Allina Pty Ltd v Commissioner of Taxation

[1990] FCA 371

Re: ALLINA PTY LTD
And: COMMISSIONER OF TAXATION
No. N G348 of 1989
FED No. 371
Taxation
90 ATC 4655/21 ATR 638
96 ALR 423

COURT

IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY
GENERAL DIVISION
Wilcox J.(1)

CATCHWORDS

Taxation - Capital gains tax - Sale of share rights - Rights issued free of charge to holders of shares in an associated company - Determination of "cost base" of rights - whether rights acquired by taxpayer "from another person" - Whether consideration given by taxpayer in form of diminution of equity in the company of which it was a shareholder.

Income Tax Assessment Act 1936, ss.160a, 160l, 160z, 160zh

HEARING

SYDNEY

#DATE 30:7:1990

Counsel for the applicant: R.J. Ellicott, QC and A.H. Slater

Solicitors for the applicant: Dunhill Madden Butler

Counsel for the respondent: P.H. Bloom, QC, J.W. Durack and M. Blackmore

Solicitors for the respondent: Australian Government Solicitor

ORDER

The application be dismissed.

The applicant pay to the respondent his costs of the proceeding.

Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules.

JUDGE1

This case raises a short but important question about the operation of Part IIIA of the Income Tax Assessment Act 1936, which deals with capital gains and capital losses.

The facts

1. At all material times Allina Pty Limited, the applicant, held 79,796 shares in the capital of Broken Hill Proprietary Company Limited ("BHP"). On 22 January 1987, BHP announced its intention to transfer its gold-mining interests (excluding its interest 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. The proposal involved the offering to BHP shareholders of the opportunity to acquire shares in BHP Gold.

2. The terms of the proposed transaction and share offer were approved at meetings of BHP and BHP Minerals Limited during February 1987. The proposal, as eventually approved, involved a sale of the gold-mining interests to BHP Gold at a price of $440 million and the issue by BHP Gold of 970 million shares at a price of 50 cents per share (25 cents par value plus 25 cents premium). 530 million shares were to be taken by BHP, approximately five million shares were to be offered to BHP Group employees and approximately 440 million shares were to be offered to BHP shareholders on the basis of one share in BHP Gold for every three BHP shares held on 27 March 1987, the rights to such shares being renounceable.

3. On 13 March 1987 BHP executed under its common seal a letter addressed to the secretary of BHP Gold. Omitting formal parts, this letter read:
   

"In consideration of BHP Gold Mines Limited agreeing to offer approximately 430 million shares to the shareholders of The Broken Hill Proprietary Company Limited ("BHP"), BHP hereby applies for 540,000,000 ordinary shares of twenty-five cents each in the capital of BHP Gold Mines Limited to be issued at par plus twenty-five cents per share premium. This application shall be irrevocable and BHP undertakes forthwith to pay for such shares upon request by BHP Gold Mines Limited which may be made at any time."

This letter was tabled at a meeting of the directors of BHP Gold held on 16 March, 1987, whereupon it was resolved to allot 540 million ordinary shares to BHP upon receipt from that company of $270 million. The directors also approved an agreement for the purchase by the company of the relevant mining tenements. It was agreed between the present parties, for the purpose of this proceeding, that this agreement was subsequently entered into by the parties thereto and that it was duly carried to completion, BHP Gold paying $440 million as the purchase price of the tenements.

1. On or about 20 March 1987 the applicant received from BHP Gold an offer document whereby BHP Gold granted to the applicant the right to subscribe for 26,599 ordinary shares of 25 cents each in the capital of the company at a premium of 25 cents per share. Stock exchange trading in the BHP Gold rights commenced on 23 March 1987. Trading commenced at $2 per right but the price quickly stabilised at about $1.30 - $1.35.

2. The applicant decided to sell its rights. They were sold through a stock broker on 14 April 1987 at a price of $1.32 per right. It is agreed by the parties that this was the market value of each of the rights at that time. The sale yielded a gross price of $35,110.68. After deduction of sale costs, the net return was $34,373.42.

3. For the purpose of this proceeding, the parties agree that the capital subscribed to BHP Gold amounted to approximately $485 million, of which $270 million came from BHP and the balance from the exercise of their rights by employees, or BHP shareholders or their assignees.

4. The applicant disclosed its sale of the BHP Gold rights. In assessing the tax payable by the company in respect of the taxation year ended 30 June 1987, the Commissioner included the sum of $34,399 which he described as "capital gain on sale of BHP Gold Mines rights". (The difference between the figure of $34,399 and the actual net return of $34,373.42 is not explained by the evidence.) In making this adjustment, the Commissioner stated that "market value for purposes of s.160ZH(9) is considered to be nil". The applicant objected to the assessment. However, the objection was disallowed, whereupon the applicant requested the Commissioner to refer the matter to this Court.

