Commissioner of Taxation v McNeil

[2006] HCATrans 300

[2006] HCATrans 300

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
  Sydney  No S56 of 2006

B e t w e e n -

COMMISSIONER OF TAXATION

Appellant

and

HELEN MARY McNEIL

Respondent

GUMMOW ACJ
HAYNE J
CALLINAN J
HEYDON J
CRENNAN J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON WEDNESDAY, 14 JUNE 2006, AT 10.21 AM

Copyright in the High Court of Australia

MR B.J. SHAW, QC:   If the Court pleases, I appear with my learned friends, MR G.J. DAVIES, QC and MR S.H. STEWARD, for the appellant Commissioner.  (instructed by Australian Government Solicitor)

MR D.H. BLOOM, QC:   May it please the Court, I appear with my learned friends, MR W.G. MUDDLE and MS K.J. DEARDS, for the respondent.  (instructed by Mallesons Stephen Jaques)

GUMMOW ACJ:   Yes, Mr Shaw.

MR SHAW:   If the Court pleases, in this case the taxpayer is and was an elderly retired lady who derived her income from, amongst other things, shares which she acquired for the purpose of enjoying the income produced by them.  Amongst the shares she held were some shares in the St George Bank and in 2001 the bank entered into a transaction which involved its creating and conferring indirectly on its shareholders a right to have the bank buy a share for each of the rights in the bank at a price fixed at $16.50.

That was a valuable right because that price was a price substantially in excess of the market price for the shares at the time.  The right was not a right directly conferred on the shareholders and it was not a right which related to the particular shares of the shareholder but for every right one share could be sold to the bank whether it was a share which the shareholder had held at the time or whether it had been acquired at some later time.  The first the taxpayer heard about it was when she received an explanatory memorandum, which appears in the appeal book at page 115, and that was accompanied by a direction form which appears in the appeal book at page 373.

GUMMOW ACJ:   This so-called buy-back procedure departs from traditional company law ideas, I suppose. Am I right thinking ‑ you do not have to answer this now - that it was authorised by section 257A of the Corporations Law?

MR SHAW:   It is certainly a buy-back authorised by one of those sections.  I am not quite sure which.  Your Honour is putting to me a number I am not quite sure about, but the answer is yes, by one of those buy-back sections.

GUMMOW ACJ:   Yes, 257B has a chart which tells you what forms of procedure you have to follow and I think this just – it depends on the size of the holding and so on.

MR SHAW:   And on the sort of scheme it is.

GUMMOW ACJ:   Yes.

MR SHAW:   There may be some question about whether this scheme is an equal access scheme or a selective buy-back.  I do not know that it matters which it is.  The reason it might be a selective buy-back rather than an equal access scheme is that foreign shareholders and employee shareholders who held their shares pursuant to employee share schemes were treated differently from the other shareholders.

GUMMOW ACJ:   Yes.

MR SHAW:   But which it is, is not, I think, material.  The information memorandum explains the structure of what is called the buy-back, although it may be a buy-back from the point of view of the companies, not necessarily a buy-back from the point of view of the vendor of the shares.  It explains, amongst other things, that the structure of the transaction was determined by what are called the transaction documents which were entered into on 12 January 2001.  Those transaction documents appear in the appeal book.  I should take the Court first of all to the sell back right deed poll.  That appears in the appeal book at page 177 and if the Court would look at page 178 it can be seen that the deed poll is made by the bank in favour of each participant and “participants” are defined in the definition clause at page 180 and they include:

(a)       a Record Date Shareholder;

(b)       a Sell Back Right Holder;

(c)       CSFB -

CSFB is Credit Suisse First Boston, and St George Custodial is a trustee company set out, I think, for the purpose, but at any rate a subsidiary of the bank.

In clause 2 at page 181 the deed poll provides that “Subject to Clause 3”, and clause 3 is on the next page, which gives the bank the right to revoke its obligations under the deed at any time prior to the listing date.  The listing date was expected to be 19 February of that year.  It was the date on which the rights were expected to be listed on the Exchange.  Clause 2(a) goes on:

Subject to Clause 3 and the ASX agreeing to list the Sell Back Rights for quotation on ASX on or before the Listing Date, St. George will, on the Listing Date, grant to St. George Custodial for the absolute benefit of:

(i)       each Record Date Shareholder –

each record date shareholder is – this definition is at page 180:

a person who is registered as a holder of Shares in the Register of Members at 5 pm on the Record Date.

The record date is defined immediately above.  It is Tuesday 23 January 2001.

for the absolute benefit of:

(i)each Record Date Shareholder (other than an Excluded Shareholder) one Sell Back Right for every 20 shares held at 5 pm on the Record Date . . . to be held by St. George Custodial under the Deed Poll (Shareholder) –

and another provision in relation to the excluded shareholders.  So far as Mrs McNeil was concerned, she was a record date shareholder and not an excluded shareholder.  Then it is provided in clause (b) that:

A Record Date Shareholder (other than an Excluded Shareholder) can obtain legal title to a Sell Back Right only by:

(i)giving a Direction to St. George Custodial by completing the Direction Form . . . with details of the number of Sell Back Rights they direct to have transferred to them; and

(ii)      returning the duly completed Direction Form to:

St George Share Registry . . . 

(c)Each Non-acceptance Shareholder Participation and Excluded Shareholder Participation shall be sold to CSFB . . . who can deal with them pursuant to clause 3 of the CSFB Deed Poll.

“Non-acceptance Shareholder Participation” is defined again on page 180.  It means:

for each Remaining Shareholder, their Remaining Sell Back Rights under the Deed Poll (Shareholders).

Then in clause 3 there is the provision about revocation.  In clause 10 at page 185 there is a provision that:

Each Participant has the benefit of this Deed Poll even though the Participant is not a party to this Deed Poll –

In 10.2:

Each Participant is entitled to enforce its rights under this Deed Poll independently from each other Participant.

The terms of the sell‑back rights are provided for in clause 6 on page 183.  The definition of “Terms” which refers to Schedule 1 and Schedule 1 is at page 186.  In clause 1 of the terms:

(a)Each Sell Back Right confers on the Sell Back Right Holder a put option to require St. George to purchase one Share at the Buy Back Price.

That turned out to be $16.50.

The Sell Back Right Holder is not obliged to exercise this option.

(b)On the exercise of a Sell Back Right in accordance with these Terms, St. George must acquire from the Sell Back Right Holder one Share at the Buy Back Price –

Then in clause 2 there is a provision that:

(a)Sell Back Rights may be sold or purchased at any time during the Trading Period –

which was expected to commence on 19 February and finish on Tuesday, 13 March.  Then in clause 4 there is a provision about how sell‑back rights were to be exercised.

In the Deed Poll (Shareholders) which appears at page 194, it will be seen that that is a deed between the bank and Custodial.  In clause 1.3(a) it is provided that:

It is the fundamental intention of the parties that:

(i)each Participating Shareholder’s beneficial interest in its Participant Entitlement be kept distinct from each other Participating Shareholders’ beneficial interest in its Participant Entitlement;

(ii)      there should be no pooling of any of the interests . . . 

(iii)each Participating Shareholder is, under a separate trust, absolutely entitled as against the Trustee to its Participant Entitlement.

Then in clause 2.1 on page 198 it is provided:

The Trustee declares that it holds each Participant Entitlement on separate trusts absolutely for each Participating Shareholder.

In clause 2.2:

(a)The Trustee will hold the Participant Entitlement absolutely for the Participating Shareholder unless and until directed under clause 3.1.

(b)Where a direction has not been received . . . the Trustee shall act in accordance with clause 3.2 –

In clause 3.1, which is further down page 199, there is a provision that:

If the Trustee receives a direction in the form of a Direction Form from an Applicant, the Trustee must as soon as reasonably practicable transfer to the Applicant the legal title to that Applicant’s Directed Sell Back Rights.

Then in 3.2 it is provided that:

(a)The Trustee will sell the Remaining Sell Back Rights for each Trust to CSFB which will:

(i)sell on the ASX or exercise the Remaining Sell Back Rights; and

(ii)pay the Proceeds on behalf of the Trustee to each Remaining Shareholder,

each in accordance with the CSFB Deed Poll. 

Then there is an undertaking by the trustee in clause 3.3 at the top of page 200.  The other relevant deed poll which was executed on 12 January is the CSFB deed poll at page 227.  That is the deed poll that I earlier referred to relating to excluded shareholders.  The CSFB deed poll is at page 302 and at page 306 it is provided that:

(a)      Subject to clause 2, CSFB:

(i)consents to the sale by St.George Custodial to it of the CSFB Sell Back Rights for the Gross Sale Mechanism Participant Payment;

(ii)will use reasonable endeavours, during the Trading Period, subject to clause 3(c), its legal obligations and market conditions, to promote the sale of the CSFB Sell Back Rights;

(iii)must pay to each Sale Mechanism Participant by the Final Payment Date an amount equal to the Sale Mechanism Price multiplied by that Sale Mechanism Participant’s Excluded Shareholder Participation or Non-acceptance Shareholder ‑ ‑ ‑

GUMMOW ACJ:   Is there a definition of “Sale Mechanism Participant”?

MR SHAW:   Yes there is.  First of all, there is a definition of “Sale Mechanism Price” on page 305 and in clause 1.2 it is provided that:

Definitions in the Sell Back Right Deed Poll, Deed Poll (Shareholders) and Deed Poll (Excluded Shareholders) apply in this Deed -

and if one goes to page 180, one finds:

Sale Mechanism Participant means:

(a)      each Non-acceptance Shareholder; and

(b)      each Excluded Shareholder.

A “Non‑acceptance shareholder” –

means a Remaining Shareholder under the Deed Poll (Shareholder).

The deed poll (shareholder) provides, at page 197, that:

Remaining Shareholders means Participating Shareholders who do not give a direction to the Trustee pursuant to clause 3.1 for all their Participating Sell Back Rights before 5pm on the Election Date.

The “Election Date” is defined at the top of page 196 – it is 16 February.  So what the transaction documents provided for was the grant to Custodial on 19 February of the sell‑back rights on behalf of the area shareholders, but it was also provided that if a participating shareholder wanted to give a direction in relation to the rights, it had to be given by 16 February.  If it was not given by 16 February, which is before the date of the grant, then the shares became remaining shares and were dealt with by being sold by Custodial to CSFB.

It follows from all that that what a shareholder could do, who was in Mrs McNeil’s position, she could if she had wanted have given a direction pursuant to the direction form, or indeed she might have done this perhaps separately, that she wished to sell, say, all her shares to the bank, or she could have given a direction that she wanted to have the sell‑back rights transferred to her, and if she had done that she could have either exercised them or have had them sold on the Exchange, or done nothing or the third alternative is that she might have done nothing.  That is in fact what she did, if doing nothing can be called doing something.  But the result of that was that her right became subject to the provision for the sale of the rights to CSFB and the achievement of the various sales which were provided for which was going to end up with the sale price mechanism kicking in and her in the end getting a sum of money.

So in effect what happened was that the bank created rights for the benefit of its shareholders.  They were valuable rights because they were rights to sell shares in the bank to the bank at a price in excess of their then market price, so they were valuable things and they could be sold.  The question which arises is did the creation and conferring of the rights on the shareholders amount to income according to the ordinary concepts and usages of mankind, or alternatively, did receipt of the moneys which were ultimately paid to her constitute the receipt of income.  If the answer to those questions are no, was her receipt of the rights or her entitlement in respect of the rights an event which gave rise to a capital gain which was taxable under the capital gains tax provisions of the Act.

CALLINAN J:   Mr Shaw, where is the provision for price?

MR SHAW:   The provision for which bit?

CALLINAN J:   The sell‑back.

MR SHAW:   Your Honour, it is at ‑ ‑ ‑

GUMMOW ACJ:   Page 305?

MR SHAW:   I am not quite sure whether your Honour is asking me about the $16.50.

CALLINAN J:   Yes, I am.

MR SHAW:   The buy‑back price is provided at – this is page 178, your Honour:

Buy Back Price means the amount specified as such in the Information Memorandum.

The information memorandum is the document I first referred to your Honour and at page 117 and I think elsewhere in the document as well it refers to $16.50.

Turning to the question of whether there was the receipt by the taxpayer of income, it is established that when one asks a question of that kind one should look at the question from the point of view of the recipient, that is, from the point of view of the taxpayer here, Mrs McNeil, and not from the point of view of the payer, and that appears in a number of place but, amongst others, in GP International Pipecoaters 170 CLR 124 and the ‑ ‑ ‑

GUMMOW ACJ:   Do you read the respondent as challenging that fairly basic idea?

MR SHAW:   No, your Honour, I do not, but the reason is it is of significance is that in the Full Court they seem to not recognise ‑ ‑ ‑

GUMMOW ACJ:   Yes, I understand that.

MR SHAW:    ‑ ‑ ‑ that proposition and it is, as your Honour rightly says, fundamental and really not, as I understand it, in dispute but nevertheless that was not the way that the ‑ ‑ ‑

GUMMOW ACJ:   Is there a particular passage in the Full Court that you would point to as straying from the path?

MR SHAW:   Yes, your Honour.

GUMMOW ACJ:   In Justice French’s judgment?

MR SHAW:   It is referred to, your Honour, in our outline at page 12, paragraph 43, and the passages in Justice French’s reasons and Justice Dowsett’s reasons are set out there.

GUMMOW ACJ:   Yes, thank you.

MR SHAW:   The passage in GP International Pipecoaters is at 136.  Then the question of how the matter is to be answered is answered by the judgment of the majority in this Court in Montgomery’s Case 198 CLR 639. At page 661 in the joint judgment of Justices Gaudron, your Honours Justices Gummow, Kirby and Hayne, the well‑known passage from the judgment of Justice Pitney in Eisner v Macomber is set out and adopted.  It is a well‑known passage but if I might remind the Court of what is said at the end of that passage which appears at page 662, there his Honour said, commencing at about point 2 on the page:

Brief as it is, it indicates the characteristic and distinguishing attribute of income essential for a correct solution of the present controversy.  The Government, although basing its argument upon the definition as quoted, placed chief emphasis upon the word ‘gain’, which was extended to include a variety of meanings; while the significance of the next three words was either overlooked or misconceived.  ‘Derived from capital’; - ‘the gain-derived-from-capital,’ etc.  Here we have the essential matter:  not a gain accruing to capital, not a growth or increment of value in the investment; but a gain, a profit, something of exchangeable value proceeding from the property, severed from the capital however invested or employed, and coming in, being ‘derived’, that is, received or drawn by the recipient (the taxpayer) for his separate use, benefit, and disposal; - that is income derived from property.

