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[1991] FCA 78
Federal Court of Australia
1991-03-15
Wilcox J
Original judgment source is linked above.
Taxation - Income tax - capital gains tax - cost base of asset - application of s. 160ZH(9)(a) (before amendment by Act No. 35 of 1990) - meaning of words "the taxpayer acquired the asset from another person" - cost base of renounceable rights to shares in BHP Gold.
Income Tax Assessment Act 1936: s. 160ZH(9)(a), s. 160A, s. 160L, s. 160Z, s. 160ZD, s. 160ZH(1)
A.H. Slater, R.F. Edmonds
Solicitors for the Appellant : Dunhill Madden and Butler
Counsel for the Respondent : D.H. Bloom QC
S.J. McMillan
Solicitors for the Respondent : Australian Government Solicit or
The orders of Wilcox J. be set aside and that in lieu thereof the appeal to this Court against the disallowance of the appellant's objection against its assessment to income tax for the year ended 30 June 1987 be allowed.
The respondent pay the costs of the appeal and of the proceedings at first instance.
Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.
This case concerns the construction of s. 160ZH(9)(a) of the Income Tax Assessment Act 1936 ("the Act") in the form which it took during the year of income ended 30 June 1987. Section 160ZH is in Part IIIA of the Act which introduced what is generally called capital gains tax into the Act in 1986.
2. The facts are not in dispute. During the 1987 year of income the appellant held 79,796 shares in the capital of The Broken Hill Proprietary Company Limited ("BHP") which it had acquired many years earlier as an investment and not for purposes of resale.
3. On 22 January 1987 BHP announced its intention to transfer its gold-mining interests (excluding its interests in OK Tedi Limited) to a new company, BHP Gold Mines Limited ("BHP Gold"). BHP Gold was a company formed by BHP and, at that time, wholly owned by it.
4. The proposal involved a sale of the gold-mining interests of BHP to BHP Gold at a price of $440 million and the issue by BHP Gold of 970 million shares at a price of 50c per share (25c par value plus 25c premium). 530 million shares were to be taken up by BHP, approximately 5 million shares were to be offered to employees within the BHP group of companies and approximately 440 million shares were to be offered to shareholders of BHP on the basis of one share in BHP Gold for every three shares held in BHP on 27 March 1987, the rights to such shares being renounceable.
5. On 5 March 1987 a further announcement concerning the proposed float of BHP Gold was made by BHP. The public announcements of 22 January and 5 March 1987 came to the attention of the appellant on or immediately following the day on which they were made.
6. On 13 March 1987 BHP and BHP Gold agreed that in consideration of BHP Gold agreeing to offer approximately 430 million shares in BHP Gold to the shareholders of BHP, BHP applied for 540 million ordinary shares of 25c each in the capital of BHP Gold to be issued at par plus a premium of 25 cents per share. On 16 March 1987 it was resolved by the directors of BHP Gold to allot 540 million ordinary shares in its capital to BHP upon receipt from that company of $270 million. The directors also approved an agreement for the purchase by BHP Gold of the relevant mining tenements. This agreement was subsequently entered into by the parties and duly completed, BHP Gold paying $440 million as the purchase price of the tenements.
7. On 20 March 1987 the appellant received from BHP Gold an offer document containing an invitation to subscribe for 26,599 shares in the capital of BHP Gold for 25 cents each and at a premium of 25 cents per share.
8. The offer document which was directed to shareholders of BHP contained full details of the proposed float and it said amongst other things:
"As a BHP shareholder you have the right to
purchase one share in BHP Gold for every three
BHP shares you now hold. If you do not wish to
take up the rights, they are yours to sell in
the normal way."
In a section of the document headed "Offer Summary" the following appeared:
"Approximately 430 million ordinary shares of 25
cents each in BHP Gold Mines Limited are offered
for subscription at a premium of 25 cents per
share payable in full on application. This
Offer is made to shareholders of The Broken Hill
Proprietary Company Limited and to BHP employees
who take up shares in BHP under the BHP Employee
Share Plan 1987 issue (the '1987 ESP issue') on
the following terms:
One BHP Gold Share for every three BHP shares held.
Entitlements calculated on your BHP holding
following the registration of transfers received
by BHP up to 5 p.m. on 27th March 1987.
