Commissioner for Act Revenue v Francey - [2014] ACAT 67

ACT CIVIL & ADMINISTRATIVE TRIBUNAL

COMMISSIONER FOR ACT REVENUE v FRANCEY
(Appeal) [2014] ACAT 67

AA 14/08
Catchwords: APPEAL – ADMINISTRATIVE REVIEW – Revenue - duty on acquisition of shares in a company that held land in the ACT – Stamp duty paid on conveyance - whether duty payable on the acquisition of shares by the respondent – trust – whether there was a constructive trust

List of Legislation: ACT Civil and Administrative Tribunal Act 2008 (ACT), ss. 68
Corporations Act 2001
Duties Act 1999 ss. 10, 11, 56, 76, 77, 78A, 83, 84, 85, 86, 88 -91, and Part 3.2
Taxation Administration Act 1999 ss. 29, 31, 37, 107A & 108A, and Schedule 1.2

List of Cases: Affinity Health Ltd v Chief Commissioner of State Revenue[2005] NSWSC 663
Australian Building & Technical Solutions P/L v Boumelhem; Boral Australia Ltd v Boumelhem; Boumelhem v Jones & Ors [2009] NSWSC 460
Fowler v Commissioner of Taxation [2012] FCA 1040
Francey v Commissioner for ACT Revenue [2013] ACAT 84
Muschinski v Dodds (1985) 160 CLR 160 at 612-4

Texts:Duties Legislation 2007 By the Late, The Honourable D Graham Hill, edited by Dr H R Sorensen, S J McMillan & DKL Raphael

Appeal Tribunal: Mr W.G. Stefaniak AM – Appeal President
Mr G.J. Lunney SC – Senior Member

Date of Orders: 17 October 2014
Date of Reasons for Decision: 17 October 2014

ACT CIVIL & ADMINISTRATIVE TRIBUNAL

AA 14/08

BETWEEN:
COMMISSIONER FOR ACT REVENUE
Appellant

AND:
MARIANNE FRANCEY
Respondent

APPEAL TRIBUNAL: Mr W.G Stefaniak AM – Appeal President
Mr G.J. Lunney SC – Senior Member

DATE: 17 October 2014

ORDER

1.Appeal dismissed.

………………………………..
Mr W.G Stefaniak AM – Appeal President
For and on behalf of the Tribunal

REASONS FOR DECISION

This is an appeal from an original decision of this tribunal given on 24 December 2013. It was reported as Francey v Commissioner for ACT Revenue [2013] ACAT 84.
Directions were given on 19 June 2014 relating to the filing of an appeal book by the appellant and the filing and serving of submissions. The appeal was to be on the material that was before the original tribunal.
The appeal application was filed on 21 January 2014, and was amended later. The Application for Appeal found its final form in a document filed on 14 July 2014.