In our submission, what we have here is something which is “not a growth or increment of value in the investment” but “something of exchangeable value proceeding from the property, severed from the capital” being the shares.

It is plain, as appears from that passage, that income need not be received in the form of money, although no doubt it often is, and that appears, amongst other things, in relation to options in the case of Abbott v Philbin in the House of Lords [1961] AC 352 at 365 to 366. That was not the case of shareholder but of employees who got options and the House of Lords held that the receipt of the option was the receipt of income.

It also appears from Montgomery that income may be derived periodically or it may be received from isolated transactions or single transactions.  So what one needs to ask oneself is whether the rights which were created by the transaction documents in respect of the sell back of shares in the company were separated from the shares themselves, because one thing is clear, namely that the taxpayer’s shares were untouched by this transaction.  She started off with the same number of shares as she finished up with.  They were the same shares and their capital had not been – or the capital paid up on them had not been affected or reduced.

This question of separation was considered in a case called Federal Commissioner of Taxation v Miranda (1976) 11 ALR 85. There in the Supreme Court of New South Wales Justice Rath considered that question and at page 95 at the bottom of the page at line 45 his Honour says:

If this reasoning is correct, it follows that if a dividend is declared upon a share acquired by the taxpayer for the purpose of profit‑making by sale –

This was a case about whether or not the provisions of section 26(a) applied to the profit made on the sale of, amongst other things, rights which had been issued by the company to its shareholders –

then the profit arising from the sale by the taxpayer of that share with the dividend right attaching to it would be included in the assessable income of the taxpayer under s 26(a).

His Honour then goes on to look at that question and at page 96 about the middle of the page his Honour says:

The question then arises whether the rights sold in this case should also be regarded as severed and distinct from the shares.  Shares purchased pursuant to such rights, whether by the shareholder himself . . . or by a purchaser of the rights would be different property from the original shares, and if profit on their sale was to be brought to tax under the first limb of s 26(a), the basis would have to be the purpose of the acquisition of the shares so acquired by the exercise of the rights, and not the purpose of the acquisition of the shares giving rise to the rights.

Then his Honour goes on to examine the question whether the rights were separate and distinct from the shares and concludes that they were at page 97 at lines 21, 22 and 23.  Indeed, it is submitted it is obvious that those rights and indeed these rights are separate from the shares.

The judgment of his Honour in Miranda was accepted by Justice Gibbs in the case of Macmine 24 ALR 216 at 266 in this Court. So what one has, it is submitted, here is when the rights were granted on 19 February 2001 pursuant to the provisions of the transaction documents which had been entered into on 12 January 2001, those rights became separate and detached from the shares. Indeed, that is obvious since the right, once it had been granted, had no relationship with the shares at all because the right was a right to sell one share. That is to say, although Mrs McNeil or anybody else who got the rights could, if they had wanted to, sell some of their own shares but they could sell the right to somebody else who could then exercise it in respect of any shares he may have. Then it is said, as we understand it, by our learned friends that that analysis is incorrect because the rights were granted in effectuation of the rights attached to the shares.

GUMMOW ACJ:   It all depends on what you mean by “effectuation”.

MR SHAW:   Indeed, so it does, your Honour.  One possible meaning is that you have extinguished the rights by exercising them so that they were not there any more or it could mean just giving effect to the rights.  In Ord Forrest 130 CLR 124 at 150 his Honour Justice Gibbs refers to what was said by Justice Dixon in the Archibald Howie Case.

GUMMOW ACJ:   I thought we would get there sooner or later.

MR SHAW:   The Court will see that his Honour cites from what was said by Justice Dixon in that case right at the bottom of the page.  His Honour says:

“The allotment of the share and the payment up of the liability thereon conferred upon the holder for the time being of the share a right to have the assets of the company used and applied in the various ways in which the articles expressly or impliedly require or authorize and this is one of them.  It is an effectuation or realization of the rights obtained by the acquisition of the share in the same way as is the distribution of a dividend.

If one thing is plain, it is that the declaration of a dividend is not an event which has any effect at all on the shares themselves.  The rights under the shares remain completely unaffected.

GUMMOW ACJ:   When Sir Owen Dixon uses the expression “a right to have”, a right against whom or what?

MR SHAW:   I suppose, your Honour, it is a right against both the company and other shareholders.

GUMMOW ACJ:   Yes.

MR SHAW:   This kind of thought is elaborated in the cases of Stevenson and Thornett.  They are both in 59 CLR.  Stevenson is at page 80.  At page 98 commences a discussion of what happens when ‑ ‑ ‑

GUMMOW ACJ:   What was the issue in Stevenson?  I must say I am not immediately familiar with it.

MR SHAW:   The question was whether a distribution of moneys or two shareholders on what I might call an irregular liquidation – in other words, it was not a liquidation properly authorised by the resolutions and so on – whether that was on capital account or whether it included partly, because it partly represented undistributed profits, on revenue account.  The majority of the Court came to the conclusion that because it was an act in which the company was being destroyed, as it were, it was all on capital account.  At the bottom of the page, three lines from the bottom, their Honours say:

But, whether profits be distributed in cash or, as in Pool v. Guardian Investment Trust Co., in specific assets, or be appropriated to answer a new issue of share capital or debenture capital, the transaction leaves the shareholder still a member of the company, holding the same title to participate in future distributions of profit and possessing, in the event of winding up, the same status as a contributory entitled to share in the surplus assets or liable to contribute towards a deficiency.

GUMMOW ACJ:   There had been a citation of Eisner v Macomber I see.

MR SHAW:   Yes.  Their Honours go on:

It is for this reason, that such a distribution of profit is described by expressions like “detachment,” “release” and “liberation.”  The title to them is treated, it may be said, as a jus re fruendi salvâ rei substantiâ.

I could not find a translation of that, nor had I seen anything which looked like Latin with circumflexes.  Nor could I understand why “rei” in the first place seemed to be in the ablative rather than the objective.  But I think what it means is a right of enjoying a thing while the substance of the thing remains unaffected.

GUMMOW ACJ:   Yes.

MR SHAW:   That seems to be the definition of “usufruct” in more or less my words in the big Oxford Dictionary but the point is that what it is talking about is you enjoy the property but, in this case, the share remains unaffected and that is what their Honours go on to say.  The share is the substance of the property that remains and the distribution the fructus, the fruit.  So we are back to trees and apples.

Then in Thornett, which is in the same volume of the Commonwealth Law Reports at page 787 at pages 801 to 802, what is being considered is a provision in the Income Tax (Management) Act 1928 (NSW) and the question of whether the provisions of the Act had the same effect as the provisions of section 47 of the present Income Tax Assessment Act and it was held they did not.  After referring to the Act Justice Dixon refers to Stevenson at the top of the next page and his Honour says:

Rich and McTiernan JJ. and myself were of the opinion that the provision did not bear the meaning that every distribution containing profits, or moneys traceable to profit, should form part of the shareholder’s assessable income notwithstanding that the distribution extinguished the share and replaced it by payment of its capital value or equivalent in assets.  We thought that it meant to include all distributions or detachments of profit by a company as a going concern but not distributions in retirement or extinguishment of the shares.  Evatt J. said: –

that is Justice Evatt in Stevenson –

“It is obvious that the ‘income’ which has its source in a company share does not include what the shareholder receives in final replacement of the rights represented by the share itself.  If the share is regarded as the fund, the income from the share is the flow or product of the fund.  But what is received at the time of the liquidation in exchange for the fund itself cannot be regarded as flowing from, or produced by, the fund”.

In our submission, what his Honour is there saying is that if you have something which can be regarded as the product of the fund or the product of the shares, then that will be income from the shares so long as salvâ rei substantiâ, as one might say.

In our submission, what is undeniable is that what Mrs McNeil received by way of her entitlement in respect of the rights was the flow or a flow or product of the shares.  It had become detached from the shares in the way in which it was contemplated by Justice Pitney in Eisner v Macomber.  In my learned friend’s submissions at paragraph 46 which is one page ‑ ‑ ‑

HEYDON J:   Page 14.

MR SHAW:   On page 14 my learned friends say:

Not every receipt by a shareholder from a company is income.  Thus the issue to a shareholder of bonus shares does not give[s] rise to the derivation by the shareholder of income according to ordinary concepts -

That, of course, is because the bonus shares leave everybody in precisely the same position as they were before although the shareholder retains the original shares and then they say the same is true of rights and they refer to Ord Forrest, to Miranda and Macmine and, in our submission, that citation does not support that proposition in relation to rights.

What is clear is that in Ord Forrest what was being considered was whether or not there was a gift constituted by the disposition of property and it was held that there was not because of the special definition in that case.  In the other two cases the question which arose was whether the sale of rights which were already in existence when they were sold at a profit gave rise to something which was taxable under section 26A.  In our submission, what we say in paragraph 8 of our reply is sufficient to dispose of what my learned friends seek to rely on.

I should perhaps add this, that in relation to dividends as defined in the Income Tax Assessment Act the position is different for two reasons. One is because of the definition of “dividend” and the other because of the terms of section 44 which requires the dividend in order to be taxable to be declared out of the profits of the company. How that occurred is explained by Justice Kitto in Uther 112 CLR 630. His Honour’s judgment was a dissenting one. The passage is at pages 638 to 639 but his Honour’s view was accepted by the Court in Slater Holdings 156 CLR 447 to 457.

So it is submitted that what one has here is a receipt of the entitlements given to shareholders by the transaction documents executed on 12 January of a right detached from the shares.  It was a valuable right and it produced income.  If necessary, we would say that the receipt of the money ultimately was income if the receipt of the right was not but, in our submission, it is plain enough that the receipt of the entitlement in respect of the rights was income because it was something valuable, realisable, separated from the shares and did not affect the substance of the shares at all.

HAYNE J:   In your written outline at page 8, paragraph 27, you begin by saying that the taxpayer held shares for particular purposes.  What, if any, significance is attached to the taxpayer’s purpose?

MR SHAW:   I think the right answer is “nothing”.

HAYNE J:   It seemed to me that the argument thus far did not flow from that proposition and yet it was the first fact stated and I just wondered whether that was more than history.

MR SHAW:   Your Honour, it is delightful colour.  It is simply saying that she was getting returns on these shares and this is just one of them, that is all.  Now your Honour has asked me, I cannot say anything more than I have said.  If I could then go to the alternative argument relating to capital gains, the relevant provisions are set out at page 18 of our submissions.  A number of questions arise.  The first question is whether a transaction occurred in relation to a CGT asset.  The relevant CGT asset here is the shares.  It is submitted that when the ‑ ‑ ‑

GUMMOW ACJ:   We do not get to this if you succeed on the first branch.  Is that because of some operation of the Act or simply forensic flourish?

MR SHAW:   No, it is because of the operation of the Act, your Honour.  It is 118‑20 which says if the same thing produces both income and a capital gain, then, insofar as it is income, the capital gain just is not counted any more.

GUMMOW ACJ:   I only have the old numbers in my head.  With the new revision it is 118‑20?

MR SHAW:   Yes, your Honour. 

GUMMOW ACJ:   That is clear, as Justice Hayne says, in the unclear English version.

HAYNE J:   Do not attempt to defend the drafting, Mr Shaw.

MR SHAW:   Sometimes it leaves room for discussion, your Honour.  If we are right about the receipt of the rights being a receipt of income according to ordinary concept, then what I put to your Honours was correct subject to this, that the amount which was ultimately received was in excess of the value placed on the right, so a question does arise about the difference if your Honours see what I mean.

GUMMOW ACJ:   There is no dispute about that, is there?

MR SHAW:   No, I do not think there is really.  For this purpose one has to assume that what I have said about income is incorrect.  If it is incorrect, then it would seem that it was necessarily incorrect because in some way or other my learned friend is right in saying that the receipt of the right or the rights in relation to the right should be regarded not as received as income or on revenue account but received on capital account because it is part of a capital reduction in relation to the shares.

That necessarily involves the proposition that the grant of the right was in relation to the shares.  Not that one could really say that it was not in relation to the shares, although it might be possible to say that it was not in relation to the shares that you own.  The Court will see the words go on “that you own”.  The Court will remember that the right was granted pursuant to the transaction documents which were entered into on 12 January which led to a grant of the right on 19 February by reference to being a shareholder registered on the record date, which was 23 January.  So it was at a date other than 19 February. 

Below their Honours seemed to have regarded that as of some significance but, in our submission, there are two answers to it.  First of all, although it is true that it is possible that between 23 January and 19 February Mrs McNeil might have sold her shares, the fact is she did not; she still held the shares on 19 February.  In any case, the transaction documents were executed on 12 January.  But the fact is she did not sell.  So, in our submission, it is impossible to say that the transaction was not in relation to a CGT asset that you own because at all times Mrs McNeil did own the shares in respect of which the entitlement was granted. 

But assuming that she had sold, in our submission, it would be difficult to say that the transaction did not occur in relation to a CGT asset that you own because, although the transaction documents did not mature into a grant of the rights until 19 February, the grant was a grant by reason of the operation of the documents which had been executed on 12 January, so that one had documents executed on 12 January taking effect by reference to 23 January and maturing on 19 February. 

One gets the impression initially when one is told that there was a grant on 19 February that there was some juridical act carried out on 19 February which produced the grant, but there is no evidence of anything of that nature having happened on 19 February.  It simply seems to have been the documents working their magic, as it were.  Because the conditions precedent were fulfilled, the rights came into existence.  But that is unnecessary to examine, in our submission, because the fact is she did own the shares at all times.

The second main thing which is said is that no capital gain was made by Mrs McNeil on the occurrence of the CGT event because there were not any capital proceeds.  The reason there were not any capital proceeds is, it is said, that the same transaction, act or event cannot be at once the transaction, act or event and the capital proceeds.  We would say as to that, first of all, if that were true, it still would not affect the matter here and it would not affect it because the transaction was the grant and the capital proceeds were the value of the right. 

In our submission, the suggestion that two things cannot be the same meets with the difficulty that in the new fashioned way the Act includes in section 104‑155 at the end of subsection (1) an example.  The example is set out in paragraph 55 of our outline on page 16 and it will be seen that the example is:

You own land on which you intend to construct a manufacturing facility.  A business promotion organisation pays you $50,000 as an inducement to start construction early.

No contractual rights or obligations are created by the arrangement.

The payment is made because of an event (the inducement to start construction early) in relation to your land.