Each BHP Gold share will cost you 50 cents.
You may sell your rights (except those you may
have acquired in connection with BHP shares
taken up by you under the 1987 ESP issue) on or
before 22nd April 1987. You have two choices:
Take up your full entitlement at 50 cents per share.
Sell (renounce) the rights to your BHP Gold shares.
If you do nothing, your entitlement will lapse.
Key Dates The respective timetables
applicable to this Offer for
BHP shareholders and for BHP
employees acquiring BHP shares
under the 1987 ESP issue are
as follows:
Shareholders Employees
Rights
Trading
Commences 23rd March rights not
renounceable
Books
Closing Date
for Determination
of
Entitlements 27th March 16th April
Rights
Trading
Ceases 22nd April rights not
renounceable
Applications
Close 29th April 12th May"
9. Later in the document under the heading "DETAILS OF THE ISSUE" the following appeared:
"...
Sale of Some or
All of Your Entitlement
If you wish to sell or dispose of some of or all
of your entitlement, please read carefully the
instructions on the back of the Entitlement and
Acceptance Form.
...
Entitlements Not Accepted
Any entitlement to BHP Gold Shares not accepted
or renounced by you on or before the
Applications Closing Date will be taken up by
the Underwriters pursuant to the Underwriting
Agreement and you will lose any benefits from
such entitlement."
10. Stock exchange trading in the rights to subscribe for shares in BHP Gold commenced on 23 March 1987. Trading commenced at $2 per right but during the first hour the price stabilised at about $1.30 to $1.35 each.
11. For the purpose of determining entitlements to take up the offer the books of BHP were closed at 5 p.m. on 27 March 1987. The rights were not traded between 27 and 30 March 1987. On 30 March 1987 the rights were first traded at $1.35 each and on that day last traded at $1.34 each.
12. On about 4 April 1987 the formal offer document was forwarded by BHP Gold to persons who were registered as shareholders of BHP as at 27 March 1987.
13. The appellant decided to sell its rights to the share issue. It sold them through a stockbroker on 14 April 1987 at a price of $1.32 per right less the expenses of sale. The net proceeds were $34,373.42.
14. The appellant disclosed its sale of the rights to the share issue in its income tax return for the 1987 year of income but claimed that the net proceeds of sale did not form part of its assessable income. The Commissioner treated the appellant as having derived a capital gain of $34,399 (the difference between this figure and $34,373 is not explained by the evidence). In calculating the capital gain the Commissioner treated the rights to the shares in BHP Gold sold by the appellant as having a nil cost base for the purposes of s. 160ZH(9).
15. The appellant objected to the assessment. The objection was disallowed and the appellant requested the Commissioner to refer the decision to this Court.
16. The matter was heard by Wilcox J. The case was conducted on the basis that the Commissioner's claim to tax the proceeds of sale of the rights depended entirely on Part IIIA of the Act. The Commissioner accepted that the appellant was not a share trader. He made no claim under ss. 25, 25A or 26AAA of the Act. His Honour therefore considered only Part IIIA and the case was conducted on appeal before us on the same basis.
17. The substantial issue before his Honour was whether a cost base for the rights is supplied by the provisions of s. 160ZH(9)(a) as it stood before its amendment by Act No. 35 of 1990.
"For the purposes of the application of sub-section
(1), (2) or (3) in determining the cost
base, the indexed cost base or the reduced cost
base to a taxpayer of an asset, if -
(a) the taxpayer acquired the asset from
another person and did not pay or give any
consideration in respect of the acquisition;
(b) the whole or a part of the consideration
paid or given by the taxpayer in respect
of the acquisition cannot be valued; or
(c) the consideration paid or given by the
taxpayer in respect of the acquisition
would, but for this paragraph, be greater
or less than the market value of the asset
at the time of the acquisition and the
taxpayer and the person from whom the
taxpayer acquired the asset were not
dealing with each other at arm's length in
connection with the acquisition of the asset,
the taxpayer shall be deemed to have paid or
given as consideration in respect of the
acquisition of the asset an amount equal to the market
value of the asset at the time of the acquisition."