5. At the commencement of the hearing I was informed that the Commissioner's claim to tax the proceeds of the sale of the rights depended entirely on Part IIIA. The Commissioner accepted that the applicant was not a share trader. He made no claim under s.25, s.25A or s.26AAA of the Act. Accordingly, I need consider only Part IIIA.
   The legislation

6. Part IIIA of the Act is lengthy and complex. The scheme of the Part is described in the judgments of the Full Court in Hepples v Commissioner of Taxation (1990) 90 ATC 4497. That description need not be repeated here. It is enough for me to refer to the particular provisions mentioned by counsel in their submissions. Division 1 of Part IIIA deals with interpretation. The opening section of the Division, s.160A, defines the word "asset" for the purposes of the Part. The term is broadly defined to mean "any form of property" and to include, amongst other things "an option, a debt, a chose in action, any other right ...". It is common ground that the renounceable rights in BHP Gold, the sale of which generated the subject receipt, were a "form of property" and, in particular, "any other right".

7. Division 2 deals with the application of Part IIIA. Section 160L(1) makes the Part applicable, subject to some presently 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. Although counsel for the applicant formally put in issue whether his client ever acquired the BHP Gold rights, and in that connection referred to the decision of Hunt J in Palmarc Investments Pty Limited v Federal Commissioner of Taxation (1985) 85 ATC 4410, it seems apparent that the elements referred to in s.160L(1) were satisfied in the present case. Palmarc Investments is readily distinguishable. That was a case of an assignment of a right to benefit in a future rights issue. The assignor/taxpayer exercised the rights, and applied for the new shares, only as trustee for the assignee. The point of the decision was that the taxpayer never took a beneficial interest in the share rights. In the present case, by contrast, the right to take up the BHP Gold shares was something received by Allina on its own behalf before it had made any arrangement with any other person. It owned that right immediately before its disposal by sale on 14 April 1987.

8. Division 3 of Part IIIA sets out the rules for determination of capital gains and capital losses. The relevant primary rule, for the purposes of this case, is that set out in s.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."

1. Where, as here, an asset is disposed of within 12 months of its acquisition by the taxpayer, "the reference in the subsection concerned to the indexed cost base to the taxpayer in respect of the asset shall be construed as a reference to the cost base to the taxpayer in respect of the asset": see s.160Z(3). In other words, indexation must be ignored.

2. Section 160ZD(1) deals with the determination of the consideration in respect of a disposal of an asset. In the present case, this occasions no problem. It is agreed that the consideration was $35,110.68. The determination of the cost base is the issue in this case.

3. Section 160ZH(1) deals with the determination of the cost base. It provides:
   

"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."

1. Neither party suggests that paras (b), (c) or (d) are relevant. Paragraph (e) would appear to cover brokerage and other expenses incurred by the applicant upon the sale of the shares; but they have been taken into account in the agreed net sales figure of $34,373.42. The relevant question is the amount of any consideration in respect of the acquisition of the rights.

2. Section 160ZH(4) sets out rules for the determination of the amount of consideration in cases where a taxpayer has paid, or is required to pay, money or has given, or is required to give, property in respect of the acquisition. That is not the present case; Allina gave nothing for the rights. But at the relevant date subs.(9) provided:
   

"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 aset were not dealing with each other at arm's lenght 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 equel to the market value of the asset at the time of the acquisition."

Acquisition "from another person"

1. The primary dispute between the parties concerns the application of s.160ZH(9). Counsel for the applicant submit that para.(a) applies to this case, that the applicant "acquired the asset from another person", namely BHP Gold, within the meaning of para (a), and that it did not pay or give any consideration in respect of that acquisition. Accordingly, say counsel, the deeming provision contained in the concluding words of the subsection applies. Allina is to be 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. But it is agreed that the market value at the date of acquisition was the same amount as was realised on the sale. Therefore, say counsel, the cost base equals the disposal consideration; no capital gain occurred and no tax is payable under Part IIIA.

2. Counsel for the respondent accept much of this argument. But they dispute that the applicant acquired the asset, that is the rights, "from another person". They say that it is incorrect to speak of acquiring shares or rights "from" an issuing company. Counsel contend that s.160ZH(9) is inapplicable to this case. The applicant gave no consideration for the rights. Therefore, they say, nothing is to be deducted from the disposal consideration, the whole of which is taxable under Part IIIA.

