Chief Commissioner of State Revenue v Lee

[2000] NSWCA 246

Reported Decision: 2000 ATC 4600
(2000) 45 ATC 130

New South Wales

Court of Appeal

CITATION:	Chief Commissioner of State Revenue v Lee [2000] NSWCA 246 revised - 6/11/2000
FILE NUMBER(S):	CA 41010/98
HEARING DATE(S):	20 June 2000
JUDGMENT DATE:	31 August 2000
PARTIES :	Chief Commissioner of State Revenue v Tsai Mei-Lan Lee
JUDGMENT OF:	Priestley JA at 1; Meagher JA; Clarke AJA

LOWER COURT JURISDICTION :	Supreme Court
LOWER COURT FILE NUMBER(S) :	30015/97
LOWER COURT JUDICIAL OFFICER :	Sperling J

COUNSEL:	Appellant: I Mescher Respondent: D K L Raphael
SOLICITORS:	Appeallant: I V Knight Respondent: Peta Bollinger
CATCHWORDS:	Stamp Duties Act - assessment dated 27 August 1992 - Division 30 - transfers of shares in a land rich company - 6% transfer of ownership - ss99A, 99E, 99F, 124A - exercise of discretion contained in s.99F(3) - intention of parties to transaction - assessment made afresh - setting aside of aggregations.
LEGISLATION CITED:	Stamp Duties Act Division 30 - ss 99A, 99E, 99F, 124A.
DECISION:	1.Appeal allowed; 2.Orders below set aside; 3.Order that the Commissioner's assessment, insofar as it relies on s.99F(1)(b)(ii) be set aside; 4.Order that in lieu thereof the respondent's liability to pay duty in the amount of $4,527.50 be confirmed.; 5.Order that the appellant pay the respondent's costs both at first instance and on appeal.

- 2 -
- 15 -

STAMP DUTIES ACT - ASSEMENT DATED 27 AUGUST 1992 - DIVISION 30 - TRANSFERS OF SHARES IN A LAND RICH COMPANY -6% TRANSFER OF OWNERSHIP - SS99A, 99E, 99F, 124A - EXERCISE OF DISCRETION CONTAINED IN S.99F(3) - INTENTION PARTIES TO TRANSACTION - ASSESMENT MADE AFRESH - SETTING ASIDE OF AGGREGATIONS.

Facts: The respondent was one of four members of the Lee family who were shareholders in Ai Ho International Pty Limited, a land rich company which purchased two properties in 1988 upon which full stamp duty at ad valorem rates was paid. The company subsequently issued further shares, some of which were transferred between shareholders to avoid the “thin capitalization” doctrine. This transaction resulted in a 6% change in ownership in the Company and stamp duty of $1,620 on this transaction was paid. The Commissioner then assessed stamp duty at $25,582.64, to which a 100% fine was added when payment was not received within 28 days. The Commissioner based his assessment upon a 66% change in ownership. which assessment was not tendered below. The respondent appealed this assessment which was heard by Sperling J and it is from this decision that the present appeal is directed. Sperling J did not have the benefit of the Commissioner’s assessment and proceeded to vitiate the exercise of the Commissioner’s discretion.

Held: by Priestley JA: There is no general criterion governing the exercise of the Commissioner’s discretion pursuant to s.99F(3) in the reduction of an assessment.
However, some propositions may apply -
1. Division 30 was inserted into the Stamp Duties Act to catch transactions involving conveyances of land by way of transfers in other property such as shares, which result in diminished liability to stamp duty. The purpose of Division 30 is to enable the Commissioner to levy normal rates of Stamp Duty on this type of transaction.
2. The discretion given to the Commissioner in s.99F(3) allows the Commissioner to excuse transactions falling within the broad ambit of Division 30 from liability to pay whole duty, where such transactions are clearly not motivated by avoidance of stamp duty.
3. The discretion ought to be exercised to ensure parity between the amount of duty that would be payable on a conveyance of land with a transfer of shares of the type envisaged in Division 30.

by Meagher JA; Priestley JA, Clarke AJA agreeing.
1. The trial judge should have relied upon s.124A of the Stamp Duties Act and exercised the Commissioner’s discretion afresh.