Now, that example is part of the Act.  That is section 2‑45 and section 950‑100(1) that is set out underneath the example.  So what one has here is somehow or other it is the law and it seems to be saying this is an example of what this is all about.  It is not just something in an explanatory memorandum; it is something in the Act itself.  So it has to be given effect to.  In our submission, when you look at the example, the act and the capital proceeds there are precisely the same thing.  So that, in our submission, it is ‑ ‑ ‑

GUMMOW ACJ:   It does at least indicate the act, transaction or event need not be an event in the law.

MR SHAW:   No.  Well, I suppose ‑ ‑ ‑

GUMMOW ACJ:   The example says, you see:

No contractual rights or obligations are created by the arrangement.

MR SHAW:   It does say that, but on the other hand, your Honour, there is the handing over of the $50, 000.  I suppose that is an act in the law, although it does not create contractual rights and obligations.

GUMMOW ACJ:   Yes.

CALLINAN J:   Justice Conti was not impressed by the example at paragraph 63 ‑ ‑ ‑

MR SHAW:   No.  Your Honour, none of the members of the courts below seemed to have been impressed by the example and our submission is they are not allowed to take that attitude.  Because it is enacted, it is part of the Act.

CALLINAN J:   Justice Conti seemed to treat it as other than an example, almost an exclusive – as if it were the only case which would answer the relevant description.

MR SHAW:   Yes.  Plainly enough, when one looks at what each of the members of the two courts below said, although we managed to persuade Justice Emmett about income, none of the judges seemed to have liked submissions about CGT event H2.  But, in our submission, first of all, one has something.  Here is the receipt by a taxpayer of something valuable arising out of her ownership of shares.  If it is not income and it is not a net capital gain, there seems to be something very wrong with the way the Act operates.  One would have thought that contrary to the way in which their Honours have obviously approached this they should have expected that if it were true that the receipt of the entitlement was not income, then it was likely that there would be some provision in the capital gains tax provisions which would catch this and, in our submission, when one looks at the words of section 104‑155, the words do seem to catch it.

HAYNE J:   Did any of their Honours in the courts below go so far as to conclude that the example is inconsistent with the provision which is the case posited by 15AD of the Acts Interpretation Act:

Where an Act includes an example of the operation of a provision:

(a)      the example shall not be taken to be exhaustive; and

(b)if the example is inconsistent with the provision, the provision prevails. 

Now, did their Honours go to ‑ ‑ ‑

MR SHAW:   No, your Honour.  I think the answer is no.

HAYNE J:   Is there any statutory provision other than 15AD and the two provisions of the 1997 Act that bears on the use of examples to which we should advert?  I am not conscious of any.

MR SHAW:   I am not conscious of any, your Honour, no.  This is not an answer to your Honour’s question, but what one has is the old law which related to disposals, and there were various definitions about disposals, and then the new law came in and then there is this whole series of CGT events, starting off with A1 and going down and down and down, and you have to look at each of them.  This one is sort of a residual one to pick up bits that one has missed on the way through, as it were, and in particular when there is not any disposal of a CGT asset.  In our submission, because it is of that kind, it ought to receive a generous interpretation rather than a narrow one.  Of course one cannot go beyond the words, but assuming that our construction is open on the words, then, in our submission, it should be preferred because it is obviously intended to plug whatever holes have inadvertently been left, as it were.

CALLINAN J:   Mr Shaw, could I return to the example for a moment, please, which states that:

No contractual rights or obligations are created by the arrangement.

Leaving aside the question of significance of that for a moment, why would not a binding contractual arrangement come into existence on the basis of the facts in the first paragraph as consideration?  Why would there not be an enforceable ‑ ‑ ‑

MR SHAW:   Your Honour, I suppose that one has to look at the example and you say to yourself, “Part of the example is that statement about no contractual rights or obligations are created”, and so what ‑ ‑ ‑

CALLINAN J:   That contradicts the first paragraph surely.

MR SHAW:   No, it need not because if I was the “you”, for example, in the example, I might have said, “I’m willing to take your $50,000 and I will do this but I’m accepting no legal obligation”.

CALLINAN J:   But those are not the facts.  It says “inducement”.

MR SHAW:   I know, but, your Honour, the facts include there are not any contractual obligations.  What I am submitting to your Honour is that I can construct a fact situation in which that is true.

CALLINAN J:   Leave aside that question for the moment.  What significance attaches to the fact that, assuming it is right, no contractual rights or obligations are created?  What would the difference have been, if any, had there been contractual rights or obligations created?

MR SHAW:   Your Honour, I think the difference might have been that there might have been – I can look it up – some other CGT event.  It is D1, I think.

CALLINAN J:   I see.  It is difficult to regard it as ‑ ‑ ‑

CRENNAN J:   This is mopping up.

MR SHAW:   Yes.

CALLINAN J:   It is difficult to regard it as a very satisfactory example.

MR SHAW:   In that we differ from your Honour.

HAYNE J:   Precisely what one is to do with examples is at the least not assisted by 235 of the Act, I would have thought.  You have to read 235, 240, 245 together and what you make of them at the end is I think the length of a piece of string.

MR SHAW:   Your Honour, I think you can at least say this, that those provisions demonstrate that the examples are to be taken seriously and not simply ignored.  I agree with your Honour that the exact operation of those things is difficult to determine but, in our submission, it is simply not open to a court to look at the example and say “Poof”.

CALLINAN J:   We have to interpret the example first if we can.

MR SHAW:   That is true.

HAYNE J:   This is designed to help exactness in legislation.

GUMMOW ACJ:   Among lay people.

HAYNE J:   Comment “Oh”.

MR SHAW:   If the Court pleases.

GUMMOW ACJ:   Yes, Mr Bloom.

MR BLOOM:   If I might turn firstly to the question of construction and briefly take your Honours to some provisions in those documents trying to avoid duplication with my learned friend’s effort, I must say this.  We put forward two possible constructions in our written submissions, as your Honours will have seen, but I think the parties are happily agreed that it does not matter which one of them is correct.

GUMMOW ACJ:   Where do we see the two postulates?

MR BLOOM:   In our written submissions at page 9, paragraphs 26 and 27.  The difference between the two really depends, your Honours, upon what was the trust property, whether it was sell‑back rights or, in the circumstances that happened, the proceeds of their sale. 

GUMMOW ACJ:   Yes.

MR BLOOM:   Your Honours, in the Sell Back Right Deed Poll which, of course, was entered into on 12 January and related to property not then in existence – that property would not come into existence, in fact, until 19 February – the person in the position of the respondent is given the right to elect to have the sell‑back rights transferred to her.  That right, too, expires before the creation of the property.

GUMMOW ACJ:   Sorry, Mr Bloom, I am not following.  Where do we start?

MR BLOOM:   I will take your Honours to it in a moment, but the definition of the election date, your Honour recalls, is 16 February – 5 pm on 16 February.  So by 5 pm on 16 February Mrs McNeil had to elect whether to have the sell‑back rights transferred to her, but they were not created until the 19th.  She did not elect and that had, in our submission, two consequences.  The first is that she did not become ‑ ‑ ‑

GUMMOW ACJ:   When you say were not created until the 19th, what precisely does that mean?

MR BLOOM:   They were created by grant on the 19th.

GUMMOW ACJ:   Pursuant to?

MR BLOOM:   Pursuant to all of the documents really, your Honour, but the Sell Back Right Deed Poll and by virtue of being conferred upon the trustee under the ‑ ‑ ‑

GUMMOW ACJ:   There was an executory situation earlier, was there not?

MR BLOOM:   Yes.

CALLINAN J:   There was a chose in action before the rights were actually created?

MR BLOOM:   Well, yes, subject to clause 3 of the ‑ ‑ ‑

GUMMOW ACJ:   That is the importance of this deed poll structure, is it not, to create these executive rights in this collection of people?

MR BLOOM:   Yes, certainly, your Honour, but your Honours recall ‑ ‑ ‑

HAYNE J:   Capable of defeasance under clause 3?

MR BLOOM:   Yes, and defeasance it was, yes.  We do not put it that she had no chose in action up to that point, but the question is whether the chose in action became instead an interest in the sell‑back rights when they were created on the 19th or whether, rather, she got an interest in the proceeds of their sale as the trust property, so she retained at all times something that is properly described as a chose in action.  That is the distinction between the two.  Your Honours, she did not become a sell‑back rights holder.  That term is defined at appeal book 180.  Your Honours see about line 40:

Sell Back Right Holder means a person who is registered as a holder of Sell Back Rights in the Sell Back Right Register.

Sell Back Right Register means the register of holders of Sell Back Rights –

and therefore she was not a holder for the purposes of clause 6(a) on page 183 which says that:

St. George acknowledges and agrees that each Sell Back Right constitutes a separate and distinct binding obligation on St. George in favour of a Sell Back Right Holder ‑ ‑ ‑

GUMMOW ACJ:   Yes.

MR BLOOM:   Likewise, the terms which commence in the schedule at appeal book 186 are replete with references to rights conferred on the sell‑back right holder:  clause 1(a) for instance, clause 4(a) at page 187, clause 4(d) at 188, clause 5.

GUMMOW ACJ:   Wait a minute, 4(d)?

MR BLOOM:   Yes, your Honour.  Clause 5 at 188 to 189, effect of exercise means that the sell‑back right holder will get these various rights; and clause 7(a) at 190.

HAYNE J:   I understand you need to get there in steps, but what is the ultimate point to which you are getting by emphasising this question of construction?

MR BLOOM:   It is to assist as best one can the Court in deciding which of the two constructions is correct.  Although there is ‑ ‑ ‑

HAYNE J:   To what end?  What turns on choice one versus choice two?

MR BLOOM:   Your Honour, there is one capital gains tax argument that we anticipate is more in our favour if the construction that our learned friends prefer is correct.  If the construction that we have put forward as the alternative construction, that is, chose in action or the trust property being the proceeds, that one argument on capital gains tax, which I will come to in due course, may not be available to us.

GUMMOW ACJ:   You say the trust property.

MR BLOOM:   Yes.

GUMMOW ACJ:   There may be more than one trust created by this arrangement.

MR BLOOM:   There are multiple trusts.

GUMMOW ACJ:   If there is just one trust, it may have a tracing attachment to it as well which finds its way into the proceeds.

MR BLOOM:   The way it was done was to say, “We’re going to create separate trusts for each taxpayer or for each shareholder and a certain number of rights referable to the shares held by that person will be in effect the trust property”.  That was the intention, and there will be no intermingling, but everything will be conferred on the trustee for immediate sale to CSFB.  CSFB was then to intermingle everything to either sell the sell‑back rights ‑ ‑ ‑

GUMMOW ACJ:   Where do we see it was to intermingle?

MR BLOOM:   That CSFB was?

GUMMOW ACJ:   Yes.

MR BLOOM:   Under the CSFB deed, one gets that from – and CSFB of course is not the trustee; it is the purchaser from the trustee.  One gets that from the definition of “Gross Sale Mechanism Participant Payment”.

GUMMOW ACJ:   Page?

MR BLOOM:   Page 304, your Honour:

the sum of the Retained CSFB Sell Back Right Amount and the Disposed CSFB Sell Back Right Amount.

“Retained” is defined on 305:

Retained CSFB Sell Back Right Amount means the gross consideration due to be received from St. George for buying back Shares relating to the exercise of the Retained CSFB Sell Back Rights –

plural –

less CSFB’s costs, including the cost of acquiring those Shares –

because of course CSFB not being a shareholder, if it was to exercise rights had to acquire shares so that that exercise could take place and the sale back could take place.  The other element, “Disposed CSFB Sell Back Right Amount”, is defined on page 304, and that is:

the total amount CSFB receives for selling the Disposed CSFB Sell Back Rights ‑ ‑ ‑

GUMMOW ACJ:   What are you reading from, Mr Bloom?

MR BLOOM:   The definition of “Disposed CSFB Sell Back Right Amount”, your Honour, on page 304, line 40.  That is the other element, that is the product of sale of sell‑back rights.  So what happens is - this is what we think was envisioned by the documents - that CSFB would purchase and indeed the trustee, as it were, of each trust for each shareholder was to sell to CSFB all of the rights that were retained rights and all of the rights that related to excluded shareholders.  CSFB was then either to exercise them by first purchasing shares in for that purpose and paying, obviously, a price for that, or was to sell them.  The net proceeds of sale and exercise were then to be accounted for, one presumes, to each separate trust.

GUMMOW ACJ:   Yes, now is that accounting explained here in this deed poll, the accounting process and does it involve fresh declarations of trust?

MR BLOOM:   If your Honour goes to 199, this is in the trust deed effectively, the deed poll shareholders.  Can I take your Honour first to clause 2.1 on page 198:

The Trustee declares -

This is on 12 January -

that it holds each Participant Entitlement -

that is, sell‑back rights not yet created -

on separate trusts absolutely for each Participating Shareholder.

GUMMOW ACJ:   Yes, but we have gone down a track now.

MR BLOOM:   Yes, so it is future ‑ ‑ ‑

GUMMOW ACJ:   But we have gone to the stage of the CSFB deed poll, have we not?

MR BLOOM:   Yes, but all of these were executed on 12 January, everything was anticipatory.  Clause 2 ‑ ‑ ‑

GUMMOW ACJ:   What I am trying to find out is, at the stage when CSFB has these funds, accumulated gross proceeds, is it then subjected in respect of that agglomeration to distinct trust obligations in favour of, amongst other people, the taxpayer here?

MR BLOOM:   CSFB is not but, in effect, the trustee is.  Under 3.2 on page 199 ‑ ‑ ‑

HAYNE J:   Sorry, just before you come to that what is the effect of clause 7 at 310 of the CSFB Deed Poll?  There seems to be a segregation of rights in favour of CSFB participants.

MR BLOOM:   Yes.

HAYNE J:   Who are the CSFB participants?

MR BLOOM:   They are remaining and excluded shareholders and that is in the first ‑ ‑ ‑

HAYNE J:   Page 178, line 40:

each Sale Mechanism Participant ‑ ‑ ‑

MR BLOOM:   And “St.George and St.George Custodial”.

HAYNE J:   Yes, but pausing there, am I right or wrong to understand the consequence of clause 7 at page 310 as being, amongst other things, to give rights separately to each sale mechanism participant?

MR BLOOM:   Yes, that is the intention, your Honour.  Not trust rights.  The trust is contained in the shareholder’s deed at 194 ‑ ‑ ‑

GUMMOW ACJ:   What are the rights spoken of in 6.2?  What is the content of the rights spoken of in 7.2 on 310:

Each CSFB Participant –

which would be your client -

is entitled to enforce its rights under this Deed Poll independently from -

What are the rights under the deed poll?

