J. said (3) unless paid-up shares were given the company would not fulfil their contract. Fry L.J. said (4) : " I think it plain that a mere agree- ment to give money contemporaneous with an agreement to take shares cannot be a payment in cash." In In re Rosherville Hotel Co. - Roberts' Case (5) there was an agreement between vendors to a company and the company, the second clause stating the considera- tion as £3,000. Clause 4 provided that the £3,000 should be paid £1,000 in cash and £2,000 in fully-paid shares. The shares were allotted. No contract was registered. Held, by Stirling J., that the shares had not been paid for in cash. Spargo's Case was cited. White's Case (6) was acted on. Mr. Buckley, of counsel, referred to Lord Selborne's decision in In re New Zealand Kapanga Gold Mining Co.; Ex parte Thomas (7), which was to the effect that in such circumstances the shares were not paid up in cash. In Credit Co. y. Pott (8) Lord Selborne L.C. restated the Spargo doctrine. The distinction where independent agreements exist, each resulting in a purely money claim, is at the root of the matter, as shown by Larocque's Case (9) already mentioned and the Barrow-in- Furness &c. Co.'s Case (10). In the Johannesburg Hotel Co.'s Case (11) Fry .J. observed that the contract to take paid-up shares in payment of property does not raise cross pecuniary debts which to avoid circuity may be used to extinguish each other mutually, and so work a virtual payment in cash. 'And the learned Lord Justice said: " A contract to take fully paid-up shares creates a liability to take the shares, but no liability to pay money, and no debt under any circumstances."

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During the argument reliance for the taxpayer was placed on Palmer's Company Precedents. The reference is adverse. In the 5th ed. (1891), at p. 99, after citing sec. 25 of the Act of 1867, this is said : - " Hence, whenever an agreement provides for the issue of paid-up or partly paid-up shares as the consideration or part of the consideration for property or rights sold or services rendered to the company, the agreement should be duly filed pursuant to the above section before the shares are allotted, otherwise the allottee will be liable to pay the nominal amount thereof in cash.' The form 15 at p. 113 undoubtedly contemplates a contract in the form as in Roberts' Case (1), but there is appended a cautionary note as to registering the contract, and referring back to p. 99, a note scarcely necessary. The quotation from p. 99 is repeated at p. 130 of the 6th ed., the last before the repeal of the 25th section of the Act of 1867, and at pp. 134-135 the cases I have cited up to 1895 are mentioned, with others to the same effect. There is nothing contrary to this in the Bullfinch Case (2). I cannot there find any statement that the consideration was payable or was paid "in cash," or that a pecuniary liability or debt was created. Spargo's Case (3) was never mentioned, nor had the Court any concern with what we are considering here. What was held, rightly or wrongly, was that the amount of the consideration was for the purposes of the particular Act to be taken at the agreed amount, £400,000. Two members of the Court, Griffith C.J. and Barton J., based their decision avowedly (4), not on the cash price mentioned, but on the nominal value of the shares being taken conclusively as their value. I am not concerned with the accuracy of that decision as applied to its circumstances, for in my opinion it has no relation to the point we have to consider. I am not at present prepared to assent to it. If it is in conflict with the cases I have cited, it is certainly erroneous, and sitting here it would be our duty to say so. I leave that case out of consideration for present purposes.

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Taylor (1) said : - ' What does 'worth' mean? It means worth in the sense of the real value to be ascertained in some manner. There can be no difficulty in ascertaining it; it does not mean nominal value. A thing may be of the nominal value of £100,000, or, as in this case, £1,000, and yet not be worth a farthing." The learned Lord Justice was there speaking of shares in a company. 3. Value of Shares. - With respect to the conclusiveness of the agreed value of the shares, or their nominal value, the Crown cannot, as I conceive, even apart from any special statutory provision, be for a moment bound by some arbitrary value, however honest it be, for mistaken it may still be, that parties for their own inscrutable purposes choose to affix to property. Still less, when in a case like the present a man simply declares for himself and for his own purposes, there being no bargaining whatever. In this case, instead of £170,000 the figure might as well have been doubled, and would then have had more efficacy in the taxpayer's favour. Hunter v. The King (2) is a clear authority based merely on general principles that where income tax deductions are claimed, the reality and not the conven- tions of the parties must prevail. Payment as between them is not necessarily payment where the Crown revenue is concerned. See particularly per Lord Robertson and Lord Lindley. There is the strongest inherent reason for not permitting any but actual and real deductions in income tax assessments, and for requiring when disputed that the taxpayer claiming them, and alone in a position to do it, should give the necessary proofs. Especially is that so when the claim is for an exceptional immunity, as in the present case. Whether what is given in payment is money or money's-worth, its true value, and not its alleged value, is all that the taxpayer can rightfully claim as a deduction under this proviso. I discard all theories and fictions and rules laid down in cases for quite other purposes having no real relevancy to the purpose of this proviso. I regard it as a plain business question, which the Commis- sioner or the Board, as the case may be, has almost in the very words of the proviso to consider, namely: How much money in coin, or in a form then convertible into coin, has it been proved to his or their satisfaction that the taxpayer actually gave for the