20. It was argued on behalf of the appellant before his Honour and on appeal to this Full Court that the appellant "acquired the assets from another person" within the meaning of s. 160ZH(9)(a), namely, BHP Gold, and that it did not pay or give any consideration in respect of that acquisition. Accordingly, the deeming provision contained in the concluding words of sub-s. (9) applies and the appellant is therefore deemed to have paid or given as consideration in respect of the acquisition of the rights an amount equal to their market value at the time of the acquisition. It was agreed that the market value at the date of acquisition was the same amount as was realised on the sale. Therefore, the cost base equals the disposal consideration; no capital gain occurred and no tax is payable under Part IIIA.
21. It was argued on behalf of the Commissioner before the learned primary Judge and on appeal that the appellant did not acquire rights "from another person" within the meaning of s. 160ZH(9)(a). It was submitted that it is incorrect to speak of acquiring shares or rights "from" the company that issues them; the rights were not previously in existence and could not be said to have been acquired from BHP Gold. Reliance was placed upon judgments of the High Court which concerned the Gift Duty Assessment Act 1941 (Cth), in Ord Forrest Pty Limited v Commissioner of Taxation [1974] HCA 57; (1974) 130 CLR 124 and Commissioner of Taxation v St Helens Farm (ACT) Proprietary Limited [1981] HCA 4; (1981) 146 CLR 336.
22. It was agreed between the parties both at first instance and on appeal, subject to an alternative argument put by the appellant with respect to s. 160ZH(9)(b), that the appellant did not pay or give any consideration in respect of the acquisition so that the second limb of paragraph (a) of sub-section (9) of section 160ZH is satisfied.
23. His Honour accepted the argument advanced on behalf of the Commissioner, the essential element in his reasoning being that, upon the proper construction of s. 160ZH(9)(a), a taxpayer cannot be regarded as having acquired an asset from another person unless there is a corresponding disposal of that asset by the other person to the taxpayer. His Honour applied the reasoning of the High Court in Ord Forrest and St Helens Farm with respect to a "disposition of property" the essence of which was that expressed in Ord Forrest by Gibbs J. at 148 and Mason J. at 155 and in St Helens Farm by Barwick C.J. at 349-350. The point is encapsulated by the following passage from the judgment of Mason J. at 155:
"An unissued share in the capital of a company
is not property; it is no more than a unit or
fraction of the company's nominal capital which
may be issued in accordance with the provisions
of the memorandum and articles of association.
When allotted, but not before, it bears the
character of a proprietary right, a chose in
action that is vested in the shareholder.
The allotment of shares in a company is
certainly not a disposition of the company's
property; nor, for the reasons already stated,
can it be described with accuracy as a
'disposition of property' in the ordinary sense
of that expression."
24. In the result Wilcox J. dismissed the application with costs. His Honour's judgment is reported (1990) 96 ALR 423.
25. Part IIIA of the Act contains a complex set of provisions which provide for the inclusion in assessable income of any "net capital gain" that accrues to the taxpayer during the year. The scheme of Part IIIA was described in the judgments of members of the Full Court of this Court in Hepples v Commissioner of Taxation (1990) 22 FCR 1; 90 ATC 4497 and by Hill J. in Commissioner of Taxation v Cooling (1990) 22 FCR 42. It is sufficient for present purposes to refer to the particular provisions on which this case turns.
26. The word "asset" is defined in s. 160A for the purposes of Part IIIA in the widest terms as meaning "any form of property" and as including, amongst other things, "an option, a debt, a chose in action, any other right, goodwill and any other form of incorporeal property" (paragraph (a)) and "any form of property created or constructed, or otherwise coming to be owned without being acquired" (paragraph (c)). It is agreed between the parties that the renounceable rights in BHP Gold, the subject of this proceeding, were a "form of property" and in particular "any other right" within the meaning of s. 160A(a).
27. Division 2 of Part IIIA contains s. 160L(1) which makes Part IIIA applicable, subject to some immaterial exceptions, to every disposal on or after 20 September 1985 of an asset that, immediately before the disposal was owned by an Australian resident and acquired by that person on or after 20 September 1985.
