Barnsdall v. Federal Commissioner of Taxation
88 ATC 4565
Judgment date: Judgment handed down 10 June 1988.
Davies J.: These appeals relate to items in an assessment of income tax dated 3 April 1980 and in an amended assessment of income tax dated 20 October 1980, both with respect to the income of the late Peter Coronell Hains for the year ended 30 June 1979. The notice of objection to the original assessment, dated 2 June 1980, was partly allowed by the amended assessment which issued on 20 October 1980. A further objection to the amended assessment, which objection was dated 4 December 1980, was wholly disallowed. By a notice dated 4 December 1980, Mr Hains requested that his objection to the original assessment be treated as an appeal and forwarded to the Supreme Court of New South Wales. On 7 February 1983, a similar request was made with respect to his objection to the amended assessment. The objections were duly forwarded to the Supreme Court of New South Wales and were subsequently transferred to this Court pursuant to Act No. 23 of 1987. The appeals were heard together but they are, nevertheless, separate appeals.
The original assessment disallowed rebates which Mr Hains had claimed under sec. 160ACA of the Income Tax Assessment Act 1936 (Cth) (``the Act'') in respect of moneys paid by him on shares allotted to him in the year of income in Stirling Petroleum N.L. and in Woodside Petroleum Limited. The amended assessment allowed to Mr Hains the rebate with respect to the Stirling Petroleum N.L. shares but included in Mr Hains' assessable income under sec. 26AAA of the Act a deemed profit of $16,478 arising on the disposition by Mr Hains on 23 April 1979 of the shares in Woodside Petroleum Limited.
It was submitted by Mr N.R. Burns of counsel, who appeared for the respondent, that I should infer that the amended assessment also dealt with and repeated the disallowance of the sec. 160ACA rebate with respect to the shares in Woodside Petroleum Limited. However, as the adjustment sheet accompanying the notice of amended assessment did not mention that particular, and as the matter was not involved in the amendments that were made, no such inference can be drawn.
I turn first to the profit which was included pursuant to the provisions of sec. 26AAA of the Act which, in the year of income, provided, inter alia:
(2) Where -
- (a) a taxpayer has purchased property after 21 August 1973 and before the commencement of this section or purchases property after the commencement of this section; and
- (b) the taxpayer has, whether before or after the commencement of this section, sold the property or an interest in the property before the expiration of the period of 12 months from the date on which he purchased the property,
(4) Where -
- (a) sub-section (2) applies in relation to the sale of any property by a taxpayer:
- (b) the Commissioner is satisfied that, having regard to any connexion between the taxpayer and the person to whom the property is so sold or any other relevant
88 ATC 4567
circumstances, the taxpayer and the other person were not dealing with each other at arm's length; and
- (c) there was no consideration for the sale or the consideration for the sale was greater or less than the amount (in this sub-section referred to as the `relevant amount') that, in the opinion of the Commissioner, was the value of the property -
- (i) in the case of a sale made before the expiration of the period of 12 months from the date on which the taxpayer purchased the property - at the time of the sale; or
- (ii) in the case of a sale made after the expiration of that period in pursuance of an option granted, or an agreement entered into, during that period - at the time when the option was granted or the agreement was entered into, as the case may be,
then, for the purposes of this section, the property shall be deemed to have been sold by the taxpayer, and purchased by the person to whom it is so sold, for a consideration equal to the relevant amount.''
A delegate of the Commissioner, Mr A.G. Butler, Chief Investigation Officer, on 6 August 1980 became satisfied that, having regard to a connection between Mr Hains and his private company, Corporate Investments Pty. Limited, to whom the Woodside Petroleum N.L. shares were sold, Mr Hains and that company did not deal with each other at arm's length. The formation of that view led to the inclusion of the profit of $16,478 in Mr Hains' assessable income by the amended assessment. The deemed profit under sec. 26AAA arose from the increase of a few cents in the stock exchange price of Woodside Petroleum Limited shares between the time of Mr Hains' acquisition and the date of his disposition thereof. Nevertheless, it is agreed by counsel that Mr Hains did not in fact make a profit on his transactions in those shares and that he in fact disposed of the shares at their cost to him.
Mr Hains was a sharebroker, not a trader in shares in his own right. Therefore, he did not wish to hold the shares in Woodside Petroleum Limited and, having regard to the provisions of sec. 160ACA(25) which I shall later set out, he did not wish to make a profit on their disposal. In these circumstances, when he purchased the rights to the allotment of the shares in Woodside Petroleum Limited, he granted to Corporate Investments Pty. Limited options to acquire from him the shares in Woodside Petroleum Limited when the same were allotted. The price of each option, of which there were seven, was $1. The price payable by Corporate Investments Pty. Limited on the exercise of each option was so calculated as to match Mr Hains' receipts with his costs.