3. Before turning to the arguments of counsel, I should mention that Part IIIA contains Division 10, entitled "Rights to Acquire Shares". However, as it stood at the relevant time, that Division applied only to cases where rights were issued by a company to its own shareholders. For example, Division 10 would have applied to rights issued by BHP itself. But it does not apply to this case. When the rights were issued the applicant was not a shareholder in BHP Gold. (Section 160ZYK, which defines the application of Division 10, was recently amended, by the Taxation Laws Amendment Act 1990, so as to cover rights issued by a company in the same group as the company in which the taxpayer held shares. But that amendment applies only to transactions effected after 8 September 1989).

4. The argument for the respondent draws upon two High Court decisions: Ord Forrest Pty Limited v Commissioner of Taxation (1974) 130 CLR 124 and Commissioner of Taxation v St Helens Farm (ACT) Proprietary Limited (1981) 146 CLR 336.

5. Ord Forrest concerned the allotment of shares by a company. The Commissioner assessed the company to gift duty on the basis that, having regard to the assets of the company and the amount payable on allotment, the company had made gifts to the allottees. Stephen J, at first instance, upheld the Commissioner's argument. On appeal, the Full Court divided; Gibbs and Mason JJ agreed with Stephen J while Barwick CJ and McTiernan J took the contrary view. The facts of the case are, of course, remote from those of the present case. In particular, the critical question was whether there had been a "disposition of property" by the company and that term was defined in such a way as to include an allotment of shares. But, in their reasons for judgment, some of the Justices made comments which are presently relevant. Thus at p 148 Gibbs J said:
   

"The question then is, was the allotment a disposition of property? An allotment of shares cannot be described as a disposition of property in the ordinary meaning of that expression. When a share is allotted, nothing is transferred or conveyed from the company to the shareholder. The person who becomes a shareholder by the allotment and issue of the share does not acquire any property in the assets of the company: Macaura v. Northern Assurance Co. Ltd. (1925) AC 619, at p 633; Archibald Howie Pty. Ltd. v. Commissioner of Stamp Duties (N.S.W.)(1948) 77 CLR 143, at p 152. What he acquires is the share, which is a separate right of property: Bradbury v. English Sewing Cotton Co. Ltd. (1923) AC 744, at p 767. Moreover, the share does not pass from the company; before allotment the share does not exist as a piece of property; it is only when it is allotted and issued that the rights which it confers are created: In re V.G.M. Holdings Ltd. (1942) Ch 235, at pp 240-241."

Mason J said at p 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."

1. The issue in St Helens Farm was similar to that in Ord Forrest. On this occasion there was a clear majority for the view that the issue of the shares was a disposition of property within the meaning of the statutory definition. Barwick CJ, adhering to the opinion he expressed in Ord Forrest, dissented. But that fact does not affect his following statement of principle, at pp 349-350:
   

"Until allotment and issue, which includes the entry of the allottee's name on the share register in respect of the allotted share or shares, there is no property in the unissued shares; and, in particular, there is not then, or for that matter at any other time, any property or proprietorial right in or of the company in the unissued shares in its capital. The company has the capacity to allot and issue shares in the capital up to the amount of that capital, its nominal capital. But that capital is not property of the company. Indeed, when allotted and issued, the nominal amount of the issued share or shares constitutes in accounting terms a liability of the company. But, upon allotment and issue, the allotee has property in the shares allotted, the extent of that property being determined by the constitutional instruments of the company. But it is not property which comes to the allottee from, or by transfer from, the company. It is property which comes into existence by the allotment and issue or, more precisely, which is the consequence of such allotment and issue. The property consists of rights which may thereafter be exercised by virtue of the membership of the company thus gained and in accordance with its memorandum and Articles of Association. All this is trite law and fundamental to the concept of incorporation with nominal capital and with limited liability of the shareholders."

1. It seems to me that the statements of principle which I have set out are determinative of this first submission. Although, as counsel for the applicant point out, people commonly speak of rights being received "from" a company, this parlance is not strictly correct. Just as shares do not come to an allottee from the issuing company, neither do rights. They are property of the shareholder which comes into existence as a consequence of the company's decision to grant the rights.

2. The conclusion that there may be an acquisition of an asset, for the purposes of Part IIIA, without any corresponding disposal is not incongruous. Section 160ZH(9)(a) itself recognises that possibility by its insistence upon the acquisition being "from another person". It is not difficult to think of acquisitions which are not from another person, and therefore do not fall within para.(a); for example, the making or finding of an asset. Moreover, the concept behind Part IIIA is that there is a relationship between the taxation liability of a disposer and that of a disposee. For example, s.160M(1) provides that, subject to the Part, "where a change has occurred in the ownership of an asset, the change shall be deemed, for the purposes of this Part, to have effected a disposal of the asset by the person who owned it immediately before the change and an acquisition of the asset by the person who owned it immediately after the change". For the reasons given in Ord Forrest and St Helens Farm the issue of the rights by BHP Gold did not constitute a change in ownership of these rights, hence no disposal upon which BHP Gold would be taxable.