28. Division 3 of Part IIIA provides for the determination of capital gains and capital losses. Section 160Z(1) provides:
"160Z(1) Subject to this Part, where an asset
other than a personal-use asset has been
disposed of during the year of income -
(a) if the consideration in respect of the
disposal exceeds the indexed cost base to
the taxpayer in respect of the asset - a
capital gain equal to the excess shall be
deemed for the purposes of this Part to
have accrued to the taxpayer during the
year of income; or
(b) if the reduced cost base to the taxpayer
in respect of the asset exceeds the
consideration in respect of the disposal -
a capital loss equal to the excess shall
be deemed for the purposes of this Part to
have been incurred by the taxpayer during
the year of income."
29. Where an asset is disposed of within twelve months of its acquisition by the taxpayer "the reference in the sub-section concerned to the indexed cost base to the taxpayer in respect of the assets shall be construed as a reference to the cost base to the taxpayer in respect of the asset": s. 160Z(3). As Wilcox J. noted, this means that indexation must be ignored.
30. Section 160ZD(1) deals with the determination of the consideration in respect of a disposal of an asset. This gives rise to no problem in this case because it is agreed that the consideration was $35,110.68. The determination of the cost base is the issue in the proceeding. Section 160ZH(1) deals with the determination of cost base and provides:
"160ZH(1) Subject to the following provisions
of this section, for the purposes of this Part,
the cost base to a taxpayer of an asset is the
sum of -
(a) the amount of any consideration in respect
of the acquisition of the asset;
(b) the amount of the incidental costs to the
taxpayer of the acquisition of the asset;
(c) the amount of any expenditure of a capital
nature incurred by the taxpayer to the
extent to which it was incurred for the
purpose of enhancing the value of the
asset and is reflected in the state or
nature of the asset at the time of
disposal of the asset;
(d) the amount of any expenditure of a capital
nature incurred by the taxpayer to the
extent to which it was incurred in
establishing, preserving or defending the
taxpayer's title to, or a right over, the
asset; and
(e) the amount of the incidental costs to the
taxpayer of the disposal of the asset."
31. It was common ground both before the primary Judge and on appeal that the relevant paragraph of s. 160ZH(1) is paragraph (a).
32. Section 160ZH(9) is the critical section in this case and it states the rules for determining the cost base. The terms of sub-section (9) have already been set out in the form which they took during the 1987 year of income.
33. The essential question in the case, both before the primary Judge and on appeal, concerns the meaning of the words in s. 160ZH(9)(a) "the taxpayer acquired the asset from another person" and the application of that meaning to the facts of this case. The point is a short one.
34. The verb "to acquire", according to its ordinary and natural meaning, connotes in our view to obtain, gain or get something. The first meaning given in the Oxford English Dictionary (1989), 2nd edition, is:
"1. To gain, obtain or get as one's own, to
gain the ownership of (by one's own
exertions or qualities)."
"2. To receive, or get as one's own (without
reference to the manner), to come into
possession of."
The Macquarie Dictionary gives a similar definition. There must be something in existence that can be obtained or gained; but the word is apt to encompass the case where one person creates an asset which at the same time comes into the possession of or is obtained by another person. Some examples are helpful. Where an owner of property grants an option to a person to purchase it the owner does not own the option before he creates it, it is created by the owner and at the very same time it is acquired by the grantee. Yet, according to the ordinary meaning of the word "acquire" it is clear that the option was acquired by the grantee from the owner of the property: see Commissioner of Taxes (Queensland) v Camphin [1937] HCA 30; (1937) 57 CLR 127 per Latham C.J. at 133-134, with whose reasons for judgment Rich and McTiernan JJ. agreed.
35. Similarly with a lease of property. The owner of property when creating the lease at the same time creates it in favour of the lessee. It is not created by the lessee. It is created by the act of the owner of the property and the lease is obtained by the lessee at the same time. It seems plain to us that the lessee acquires the lease from the owner of the property: see Camphin's Case, also per Latham C.J. at 133-134.
36. Other examples of the creation of a fresh set of proprietary rights out of a greater bundle of pre-existing proprietary rights may be found in the judgment of Hill J. in Commissioner of Taxation v Cooling (supra at 63-64). In such cases, there is an acquisition of those new proprietary rights by the party in whom they are vested.