MR BLOOM:   In effect, a right to an account of the proceeds of sale.

GUMMOW ACJ:   Where do we see the right to account?

MR BLOOM:   Well, again, your Honour, can I take you back if I may ‑ ‑ ‑

GUMMOW ACJ:   No, from this deed.

MR BLOOM:   But they are all interrelated, your Honour, and one gets at page 199, if I could just start there, in clause – one really needs to go first to 2.2 at the top of page 199:

(a)      The Trustee will hold the Participant Entitlement –

That is the sell-back rights –

absolutely for the Participating Shareholder unless and until directed - 

by 16 February –

(b)Where a direction has not been received from a Participating Shareholder in respect of all its Participant Entitlement before the [16 February], the Trustee shall act in accordance with clause 3.2 and shall hold the Proceeds absolutely for the Participating Shareholder.

(c)This clause 2.2 has precedence over any other clauses of this Deed that are inconsistent with it.

Then 3.2:

(a)The Trustee will sell the Remaining Sell Back Rights for each Trust to CSFB which will:

(i)sell on the ASX or exercise the Remaining Sell Back Rights; and

(ii)pay the Proceeds on behalf of the Trustee to each Remaining Shareholder,

each in accordance with the CSFB Deed Poll.

Then over at 3.3 just to complete it:

Subject to clause 3.2, the Trustee undertakes to each Participating Shareholder that it will:

(a)transfer the Directed Sell Back Rights to the applicants;

(b)sell the remaining Sell Back Rights for each Trust to CSFB and pay to Remaining Shareholders the Proceeds (or take all reasonable steps to ensure CSFB as its agent does so) -

So that was a mechanism which they dealt with.

HAYNE J:   An important informing consideration of these deeds is the necessity to make sure there is no managed investment scheme.

MR BLOOM:   Yes, your Honour.  Yes.

HAYNE J:   That depended upon treating individuals individually, is that right?

MR BLOOM:   Correct, your Honour.

HAYNE J:   Without pooling, in effect, putting it all together as a single managed investment scheme.

MR BLOOM:   Precisely so.  The deed has a specific provision dealing with that.

HAYNE J:   Yes, we saw that in ‑ ‑ ‑

GUMMOW ACJ:   What I still cannot see is the duration in any specific sense of any trust in respect of your client, the subject of which is the proceeds which there are various covenants to pay.

MR BLOOM:   Whether the trust property could be the proceeds?

GUMMOW ACJ:   Yes.

MR BLOOM:   It really comes out of, your Honour, and it may not be correct, but it really comes out of 199, it seems to us, clause 2.2 through to clause 3:

Where a direction has not been received . . . the Trustee shall act in accordance with clause 3.2 and shall hold the Proceeds absolutely for the Participating Shareholder.

This was all intended to happen ‑ ‑ ‑

GUMMOW ACJ:   What are you reading from?

MR BLOOM:   Clause 2.2 at the top of 199.  There is that plus clause 3, in particular 3.2 and 3.3.  There seems to be a distinction attempted in the deed itself between a situation where there is receipt of a direction, in which case if they have not then been transferred the trust property will be the sell‑back rights themselves and no receipt of a direction.  But we have to say this too, your Honours ‑ ‑ ‑

GUMMOW ACJ:   You would have to read out of 2.2(b) an obligation to segregate, would you not?

MR BLOOM:   Yes.  There is also this problem with the construction that the proceeds and not the sell‑back rights are the trust property, and that is that if the grant is on 19 February, the sale in fact to the trustee takes place on 20 February and it may be the case that having regard to the consent principle on the 19th, it was still open, no direction having been given, to a person in the position of my client to have required a transfer of the sell‑back rights to herself.

HAYNE J:   As to segregation, 2.2(b), “proceeds” is a defined term and “proceeds” at pages 196 over to 197.  It is the individual entitlement, is it not?

MR BLOOM:   Yes, your Honour.

HAYNE J:   Individual entitlement calculated in the manner specified.

MR BLOOM:   Yes.  It may be slightly more felicitous drafting, your Honours, than the new capital gains tax provisions and perhaps only slightly.  Mr Muddle reminds me the rights under the CSFB deed poll are those dealt with in clause 3 of that deed at page 306.

Your Honours, could I turn now to income according to ordinary concepts.  It is our respectful submission that on 19 February the respondent obtained from St George, because she had been a shareholder in that company earlier on 23 January, a capital asset in the form of her interest, whatever it was, in the sell‑back rights and that upon the disposal of that capital asset, she realised for the purposes of the 1997 Tax Act an assessable capital gain of $62.  That $62 is the difference between the 576, her share of the proceeds of sale, and the market value of the asset on the date of acquisition which is treated by section 112-20 of the 1997 Act as the cost base of ‑ ‑ ‑

GUMMOW ACJ:   That is uncontroversial, is it not?

MR BLOOM:   Uncontroversial, yes.  She accepted all along that she was liable to pay tax on the $62.  But it is also the respondent’s case that neither the 514 nor the 576, 514 being the value of the rights on the date of issue, the 576 being the proceeds received, was additionally or separately assessable as income according to ordinary concepts or as a capital gain.  The Commissioner’s primary argument is that the market value of the sell‑back rights on 19 February was income according to ordinary concepts and that it was derived by the respondent on that day. 

We leave aside for the moment the question of whether section 44 and companion sections in the 1936 Act constitute a code with respect to the taxation of income from shares. We will be making a submission to that effect, but the Commissioner’s case at first relies upon a passage well referred to, including by this Court, in the Supreme Court’s judgment in Eisner v Macomber.  That passage was also cited earlier with approval by this Court in Read’s Case 167 CLR 57 at 67 in the joint judgment of Chief Justice Sir Anthony Mason, Justices Deane and Gaudron, first full paragraph:

In our opinion a mere increase in the value of an asset does not amount to a capital profit.  A profit connotes an actual gain and not mere potential to achieve a gain.  Until a gain is realized it is not “earned, derived or received”.  A capital gain is realized when an item of capital which has increased in value is ventured, either in whole or in part, in a transaction which returns that increase in value.

They refer to Eisner v Macomber in that same passage for that proposition, and that of course we say supports the way in which assessment should take place in this case.  Your Honours will recall that in Eisner v Macomber the Supreme Court held that bonus shares which were issued as new shares to existing shareholders were not taxable as income.  They were not income according to ordinary concepts.  It followed that within the passage in the judgment that is so relied upon that they were not relevantly severed or detached from the existing shares.  The existing shares remained.  They were not derived from, using the words in Eisner v Macomber, the capital being those existing shares.

Now, our learned friends here speak of the sale back rights as having been severed or detached from the respondent’s shares as if there was some sort of coupon previously attached to and forming part of the shares which was simply detached.  That argument, with respect, conflates two rights.

GUMMOW ACJ:   Well, I think he says they had become separate items of commerce, to put it in basic terms.

MR BLOOM:   There is no issue that they are separate items of property, that they ‑ ‑ ‑

GUMMOW ACJ:   And traded in separately, turned to account independently one of the other.

MR BLOOM:   Absolutely, but insofar as the cases turn on questions of severance – and that is the word relied upon by my learned friend and it is a word which comes from ‑ ‑ ‑

GUMMOW ACJ:   It is a metaphor really.

MR BLOOM:   It is, and it comes from two places though.

GUMMOW ACJ:   But that does not mean it is bad.  It is the idea that is being expressed.

MR BLOOM:   Yes, but it may not be right to describe what is happening here, with respect, because when severance has been used in the Australian cases about dividends according to ordinary concepts, the severance is a severance or detachment of funds representing profits of the company and the passing of those over to the shareholders.  It is a composite concept.  When Eisner v Macomber were talking about detachment, that is, with respect, what they too were talking about.  But, as we say, the argument for our learned friend seems to conflate two rights.  There is a small ‑ ‑ ‑

GUMMOW ACJ:   Does Eisner square with the earlier decision of the House of Lords in Blott?

MR BLOOM:   I think Blott followed Eisner. I think they were about the same time and I think their Lordships had the benefit of the decision in Eisner v Macomber and followed it, followed it in the sense that they said they thought that it was right and that the reasoning should be applied.  So I am submitting to your Honours that the argument seems to conflate two rights:  the right which is the general right to returns of capital from time to time and which is part of the variety of rights making up the share and the Rights, the Sell Back Rights, issued in this case in, to use Sir Owen Dixon’s term, effectuation of the former right. 

In our submission, your Honours, the authorities make it clear that the rights which comprise a share can broadly speaking be divided into two categories:  the right to such dividends as may be declared from time to time and the right to such capital as is from time to time returned or distributed. 

GUMMOW ACJ:   The problem is over the top of this traditional understanding which we all grow up with you now have this Act.

MR BLOOM:   But we are talking at the moment about income according to ordinary concepts.

GUMMOW ACJ:   Yes, I know, but if you are talking about company law upon which all this is operating, you have the traditional company law ideas and now you have this special provision, 257A and B.  The question is, when you talk about rights of shares, there is now this statutory potential, if you like, and how does that fit in with previous understandings?

MR BLOOM:   It is another permitted way of returning capital ‑ ‑ ‑

GUMMOW ACJ:   Sir Owen Dixon did not have to understand this in Archibald Howie because it would have been regarded as amazing that what has happened here could happen, and it only happens because of what the statute now says.

MR BLOOM:   Yes, but Sir Owen did refer to the then provisions dealing with reductions of capital.

GUMMOW ACJ:   Yes.

MR BLOOM:   Sell‑back rights are now part of the Corporations Act dealing with reductions of capital and were part of the Corporations Law which applied at this time – the same provisions, really.

HAYNE J:   Plainly, but there are several ideas that need to be, I think, kept in mind once, namely, there is a temporal element involved when you speak of shareholders rights – shareholders rights when?  Rights as defined wholly in the constitution of the company?  Rights as defined in the constitution as later added to by the relevant law?  Rights as not only added to by the law but engaged by particular board decisions?  Yes, sell‑back rights are concerned with capital management of the company, but is that a complete answer to the question that we must confront?

MR BLOOM:   Not a complete answer, your Honour, but in looking ‑ ‑ ‑

HAYNE J:   Because it focuses on the position of the company rather than the recipient.

MR BLOOM:   Yes, but the recipient’s rights, although, of course, this conjury, as it has been called, of rights depends upon the contract which is the articles and depends upon the Act from time to time.  We accept, of course, that that Act must, if it varies, vary those rights.  But still having regard to the maintenance of capital doctrine, which we would understand has not been impaired, there is still only two rights, really, to dividends and to capital, broadly speaking.

HAYNE J:   But here you get this species of right which is a tradable right to require purchase back of shares – your shares, anyone’s shares – so long as you can produce the share.

MR BLOOM:   It is not a new concept in general terms, your Honour, because, of course, your Honour recalls that in Miranda and Macmine one was dealing with renounceable rights and those rights were separately tradable in each case.  Indeed, the cases only arose because they were separately tradable and traded.  No one suggested for a moment that the renounceable rights in either of those cases was income or a revenue asset.  It did not occur to any of their Honours of this Court who decided Macmine and it certainly did not occur to the Commissioner to put forward that renounceable rights were income according to ordinary concepts, and yet that is a necessary consequence.

GUMMOW ACJ:   Macmine was about taking up shares?

MR BLOOM:   Rights to take up shares, yes, call options rather than – yes.  But they were still rights and I will come in a moment, your Honours, to a passage in the judgment of Sir Harry Gibbs in Ord Forrest, which my learned friend did not take your Honours, where he says really rights – and he may have had in mind renounceable rights, but he certainly says rights stand in the same position as bonus shares.  It is just a bonus from the company which is not an assessable dividend, but I will come to that in a moment. 

If I can just go back to my probably too simplistic example, but when a dividend is declared, the right to dividends generally is not extinguished.  The right to dividends generally remains into the next period and the period after that and each time the dividend is declared it is an effectuation, to use Sir Owen Dixon’s word, of that general right.

GUMMOW ACJ:   I am not sure what the right to dividend means really.

MR BLOOM:   The right to dividends ‑ ‑ ‑

GUMMOW ACJ:   Before declaration, yes.

HAYNE J:   Any more than the right to enforce the constitution ‑ ‑ ‑

MR BLOOM:   It is the right to enforce the constitution, but what does it entitle the shareholder to in terms of the assets of the company, because your Honours recall this all started in Baldwin’s Case where the argument put and rejected was that the shareholder had an interest in the assets of the company and it was said, no, you have a variety of rights, a right to get money back from the company and that can be divided effectively between income rights and capital rights.  That was the way that the reasoning in those days proceeded. 

Your Honours have been taken to what Sir Owen Dixon said in Archibald Howie and I will not take your Honours to it again but, in our respectful submission, bonuses in the form of rights stand in no different position to bonuses in the form of shares and, specific statutory provisions apart, they involve the shareholder in receipt of capital according to ordinary concepts.  If I could now take your Honours to Ord Forrest 130 CLR 124.

CALLINAN J:   Mr Bloom, could I just ask you a question before you do that?

MR BLOOM:   Yes, your Honour.

CALLINAN J:   Does the company’s capacity to buy back its shares depend to some extent upon the capitalisation earlier of profits ‑ ‑ ‑

MR BLOOM:   No.  It could be that profits are capitalised and used but ‑ ‑ ‑

CALLINAN J:   Well, in this case was there any evidence about that?

MR BLOOM:   In this case the entirety of the buy‑back purchase prices was debited to share capital.  This was part of a reduction of capital and your Honours will appreciate, too, that under the Tax Act, because the amount of the buy‑back purchase price was debited to share capital account, there is a specific provision to which I will take your Honours briefly shortly that says no part of what was paid on the buy‑back was a dividend.

GUMMOW ACJ:   Where do you say this arrangement fitted in in the grid at section 257B of the law?

MR BLOOM:   An equal access scheme, your Honour.  That is why it was offered to every shareholder and the premium inherent in it was ‑ ‑ ‑

GUMMOW ACJ:   Was there not some difference with foreigners?

MR BLOOM:   Foreigners and employees were excluded shareholders.  They were not entitled to the sell‑back rights but were still entitled as shareholders to get the benefit of the premium if there was one.  Of course, the premium was not known at the time when the grant took place.  That all depended upon the market forces that followed thereafter.  It was hoped by the bank that the premium would encourage everybody to take advantage of the sell‑back in one way or another so that the reduction of capital to the desired extent could be effected.  This was at all times from the bank’s perspective a reduction of capital.