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and guidance, the Act itself. Sec. 23 takes the whole assessable income as a basis, and then directs deductions of losses and outgoings in producing that income, but excludes capital outgoings. Some- times deductions specified are directly described. Others are either left to the judgment of the Commissioner or are dependent on his being satisfied of some circumstance. Sec. 24 allows a special deduction. But sec. 25 is a negative section. It forbids certain matters being allowed as deductions "in any case." So far, the prohibition is absolute. There are, however, as to some of those matters, one possible relaxation, and one only. That is, where something is established to "' the satisfaction of the Commissioner " he "may" allow a deduction. Now, one of the items expressly prohibited by sec. 25 as a deduction is " (i) any wastage or deprecia- tion of lease or in respect of any loss occasioned by the expiration of any lease.' Then comes the permitted relaxation by way of proviso. The only relevant deduction possible is one that "the Commissioner may allow as a deduction," namely, the stated annual proportion of '' an amount for the assignment or transfer of a lease of premises . . . used for the production of income." But the express condition on which the Legislature has insisted before such a deduction is even permissible is that "it is proved to the satis- faction of the Commissioner that" the taxpayer "has paid" the "amount." Then and then only is the Commissioner at liberty to allow a deduction, which is by dividing "the sum so paid" &c. How in the face of that very explicit language any Court can compel the Commissioner or the Board to be satisfied in such circumstances as we have here, passes my comprehension. "Proved" and " satisfaction" are not used technically, but with reference to administration. The proof which the Commissioner or the Board is to require is such as an ordinary fair-minded and prudent man holding a position of public trust in relation to the Treasury would require. The "satisfaction" is such a degree of assurance or conviction that he would desire to reach after the examination of the proof offered, as would lead him to act upon it as true if his own interests were at stake. If he would not be satisfied, supposing his

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of that year. But as the parties did not themselves raise the question and as they have now agreed that the matter may be treated as an appeal from the Board of Review or the Commissioner, I do not feel called upon to consider it. The taxpayer complains that the Commissioner has disallowed a deduction of £17,000 claimed pursuant to sec. 25 (i) of the Income Tax Assessment Act 1922-1925. This sum was arrived at by dividing an amount of £170,000, which the taxpayer claims to have paid as part of the consideration for an assignment of sub-leases, by the number of years of the unexpired period of the sub-leases at the date at which the consideration for their assignment was given. They were acquired by an agreement made between the vendor and a person who contracted for and on behalf of the taxpayer, by which it was agreed that the vendor "should sell and the taxpayer should purchase all the estate and interest of the vendor in the said sub-leases, and it was further agreed as follows : - (2) Part of the consideration for the said sale shall be the sum of one hundred and seventy thousand pounds which shall be paid and satisfied by the allotment to the vendor or his nominees of one hundred and seventy thousand fully paid-up shares in the Company of one pound each." The agreement was duly adopted by the Company and carried into effect, and the 170,000 fully paid shares of £1 each in the taxpayer were allotted to the vendor. The question, following the language of the proviso of sec. 25 (i), is whether the taxpayer in this transaction has paid any and what amount for the assignment or transfer of a lease (it being assumed that the sub-leases were of premises used for the production of income). The transaction is of an ordinary character, and represents a customary method by which a company acquires assets by the use of its share capital. In a well-known passage in Ooregum Gold Mining Co. of India v. Roper (1) Lord Watson described the legal character of such a transaction. He said : - ' A company is free to contract with an applicant for its shares ; and when he pays in cash the nominal amount of the shares allotted to him, the company may at once return the money in satisfaction of its legal indebtedness for goods supplied or services rendered by him. That circuitous process is not essential. It has been decided that, under

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Income Tax Assessment Act 1922-1925. Many cases can be cited from other branches of the law which show that it is a payment. Two interesting cases arising from the old law, which did not allow of variance in pleadings, are well stated in Selwyn's Nisi Prius, 11th ed., at p. 656 : - * The plaintiff declared in asswmpsit (Brown v. Fry (1) ) that in consideration that the plaintiff had bought of the defendant a horse for so much money, the defendant warranted the horse to be sound. In proof of the plaintiff's case a receipt, which had been given by the defendant, was produced, purporting to be a receipt of so much money, for a horse warranted sound. On cross-examination of the witness who produced the receipt, it appeared, that the plaintiff had given a mare as well as a sum of money in exchange for defendant's horse. It was objected, that there was a variance ; but Graham B., was of a different opinion, observing, that the receipt admitted that the defendant had taken the mare as money. So where the declaration stated (Hands v. Burton (2), recognized in Saaty v. Wilkin (3) ) that in consideration that the plaintiff would buy of the defendant a horse for £31 10s., to be paid by the plaintiff to the defendant, the defendant promised that the horse was sound; and that the plaintiff did buy of the defendant the horse for that price, and did pay to the defendant the said £31 10s., and then alleged as a breach that the horse was unsound ; it appeared in the proof, that the defendant agreed to dispose of his horse, which he warranted sound, to the plaintiff, for thirty guineas, but agreed, at the same time, that if the plaintiff would take the horse at that value, he, the defendant, would purchase of the plaintiff's brother another horse for fourteen guineas, and that the difference only should be paid to the defendant. The witness described it as one deal between the parties, and that, but for the latter consideration, he did not believe that the bargain would have been made. It was, therefore, objected, that the proof varied from the contract as laid, and showed rather a contract for the exchange of horses, paying the difference only in money, than an entire money payment for the horse in question. But the Court overruled the objection; Lord Ellenborough C.J. observing,

J C Williamson's Tivoli Vaudeville Pty Ltd v Federal Commissioner of Taxation [1929] HCA 33 - HCA 1929 case summary — Zoe

At a glance

Court

Decision date

Before

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Judgment (196 paragraphs)