Corporate Investments Pty. Limited was a company which undertook share trading activities. Mr Hains was the beneficial owner of all the shares issued therein and was chairman of directors thereof. The other director was a member of the sharebroking firm of which Mr Hains was a partner.
There is no issue before the Court as to the calculation of the profit. It may be noted, however, that the profit was not calculated by reference to a fair consideration for the options that were granted but upon the market value of the shares when the options were exercised and the shares transferred.
Mr T. McCarthy, counsel for the applicant, submitted that the crucial words in sec. 26AAA(4) were not simply ``at arm's length'' but ``dealing with each other at arm's length''. He submitted that weight should be given to the words ``dealing with'' and that it was not sufficient for the inclusion of the profit in Mr Hains' assessable income that the Commissioner's delegate be satisfied that Mr Hains and Corporate Investments Pty. Limited were not at arm's length. He submitted that the delegate was not entitled to come to a view that sec. 26AAA(4) should be applied unless he was satisfied that the circumstances of the transaction showed that Mr Hains and the company had not dealt with each other at arm's length.
Mr McCarthy also submitted that, in the expression in sec. 26AAA(4)(b) ``any connexion between the taxpayer and any person to whom the property is so sold or any other relevant circumstances'', the word ``or'' should be read as ``and'' or as ``and/or''.
The term ``at arm's length'' was developed in the law with respect to transactions between
88 ATC 4568
persons, one of whom, such as a trustee or solicitor, is in a position of special influence with respect to the other, a beneficiary or client. A classic statement of the principles is found in the speech of Lord O'Hagan in
McPherson v. Watt (1877) 3 App. Cas. 254 at p. 266. See also
Haywood v. Roadnight (1927) V.L.R. 512 at p. 521.
However, such cases are of little assistance in the interpretation of statutes which are concerned with taxation, with financial grants or with other matters of a fiscal nature. The equitable principles are not apposite in the context.
If the term were simply ``not at arm's length'',
Australian Trade Commission v. W.A. Meat Exports Pty. Ltd. (1987) 75 A.L.R. 287 would apply. At p. 291, Beaumont, Wilcox and Burchett JJ. said that that expression in sec. 4(8) of the Export Market Development Grants Act 1974 (Cth) referred to the circumstance ``where one of them has the ability to exert personal influence or control over the other''. Their Honours said that this was the ordinary meaning of the phrase and that it was ``evident that the policy of the legislation would seek to exclude payments to such persons...''.
However, sec. 26AAA(4) used the expression ``not dealing with each other at arm's length''. That term should not be read as if the words ``dealing with'' were not present. The Commissioner is required to be satisfied not merely of a connection between a taxpayer and the person to whom the taxpayer transferred, but also of the fact that they were not dealing with each other at arm's length. A finding as to a connection between the parties is simply a step in the course of reasoning and will not be determinative unless it leads to the ultimate conclusion.
In Canada, the expression ``to deal with each other at arm's length'' wherever appearing in the Income Tax Act 1948 (Canada) was amplified in sec. 127(5) thereof, in that a transaction between a corporation and a person by whom it was directly or indirectly controlled or between corporations controlled directly or indirectly by the same person was deemed not to be a dealing at arm's length. Accordingly, many Canadian authorities are not on point. However, it may be noted that, in
Minister of National Revenue v. Sheldons Engineering Ltd. 55 DTC 1110; (1955) C.T.C. 174, Locke J., delivering the judgment of the Court, said at DTC pp. 1113-1114; C.T.C. p. 180:
``Apart altogether from the provisions of that section, it could not, in my opinion, be fairly contended that, where depreciable assets were sold by a taxpayer to an entity wholly controlled by him or by a corporation controlled by the taxpayer to another corporation controlled by him, the taxpayer as the controlling shareholder dictating the terms of the bargain, the parties were dealing with each other at arm's length and that s. 20(2) was inapplicable.''