GUMMOW ACJ:   Not requiring court approval under this new system.

MR BLOOM:   No.  That is why she received it.  Your Honours, Sir Harry Gibbs at 150 in Ord Forrest refers to what Sir Owen Dixon said at the bottom of page 150 and my learned friend has taken you to that.  Then his Honour says:

Secondly Dixon J. said that the contribution by a shareholder to the capital of the company “measures his right to any return of capital which the company may make either as a going concern or in a winding up”.  Williams J. expressed similar views, and pointed out that when a dividend is declared, or a special resolution to return capital takes effect, the ‑ ‑ ‑

GUMMOW ACJ:   Why was this debate taking place in Ord Forrest?

MR BLOOM:   In Ord Forrest the issue was whether an allotment of shares ‑ ‑ ‑

GUMMOW ACJ:   Have we got the definition from the Gift Duty Act?

MR BLOOM:   It should be in the headnote, I think, if I could go to that, your Honour.  An allotment of shares was expressly defined as a disposition of property and the question was, notwithstanding that an allotment of shares was not a disposition of property at law because it did not pre‑exist, was it nonetheless a disposition of property as defined.  The Court divided in Ord Forrest and subsequently in St Helens the majority view was that it could be a disposition of property within the definition of gift duty legislation.  Over at page 151 Sir Harry Gibbs says:

The reasoning of the members of the Court in that case is in my opinion entirely apposite to the situation where a company uses undistributed profits to pay up bonus shares which are allotted to existing shareholders in proportion to their holdings, or offers rights which contain an element of bonus to its shareholders in proportion to their holdings.

So his Honour saw no distinction between bonus shares and bonuses in the nature of rights.  We say, with respect, if that is correct – I should also take your Honours while you have it to the judgment of Sir Anthony Mason at 157.  At the top of 157 he says:

Nor is any difficulty occasioned when a company makes an offer to shareholders of renounceable rights to take up new shares in proportion to their existing holdings.  The shareholder is then at liberty to sell his rights to take up new shares.  The difference between the value of the new share when allotted and the amount payable to the company for it reflects the value of the right to take up the share which is itself a satisfaction of the existing shareholder’s rights under the memorandum and articles of association.

GUMMOW ACJ:   Yes, but that is leading to the conclusion there is no element of gift.

MR BLOOM:   Yes, ordinarily, because, in effect, you already have the right to it.  It is one of the rights you have as part of your share.

GUMMOW ACJ:   Where did they end up in St Helens on this question?

MR BLOOM:   It was a disposition for gift duty purposes, your Honour.  It was one of the last cases, I think, heard at Darlinghurst by the High Court.

HEYDON J:   In your written submissions, page 14, footnote 12, after referring to Ord Forrest it says “per Gibbs J at 157” – it was actually per Justice Mason.  It then says “cf”.  What does “cf” mean there?  What do the second two groups of cases have to do with ‑ ‑ ‑

MR BLOOM:   I am about to go immediately to Miranda and Macmine because we think that in Miranda Justice Rath, with respect, conflated those two rights in error.  It was not necessary to his decision.  The only necessary thing for him to conclude was whether or not they were separate property.  He concluded that but also concluded, we would suggest, with respect, unnecessarily and erroneously, at least in the way in which advantage is taken of it by our learned friends, that there was some severance from the share of the Right that came to the shareholder. 

My learned friend has taken your Honours to the passages.  It really begins at 95, line 14 and goes over to page 97.  So in order to conclude that they were separate properties his Honour concludes that they were severed and distinct from the shares.  Distinct, yes, severed if that means they were different property, but not severed, with respect, if that means they came out of the share as some coupon that was detached and came into existence at that point. 

Again we remind your Honours that nobody, the Commissioner included, thought to argue that the rights in that case were income according to ordinary concepts.  The sole question in that case was whether the profit on the sale of them as implicitly a capital asset was brought to account under section 26(a), which, as your Honours recall, tacks the profit on sale of property acquired inter alia for resale at a profit.  His Honour held that this was separate property and that one could not attribute the purpose applicable to the acquisition of the original shares to the new property. 

Your Honours, in Macmine 24 ALR 217 – it is not elsewhere reported, your Honours – it is right, as my learned friend said, that Sir Harry Gibbs referred to the judgment of Justice Rath in Miranda, but it is probably not correct to say that he approved of everything that was said in it.  At page 226 he says, middle of the page:

Thirdly, when Sheppard J came to consider whether the proceeds from the sale of the rights could be regarded as profits within the first limb of s 26(a), he followed the decision of Rath J in FC of T v Miranda (1976) 11 ALR 85; 6 ATR 367; 76 ATC 4180. In that case Rath J held that rights to take up new shares to which a shareholder became entitled by virtue of an existing shareholding constituted property different from the existing shares –

so that is the extent of his Honour’s approval –

and that it did not follow from the fact that the original shares were acquired for the purpose of profit-making by sale that the rights were also so acquired.  He further held that when such a shareholder sells the rights instead of taking up the shares, it cannot be said that the shareholder has made a profit which has arisen from the sale of property acquired by him for the purpose of profit-making by sale, even though the acquisition of the shares in the first place may have been for the purpose of profit-making by sale . . . Before us the Commissioner has not sought to challenge the correctness of the conclusions of Rath J, and for that reason I need not consider for myself whether I agree with them.  To say that is of course not to imply disagreement.

The only other Judge of this Court to refer to it in Macmine was Justice Jacob at 248, middle of the page:

There remains the Commissioner’s appeal in respect of the sale in June 1968 of 900 rights in Petsec.  The Commissioner accepts as correct the conclusion of Rath J in FC of T v Miranda (1976) 76 ATC 4180; 6 ATR 367 that where shares are acquired for the purpose of resale at a profit sums received on the sale of rights to a new issue of shares in the same company do not thereby become “profits” within s 26(a).

So in neither case was it suggested that the rights there – renounceable rights were income or a revenue asset, and yet the result of the arguments for the Commissioner in this case is that they must have been.

GUMMOW ACJ:   Well, he has changed his view.

MR BLOOM:   As your Honour tells me all the time, he is entitled to.

GUMMOW ACJ:   Maybe.

MR BLOOM:   But, your Honour, he cannot change what is income according to ordinary concepts.  He may try to bring something within the net that he has not previously tried, but that of course does not change the question for your Honours as to whether it is correct.

If I might then go to the code argument. If your Honours accept the argument just put that it is not income according to ordinary concepts, then you do not need to consider this code argument. But that code argument is that section 44 and companion sections together constitute a code with respect to the taxation of receipts by shareholders from companies – a complete code.

GUMMOW ACJ:   This word “code” is a mischievous word, or a slippery one anyway.

MR BLOOM:   Yes, and I am going to try to support it, your Honour, by two dissenting judgments in this Court and then some obiter reasoning of Justice Gibbs agreed in by other Judges of this Court, and that is the best I have really – apart from the passages in Norman’s Case cited in our submissions, that is the best I have to support it, but it is, with respect, compelling reasoning and it is as follows. 

Mr Muddle reminds me to tell your Honours that of course every time when it has been desired to tax a receipt from a company in the hands of a shareholder either the definition of “dividend” has been enlarged or there has been a special deeming provision inserted to deal with capital payments like loans or forgiveness of loans or things which quite clearly are not income according to ordinary concepts.  Very often that deeming goes further and says they are deemed not only to be dividends but deemed to have been paid out of profits to the shareholder, so as 44 can have operation.

Indeed, in relation to buy‑backs, both on‑market and off‑market buy‑backs have been the subject of specific deeming provisions.  An on‑market buy‑back – that is, where the shares are listed and the buy‑back takes place on the market – is deemed not to give rise to a dividend to any part of the purchase price, whatever its source.  An off‑market buy‑back is, to the extent to which the purchase price is not debited to share capital account, deemed to be a dividend.

The relevant section here is section 159GZZZP(1) – and, yes, your Honours, it is a section – and it had the result that in this case no part of the purchase price of the shares bought back by St George when the sell‑back rights were exercised was deemed to be a dividend.  Now, there are passages set out in our written submissions at paragraphs 36 to 38 from the judgment of Sir Owen Dixon in Norman’s Case.

GUMMOW ACJ:   Are there other examples of a specific provision in the Act to remove doubts as to what would be income according to ordinary concepts which you say is then a code?

MR BLOOM:   I would have to think to answer that question as to whether there are codes.  I might do that after lunch, with your Honour’s permission.  Well, I will come back to your Honour on that, if I may.  But if your Honour goes to paragraph 41 of our submissions, there are numerous examples of the sorts of things that have been deemed to be dividends:  loans to private companies which are clearly capital; excessive remuneration for services rendered; payments to associates; forgiven debts.

HAYNE J:   Could I just understand the structure of the reasoning because I am not certain that I do.  The proposition is, is it, this – or the hypothesis for consideration is that this receipt might fall within income according to ordinary concepts?

MR BLOOM:   Yes, your Honour.

HAYNE J: But because section 44 exists and there are specific amplifications, if I can use that in the most neutral way, of 44, what is the conclusion?

MR BLOOM:   Can I add one thing to it before I – for the conclusion, your Honour?

HAYNE J:   Yes.

MR BLOOM: According to these passages to which I will take your Honours in the judgments of Judges of this Court, the focus on determining whether something received by a shareholder from his company, or her company, was income switched. It switched from the traditional question of looking at the receipt in the hands of the shareholder to the question of whether it came out of profits within section 44, and the conclusion comes from that, your Honour.

HAYNE J:   What is the conclusion?

MR BLOOM:   The conclusion is that if a payment is not a dividend as defined in section 6 or as deemed in some other provision and/or is not paid out of profits – and both those things are conceded here; it is not, our learned friend’s accept, a dividend as defined, it is not a distribution and it is not out of profits – then it cannot be income according to ordinary concepts in the way in which the Act is currently.

HAYNE J:   So the concept of income according to ordinary concepts is restricted by the successive amendments that have been made in amplification of 44?

MR BLOOM:   And section 6 and dividends generally, yes.  Your Honour, it is almost like a 109 issue. 

HAYNE J:   No.  Is that the proposition?

MR BLOOM:   It really does tend to cover the field, yes.

HAYNE J:   The proposition has to come, does it not, to that, that income according to ordinary concepts is narrowed by the specificity of 44 and the subsequent amplifications, because the next question is:  why on earth would you read the Act that way?

MR BLOOM:   Because the intention is to bring a lot of things within the concept of dividend that are not income according to ordinary concepts and by implication to exclude those things which are income according to ordinary concepts which are not also included.

GUMMOW ACJ:   By necessary implication?

MR BLOOM:   Yes.

GUMMOW ACJ:   Having regard to the structure, scope and purpose of the Act?

MR BLOOM:   Yes.  I think Justice Deane once said that the only purpose behind the Act is to tax or to raise tax.  If one has regard to that purpose, I am not sure where one ends up.

HAYNE J:   Income tax is a tax upon income.

MR BLOOM:   Yes, but what is income?  When you look at shares in a company – I have better advocates for me, I think with respect, than myself and I will take your Honours to Sir John Latham and Justice Kitto and to ‑ ‑ ‑

GUMMOW ACJ:   I bet they did not have this submission in mind.

HAYNE J:   But they are about to be deemed to be.

MR BLOOM:   Can I cavil with your Honour about that in a little bit?  Let me go to it.  The first decision is Blakely 82 CLR 388.

GUMMOW ACJ:   It is an informal liquidation, is it not?

MR BLOOM:   A very informal liquidation.  They simply appropriated the assets of the company and walked away with them.

GUMMOW ACJ:   Yes.

HAYNE J:   It is shorter and easier, you understand, Mr Bloom.

MR BLOOM:   The argument for the Commissioner was presented by Mr Tait at page 392.

GUMMOW ACJ:   Was this not followed by an amendment to the Act?

MR BLOOM:   Yes, but in Uther’s Case that was held probably to be ineffective and Justice Kitto dissented.

GUMMOW ACJ:   And he was ultimately supported, was he not?

MR BLOOM:   Ultimately preferred but in an obiter reasoning.  So Mr Tait says:

Sections 44 and 47 of the Income Tax Assessment Act 1936 (read with the definitions in s. 6 of “dividend”, “liquidator” and “paid”) provide a complete scheme for the taxation of the profits of companies, s. 44 dealing with a company which is a going concern and s. 47 with the case of a winding up.

Then the Chief Justice, Sir John Latham, at 397 says, second full paragraph:

It is contended for the commissioner that under the applicable Commonwealth Act it is irrelevant to inquire whether moneys (or other property) received by a shareholder represent “ the fruit ” of the share, the “ detachment ” of which leaves the share standing as a piece of property. It is argued that the only question which arises under the Commonwealth Act is whether what was received represented profits of the company. Such receipt may or may not represent a profit to a shareholder; for example, a shareholder may have paid a full market price for his shares, representing the estimated value not only of the capital assets of a company, but also of a shareholder’s interest in undistributed profits of the company. But that fact would be immaterial to the liability of the shareholder to pay tax on dividends received in respect of such shares. In the case of a company which is a going concern all dividends paid as such represent the fruit of the share and under the Commonwealth Act are taxable income in accordance with s. 44. But it is contended for the commissioner that under the relevant provisions of the applicable statute they are made taxable only because what the shareholder has received is a profit of the company and not –

this is the original ordinary income test –

because they represent something detached from the proprietary interest of a shareholder which is represented by his share. I agree with the argument for the commissioner that the criterion of assessability under s. 44 is not whether what is received by a shareholder is income to him in the sense of something detached from his capital asset consisting in his shares: the relevant question to ask is whether what is received comes from the profits of the company.

GUMMOW ACJ:   Now look at page 399 – this is what was agitating him – about line 5:

The commissioner is, in my opinion, really seeking to tax –

et cetera, and then the next paragraph:

further provisions are required to prevent persons evading the revenue laws by disregarding the provisions of the Companies Act with respect to liquidation.

They were very concerned not to facilitate defiance of the Companies Act.

MR BLOOM:   Certainly.  The Chief Justice would have held that in the circumstances that happened there nor was there a distribution because a taking did not involve any distribution by the company, no act by the company.  But Justice Fullagar, with whom Justice Dixon agreed, took the opposite view.  At 404 his Honour says ‑ ‑ ‑

GUMMOW ACJ:   Well, he talks about a formal liquidation.

MR BLOOM:   Yes.