2. The discretion should be exercised in the respondent’s favour as there was no intention to evade stamp duty; in the absence of this intention Division 30 of the Stamp Duties Act does not apply; and the subject transaction transferred 6% of the ownership of the company, not the 66% the Commissioner based his assessment upon.

3. The amount of duty assessable under s.99F(1)(a) on the subject transaction is $4,257.50. This amount has not been paid. If the aggregations made under s.99F(1)(b) were disallowed by exercise of the discretion under s.99F(3), it would not be necessary to remit the matter to the Commissioner and the assessment of $4,257.50 remains outstanding. In these circumstances, the imposition of a fine for this unpaid amount is inappropriate.
Orders

1. Appeal allowed.
2. Orders below set aside.
3. Order that the Commissioner’s assessment, insofar as it relies on s.99F(1)(b)(ii) be set aside.
4.(a) Order that in lieu thereof the respondent’s liability to pay duty be assessed in the amount of $4,527.50, subject to any entitlement the respondent may have to credit against that sum.
(b) The parties are to notify t he court within 7 days of the making of these orders whether they have agreed on the questions whether the respondent is entitled to any credit, and if so, its amount, and if they have not agreed, are to file a written note of their respective contentions.
5. Order 4(a) is not to operate until further order of the court.
6. Order the appellant to pay the respondent’s costs both at first instance and on appeal.

THE SUPREME COURT
OF NEW SOUTH WALES
COURT OF APPEAL

CA: 41010/98

PRIESTLEY JA
MEAGHER JA
CLARKE AJA

Thursday 31 August 2000

CHIEF COMMISSIONER OF STATE REVENUE v TSAI MEI-LAN LEE

JUDGMENT

1   PRIESTLEY JA: I have had the benefit of reading Meagher JA’s reasons in draft form, and agree with his reasoning and conclusions, except that I refrain from expressing any opinion about the operation of the relevant provisions upon examples that were discussed in the course of the oral argument. 2 A question of some general importance to the operation of the Stamp Duties Act 1920 which was discussed at length in the oral argument in the appeal was whether it was possible to state some general criterion by which the Chief Commissioner should decide whether or not he should be satisfied to cause a reduction, pursuant to s 99F(3), in the amount of an assessment. Section 99F(3) is as follows:

“ If the Chief Commissioner is satisfied that it would not be just and reasonable in the circumstances, the Chief Commissioner may determine that an amount calculated in accordance with subsection (1)(b)(ii) and specified in the Chief Commissioner’s determination shall not be aggregated for the purposes of this section. ”

3   In the course of argument I formed the view that the following propositions might answer the question:

1. Division 30 was inserted in Pt III of the Act in 1987 to deal with a very particular kind of transaction; namely, one in which shares in a land-owning company were sold and the sale attracted less duty or tax than would have been the case if the land held by the company had been sold, the sale of the shares effecting much the same results so far as the human parties involved were concerned in substance as if the land itself had been sold. The basic idea of the Division was to ensure that transactions by way of sale of shares which had the substantive effect of transferring the ownership of land or an interest in land would bear the rate of duty that the sale of the land or the interest in land itself would have attracted.
2. Within s 99F itself, the grant of the discretion to the Chief Commissioner in subsection (3) recognised that the widely drawn provisions of Division 3O will bring within their operation transactions which the basic purpose of the Division was not aimed at. The existence of the discretion showed that the legislature (or the legislation) intended that there would be some cases which would not attract the whole duty which would be payable if the discretion were not there and were not exercised.
3. From this it seems to follow that the discretion ought to be exercised in such a way as to prevent any assessment of the amount of duty payable by the operation of Division 30 being greater than the amount that would have been payable if the land or the interest in the land had been transferred directly rather than indirectly by the share transaction.