3. Although the applicant agrees that Division 10 does not cover the present case, its counsel seek to gain some assistance from the existence of that Division. They say that, if the respondent's argument is correct, Division 10 is unnecessary. Therefore, the fact that this Division was inserted in the Part is an indication that Parliament considered that a rights issue might constitute an acquisition of an asset from another person. In particular, they point to s.160ZYN which provides that "the shareholder shall not be deemed to have paid or given any consideration in respect of the acquisition of the rights."

4. There is something in this argument but its force is reduced by a consideration of the other terms of the Division. The Division contains an important concession to shareholders, if rights are caught by Part IIIA, in back-dating the date of acquisition of the rights to the time when the shareholder acquired the original shares: see s.160ZYM. See also the special rules contained in ss.160ZYO and 160ZYQ. It is understandable that a provision such as s.160ZYN should be placed within a Division dealing with special case of the issue of rights by a company to its shareholders. Given the perceived need to enact special rules relating to the issue of rights to existing shareholders, I do not think that the existence of Division 10 should be taken as an indication of a legislative intention concerning the issue of rights to others.
   Diminution of value

5. Counsel for the applicant put an alternative argument to that based on s.160ZH(9)(a). They say that the grant by BHP Gold to Allina of the right to take up shares in BHP Gold must be seen as part of a total transaction, involving BHP as well as BHP Gold and Allina, whereby Allina (in common with other BHP shareholders) lost something of value, namely a proportion of its equity in the assets of BHP. Reference is made to the decision in Archibald Howie Proprietary Limited v Commissioner of Stamp Duties (1948) 77 CLR 143. That case concerned a reduction of capital whereby a company distributed to its shareholders in specie shares held by it in other companies. The question arose whether the share transfers were made upon a bona fide consideration in money or money's worth of not less than the unencumbered value of those shares. Dixon J pointed out, at p 152, that, although a shareholder has no proprietary right or interest in the assets of the company, "his 'share' is after all an aliquot proportion of the company's share capital with reference to which he has certain rights. He is entitled among other things to have share capital applied in pursuance of the memorandum and articles of association and, so far as assets are available for the purpose, to have his paid up capital returned in a liquidation or upon a reduction of capital if that method of returning it is decided upon pursuant to the articles of association. These rights all arise out of the contract inter socios". See also Williams J at p 157.

6. There are difficulties about this alternative argument. In the first place, the premise is not proved. There is no evidence to suggest that the arrangement made between BHP and BHP Gold reduced the net worth of BHP. The evidence indicates that the sale price of $440 million was fixed after advice from sharebrokers. There is no reason to think that the sale price was inadequate. The effect of the transaction may have been simply to change the nature of BHP's assets without affecting their total value. It is true that, on the market, purchasers were prepared to pay a premium to secure the rights, but that does not prove that BHP sold its tenements at an undervalue.

7. Secondly, the principle applied in Archibald Howie is one of limited application. This is shown by the subsequent decision of the High Court in Davis Investments Proprietary Limited v Commissioner of Stamp Duties (NSW) (1958) 100 CLR 392. The appellant in that case made an agreement with a wholly-owned subsidiary to purchase at an undervalue shares owned by the subsidiary. The same issue arose as in Archibald Howie; but, by majority, the High Court reached a different conclusion. The reason was that, although the relationship between the two companies explained the transaction, it was not one for which company law provided; but, rather, was a transaction of purchase and sale. Dixon CJ , who wrote the leading majority judgment, described the transaction at p 407 as one in which "a fasciculus or congeries of rights in personam existed in the hands of Davis Investments Pty Ltd as sole shareholder in the exercise of which it proceeded to reduce into its ownership and possession the shares transferred, at the expense of a precisely corresponding loss of value in the shares embodying the rights so exercised". Nonetheless, his Honour considered that the relevant consideration was the price actually paid.

8. Accepting that the presently relevant transaction includes the sale by BHP to BHP Gold of its gold-mining tenements, the transaction is more akin to that in Davis Investments than Archibald Howie; it is a transaction of purchase and sale at an agreed price. Accordingly, as it seems to me, the argument that Allina and the other BHP shareholders gave consideration for the issue of the rights, by diminution of their equity in BHP, cannot be sustained.

9. My conclusion is that s.160ZH(9)(a) has no application to the facts of this case and that this is an example of an acquisition of an asset at no cost. Accordingly, the Commissioner was correct in assessing the applicant to tax under Part IIIA upon the whole of the net proceeds of the sale of the rights. The appeal should be dismissed and the applicant ordered to pay the respondent's costs.