Minister of National Revenue v. Merritt & Another 69 DTC 5159; (1969) C.T.C. 207, Cattanach J. was concerned with an issue arising under the Estate Tax Act 1958 (Canada), which Act did not include the deeming provision in sec. 127(5) of the Income Tax Act. After citing the above passage from Locke J.'s judgment, his Honour said, at DTC pp. 5165-5166; C.T.C. p. 217:
``In my view, the basic premise on which this analysis is based is that, where the `mind' by which the bargaining is directed on behalf of one party to a contract is the same `mind' that directs the bargaining on behalf of the other party, it cannot be said that the parties are dealing at arm's length. In other words where the evidence reveals that the same person was `dictating' the `terms of the bargain' on behalf of both parties, it cannot be said that the parties were dealing at arm's length.''
Robson Leather Company Ltd. v. Minister of National Revenue 77 DTC 5106; (1977) C.T.C. 132 and
Robinson and Others v. Minister of National Revenue (1987) 1 C.T.C. 2055.
It will be seen that those cases looked primarily to the relationship between the contracting parties and to influence and control.
I do not disagree with this analysis but I accept Mr McCarthy's submission that there may be transactions between related parties in which the parties deal with each other at arm's length. This may occur notwithstanding a close relationship between the parties or the power of one party to control the other. Such a circumstance would have arisen, for example, if, in the present case, Mr Hains had offered his
88 ATC 4569
shares in Woodside Petroleum Limited for sale on the stock exchange and his private company, competing in the stock exchange on the day, had by chance acquired the self-same shares.
Mr McCarthy submitted therefore that the delegate of the Commissioner considered this matter on a wrong basis. Mr McCarthy tendered in evidence the following interrogatories and answers:
``1. Was the Respondent satisfied for the purposes of Section 26AAA(4) of the Income Tax Assessment Act 1936, as amended, that the Applicant and Corporate Investments Pty. Limited were not dealing with each other at arm's length in relation to the transactions referred to in the Statement of Agreed Facts? Answer: Yes.
2. If the answer to question 1 is yes, when was the Respondent so satisfied? Answer: 6 August 1980.
3. If the answer to Question 1 is yes, who on behalf of the Respondent was so satisfied? Answer: Arthur G. Butler, Chief Investigation Officer, D.
4. If the answer to Question 1 is yes, what circumstances were taken into account in being so satisfied? Answer: The circumstance that Corporate Investments Pty Limited was wholly owned by the applicant Peter C. Hains.''
Mr McCarthy submitted that it appeared from those four answers that the delegate, Mr Butler, had considered only the relationship between Mr Hains and Corporate Investments Pty. Limited and had not considered the nature of the transaction between them or the circumstances in which they dealt with each other.
However, the answers to interrogatories are not the only material before the Court which bear upon this matter for there is a statement of agreed facts to which is attached a letter, dated 1 February 1980, from Mr Hains' accountants to the Deputy Commissioner Sydney which gives many details of the transaction. I assume that Mr Butler did have regard to this information, including the fact that the Woodside Petroleum Limited shares were not sold on the open market but were transferred pursuant to a private transaction of a somewhat unusual character between Mr Hains and his own private company.
I accept Mr McCarthy's submission that, had the delegate looked solely at the relationship between Mr Hains and his company, he would have been in error for he had to form a view as to the nature of the dealing between them. But, from the information which is before the Court, I am unable to conclude that he so restricted his consideration or that he failed to have regard to the nature and circumstances of the disposition.
It seems to me inevitable that, on the information that was before him, Mr Butler would have concluded that Mr Hains and Corporate Investments Pty. Limited were not dealing with each other at arm's length. It does not appear to me that any other conclusion was reasonably open. I cannot conclude from the delegate's decision that he failed to take into account the material that was before him or that he approached the issue with an incorrect view of the law.
Mr McCarthy also relied upon evidence given to the Court that the transaction, which took place between Mr Hains and Corporate Investments Pty Limited, was similar to transactions which took place between Mr Hains and three private companies with respect to the shares in Stirling Petroleum N.L. Mr McCarthy submitted that the relationship between Mr Hains and those three companies was much less close, that the grant of options was not an unusual transaction in respect of shares and that it was not shown that the prices fixed by the options were not fair prices.
However, the effect of this evidence was to show no more than that the price fixed by the option agreements between Mr Hains and Corporate Investments Pty Limited may well have been a fair price. Proof that a transaction was fair is not sufficient to show, in the context, that the dealing was at arm's length. The term ``at arm's length'' in sec. 26AAA(4)(b) is not to be construed as meaning ``for a fair price''. Indeed, this provision did not turn its attention primarily to price, though the price paid may be a relevant factor. The provision did not purport to fix a fair price for the transaction but rather, when a finding had been made that the dealing was not an arm's length, fixed an arbitrary consideration, the value of the property at the time of its sale.