4   When the possibility that this approach might be adopted was raised with counsel, counsel for the Chief Commissioner struggled valiantly to show that s 99F(3) gave the Chief Commissioner a greater range within which to operate the discretion than the suggested approach would give. However, he was not able, to my mind, to suggest any even broadly workable alternative. His submissions all seemed to me to lead to the conclusion that the Chief Commissioner’s discretion would be absolute, which he would exercise in any way that seemed fit to him, without reference to any particular guideline at all, no matter how rough and ready. 5   Since the approach set out above seems to me to provide an at least roughly intelligible and workable criterion, which emerges naturally enough from the statutory provisions themselves, read in the light of the second reading speech (for which see Sperling J’s reasons), it is in my view preferable that it should be adopted rather than that the court should accede to the Chief Commissioner’s much wider and more amorphous contention. 6   It may be that the suggested criterion will not be applicable in every case; it may be possible that cases will occur in which some departure from it would be fitting. As I see the matter at present, however, such cases are likely to be very rare. 7   I agree with the orders proposed by Meagher JA. 8   MEAGHER JA: This is an appeal from a judgment of Sperling J. In my view, as will appear, the appeal fails in substance, but the result is not quite the same as that reached by his Honour. It concerns the application of Division 30 of the Stamp Duties Act to an assessment of stamp duty made by the Commissioner of State Revenue. The assessment was contained in a letter to Mrs Lee, the present respondent, dated 19 February 1996. Mrs Lee objected to this assessment, which objection was disallowed by the appellant on 10 October 1997. She subsequently appealed the Commissioner’s decision, which was heard before Sperling J and judgment handed down on 17 November 1998. 9 The purpose of the Division is clear enough. It is to treat transfers of shares in a land-rich company as if they were transfers of the land itself; or, more exactly, to prevent that type of tax arrangement which consists of interposing a corporate body between the individual or individuals who own the land and the land itself, with a view to minimising the duty payable on transfers of the shares (which in reality are transfers of land). 10 The means whereby duty is exacted is to force the individuals in those circumstances to lodge statements to the chief Commissioner, which are then taxed. This is laid down in s.99E of the Stamp Duties Act, sub section (1) of which is in the following terms:

“(1) If a person:
(a) acquires a majority interest,
(b) acquires an interest which results in the person having a majority interest,
(c) acquires an interest which together with the interest of a related person, is a majority interest, or
(d) having a majority interest (including an interest which, together with the interest of a related person, is a majority interest) acquires a further interest,
in a designated landholder, the person shall lodge with the Chief Commissioner a statement in respect of the acquisition.”

11 The width of the sub-section can be appreciated if one refers to the definitions contained in s99A, which appears at the commencement of Division 30 and are as follows:- 12 At s99A(1) “designated landholder means a landholder which is entitled to land:

“(a) the unencumbered value of which (not including the unencumbered value of land the subject of a land use entitlement) comprises not less than 80 percent of the unencumbered value of all assets to which it is entitled, not including assets consisting of: ……,”

Various types of property are then described as “land” and then at sub section (b) the definition is completed as follows -
“(b) the unencumbered value of which, insofar as the land is in New South Wales, is not less than $1,000,000.”

13   Again at 99A(1), “majority interest means an interest (other than a land use entitlement) in a landholder which, if the landholder were to be wound up:

(a) in the case of an interest acquired by a single acquisition - immediately after that acquisition, or
(b) in the case of an interest acquired by 2 or more acquisitions - immediately after the later or latest of those acquisitions,
would entitle the person who acquired the interest or that person together with any related person to participate (otherwise than as a creditor or other person to whom the landholder was liable at the time of the acquisition) in a distribution of the property of the landholder to an extent greater than 50 percent of the value of the property distributable to all the holders of interests in the landholder.”