GUMMOW ACJ:   Liquidation is a ‑ ‑ ‑

MR BLOOM:   But also took the opposite view on the effect of the Act.  At the bottom of 404, last paragraph:

The Act relevant to the present case is the Income Tax Assessment Act 1936-1942. I understood Mr Tait, for the Commissioner, to maintain in the first place that the Commonwealth Act had since 1936 adopted, with regard to the taxation of the income of companies and their shareholders, a basic principle different from that which had found expression in the earlier Acts.  He said, if I followed him correctly, that the present scheme was to tax the profits of a company in the hands of its shareholders, whereas the Acts in question in Stevenson’s Case and Thornett’s Case –

cases relied upon by our learned friends –

set out to tax the income of the shareholder as such.  I do not think that anything can be made of any such general proposition, which seems to represent a conclusion rather than a premise.  The relevant Act must simply be construed according to ordinary principles, and we must see whether it does, so construed, subject to tax that which was held not to be taxed under the legislation considered in Stevenson’s Case and Thornett’s Case . . . 

The main argument for the Commissioner was based on s. 44(1) of the Act, read in the light of the definitions of the word “dividend” and the word “paid” in s. 6. Section 44(1) provides that the assessable income of a shareholder in a company shall (a) if he is a resident, include dividends paid to him by the company out of profits derived by it from any source . . . It is par. (a) that is relevant here. Section 6 provides (omitting matter irrelevant to the present case) that the word “dividend” includes any distribution made by a company to its shareholders, whether in money or other property, and any amount credited to them as shareholders, but does not include a return of paid‑up capital. Section 6 also provides that the word “paid” in relation to dividends includes credited or distributed. The argument was that in the present case there had been a distribution made by a company to its shareholders in property other than money, and that the effect of s. 44, read with the definitions, was to include in the assessable income of the shareholders so much of what was distributed as represented profit of the company and to exclude so much as represented a return of paid‑up capital.

Then, after remarking that the words were different in the earlier statutes, he says in the last full paragraph on that page about point 7:

Now it is possible that, when the Commonwealth legislation assumed in 1936 the form which it has since retained, it was intended to cover, and was believed to cover, such cases as Stevenson’s Case and Thornett’s Case. I should seriously doubt this myself. One would have expected such a result to be sought rather through the medium of s. 47 than through the medium of s. 44, and s. 47 would seem to be unnecessary if s. 44 has the meaning contended for. But, if this was the intention behind the new form which the legislation took, I think that the draftsman missed, as I think the argument for the Commissioner in this case misses, the whole point of the decisions in Stevenson’s Case and Thornett’s Case – and, for that matter, in Burrell’s Case.

GUMMOW ACJ:   What do you say about the penultimate paragraph of Justice Fullagar’s judgment where he does deal with general principles, does he not?

MR BLOOM:   He does, and Sir Owen Dixon ‑ ‑ ‑

GUMMOW ACJ:   He is not saying, “I don’t get to general principles because there’s a code”.

MR BLOOM:   Absolutely, but it was the judgment of Sir John Latham that was to be followed by Justice Kitto and later by the Full Court in Slater Holdings.  It was preferred over the judgment of Justice Fullagar in which Sir Owen Dixon had agreed on this point.  The next case, your Honours, is Uther (1965) 112 CLR 630, and at page 634, third line, Justice Kitto says:

On 2nd March 1962 the company, finding that it had cash on deposit at its bankers in excess of its requirements to the extent of £499,663 10s. Od., determined to reduce its capital by cancelling all un‑issued shares and one‑half of the issued shares of each class.  This was to be done by paying £2 per share to the holders of cancelled preference shares, £17 5s. 6d. per share to the holders of the cancelled ordinary shares and £14 6s. 6d. per share to the holders of the cancelled deferred shares.  The total amount to be paid was £499,663 10s. 0d.  The reduction this proposed was confirmed by the Supreme Court of Victoria and was duly carried into effect . . . The Commissioner assessed him to tax on the footing that the amount which a member of the company received under the reduction in respect of a cancelled share, less the amount paid up thereon, was assessable income under the provisions of the Act.  The learned Judge, however, held that moneys distributed were of a capital nature and that there was no provision of the Act requiring that any portion of them be included in assessable income.  Accordingly he allowed the appeal, set aside the assessment and directed the issue of an amended assessment.

The correctness of his Honour’s opinion that the whole of the amounts received by the shareholders in the distribution was capital in their hands must, I think, be conceded at once.  There was no detachment from the company’s assets of any amount to represent profits, no distribution of moneys as the produce of shares which should remain nevertheless intact.  There was simply an allocation and payment to each shareholder of a sum of money belonging to the company, in satisfaction of extinguishment of some of his shares.  The shares were the shareholder’s capital:  so, necessarily, was the money that took their place.

He refers to Webb and Stevenson and Thornett.

The Commissioner, however, relies upon the provisions of the Act to bring the excess of the amount distributed in respect of each share over the amount paid up thereon within assessable income notwithstanding its capital nature. The relevant provisions are in s. 44(1)(a) and the definition of “dividend” in s. 6(1).

Then over at page 637, about point 4 of the page after the reference to Stevenson’s Case, his Honour continues;

The ground on which the respondent contends that the excess is not included by s. 44 (1) (a) in his assessable income is that the reasoning of the judgment of Fullagar J., in Federal Commissioner of Taxation v Blakely necessitates that conclusion.  I shall turn at once to that case.

He sets out what had happened, the differences in the reasoning.  At about point 8 or point 9 of the page, the sentence beginning:

If the case should stand as an authority to this effect, no doubt the present case must be decided against the Commissioner; for in this case, as in that, what the shareholders received was not an amount of detached profits of the company, distributed as the fruit of the shares –

I just remind your Honours, whenever anybody talks about income according to ordinary concepts of a shareholder they talk about a detachment in the sense of a detachment of profits and a distribution of that to the shareholder, not a detachment of a right or a bonus share –

but was simply property extracted from the assets of the company without regard to the distinction between what would be capital and what income in the hands of the shareholders.  But that that is the criterion of assessability under the Act as it stands was a proposition which Latham C.J. categorically denied -

“the criterion of assessability under the Act as it stands” – in other words, it is not the common law one but it is this one -

He considered the relevant question to be whether what the shareholder has received has come from the profits of the company:  and I feel obliged to say, with great respect, that when the terms of the legislation are examined that appears to me quite clearly to be so.

Then over at page 639 about point 4, after the reference to “new s. 16AA”:

The section brought into a shareholder’s assessable income “dividends” to the extent to which they were paid out of the profits of the company, while the definition, as I have said, removed from the word “dividend” the prima facie restriction to income which is normally inherent in it, and gave the word a comprehensive meaning to include “any distribution” by a company out of its profits.  The expression “out of its profits” was omitted in the 1936 consolidation, as I have already said, but its presence or absence is immaterial to the point which it is important here to notice.  The point is that the enactment of s. 16AA together with the definition had the effect of making shareholders in a company which is a going concern assessable to tax on a principle fundamentally different from that of previous legislation.  The criterion for the inclusion of a shareholder’s receipts from the company is no longer the “dividend” character of the receipts, that is to say their income character when considered from the shareholder’s point of view; it is the profit character – from the company’s point of view‑ of the source from which distributions should be made.

Counsel for the Commissioner put this to the Court in Blakely’s Case, and his submission was upheld by Latham C.J.  Fullagar J. dismissed it as representing a conclusion rather than a premiss.  In truth the amendments, as I have endeavoured to show, were directed to changing the major premiss which the Act propounded.

I want to turn now, your Honours, to Slater Holdings ‑ ‑ ‑

GUMMOW ACJ:   Perhaps over lunch can you tell us what submission you have on what Professor Parsons says about these cases in paragraph 2.238 of his work?  I am referring to the very first edition in 1985.

MR BLOOM:   Yes, your Honour.  Is that a convenient time, your Honour?

GUMMOW ACJ:   Well, no. You were going to another case.

MR BLOOM:   I can go to Slater Holdings 156 CLR 447. At page 449, Mr Simos, for the Commissioner, submitted, at about point 4 of the page:

It is not correct to characterize the receipt in the hands of the taxpayer in any way other than that provided by s. 44(1)(a), i.e. as a dividend paid out of profits derived by the company from any source.

He says a little below the reference to Houghton’s Case:

The dissenting judgment of Kitto J. in Uther’s Case should be preferred -

Mr Hughes, for the respondent, over at page 450, says:

Blakely’s Case shows that the receipt must be characterized in the hands of the taxpayer.

That was the tension, again, arising in Slater Holdings on one view of it, although at the end of the day, there was no need for their Honours to finally resolve it.

At 453 in the judgment of Sir Harry Gibbs, with whom Justices Mason, Brennan, Deane and Dawson all agreed, his Honour sets out section 44:

“(1)The assessable income of a shareholder in a company . . . shall . . . 

(a) . . . include dividends paid to him by the company out of profits . . . 

By s 6(1) of the Act, “dividend” is defined to include –

and he sets that out –

“shareholder” includes “member or stockholder”.

One of the questions in this case of course has been the company limited by guarantee was whether somebody who did not have a share was nonetheless assessable as a member, and of course the Court held that he was.  Then the first full paragraph on 454:

If the provisions of the Act are applied directly to the facts of the case, it is difficult to resist the conclusion that the dividends became part of the assessable income of the recipients, at least to the extent that they were paid out of the capital profits reserve which represented the capital gains made on the sale of the shopping centre.  Whether or not the so‑called dividends were dividends in the ordinary sense of the word, each was a distribution made by a company to a member of the company and . . . it was paid out of profits.

He then points to the fact that in the Federal Court, Justices Lockhart and Fitzgerald had felt constrained by the majority judgments in Blakely and Uther to reach a conclusion that the distributions did not fall within 44(1)(a).  As your Honours see in the middle of the passage extracted from their Honours’ judgment in the Federal Court:

There was no detachment or severance from the funds of the company as representing a profit made by it.

Then over at 455, his Honour refers to Stevenson and notes about point 7 of the page that:

“dividend”, were construed to cover all distributions in a liquidation, but that the position would be otherwise if the section referred only to distributions or detachments of profit by a company as a going concern.  Then, after saying that the prima facie liability of the shareholders to account for the assets of the company received in an unauthorized distribution tended against their taxability as income, their Honours said that the liability to tax depended upon an examination of the true nature or character of the receipt.

That case was followed in Thornett.  Over the page there is a reference to Blakely, Justice Fullagar’s judgment with whom Sir Owen Dixon agreed and he says at the bottom of the page:

Latham C.J. expressly disagreed with this view of the effect of the Act.  He said –

and your Honours have been taken to that. 

In Federal Commissioner of Taxation v. Uther, Kitto J., in his dissenting judgment, advanced a criticism of the judgment of Fullagar J., which, with all respect, I find compelling.  Fullagar J. was right in saying that the distribution made to the shareholders in Federal Commissioner of Taxation v. Blakely was a capital receipt according to general principles, but he gave insufficient weight to the change that had been effected to the law by defining “dividend” so as to include a distribution made by a company to any of its shareholders.  As Kitto J. pointed out, the effect of the amendments to the law, first made by the Income Tax Assessment Act 1934 and repeated wen the Act was passed in 1936, was to make shareholders in a company which is a going concern assessable to tax on a principle fundamentally different from that of the previous legislation. Kitto J. continued:

“The criterion for the inclusion of a shareholder’s receipts from the company is no longer the ‘dividend’ character of the receipts, that is to say their income character when considered from the shareholder’s point of view; it is the profit character – from the company’s point of view – of the source -

Then at 459 point 5 he says:

It is unnecessary finally to decide whether the reasons given by the majority in Federal Commissioner of Taxation v. Blakely and Federal Commissioner of Taxation v. Uther were in all respects correct.

So the best I can do is to proffer two dissenting judgments and one set of obiter reasoning but, with respect, compelling reasons in support of the argument we seek to make.  Is that a convenient time, your Honour?

GUMMOW ACJ:   Yes.  We will adjourn until 2.00 pm and then we will conclude at 4.00 pm, if not earlier.

AT 12.48 PM LUNCHEON ADJOURNMENT

UPON RESUMING AT 2.02 PM:

GUMMOW ACJ:   Yes, Mr Bloom.

MR BLOOM:   Thank you, your Honour. Before lunch I was dealing with the question of whether it might be argued that section 44 and companion sections are a code. If that submission is accepted, then the question no longer is as to the nature of the receipt in the hands of the shareholder or, indeed, as to whether there has been a detachment of profits distributed as fruit of the tree. Rather, the question is whether there is a dividend as deemed or defined and whether it has been or is deemed to have been paid to the shareholder out of profits. As the Commissioner concedes in this case, there is neither a divided nor a payment out of profits. Then, if the code argument be right, that question must be answered in our favour.

HAYNE J:   Is not the code argument an inversion, namely, an inversion by taking the amplification of the provisions dealing with dividends to include that which would not be income according to ordinary concepts in aid of an argument that by including things not income, according to ordinary concepts, somehow narrows the definition of what is income. 

MR BLOOM:   We think not, your Honour, with respect, because it also includes income according to ordinary concepts and excludes certain things that are income according to ordinary concepts.  In doing so, shows an intention to, as we made in the terms of our 109 submission, to cover the field.  Even if, however, your Honours, the question is still as to the nature of the receipt in the hands of the shareholder, then this receipt was truly receipt of capital according to those tests.  It was in partial satisfaction of the rights which she enjoyed as a shareholder.  It did not involve a detachment or liberation of profits of the company.

If I can turn, then, to the paragraph in Parsons that your Honour, the presiding Judge, referred me to before lunch, insofar as the dichotomy raised there is between a receipt in satisfaction of rights which make up the share and a receipt which is derived from the share, we say, of course we come within the former of those two. 

If I could also refer your Honours, while your Honours have Parsons, to paragraph 247 where he doubted that rights would be income according to ordinary concepts and paragraphs 262 and following where he, himself, deals with the argument that section 44 and companion sections are a code ‑ ‑ ‑

GUMMOW ACJ:   Yes, I thought it might have an origin somewhere.

MR BLOOM:   Like everything in Professor Parsons’ book, your Honour, with respect, there is a little each way.  He says that there is one decision of this Court, Angus, which might tend against that argument; with respect, we do not think it does.  It was a case which held that a beneficial shareholder was still entitled to an exemption under section 23(q) for income from a share which went into the hands of the trustee.  But there are some arguments we would respectfully adopt in those paragraphs which support the code argument.

Your Honours, my learned friend referred very briefly to a decision of the House of Lords in Abbott v Philbin and said I think, that that was a case where the House of Lords held that options were income.  That is true but only half the story.  They held that the options were income because they were part of the salary of the person who received them and they were income under a specific statutory provision which taxed perquisites of office.  To the same effect was the provision considered by Chief Justice Bowen then of the Supreme Court in equity in Donaldson’s Case.