88 ATC 4570
The subject transaction was one between Mr Hains and his private company. It was a private transaction with a company which he controlled and which was his investment and share dealing arm. Such a transaction is not an arm's length dealing for the purposes of sec. 26AAA(4).
Moreover, Mr N.R. Burns, counsel for the respondent, was correct in his submission that the evidence adduced before this Court as to the circumstances of the dealings in the shares in Stirling Petroleum N.L. was irrelevant. That evidence was not before Mr Butler when he made his decision and was not material that he ought to have had before him. The subject issue concerns a discretionary decision made by a delegate of the Commissioner. The principles applicable to the review of such a decision are those of judicial review in the strict sense. In brief, the decision was one for the Commissioner or his delegate, not for this Court, and the decision ought not to be set aside unless there has been a breach of the rules of natural justice or an error of law is disclosed having regard to the material that was or ought to have been before the decision maker and taken into account.
Such principles were stated, in the context of taxation appeals, in
Avon Downs Pty Ltd. v. F.C. of T. (1949) 78 C.L.R. 353 at p. 360,
F.C. of T. v. Brian Hatch Timber Co. (Sales) Pty. Ltd. 72 ATC 4001 at pp. 4010-4011; (1972) 128 C.L.R. 28 at pp. 30-31 and 57-59 and
Kolotex Hosiery (Australia) Pty. Ltd. v. F.C. of T. 75 ATC 4028 at pp. 4031, 4048-4049 and 4055-4056; (1975) 132 C.L.R. 535 at pp. 541, 567-568 and 578-579.
The decision of Stephen J. in
Duggan and Ryall v. F.C. of T. 72 ATC 4239; (1972) 129 C.L.R. 365 has been thought by some to establish a wider principle, but, on analysis, it is simply an application of the ordinary principles of judicial review. At ATC pp. 4241-4242; C.L.R. p. 368, Stephen J. expressly rejected as relevant the additional evidence adduced before the Court in the course of the hearing.
These principles apply notwithstanding that a taxation appeal is not an appeal in the strict sense but an appeal by way of rehearing. The only relaxation of the ordinary principles of judicial review is that seen in Kolotex Hosiery (Australia) Pty. Ltd. v. F.C. of T., cited above, namely, that, once the Court has found error in the discretionary decision, it may in an appropriate case exercise the discretion for itself. But that is not this case.
In my opinion, there was no error in the delegate's decision with respect to the sec. 26AAA profit. The objection to the amended assessment was therefore properly disallowed and the appeal with respect thereto must be dismissed.
I turn now to the appeal constituted by the objection to the original assessment. That concerns the disallowance of the rebate on the moneys paid by Mr Hains on the allotment to him on the shares in Woodside Petroleum Limited. The rebate was claimed under sec. 160ACA. At the hearing, it was conceded by Mr Burns that no ground for the disallowance of the rebate existed save that provided by subsec. (25), which reads:
``(25) Where a person has paid moneys on shares and -
- (a) the proceeds of the sale of the shares have been included, or are to be included, in the assessable income of the person of any year of income;
- (b) a profit arising from the sale of the shares has been included, or is to be included, in the assessable income of the person of any year of income; or
- (c) a loss arising from the sale of the shares has been allowed, or is allowable, as a deduction in an assessment of the person in respect of income of any year of income,
then a rebate in respect of the moneys paid on the shares is not allowable, and shall be deemed not to have been allowable, under sub-section (5) or (15) in any assessment in respect of income of that person.''
The profit relied upon by Mr Burns was the profit under sec. 26AAA included in the amended assessment.
There are two reasons why this provision does not save the disallowance of the rebate. The first is that the disallowance was made by the original assessment. That assessment simply disallowed the rebate. At that time, no decision had been made under sec. 26AAA(4). Therefore, it could not be said that a profit arising from the sale of the shares had been
88 ATC 4571
included or was to be included in the assessable income of Mr Hains.
When speaking of an analogous decision, that with respect to the allowance of past losses pursuant to sec. 80 of the Act, Barwick C.J. said in Kolotex Hosiery (Australia) Pty. Ltd. v. F.C. of T., cited above, at ATC p. 4031; C.L.R. p. 541:
``But it is important to observe that where the Legislature takes such a course it will be the Commissioner's relevant state of mind at the point of assessment which will be determinative. In emphasising that the Commissioner's state of mind at the time of assessment is the relevantly critical fact, I include in that connection the time up to the date of the issue of the assessment, a period during which the Commissioner may reconsider his assessment. Once the assessment is issued, however, it is the Commissioner's state of mind which then exists as to the relevant matters which is the critical element in the process of assessment: for it is the Commissioner's state of mind which is the warrant for his action in the process of assessment of allowing or not allowing the deduction for which sec. 80 provides.''