BACKGROUND

The Commissioner for ACT Revenue, (the appellant), assessed duty pursuant to the Duties Act 1999 on an acquisition of shares by Ms Francey, (the respondent), in a company which held land in the Territory. The assessment was based on the transfer of 59,999 of 60,000 issued shares to the respondent. Prior to transfer, the shares had been owned by Mr Kerill Chambers, (KTC) a family member. The remaining 1 share was owned by Mr Robert Chambers, (RFC) also a family member.
In the original decision, the tribunal set out the facts as follows at paragraph 24. Reference in this quotation to ‘the Applicant’ is a reference to the respondent in this appeal.
i.The purchase transaction of the property and the business operating on the property in 2007/2008 was complicated because when the Applicant was negotiating the transaction she owned a business that was part of a Buying Group which restrained its members from owning any other business in the same industry that was not part of the group. She was in the process of finalising an agreement to exit the Buying Group. This was not finalised until 12 March 2008. In the meanwhile, the property and the business she was acquiring needed to be held by an entity with which she was not associated.
ii.At this time her brother-in-law, KTC, was the sole director of UDS. He owned the company and had no significant assets or liabilities other than shareholder loans to the company. KTC agreed to the use of UDS as one of the purchasing entities for the transaction in order to assist his brother (the Applicant’s then spouse, Robert Farris Chambers (RFC)) and the Applicant. He also agreed to serve as the sole director of a new company, TS (CBR) Pty Ltd (TSCBR), which was set up for the purpose of purchasing the business. He said in his Witness Statement (Exhibit A2) he was not involved in any way with the negotiations for the purchase of the property and the business and he was not involved in the negotiations with NAB for the funding of the purchase.
iii.The Applicant negotiated with the vendor of the business and the property and with NAB for the finance to fund the purchase of both the business and the property.
iv.NAB, in providing the finance for the purchases, advised the Applicant that it needed to be satisfied that she had control over the assets being acquired as she was providing the additional asset backing for the transaction.
v.KTC entered into an Option Agreement with the Applicant on 14 December 2007 that allowed her, at any time on 24 hours notice, to formally acquire the shares in UDS for $1.00. The agreement obliged KTC to not sell, assign, mortgage, pledge, give away, transfer or otherwise encumber or deal with any interest in the UDS shares. The Option Agreement satisfied the NAB s requirements and enabled the Applicant to comply with the Buying Groups restraint condition.
vi.The NAB approved a loan of $3.55 million on 21 December 2007. An email to the Applicant from Matthew Douglas at NAB (NAB email) dated 19 November 2007 refers to the discussion in (iv) above. The borrowing scenario referred to in this email, except for a slight variation in the amounts, was corroborated by KTC in his Witness Statement (Exhibit A2). NAB approved a temporary overdraw facility for the Applicant to pay the deposit on the transaction.
vii.The Applicant said she did not seek legal, accounting, taxation or financial advice at the time that she entered into the Option Agreement and on UDS s purchase of the property. It does however; appear from the NAB email, that she may have had some discussions about structure and tax ramifications with Mr Douglas when seeking NAB finance for the purchase of the property and the business.
viii.UDS entered into an agreement to purchase the property for $1,150,000 on 4 January 2008, paid stamp duty of $59,375 on 7 January 2008 and settled the purchase of the property on 14 January 2008.
ix.ASIC records show that KTC beneficially held 59,999 of the 60,000 shares in UDS until they were transferred to the Applicant when she exercised the option in the Option Agreement in August 2011. KTC and the Applicant executed the share transfer form on 16 August 2011.
x.The remaining one UDS share has been held by RFC at all material times.
xi.The Commissioner issued the section 82 notice on 23 January 2012 and on 29 February 2012 issued a Notice of Assessment based on the relevant acquisition by the Applicant of a significant interest in a landholding entity in the ACT.
At the original hearing the respondent submitted that at the time that the company acquired the land, all shares in it were held on a constructive trust for the benefit of the respondent and the exercise of the option simply transferred bare legal title of the shares and thereby ownership and control to her, she being already the beneficial owner of the shares. The respondent further submitted that as the concept of constructive trust had evolved, it has been recognised as arising both as a remedy, involving judicial discretion, or as an institution whereby the property interest arises from inception and is not subject to judicial discretion. The respondent relied on a statement by Deane J in Muschinski v Dodds (1985) 160 CLR 160 at 612-4 in support of the latter submission. The respondent also relied on Australian Building & Technical Solutions P/L v Boumelhem; Boral Australia Ltd v Boumelhem; Boumelhem v Jones & Ors [2009] NSWSC 460.
The original tribunal appears to have accepted those submissions, and came to the following conclusions:
51The Tribunal, having considered all of the evidence and submissions, concurs with Mr Francey’s submissions that the Applicant and KTC intended in entering the Option Agreement to create an agreement whereby all of the shares in UDS would be beneficially held for the Applicant. The unchallenged witness statements supported these submissions. While it was subsequently ascertained that KTC only held 59,999 shares in UDS and RFC held one share, this was not material to the Tribunal’s decision. The arrangement was described as a family arrangement at the time. This was unchallenged.
…
56.The Tribunal has carefully considered the case law provided by the Applicant and all of the documentation and submissions before the Tribunal from both parties and is persuaded that the stated intention of the Applicant and KTC and RFC at all relevant times was that the UDS shares were beneficially held for the Applicant. By 14 January 2008 the Applicant had sourced and secured to NAB s satisfaction, all of the finance for UDS as well as the duty to purchase the property (and the business). The Tribunal had no reason not to accept that this was the factual history. The Applicant was present during the hearing and was not cross examined.
57.The Tribunal concurs with the Applicant’s submissions that from 14 January 2008 at the latest, no shareholder could assert beneficial ownership in the shares or the property of UDS against the Applicant and that the Applicant’s interest in UDS and the property would prevail over any creditor.
58.The Tribunal is satisfied and finds that a constructive trust arose no later than 14 January 2008. The consequence of this finding is that the beneficial ownership in UDS was vested in the Applicant as and from that date. What was transferred to her as the beneficial owner on 16 August 2011 was the bare legal title.
59.It follows that the Applicant, for the purposes of the Duties Act and the TAA, is not liable for the payment of duty on the transfer on 16 August 2011.
The Commissioner has appealed from the decision of the original tribunal. In his submissions, the appellant refers to a number of key errors of fact and law in support of his appeal. They were listed as follows:
8.1The Tribunal erred in fact in finding a constructive trust existed in relation to the UDS shares in favour of the respondent prior to the exercise of the option agreement.
8.2Even if the constructive trust finding was correct, the Tribunal erred in law in failing to consider whether the respondent acquired a significant interest in a landholder as at 16 August 2011.
8.3The Tribunal erred in fact in its finding that the duty had been paid on the option agreement.
8.3The Tribunal erred in fact and law in finding that S 11(2) of the Duties Act applied to the duty charged by the Commissioner.