GUMMOW ACJ:   That is Sir Nigel Bowen’s decision?

MR BLOOM:   Yes.  Section 26(e) is the equivalent to the perquisites provision in the United Kingdom and that section is set out at – I am sorry, your Honours, the reference is ‑ ‑ ‑

HEYDON J: (1974) 23 FLR 1.

MR BLOOM:   Thank you, your Honour.  At 17 point 5 the relevant section is set out:

The assessable income of a taxpayer shall include –

. . . 

(e)       the value to the taxpayer of all allowances, gratuities, compensations, benefits, bonuses and premiums allowed, given or granted to him in respect of, or for or in relation directly or indirectly to, any employment -

At page 18 about point 8 his Honour refers to Abbott v Philbin and said:

These cases –

including Abbott v Philbin –

turn upon the provisions of the English income tax legislation-in particular sched. E of the Income Tax Acts . . . The wording of these provisions is markedly different from our s. 26(e), particularly with its reference to “perquisites” of office or employment.  But in its practical application in many respects it is not dissimilar.  I think it is fair to say that in these days, such benefits are regarded as being in the nature of a bonus or an addition to salary and are of an income nature –

in effect for that reason.  Your Honours, that is all we want to say on the issue of income.

If I might turn now to the capital gains tax provisions, the Commissioner relies, as your Honours know, on capital gains tax of H2.  We have handed up over the adjournment copies of the legislation that your Honours might find convenient to use.  The first section that I wanted to take your Honours to is 104-155 and that deals with when a CGT event H2 happens, so it must be:

an act, transaction or event occurs in relation to a *CGT asset that you own –

I pass over the example to which I shall return –

(2)The time of the event is when the act, transaction or event occurs.

So the relationship is required at that time between the event and the asset.

Section 116-20, which is at page 11 – the pages are at the bottom, your Honours – is the second limb of H2 and is necessary before there is any taxability.  It defines the capital proceeds from event H2 and in subsection (2) at the bottom of the page, your Honours see H2:

Receipt for event relating to a CGT asset -

The money or other consideration ‑ ‑ ‑

GUMMOW ACJ:   Sorry, where are you reading, Mr Bloom?

MR BLOOM:   The bottom of page 11, your Honour, in the table.

GUMMOW ACJ:   Yes, thank you.

MR BLOOM:   Your Honour sees “This table sets out what the capital proceeds from”, inter alia, “H2 are” and it is:

The money or other consideration –

we emphasise the word “consideration” –

you received, or are entitled to receive, because of –

and we emphasise those words as well –

the event.

Now, it is clear, in our respectful submission, that you need both things for an assessable capital gain, that is the happening of the event, and consideration because of it.  If I could come back for the moment to nexus.  At the time of the event here, in our respectful submission, the necessary relationship between event and asset is absent.  The sell‑back rights are issued to those who are on the register of shareholders on 23 January.  The continued ownership beyond that date and, in particular, ownership on 19 February when the event takes place is, if it happens to occur, irrelevant. 

Now, in Hepples’ Cases 173 CLR 492, that was a case on the forerunner to H2, as your Honours remember, and it involved, inter alia, that section 160M(7) and, in effect, what divided the Court on M(7) was whether the asset in question had to be an asset of the taxpayer. As soon as the Court had decided that that was not necessary, the Act was amended to make sure that it could only apply where the asset was an asset of the taxpayer and H2 carried that into effect. Justice McHugh at 541 says, first full paragraph:

Section 160M(7) also requires that the identified act or transaction shall have “taken place in relation to an asset” or that the identified event shall have been one “affecting an asset”.  The phrase “in relation to” can be of wide import, but in par. (a) the association of that phrase with the words “has taken place” show that “a coincidental or mere connexion” is not enough; there must be a direct connexion between the act or transaction which has taken place and the “asset”.

We say that must be at the time of the event specified in the section 104‑55.  To the same effect in Cooling 94 ALR 146 in the Full Court of the Federal Court Justice Hill says at about point 5 of the page about line 27:

The second proposition is that the act or transaction must be either in relation to the asset of which the section speaks or there must be an event which affects the asset in some way.  The words “in relation to” are very broad words but they do require a real relationship between the act or transaction on the one hand and the asset on the other.

In our submission, that relationship must exist at the time of the event, which by subsection (2) was made the relevant time and the event must happen in relation to a taxpayer because the taxpayer is on the date of the event the owner of that asset and not because he or she was the owner of an asset at some antecedent point.  For that reason, in our respectful submission, there is simply no H2 event in relation to the taxpayer here.

Further, in our respectful submission, if there is an H2 event, neither the $514 value nor the $576 received is capital proceeds because of that event.  As to the $514, the Commissioner’s argument is that the grant of the sell‑back rights is a grant beneficially to the respondent.  The grant and the obtaining by her of that beneficial interest is one and the same thing.  It happens at the same time.  Even assuming that the obtaining by her of an interest could be consideration passing to her, it cannot be because of the event; it is the event.

Now, my learned friend relies upon the example.  We have referred to that in paragraphs 68 and 69 of our written submissions.  The example is perhaps an example of 104‑155, that is, an H2 event, but it is not an example purporting to deal with capital proceeds because of the event.  As we point out in 69, with respect, the assumption underlying that example in order for one to get taxability is that the landowner accepted the $50,000 that was proffered and that he presumably received it in consideration of a promise, whether enforceable or not, emanating from him.

CALLINAN J:   Well, that is my difficulty about the example.  The example expressly states that there are no obligations or rights created in the circumstances.  Now, does that not therefore mean that the money was a gift?

MR BLOOM:   Yes.

CALLINAN J:   It may still be a capital gain – I do not know whether it is or is not – but it is a gift, is it not?

MR BLOOM:   It is a gift.  In the example there is a gift.  Now, a gift may be an event ‑ ‑ ‑

CALLINAN J:   Then if it is a gift, you are only looking, are you not, at the intention of the donor?

MR BLOOM:   Yes.

CALLINAN J:   And you are looking at what the donor does with it, but are you not supposed to look at the character of the receipt in the hands of the recipient?

MR BLOOM:   Your Honour, the gift, if it is going to give rise to taxation, must be consideration, and a gift cannot be consideration.

CALLINAN J:   Well, that is my next question.

MR BLOOM:   So it is only dealing with the first half.  It is say, all right, a gift could be an event, but it does not deal with the next part.

CALLINAN J:   Well, gift, no consideration, so you are not within the last ‑ ‑ ‑

MR BLOOM:   Exactly, you are not within capital proceeds.  Consideration, your Honours, is a term which has some meaning.  We accept that it does not have a technical contractual meaning but, as this Court made it clear in Scully 201 CLR 148 – and I would simply refer your Honours to the passage at 166 – if something is to be consideration, what is required is some element of recompense or exchange. So too, if I may take your Honours briefly back to Read’s Case 167 CLR 57 at 64 about point 6 of the page in the joint judgment of Sir Anthony Mason, Justices Deane and Gaudron:

The words “valuable consideration” would seem intended to embrace receipts not in money form, but capable of being valued in money terms.  Implicit in them is the notion of a quid pro quo or a material “reward, remuneration; a compensation” –

That requires, in the commonsensical approach to these capital gains tax provisions, that something emanates from the taxpayer.  Something comes from the taxpayer for which the relevant payment is capital proceeds or consideration because of this event.

CALLINAN J:   An obligation assumed or something of that kind.

MR BLOOM:   One possibility.

CRENNAN J:   She is entirely passive.

MR BLOOM:   Entirely, your Honour.

CALLINAN J:   Can a gift be a capital gain under other provisions of the Act?

MR BLOOM:   No, your Honour.  That was not the intention.  There was no intention to have a gift duty by stealth.

CALLINAN J:   Well, that is a very curious example then, is it not, really?  It does not get you anywhere.

MR BLOOM:   It is perverse and, as Justice Hayne has pointed out, it cannot be read so as to replace what the Act itself says.

CALLINAN J:   Yes.  It seems to be in contradiction of H2 on the table, the bottom of the table which refers to consideration.

HAYNE J:   Let me just understand what you are saying.  Are you saying that this is a departure from the words of the Act?  Are you saying there is contrariety?

MR BLOOM:   Out first proposition, your Honour, before we get to that, is that this example is an example of something which could be an event affecting an asset.  If it goes that far, that is all it does and it does not cause us any difficulty because it does not deal with the second limb which is capital proceeds.  The old M7 had both aspects in the one section.  There has now been, with this new rewrite, a dividing up into two different sections, but this example is given solely in relation to the H2 event.  It is not given in relation to the question of whether this is consideration because of an event.  If, on the other hand, this is suggesting that the $50,000 gift is a gift which could be consideration, then there is contrariety, yes.

Can I take your Honours to paragraph 70 of our written submissions and just give your Honours some examples of what was intended to be put by firstly M(7) and then, we would say, H2.  The explanatory memorandum for the Bill which was the Income Tax Assessment Amendment (Capital Gains) Bill 1986 said in relation to proposed M(7):

Examples of the acts, transactions or events affected by this provision include that of an amateur sportsman who receives a payment on becoming a professional, the receipt of consideration for entering into exclusive trade tie agreements or restrictive covenants, or in connection with the variation, cancellation or breach of business contracts or agency agreements. 

In each one of those examples something emanates from the taxpayer and ‑ ‑ ‑

HAYNE J:   You seem to flirt with but not embrace the notion that consideration is a contractual term.  Now, where is the submission?  Is the submission that consideration was used in a contractual sense?  Is the submission that it is not?

MR BLOOM:   No, your Honour.  As I said before, it is not used in a strict contractual sense.

GUMMOW ACJ:   In what loose sense then?

MR BLOOM:   In the loose sense – I would not say that this Court was loose in Scully when it said it requires some ‑ ‑ ‑

GUMMOW ACJ:   It was construing a section.

MR BLOOM:   Yes, but it said that in that section one was not limited to a strict contractual sense but that one went to consideration in another sense which was recompense.  Likewise in Read where the Court said consideration involved some concept of quid pro quo.  Consideration, I think, as Chief Justice Gleeson pointed out recently in the Dick Smith Case, could be, in the conveyancing sense, marriage.  But we would, with respect, adopt what has been said about quid pro quo and about recompense as applying, even in the widest sense for consideration, even if that is not strictly contractual.

Your Honours, we try to point out in paragraph 70 that each of the examples in the explanatory memorandum, each of the examples in cases so far, Cooling, Hepples, involved an act, transaction or event where something moved from the taxpayer and the payment which was brought to tax was in consideration for that.  So the giving of a restrictive covenant, the entry by the taxpayer into a lease in Cooling and the giving of a guarantee.

GUMMOW ACJ:   What about something moving from a third party followed by the conferral of a benefit on the taxpayer?

MR BLOOM:   One has to find a connection then between a capital gains tax asset owned by the taxpayer which was the source of that payment.  I cannot immediately think of an example, but if it did affect a capital gains tax asset and the payment was by a third party in consideration of something the taxpayer did, it may be enough to bring it within, but it still has to affect an asset owned by the taxpayer.  Your Honour, the word used is “consideration”.  It is not “money or other property”; it is “money or other consideration”.

Another example in a case our learned friends relied upon, Brooks, that was another section 160M(7) case, although, as it happened, M(7) was displaced by other provisions because it is a provision of last resort.  The recipient of the money there, the vendor under the contract, gave up its right to sue for breach of contract and in exchange received the deposit which was forfeited.  There was again the element of exchange.  Something emanated from the taxpayer.

Your Honours, for those reasons, in our respectful submission, the value of the sell‑back rights cannot both be the consideration for the grant of the rights and the grant of the rights themselves.  It cannot be the same thing.  Secondly, in any case it is not consideration for anything emanating from the taxpayer and hence in those circumstances does not come within capital proceeds for that reason as well.  That means there is no assessable capital gain if that is correct.

If I could turn then to the 576.  I forgot to mention in the context of income according to ordinary concepts that of course, if the rights are a capital asset and they are disposed of for the 576, the 576 is likewise capital.  That is supported perhaps by a passage in the judgment of Justice Brennan when on the Federal Court in Federal Coke 34 FLR 375. The passage is at the bottom of 401 to 402. Your Honours see a paragraph beginning:

When a recipient of moneys provides consideration for the payment, the consideration will ordinarily supply the touchstone for ascertaining whether the receipt is on revenue account or not.  The character of an asset which is sold for a price, or the character of a cause of action discharged by a payment will ordinarily determine, unless it be a sham transaction, the character of the receipt of the price or payment.  The consideration establishes the matter in respect of which the moneys are received.  The character of the receipt may then be determined by the character, in the recipient’s hands, of the matter in respect of which the moneys are received.

So she disposed of, if we are right in our first argument, a capital asset.  Being the rights for that, she gets capital proceeds which cannot be income according to ordinary concepts.

As to the 576 in terms of capital gains, that $576 is consideration for the disposal by her of the rights.  The disposal is a separate capital gains tax event – event A1.  The disposal by the trustee to CSFB is treated as a disposal by the respondent herself under section 106‑50 which is at page 10 of the legislative materials that your Honours have:

If you are absolutely entitled to a *CGT asset as against the trustee of a trust (disregarding any legal disability), this Part and Part 3-3 apply to an act done by the trustee in relation to the asset as if you had done it.

So on the Commissioner’s case there is an A1 disposal, in effect, by the respondent.  That is the way that, in fact, it has been treated on her return and tax has been paid.  The 514 is the cost base, the value expressly provided, and the difference of $62 is the taxable capital gain, which the respondent has always accepted as such and the Commissioner, of course, has always treated as a taxable capital gain as the result of an A1 disposal under his ruling which is set out in the appeal book at pages 74 to 75.  I would simply refer your Honours to paragraphs 41 and to 46 to 48 of that ruling. 

HAYNE J:   Just before we leave 104‑155, what significance, if any, do we attach to subsection (5) of that division, in particular the appearance in (5)(e) of the grant of an option to acquire shares as being explicitly accepted from event H2?  What, if any, light does that show on the grant of a put option in respect of shares?

MR BLOOM:   Your Honour, with respect, nothing.  It certainly deals specifically with that.  If that is for more abundant caution, it does not necessarily mean that such a grant of an option would be an H2 event but, be that as it may, one still must have the two sides of the equation:  the grant or the event and capital proceeds because of it.  I do need to come back to (5) because of paragraph (b), however, your Honour, and also I need to come back to (1) because of the note at the end of subsection (1).  