14 At 99A(8), the class of relationships termed “related person” for the purposes of Division 30 are defined as -

“(a) natural persons are related persons if:
(i) they are partners, or
(ii) the relationship between them is that of a married couple, de facto partners or parent and child
(b) private companies are related persons if they are related corporations within the meaning of the Companies (New South Wales) Code ;
(c) trustees are related persons if any person is a beneficiary common to the trusts of which they are trustees,
(d) a natural person and a private company are related persons if the natural person is a majority shareholder, director or secretary in or of the company or a private company which is a related corporation within the meaning of the Companies (New South Wales) Code ,
(e) a natural person and a trustee are related persons if the natural person is a beneficiary under the trust of which the trustee is a trustee, and
(f) a private company and a trustee are related persons if:
(i) the company, a majority shareholder, director or secretary in or of the company is a beneficiary of the trust of which the trustee is a trustee, or
(ii) a related corporation (within the meaning of the Companies (New South Wales) Code) of the company is a beneficiary of the trust of which the trustee is a trustee.”

15   At 99A “Prior acquisition, in relation to a designated landholder, means the acquisition by a person or a related person of an interest in the designated landholder;

(a) on or at any time during the period of 3 years before the date of a relevant acquisition by the person of an interest in the designated landholder; but
(b) not earlier than:
(i) in the case of a designated landholder, being a private company - 21 November 1986, or
(ii) in the case of a designated landholder, being a private unit trust scheme - the date of assent to the Stamp Duties (Amendment) Act 1987 ”

16 The section of the Act which prescribes what duty is to be assessed and paid in respect of s.99E instruments, and the section which is most relevant to the present case, is s.99F, sub-ss (1) and (3) of which are in the following form:

“(1) A statement lodged under section 99E is chargeable with duty at the rates specified in paragraph (1) under the heading “Conveyances of Any Property” in the Second Schedule on:
(a) in the case of a relevant acquisition of an interest in a designated landholder and where there are no prior acquisitions of interest in the designated landholder - the amount calculated by multiplying the unencumbered value of all land in New South Wales to which the designated landholder is entitled at the date of the relevant acquisition and required to be included in the statement, or
(b) in the case of a relevant acquisition of an interest in a designated landholder and one or more prior acquisitions of interests in the designated landholder - the aggregate of:
(1) in respect of the relevant acquisition - the amount calculated in accordance with paragraph (a), and
(ii) in respect of each prior acquisition - each amount calculated by multiplying the unencumbered value of all land in New South Wales to which the designed landholder was entitled at the date of the prior acquisition and required to be included in the statement…..
(3) If the Chief Commissioner is satisfied that it would not be just and reasonable in the circumstances, the Chief Commissioner may determine that an amount calculated in accordance with subsection (1)(b)(ii) and specified in the Chief Commissioner’s determination shall not be aggregated for the purposes of this section.”

17   The essential facts concern the dealing of a Chinese family called Lee, whose members I, like everyone else, shall refer to by initials. They consisted of a father (THL), mother (TML), two sons (HJL and HML) and a daughter (HHL). The mother (TML) is the present respondent. In August 1987 HJL and HML, through their purchase of a shelf company, ended up by holding 500 shares each in Ai Ho International Pty Limited, those shares having a par value of $1.00 each. On 20 June 1988 a contract was entered into by which a Mrs Lee (who was not one of the five persons I have mentioned) purchased a property at 55 Liverpool Road, Enfield for $383,000. On 1 September 1988 the company entered into a contract to purchase a property at 78 Meredith Street, Bankstown for $886,000. Settlement of the Enfield and Bankstown properties respectively took place on 26 September and 29 September 1988. Then Mrs Lee transferred the Enfield property to the company. Full stamp duty at ad valorem rates was paid on all contracts and transfers. 18   Meanwhile, on 19 September 1988, the company issued further shares - 99,500 each to HJL and HML (taking each of their holdings to 100,000), 100,000 to THL, 100,000 to TML and 100,000 to HHL. 19   Then on 30 June 1991 there occurred the transaction which led to the dispute in the present case. On the eve of his return to Taiwan, HJL transferred to his mother TML (the present respondent) 30,000 of his shares. His stated reason was to avoid the “thin capitalization” provisions of the Income Tax Assessment Act (ie Part III Division 16F), and this explanation was accepted by the Commissioner. As a result of the transfer, the Company’s shareholding was held to be as follows:

HJL 70,000
TML 130,000
HML 100,000
HHL 100,000
THL 100,00

20   TML seems to have paid $1,620 by way of stamp duty on the transaction. Nobody can understand how this sum was computed. 21   On this smallish transaction, the Commissioner levied duties of $51` ,117.64. To understand how he reached this result one must have recourse to his written assessment dated 27 August 1992. I must note that this document, which is absolutely essential, was not tendered by either party to his Honour, and the absence of it misled his Honour in understanding the assessment. In this regard I note that learned counsel who appeared before us for the Commissioner did not appear at the trial. 22   It was common ground that the unencumbered value of the Company’s land (ie both the Bankstown and Enfield properties) was, at the time of the relevant transfer, $2,875,000. 23   The percentage of the shares transferred in the issued capital of the company was 6%. The Commissioner therefore found that duty was assessable on 6% of $2,875,000: that amounts to $172,500. That disposes of s.99F(1)(b)(i) of the Act. The Commissioner then turned his attention to s.99F(1)b)(ii) and said:

“Prior acquisitions (being the prior acquisition of Tsai Mei-Lan Lee herself and the other shareholders all of whom are “related” persons within the meaning of s.99A(8) of the Act.
Prior acquisition by Tsai: 20% x $886,000 $ 177,200
Prior acquisition by Teng: 20% x $886,000 $ 177,200
Prior acquisition by Hui: 20% of $886,000 $ 177,200”

The narration in the assessment then continued, adding the assessable amounts under paragraphs (b)(i) and (b)(ii) of s.99F(1) and exercising discretion under s.99F(3):

“Aggregate assessable amount vide s.99F(1)(b) $ 704,100
(Note: the allotments to Hong and Hung on 19/09/88 are also technically “prior acquisitions” within the meaning of the Act. However, in accordance with my discretion under s.99F(3) of the Act, I have not assessed any duty in respect of these acquisitions as the overall effect of the various allotments which took place on that day was to dilute their equity in the company.)
Duty on $704,100 $ 27,174.50
Less s.99F(2)(b) Credit (being amount of duty paid on share transfer proportionate to land quotient of the company’s assets)
s.180 x 97.6% $ 175.68
Duty payable on statement $ 26,998.82
Less duty overpaid on transfer $ 1,440.00
Balance duty payable on statement $ 25,558.82”

The assessment letter ended by saying no fine would be imposed if the $25,582.82 were paid within 28 days. As the amount was not paid the Commissioner subsequently added a 100% fine.

24   The Commissioner therefore charged duties on the basis that there was a 66% change of ownership (either of the shares or of the land), whereas there was a transaction involving no more than 6% of either. In fact, if the Commissioner wished to be bloody-minded, he could have aggregated HJL’s and HML’s “prior acquisition” as well, and taxed the hapless TML on the basis that she had held all the Company’s real estate; but mercy overtook him. 25   His Honour’s judgment proceeded on the basis that TML was being taxed as if she had a 26% interest in the land, whereas in fact it was as if she had a 66% interest in the land. His Honour came to the figure of 26% by adding the 6% figure to the 20% figure involved in TML’s personal acquisition on 19 September 1988, a conclusion his Honour would not have reached if he had before him the relevant documents and observed that THL’s and HHL’s 19 September 1988 acquisitions were also aggregated. 26   The recipient of the imposition, the respondent, appealed to Sperling J against the appellant Commissioner’s assessment. A number of grounds of appeal were taken, and Sperling J rejected all of them but one, viz. that the Commissioner wrongfully exercised the discretion conferred on him by s.99F(2). His Honour upheld the appeal on this ground, principally on the basis that the wide discrepancy between the real 6% and the hypothetical 26% was a factor which should tend towards an exercise of the discretion but was a factor which did not seem to occur to the Commissioner. His Honour seemed to think (encouraged in that regard by the counsel who appeared before him) that he was bound to act in accordance with such cases as House v The King (1936) 55 CLR 499 and Avon Downs Pty Limited v Federal Commissioner of Taxation (1949) 78 CLR 353. He was therefore looking to what elements might vitiate a discretionary judgement. In truth, his Honour’s task was easier than this - section 124A of the Stamp Duties Act, since repealed, was the relevant statutory provision for an assessment served prior to 1 January 1997. Section 124A was in the following form, viz

“ 124A.(1) An appeal to the Supreme Court under this Part is by way of rehearing of the original objection to the Chief Commissioner and is limited to the grounds of the original objection.
(2) On giving its decision, the Court may determine the amount of any duty payable as a result of the decision (including any fine).
(3) This Act applies to the Court’s assessment of duty or decision with respect to the refunding of duty in the same way as it applies to the assessment of duty, or calculation of the amount of duty to be refunded, by the Chief Commissioner.”