The subsequent inclusion in Mr Hains' assessable income of the profit under sec. 26AAA did not cure the defect, for the amendment made on 20 October 1980 related not to the disallowance of the rebate under sec. 160ACA but to a different particular, the inclusion of the profit under sec. 26AAA.
The point becomes clear when it is realised that Mr Hains was not entitled to raise in his objection to the amended assessment any question with respect to the disallowance of the rebate under sec. 160ACA. Section 185 of the Act, which provided for the lodgment of objection to assessments provided, inter alia:
Provided that, where the assessment is an amended assessment, the taxpayer shall have no further right of objection than he would have had if the amendment had not been made, except to the extent to which by reason of the amendment a fresh liability in respect of any particular is imposed on him or an existing liability in respect of any particular is increased.''
Mr Hains did not in fact raise in his objection to the amended assessment any matter with respect to the disallowance of the rebate under sec. 160ACA. That matter was raised in his objection in respect of the original assessment.
In my opinion, the objection to the original assessment should have been allowed for, at the time of the original assessment and at the time of the objection, it could not be postulated that any profit arising from the sale of the shares had been included or was to be included in Mr Hains' assessable income. As no other ground for the disallowance of the objection is now relied upon, the objection should succeed.
The second ground upon which I would uphold the objection is that the word ``profit'' in sec. 160ACA(25)(b) ought to be given its ordinary meaning. Such meaning is that described by Gibbs J. when speaking of sec. 26(a) of the Act in
Steinberg v. F.C. of T. 75 ATC 4221 at p. 4233; (1975) 134 C.L.R. 640 at pp. 696-697:
``The profit arising from the sale will be the net pecuniary gain resulting from the acquisition and resale of the property, and will be represented by the excess of the amount received on the sale over the amount outlaid in acquiring the asset plus the expenses incurred in getting it ready for sale and selling it.''
Mr Hains did not derive a profit in that sense from his dealings in the shares in Woodside Petroleum Limited. It is conceded that he did not make a profit and that no actual profit was included in his assessable income.
Section 160ACA(25)(b) used its own terms and did not refer to a profit arising under sec. 26AAA or under sec. 26(a) or any other specific section. Did it contain words to the effect of ``pursuant to s. 25(1), 26(a) or s. 26AAA'' then the position would be different. It did not, however, do so but used the word ``profit'', the meaning of which is its meaning in ordinary parlance.
Section 26AAA(4) was a provision inserted in the Act to aid the operation of sec. 26AAA. It was not a provision which applied to the Act generally or which was appropriate to the operation of the Act generally. It was a provision designed to promote the achievement of the object of sec. 26AAA and to preclude avoidance of its provisions.
88 ATC 4572
Were there any doubt about the matter, which I think there is not, that doubt is removed by the specific statement in sec. 26AAA that the deeming provided for was ``for the purposes of this section''. It would be wrong to apply that deeming provision to the operation of sec. 160ACA for it was not included in that section nor intended to aid that section but was a provision that operated solely for the purposes of sec. 26AAA.
After the year of income, sec. 160ACA was amended to include subsec. (28) thereof which now specifically precludes the allowance of the rebate with respect to shares disposed of within 12 months of allotment. But the provision was not in the Act at the relevant time. Perhaps the reasoning of Dixon J. in
Grain Elevators Board (Victoria) v. Dunmunkle Corporation (1946) 73 C.L.R. 70 at p. 86 assists the interpretation I have placed on sec. 160ACA(25).
For these reasons, I am of the opinion that the rebate under sec. 160ACA in respect of the amounts paid by Mr Hains on the shares in Woodside Petroleum Limited was wrongly disallowed and I would uphold the appeal constituted by the objection to the original assessment in that respect.
As the applicant has had partial success and as the sum involved in the rebate is considerably greater than that involved in the deemed profit, I think an appropriate order as to costs is that the respondent should pay one-half of the applicant's costs of the appeals.
THE COURT ORDERS THAT:
1. The appeal with respect to the sec. 26AAA profit be dismissed.
2. The appeal with respect to the disallowance of the sec. 160ACA rebate be upheld.
3. The matter is remitted to the respondent with the direction that the subject assessment of income tax be amended in accordance with the Court's reasons for judgment.
4. The respondent pay one-half of the applicant's costs of the proceedings.