LEGISLATION

The relevant legislation is set out in the decision of the original tribunal.

CONSTRUCTIVE TRUST

The basis of the original decision was that a constructive trust had come into existence at either the time of the option agreement, 14 December 2007, or when the property was purchased on 14 January 2008. This finding is challenged on appeal. The appellant submits that the original tribunal erred in relying on its assessment of the subjective intentions of the parties at the time of the option agreement. In the appellant’s submissions of 14 July 2014, it was expressed as follows:
What is relevant in assessing the existence of a constructive trust is not the subjective intentions of the parties after the fact - rather, it is the objective intentions of those parties at the time of the events said to give rise to the constructive trust.
The submission asserted that the objective intention of the parties was to enter into an option agreement to give formality to their arrangement. Their intentions were embodied in that agreement.
In the original decision, the tribunal considered the authorities relating to constructive trusts, in particular, Muschinski v Dodds (1985) 160 CLR 583 where there had been a common intention between parties to create an equitable interest in property. The tribunal examined the factual circumstances of the dealings which resulted in the signing of the option agreement and made the following factual finding.
55It was not readily apparent from the evidence who drew up the Option Agreement; however it is apparent, when reading the Option Agreement and KTC’s two witness statements, that KTC regarded his UDS shares, from the time of the Option Agreement, as being beneficially held for the Applicant and no longer being his property. RFC, who held the one remaining UDS share, corroborated this in his witness statement.
The original tribunal acknowledged that there was no express declaration of trust, but that the option agreement was signed in pursuance of a common intention that the 59,999 shares should be beneficially held for the respondent. That this was the case is supported by the bank’s desire to have the respondent demonstrate that she had control of the company. It was open to the original tribunal on the evidence available to it to find that the parties intended the terms of their rights and obligations relating to the shares to extend beyond simply those conferred by the option agreement. Assessment of the subjective intention of the parties was only one aspect of the evidence examined. The original tribunal clearly reviewed the available evidence and the applicable law and came to the conclusion that a constructive trust arose at the time that the option agreement was signed (see para 55 quoted above). This was a view of the evidence which was available to it, and it is the opinion of this Appeal Tribunal that no error has been demonstrated.