Your Honours, the intervention of the A1 disposal has two effects, in our respectful submission.  The first is that the $576 is properly regarded as capital proceeds received because of that event, and that is the more proximate event, and not received because of the earlier or previous H2 event, if there was one, and causation is a relevant consideration in this context.  If I could ask your Honours to go back to Hepples 173 CLR 492, Justice Dawson at 520, about point 9 of the page:

Further, he received the money expressly in consideration of his entering into the deed, so that there was a direct causal connexion between the entry into the deed (i.e. the act, transaction or event) and the receipt of the consideration.

Justice Toohey at 524, point 5:

Unquestionably the appellant received the $40,000 “by reason of” his entry into the deed.  No nice questions of causation arise –

Justice McHugh at 540, last paragraph:

The starting point in any analysis of an act, transaction or event alleged to be within s. 160M(7) is to identify whether the act, transaction or event is one by reason of which “an amount of money or other consideration” has been paid.  The phrase “by reason of” requires that the act, transaction or event upon which the Commissioner relies be the cause of the receipt of or entitlement to the amount of money or other consideration.  This means that the act, transaction or event must be precisely identified.  Further, while it is not appropriate to substitute another verbal formula for the causal phrase “by reason of”, a causal connexion between two events is not established in a statutory context merely because one event is a causa sine qua non of the other or because, in the widest sense, one event has contributed to the occurrence of the other ‑ ‑ ‑

GUMMOW ACJ:   Why?  It all depends on the statute.

MR BLOOM:   Yes, and your Honours have recently said that too.

GUMMOW ACJ:   Well, you cannot say it is not established in a statutory context.  It depends on the statute.  It is just too broad a statement.

MR BLOOM:   But he goes on to say that the language of this section – because, your Honour ‑ ‑ ‑

GUMMOW ACJ:   That is not the question.  He is gone, Mr Bloom.

MR BLOOM:   I am sorry, M(7) of course is intended to be rewritten, and it is rewritten as H2 plus consideration or capital proceeds.  So one is really dealing with the easy to understand rewrite, so it is said, of M(7) as amended after Hepples’ Case.  But, your Honours, causation is relevant.  The most proximate cause here is an A1 disposal.  The H2 disposal, if there be one, that proceeds it is not that proximate cause.  To the same effect, your Honour the presiding Judge in Cooling 94 ALR 121 – I will simply give your Honours the reference – at 124 to 125 and Justice Hill at 146. So we say it is the intervening and separate act of disposal which is directly responsible for the $576 proceeds and therefore one does not have those as proceeds of the H2 event.

The second result of there being two events, if there are two, is that where two CGT events may apply to the situation of a taxpayer, H2 being one of them, then H2 will be displaced.  That comes about through each of two different provisions.  The first is section 102‑25, and your Honours might find it a little difficult to get this clearly out of the provisions of that section alone, so if you read them subject to the note at the end of section 104‑155(1) which says:

[H2] does not apply if any other CGT event applies:  see section 102‑25.

Why they could not then say that when they got to 102‑25 is difficult to know, but the way it works out is that H2 is the event of last resort.  The words in subsection (1) are:

Work out if a *CGT event (except *CGT events D1 and H2) happens to your situation.  If more than one event can happen, the one you use is the one that is the most specific to your situation.

The word “situation” in accordance with the ordinary dictionary meanings is set of circumstances or state of affairs, and the events relied upon here as H2 events and A1 events are, in our respectful submission, clearly part of the same circumstances.  The grant is to the trustee upon trust for sale.  There is an almost immediate sale.  So the situation of the taxpayer is such that A1 applies and if H2 also applies, A1 displaces it.  The other exclusion comes from the definition of H2 event in 104‑155(5)(b).  If your Honours go back to page 9 of the legislation:

CGT event H2 does not happen if:

. . . 

(b)the act, transaction or event requires you to do something that is another *CGT event that happens to you –

Well, again, 106‑50 says that if she has a beneficial interest in the sell‑back rights, the acts of the trustee are her acts.  The grant is to the trustee requiring the trustee, that is, her, to sell them.  That is the A1 disposal.  So we would say that if that is the proper construction, that (5)(b) also applies.

MR SHAW:   If the Court pleases, in my submission, my learned friend is not free to make that submission.  That is not a submission that is contained in the written submissions that have been submitted to the Court and there is no notice of contention. 

GUMMOW ACJ:   What do you say about that, Mr Bloom?

MR BLOOM:   Your Honours, just this.  It was a submission that was fully put at first instance before the trial judge.  It was not relied upon in the Full Court because the Commissioner moved away from the contention he now puts that there was a full beneficial interest in the sell‑back rights.  Before the Full Court the Commissioner simply said there was a right to ‑ ‑ ‑

GUMMOW ACJ:   If you were going to put this submission, you should have put Mr Shaw on notice.

MR BLOOM:   I did, yesterday.

GUMMOW ACJ:   And you should have put us on notice of it too.

MR BLOOM:   Well, your Honours, that I did not do.  I certainly put Mr Shaw on notice of it, your Honour.  It is not as if it is run for the first time.  It was most certainly run at first instance and at length and dealt with by the Commissioner.  What prejudice can there be, with respect?  It is a statutory construction question.  There is no evidence that might be needed to deal with it.  If your Honours please, those are our submissions.

GUMMOW ACJ:   Yes, Mr Shaw.

MR SHAW:   I have asked my learned friend, Mr Davies, to make the reply, if the Court pleases.

GUMMOW ACJ:   Yes, thank you, Mr Shaw.  What do you say about the last point?  Do you want to add anything to what Mr Shaw said about it, the last point that Mr Bloom made?

MR DAVIES:   No, I do not wish to, your Honour.

GUMMOW ACJ:   All right.

MR DAVIES:   Your Honour, can I go back to the income point and deal first with the code argument.  My learned friend’s submissions in relation to the code argument contained in the respondent’s written submissions commence at paragraph 36 on page 11. 

In that paragraph it is submitted that section 44 and the related provisions constitute a code in relation to the taxation of dividends. My learned friend this morning submitted that the grant of the sell‑back rights did not constitute a dividend as defined. We agree with that submission and have always agreed with that submission. It follows then that what is before the Court is assessbility of a receipt which the parties agree do not constitute dividends for the purposes of the income tax legislation. It is therefore irrelevant as to whether there is or there is not a code in the legislation dealing with the assessbility of dividends. This morning my learned friend changed his submission to it not being a code relating to ‑ ‑ ‑

GUMMOW ACJ:   Well, in what sense are we using this word “dividend”, I suppose?  In the Act it has been stretched.

MR DAVIES:   In the Act it has been stretched out in accordance with a definition.

GUMMOW ACJ:   Yes.

MR DAVIES: The parties agree that the receipt that we are concerned with does not fall within the definition. My learned friend submitted this morning that it is a code dealing with receipts generally from a company by a shareholder. If the Court looks at the provisions of sections 44 and onwards, they are all concerned with the assessbility of dividends as defined, not with the assessbility of receipts that fall within the definition of dividend and the assessbility of receipts that do not fall within the definition of dividend.

So, in our submission, it is an error to have recourse to specific provisions relating to what I call property that has a specific statutory definition in order to determine the assessbility of a receipt that does not come within the ambit of the very provisions that my learned friend is relying upon.

My learned friend referred to the three cases of Uther, Blakely and Slater Holdings and in none of those cases did any of the Judges, whether they dissented or were in the majority, indicate that the question as to the assessability of something that was not a dividend as defined was to be determined by reference to the specific provisions dealing with the assessability of dividends.  So, in our submission, the question here is whether the receipt is one according to ordinary concepts.  That by itself means that in determining what is and what is not falls within ordinary concepts it would be odd to have recourse to specific provisions of the income tax legislation dealing with another beast.

My learned friend submitted that rights issues were said by Justice Gibbs in Ord Forrest to be the same as bonus share issues.  My learned friend took the Court to page 151 of Ord Forrest and referred also to a passage of Justice Mason at page 157.  It is true that in those passages, or at least at page 151, his Honour Justice Gibbs did say that bonus share issues and rights issues were analogous, but the point of what his Honour was saying was not that they were either both income or both capital but that neither of them constituted a gift by the company to the shareholder.

This has relevance for both capital gains tax and also here.  What we are not concerned about in this case is a gift.  When it comes to considering the capital gains tax provisions, Mrs McNeil gave consideration.  The consideration she provided, according to Justices Gibbs and Mason in Ord Forrest, were the rights that she held as a shareholder in relation to the right to participate in the sell-back transaction.  The reason why, in our submission, the receipt for her was income was because what she got was something that was severed and detached from her rights as a shareholder.  It is that very fact that gives rise to the income nature of what she has received for during, after her shareholding remained untouched.

My learned friend referred to two cases of Macmine and Miranda and submitted that because of the attitude taken by the Commissioner in this case, it necessarily followed that in those cases the profit on the sale of the rights was of an income nature.  My learned friend’s submission should not be accepted.  The two things are separate.  When I say the two things, the assessability of the receipt of the sell-back right is a matter that must be determined by reference to the transaction that gives rise to the receipt of the sell‑back right.  If subsequently the rights are then disposed of and the issue is whether the proceeds are assessable, then that must be considered by reference to the circumstances surrounding the disposition of the rights.

It can be the case that a shareholder receives a dividend in specie, for example, dividend satisfied by a distribution of shares, dividend assessable under the Income Tax Assessment Act, but when it comes to disposing of the shares at some time in the future it does not follow that the profit on the sale of the shares is also assessable because they had been received in the form of a dividend and assessable at that time. 

In Miranda and Macmine what was before the Court was this issue of assessability on subsequent disposal, not the issue of the assessability of the rights when they were issued.  Abbott v Philbin is another example of a case where it was held that the disposal of the rights did not give rise to assessable income but the issue of the rights at an earlier time had constituted assessable income.

Now, may I turn to the capital gains tax issue.  The first submission by my learned friend was that the requirement that the act, transaction or event be in relation to a CGT which Mrs McNeil owned at the relevant time was not satisfied.  The submission is that the sell‑back rights were granted in relation to shares which she held at an earlier time on 23 January 2001, the record date.

In our submission, the requirement is satisfied because the sell‑back rights were issued in relation to shares which, on the facts, Mrs McNeil owned both on 23 January and on 19 February.  My learned friend had submitted that and invites the Court to read paragraph (a) of section 104‑155(1) as requiring that the act, transaction or event occur because the asset to which it relates is owned by the taxpayer on the date of the act.  In our submission, the proper construction of that paragraph does not have that requirement.  What it requires is an act, transaction or event in relation to an asset which on the date of the act, transaction or event the taxpayer owns.  In the present case what occurred was that the sell‑back rights under the transaction documents were granted on the 19th in relation to a parcel of shares which on 19 February she owned.

It is also the case, if the Court pleases, that the grant occurred pursuant to transaction documents that were executed on 12 January and it is clear that the grant itself under those transaction documents from the 12th onwards were directed at a parcel of shares which Mrs McNeil owned.  It would be an odd result if it were held that paragraph (a) was not satisfied in the present case because, although she continued to hold the shares throughout the whole of the sell‑back right procedure, under the terms of the transaction documents, the shares in relation to which the sell‑back rights were granted were shares identified as at 23 January rather than shares identified as at 19 February.

My learned friend then submitted that Mrs McNeil did not receive any consideration because of the grant of the sell-back rights.  I might remind the Court what Justice Mason said in Ord Forrest at the top of the page 157:

Nor is any difficulty occasioned when a company makes an offer to shareholders of renounceable rights to take up new shares in proportion to their existing holdings.  The shareholder is then at liberty to sell his rights to take up new shares.  The difference between the value of the new share when allotted and the amount payable to the company for it reflects the value of the right to take up the share which is itself a satisfaction of the existing shareholder’s rights under the memorandum and articles of association.  The company receives full consideration in the form of the amount payable by the allottee and in the satisfaction of the rights of the

existing shareholder.  There is therefore no element of gift in the offer which the company makes to its shareholders.

May I remind the Court also that we are in the capital gains tax provisions because it has been found that the receipt of the sell-back rights was not income.  My learned friend’s submission that the sell-back rights were not income can be encapsulated in paragraph 51 of his written submissions on page 15, which submits:

The sell back rights here were issued in partial satisfaction of the shareholders’ right to participate in reductions of capital.

In our submission, my learned friend cannot have it both ways.  My learned friend submits that the money or other consideration received cannot in the present case be the value of the sell-back rights because the act, transaction or event cannot be the same thing as the consideration received.  I have taken the Court to the example which, whatever its deficiencies, does indicate at the very least that the act, transaction or event can be the same as the capital proceeds. 

…..our primary submission is that on the legislation there is no reason for restricting the operation of capital proceeds in the way suggested and that some guidance is provided by the example.  Even though there are difficulties with the example, the one thing it does demonstrate is that the two can be the same.  The second thing in this case in any event, in our submission, is that they are not the same here.  The consideration she received was the value of the sell-back rights and the act, transaction or event was the grant of the sell-back rights.

Finally, my learned friend made some submissions about section 102‑25 as to the order of application of CGT events.  In our submission, that provision does not assist his case.  The act, transaction or event that we have identified as the grant that takes place pursuant to the transaction documents and occurs ultimately on 19 February.  On that date there is no other CGT event, so that under the application of section 102‑25 it is not one where on that date some other event is one that takes precedence over H2.  There may be an A1 event subsequently, but that is not relevant to the happening of a CGT event on 19 February.  If the Court pleases.

GUMMOW ACJ:   Yes, thank you, Mr Davies.  The Court is indebted to the parties and will reserve its decision in this matter. 

Before we adjourn there is one further matter that should be said.  The Court understands that this may be the last occasion on which it would have the assistance of leading counsel for the appellant.  Mr Shaw signed the roll of counsel as long ago as 3 April 1959.  Shortly thereafter, he first appeared in this Court.  He was led by Gillard QC in the case of Ferrum Metal 105 CLR 647. The judgment in the present appeal, when it comes to be reported, will appear, I imagine, in volume 225 or thereafter of the Commonwealth Law Reports. Thereby hangs a tale. In the last 45 years Mr Shaw has appeared in more than 80 cases in this Court which have been reported in the Commonwealth Law Reports. The Court acknowledges with gratitude the assistance provided over that period and wishes Mr Shaw well.

We will now adjourn until 10.00 am tomorrow morning.

AT 3.00 PM THE MATTER WAS ADJOURNED