27 It is fairly clear from the wording of s.124A that his Honour should have exercised the Commissioner’s discretion afresh. This view was not contested by the Commissioner in this Court. Had it been acted on below, Sperling J would have reached a similar result by a different route. 28 There is no doubt, in my opinion, that the discretion ought to be exercised in the respondent’s favour. There are at least three reasons why this is so. The first is that the parties to the transaction, TML and HJL, had no intention to evade any New South Wales Tax or duty: there is no reason to doubt that the purpose of entering the transaction was to ensure that they were not disadvantaged by the “thin capitalization” doctrine. The second is that, if the purpose of Division 30 was to ensure that there was no evasion of the payment of ad valorem duty in land deals, that is wholly inappropriate in the present circumstances: within three years of the transaction of 30 June 1991 no less than three lots of duty on an ad valorem basis were paid - two in respect of the Enfield property and one in respect of the Bankstown property. The third is the anomaly of being taxed as if a transaction consisted of the sale of 66% of the Company’s realty whereas it was in fact only 6%. 29   The contrary argument put on behalf of the Commissioner usually runs something like this (although I have no desire to parody it): if the Commissioner were under a duty to exercise his discretion under s.99F(3) in all cases where it was just and reasonable to do so (as in the present case) there would be no, or virtually no, room left for s.99F(2) to operate. There are two answers to this: the first is “tant pis”; the second is that there would still be many cases in which no reason to exercise the discretion would exist and allow s.99F(1) to reign supreme. 30   An example of one such case is the following, which was given by Clarke AJA in the course of argument: company A purchases land in 1980; in 1985 a father and son, X and Y, buy 70% and 30% of the shares in company A; in 1986 company A buys real estate and becomes “land rich”, and towards the end of 1987 X acquires Y’s 30% interest. There is no reason one can see to apply any discretion in favour of the transaction if the Commissioner were to seek to recover duty on the basis that there had been a 100% transfer of the land. Many other examples can be imagined. 31   A problem remains. The Commissioner has assessed the respondent as if a transfer of 66% of the land were involved. But, a transfer of the equivalent of 6% of the land was involved. That land (ie the 6%) had an assessable value of $172,500. The court was told by the Commissioner that the duty payable on a conveyance of land, in accordance with s.99F(1)(a), would be $4,527.50. That amount has not yet been paid although it may be that the respondent is entitled to some credit against it. If, as I am minded, we were to order that a discretion should be exercised under s.99F(3) to disallow all aggregations under s.99F(1)(b), the provisions of paragraph (a) would still apply. It would then not be necessary to remit the matter to the Commissioner, as Sperling J did. It follows then that the appeal should be allowed, although in substance it has failed. I do not think it would be appropriate, in the circumstances, to impose any fine. 32   The orders which I therefore propose are as follows:

1. Appeal allowed.
2. Orders below set aside.
3. Order that the Commissioner’s assessment, insofar as it relies on s.99F(1)(b)(ii) be set aside.
4.(a) Order that in lieu thereof the respondent’s liability to pay duty be assessed in the amount of $4,527.50, subject to any entitlement the respondent may have to credit against that sum.
(b) The parties are to notify t he court within 7 days of the making of these orders whether they have agreed on the questions whether the respondent is entitled to any credit, and if so, its amount, and if they have not agreed, are to file a written note of their respective contentions.
5. Order 4(a) is not to operate until further order of the court.
6. Order the appellant to pay the respondent’s costs both at first instance and on appeal.

33   CLARKE AJA: I agree with Meagher JA.