APPLICATION OF ACT IF TRUST FOUND

This ground of appeal focuses on the terms of section 83 and section 84 of the Duties Act.
The appellant submits that there are three questions which must be answered in determining the liability to duty having made the assumption that there was a constructive trust.
The first of these questions was whether at the relevant time the company was a landholder. It was not disputed that the company was a landholder as defined in the Act and held the beneficial interest in the land.
The second question is whether the respondent had at any time a significant interest in the company. Related to that is the further question, whether the respondent acquired that interest at the time of the share transfer pursuant to the option agreement: that is 16 August 2011.
As to the second question, the appellant submitted that through the share transfer the respondent acquired a significant interest in the company. It pointed out that there was a specific definition of ‘interest’ for the purposes of Part 3.2 of the Act, (Part 3.2: Acquisition of Interests in Certain Landholders). The word ‘interest’ was defined generally in the Dictionary, but reserved the definition for Part 3.2 to that found in section 83. Although the appellant submitted that this definition indicated a clear legislative intention to exclude a beneficial interest from the definition of ‘interest in a landholder’ for the purposes of Part 3, the Tribunal notes the terms of sub-section 84(2)(c) of the Act. This refers to a change in the capacity in which a person holds an interest, as including a change in the beneficial ownership of an interest held by a person who is a trustee.
The appellant notes the use of the word ‘entitlement’ in section 83 and further submits that at no time prior to the exercise of the option would the respondent be entitled to a distribution of property. This is because distributions may only be made to members of the company ‘according to their rights and interests in the company’ (section 501 of the Corporations Act 2001). Section 231 of the same Act defines ‘member’ in terms of names entered on the register of members.
The Tribunal was referred to Affinity Health Ltd v Chief Commissioner of State Revenue[2005] NSWSC 663. This decision, as far as it is relevant to this case, concerned the NSW Duties Act 1997 and whether for the purposes of that Act, acquisition of shares in a landholding private company occurred on execution of the contract for sale of shares; or, when the purchaser was entered into the company’s register of members. There was a contract for the sale of the shares, but it was conditional on the approval of the Foreign Investment Review Board to a certain transaction. It was held that the condition was not precedent to the formation of a binding contract, but was precedent to the performance of the binding contract for sale of the shares.
It was held that the time of acquisition was the time of entry into the company’s register. Gzell J at [26] said:
The authorities … which speak in terms of an equitable interest arising upon execution of a conditional contract for sale are based upon the premise that equity intervenes because it would be unconscionable to allow the other party to act inconsistently with its obligations under the contract for sale. Equity acts in personam against the vendor to prevent unconscionable conduct. It goes no further.
The issue of a trust did not arise in that case. Affinity was considered in Fowler v Commissioner of Taxation [2012] FCA 1040. It was not a duties case, but one which considered an option to purchase shares in relation to the Income Tax Assessment Act. It applied Affinity in relation to the timing of the acquisition of share options where the grant of the options was conditional upon shareholder approval in General Meeting. It was held that a beneficial interest in a right to acquire a share did not arise until the contingency as to the shareholders’ approval was satisfied and then attracted the provisions of the ITAA.
The Tribunal was referred to Duties Legislation 2007 Hill, edited by Dr H R Sorensen, S J McMillan & DKL Raphael and notes the following passage from that text:
150 (NSW) What are “interests” and “significant interests” in landholders? Para [7.0540] When is an interest in a landholder acquired?
“It is clear that the grantee of an option to purchase a share or marketable security would not be a person entitled to participate in a winding-up and, a fortiori, would not be a person who has acquired any interest in a landholder.”
There is a difference in the wording of the section being considered in that text and section 83. The relevant part of the section considered in the text is as follows:
150. For the purposes of this Chapter, a person has an interest in a landholder if the person, in the event of a distribution of all the property of the landholder, would be entitled to any of the property distributed.
However in the same paragraph of the text referred to above, the following appears:
An argument can be made that there is a difference in the case of private unit trusts, since the trustee of such a trust, if on notice, could be compelled to distribute to the person entitled in equity, rather than the legal holder. In this case the register is not conclusive, it does not protect the trustee.
In the present case, the trust arose on 14 December 2007. The respondent became the beneficial owner of those shares with all the rights and entitlements which came with that status. At the time that the property was acquired by the company, the respondent continued to be the beneficial owner of all except one issued share in the company, and arguably all the shares in the company. That continued through 16 August 2011 when the respondent executed the share transfer form in relation to those shares.
The Court in Affinity was dealing with contingent rights in which the remedies available were subject to the discretion of the Court. The respondent had the remedies available to her to enforce the trust which were available to all beneficiaries who were able to establish their entitlement to them. The Tribunal is of the view that the principles referred to in Affinity are not applicable in the circumstances of this case where a trust has been found

At any time prior to the transfer of the legal title to the shares, the respondent had the capacity upon giving notice, to call in the legal title which would result in the merger of the legal and beneficial interests At that time, she would have been able to become a member of the company, however there was no change in her entitlement to beneficially participate in the property of the company on a winding up. She had always had the beneficial interest in the shares of the company and the means to enforce the trust which would include appointment of a receiver, or to have the shares transferred to herself.
In summary, the Tribunal considers that the following considerations are applicable:
(a)The outcome in Affinity is not applicable to the circumstance of this case since different equitable principles apply.
(b)At the time of the option agreement the respondent was sui juris, had the full beneficial interest in the shares, and this did not change at the time of acquisition of the property by the company or upon transfer of the legal title to the shares.
(c)Section 84(2)(c) indicates that recognition of a beneficial interest under a trust is part of the scheme of Part 3.2.
(d)The sections of the Corporations Act referred to above require that a distribution on a winding up be made to the registered members of the company.
However the definition of interest in section 83 refers to an entitlement to a distribution of property on a winding up or otherwise. The appellant argues that the respondent was not entitled to a distribution “from the landholder” because she could not at any point prior to becoming the legal holder of the company’s shares, have enforced against the company a right to a distribution. The Act uses the word ‘entitlement’, not the right to enforce. Although the respondent’s entitlement is not a direct one, her entitlement is clearly enforceable and one which the Tribunal considers to be the subject of the Act. The Tribunal is of the view that, for the reasons referred to above, the respondent’s capacity as beneficial owner of the shares to readily become the full owner of the shares gives her an entitlement to a distribution on a winding up for the purposes of section 83.
It follows that she acquired a beneficial interest in at least 59,999 of the company’s issued shares on 14 December 2007. That interest became a significant interest for the purposes of section 83 when the company acquired the land and became a landholder as defined in Part 3.2 on 14 January 2008.
There was a further ground of appeal relating to a finding made in the original decision relating to the operation of section 11(2) of the Act. The Tribunal finds that ground made out, however the reversal of the finding does not have consequence for the present decision of the Tribunal.
Accordingly, the formal orders of the Tribunal are that the appeal be dismissed.
………………………………..
Mr W.G. Stefaniak – Appeal President
for and on behalf of the Tribunal