37. Counsel for the respondent relied on cases, in particular Ord Forrest and St Helen's Farm, where questions arose as to the meaning of the phrase "disposition of property" with respect to an allotment of shares by a company for the purposes of the Gift Duty Assessment Act 1941 (Cth). In Ord Forrest there was an allotment of shares by a company and the Commissioner assessed the company to gift duty on the ground that the allotment was a disposition of property by the company accompanied by an inadequacy of consideration having regard to the company's assets and the amount payable on allotment, and hence a dutiable gift. Stephen J. at first instance upheld the Commissioner's argument. On appeal, the Full Court of the High Court was equally divided. Gibbs and Mason JJ. adopted the same view as Stephen J. but Barwick C.J. and McTiernan J. took the contrary view. The crucial question was whether there had been a "disposition of property" by the company, a phrase which was defined by the definition section in such a way as to include an allotment of shares in a company. Gibbs and Mason JJ. said that an allotment of shares cannot be described as a disposition of property in the ordinary meaning of that expression because when a share is allotted nothing is transfered or conveyed from the company to the shareholder. The person who becomes a shareholder consequent upon the allotment and issue of the share does not acquire any property in the assets of the company. The share does not pass from the company as before allotment it did not exist as a piece of property and it is only when it is allotted and issued that the rights which it confers are created. An unissued share in the capital of a company is not property; it is merely a unit or fraction of the company's nominal capital which may be issued in accordance with the provisions of the company's memorandum and articles of association. When it is allotted, and not before, a proprietary right arises and it is a chose in action that is vested in the shareholder. See the judgment of Gibbs J. at 148 and Mason J. at 155. Barwick C.J. adopted, on this question, substantially the same view. The Chief Justice said that upon allotment and issue the allottee has property in the shares allotted but it is not property which comes to him from or by transfer from the company. The property arises upon the allotment and issue and not before. Similar views were expressed in St Helens Farm. See, for example, Barwick C.J. at 349-350.
38. In short the Judges in the High Court in both Ord Forrest and St Helens Farm held that a disposition of property connotes the transfer or disposition of something to somebody which was in existence before it was disposed of. It is not an apt word to describe the creation of something that did not exist before its creation. By parity of reasoning in the case before us there was no disposition of property when BHP Gold conferred on the shareholders of BHP the right to apply for shares in BHP Gold. Ord Forrest and St Helens Farm are authority for that proposition. But, as has already been shown, property can be acquired by one person without there being any disposition of that property by another person. The allotment of shares is an act of the company, the capital of which is the source of the allotment. The allottee in ordinary parlance acquires the shares from the company. The transaction falls within the first meaning of the word "acquire" in the Oxford English Dictionary of gaining, obtaining or getting as one's own or gaining the ownership of. Also, as was observed by Cohen L.J. who delivered the judgment of the Court of Appeal of England in Congreve v Inland Revenue Commissioners (1947) 1 All ER 168 at 173; affd., (1948) 1 All ER 948:
"... as used by lawyers the word 'acquired' has
long covered transactions of a purely passive
nature and means little more than receiving.
Indeed, that is the second ordinary meaning
given in the Shorter Oxford Dictionary."
See also Kingsley v Sterling Industrial Securities Limited (1966) 2 All ER 414 per Winn L.J. at 429.
39. In Ord Forrest Gibbs J., in stating at 148 that when a share is allotted it "does not pass from the company" and that "it is only when it is allotted and issued that the rights which it confers are created" observed: "What he (i.e. the allottee) acquires is the share, which is a separate right of property". Hence his Honour recognised that, although there is no disposition of a share upon allotment there is nevertheless an acquisition of it by the allottee. There is no inconsistency between the reasons for judgment of the justices of the High Court in Ord Forrest and St Helens Farm and the interpretation of s. 160ZH(9)(a) which we adopt.
40. On the facts of this case it is clear that the appellant acquired renounceable rights in shares in BHP Gold from BHP Gold. It must have got something from somebody because it certainly did not create its renounceable rights, yet it was able to sell them on the stock exchange for a net price of $34,373. What it acquired or obtained were the renounceable rights in BHP Gold which it obtained from BHP Gold itself, as it was its share capital which was the source of the issue of shares.
41. Other arguments were addressed on behalf of the appellant. It was argued that the amendment to paragraph 160ZH(9)(a) by Act No. 35 of 1990 (applicable to acquisitions of assets after 15 August 1989) supports the appellant's case. Paragraph (a), after the amendment, reads as follows:
"160ZH(9) For the purposes of the application
of sub-section (1), (2) or (3) in determining
the cost base, the indexed cost base or the
reduced cost base to the taxpayer of an asset, if -
(a) the taxpayer acquired the asset from
another person (not being an acquisition
resulting from the doing by that other
person of an act or thing that did not
constitute a disposal of the asset by that
other person for the purposes of this
Part) and did not pay or give any
consideration in respect of the acquisition;
(b) ...
(c) ...
the taxpayer shall be deemed to have paid or
given as consideration in respect of the acquisition
of the asset an amount equal to the market value
of the asset at the time of the acquisition."
The words introduced by the amendment are underlined.
42. There was some debate before us as to the circumstances in which courts are entitled to examine a later statute to determine whether it throws any light upon the interpretation of an earlier statute. Plainly this course can be taken when the words of the earlier statute are ambiguous, but if the words of the earlier statute are clear, little assistance may be gained from the later statute. Also, care must be exercised to ensure that the words in the later statute have not been inserted to remove possible doubts. See In re MacManaway and In re The House of Commons (Clergy Disqualification) Act 1801 (1951) AC 161 at 177-178; Kirkness (Inspector of Taxes) v John Hudson and Co. Limited (1955) AC 696 especially per Viscount Simonds at 712-713; and Thompson v J.T. Fossey Pty Limited (No. 1) (1978) 20 ALR 496 per Franki J. at 501-502; Pearce and Geddes, Statutory Interpretation in Australia, 3rd ed., 1988, para. 3.25. We do not discern any ambiguity in the relevant words of s. 160ZH(9)(a), so do not find it necessary to call in aid the language of the amendment to paragraph (a).
43. Counsel for the appellant also relied upon sections in Divisions 10 and 11 of Part IIIA to support the appellant's interpretation of s. 160ZH(9)(a) including s. 160ZYK(c), 160ZYR(c), 160ZYN and 160ZYU. We see no need to consider this further point.
44. It was argued by counsel for the appellant in the alternative to their principal argument that, if paragraph (a) of s. 160ZH(9) was inapplicable, then paragraph (b) applied. It was said on this alternative approach that there was consideration paid or given by the appellant for the receipt of its renounceable rights; but that the amount of the consideration cannot be valued, with the result that the cost base for capital gains tax purposes was the market value of the rights so that no tax would be payable. It is not necessary for us to consider this alternative argument.
45. This appeal was argued before us on the basis that the appellant had acquired an asset, namely, the renounceable rights to shares in the capital of BHP Gold. The argument centred on the question of whether the relevant rights had been received "from another person" within the meaning of s. 160ZH(9)(a). Counsel for the appellant suggested there is a question whether any proprietary rights at all were created in favour of the appellant for the purposes of the definition of "asset" in s. 160A. This would involve considering what property rights, if any, were created when the relevant agreement was made between BHP and BHP Gold and what rights, if any, arose from the making of the offer by BHP Gold to BHP shareholders including the appellant. Certainly proprietary rights were created once the offer was taken up by BHP shareholders but there is a question as to the nature of any enforceable proprietary rights before then. Although the point was briefly ventilated by counsel for the appellant in argument before us no submission was put with respect to it as the appellant was content to have the appeal decided on the basis mentioned above.
46. We would allow the appeal and set aside the orders appealed from; and in lieu thereof order that the appeal to this Court from the disallowance of the appellant's objection against its assessment to income tax for the year ended 30 June 1987 be allowed. The respondent must pay the costs of this appeal and of the proceedings at first instance.
# Re Allina Pty Limited
Commissioner of Taxation \[1991\] FCA 78; 87 Taxation 91 Atc 4195/21 Atr 1320 99 ALR 295 28 FCR 203
(1974) 130 CLR 124
(1981) 146 CLR 336
(1990) 96 ALR 423
(1990) 22 FCR 1
(1990) 22 FCR 42
(1937) 57 CLR 127
(1978) 20 ALR 496