Dick Smith Electronics Holdings Pty Ltd v Chief Commissioner of State Revenue

[2002] NSWSC 1208

CITATION:	Dick Smith Electronics Holdings Pty Ltd v Chief Commissioner of State Revenue [2002] NSWSC 1208
FILE NUMBER(S):	SC 4574/02
HEARING DATE(S):	16/12/02
JUDGMENT DATE:	19 December 2002
PARTIES :	Dick Smith Electronics Holdings Pty Ltd - Plaintiff Chief Commissioner of State Revenue - Defendant
JUDGMENT OF:	Gzell J

COUNSEL :	Mr J W Durack SC with Mr D G Charles - Plaintiff Dr H R Sorensen - Defendant
SOLICITORS:	Gilbert & Tobin Lawyers Crown Solicitor
CATCHWORDS:	TAXES AND DUTIES - Stamp Duties - Value of Dutiable Property - Consideration for Notional Transfer - Agreement for Sale of Shares - Purchase Price Less Dividend Amount - Purchaser lends Company money to pay Dividend - Consideration moving a Transfer must pass away from Transferee to acquire rights the subject of the Transfer and no other rights - Payment to acquire two assets, Shares and Debt - Consideration limited to Purchase Price for the Shares
LEGISLATION CITED:	Duties Act 1997 Taxation Administration Act 1996 Stamp Duties Act 1920
CASES CITED:	Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143 Commissioners of Inland Revenue v Glasgow and South Western Railway Co (1887) 12 App Cas 315 Central and District Properties Ltd v Inland Revenue Commissioners [1966] 2 All ER 433 Royal Insurance Company v Watson [1897] AC 1 Davis Investment Pty Ltd v Commissioner of Stamp Duties (NSW) (1957-1958) 100 CLR 392
DECISION:	Defendant's decision set aside. Plaintiff's objection to assessment allowed. Assessment set aside. Matter remitted to Defendant for determination in accordance with reasons.

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION

GZELL J

THURSDAY 19 DECEMBER 2002

4574/02 DICK SMITH ELECTRONICS HOLDINGS PTY LTD V CHIEF COMMISSIONER OF STATE REVENUE

JUDGMENT

1 The plaintiff acquired the issued capital of InterTan Australia Ltd (“InterTan”) under a share acquisition agreement (“Agreement”). It says the consideration for the transaction was $88,555,552. The defendant says the consideration was $114,139,649.

2 InterTan is a “NSW company” as that term is defined in the Dictionary to the Duties Act 1997. The shares in InterTan were, therefore, dutiable property in terms of s 11(1)(d)(i). Section 8(1)(d)(i) provided that duty was charged on an agreement for sale or transfer of dutiable property. Section 9(1) provided that the duty was to be charged as if the dutiable transaction was a transfer of dutiable property. The actual transfer of the shares was subject to duty of $2 under s 18(2). Section 19 provided that duty was to be charged on the dutiable value of the dutiable property subject to the dutiable transaction at the relevant rate set out in Pt 3. Section 32(1) in Pt 3 provided that the rate of duty was to be calculated by reference to the dutiable value of the dutiable property subject to the dutiable transaction. Section 21(1) contained the following definition:

“The dutiable value of dutiable property that is subject to a dutiable transaction is the greater of:
(a) the consideration (if any) for the dutiable transaction (being the amount of a monetary consideration or the value of a non-monetary consideration), and
(b) the unencumbered value of the dutiable property.”

It is common ground that it is the consideration for the dutiable transaction and not the unencumbered value of the shares that is in question.

3 The defendant made an assessment under s 8(1) of the Taxation Administration Act 1996 and issued a notice of it under s 14(1). The plaintiff, being dissatisfied with the assessment, lodged an objection under s 86(1). The defendant disallowed the objection under s 91(2) and gave notice thereof under s 93(1). The plaintiff sought a review of the decision of the defendant by this Court under s 97(1).

4 Clause 5.1 of the Agreement provided that on completion the vendors would sell and the purchaser would purchase the shares for the “Purchase Price”. That term was defined in cl 1.1 to mean $114,139,649.00 minus the “Dividend Amount”. That term was defined in the same provision to mean all retained earnings up to a maximum of $27 million that InterTan was able to pay on the shares at completion or such other amount as the parties agreed. Clause 4.4(a) provided that prior to completion the vendors would ensure that InterTan declared a dividend, payable on completion, on its ordinary shares equal, in total, to the Dividend Amount. Clause 7.7 provided that on completion, immediately after payment of the Purchase Price, the purchaser would “fund” InterTan so that it was able to discharge the debts created by the declaration of the dividend.

5 The dividend declared was for $25,584,097. The plaintiff claimed that the Purchase Price, therefore, became $88,555,552. Immediately after the payment of this amount, the plaintiff “funded” InterTan by way of a loan of $25,584,097 and it was from those funds that the liabilities created by the declaration of the dividend were discharged. In effect, the vendors sold their shares ex dividend.

6 In Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143 a company reduced capital and returned the reduction to shareholders by an in specie transfer of shares in other companies at book value when the shares had a higher market value. The Stamp Duties Act 1920 (NSW), s 66(3B) provided that a conveyance made upon a bona fide consideration in money or money’s worth of not less than the unencumbered value of the property conveyed should be charged to duty on the amount or value of the consideration. It was held that the transfers were within this provision. In a classic statement of the meaning of consideration in this context, Dixon J said at 152:

“In the context I think that the word “consideration” should receive the wider meaning or operation that belongs to it in conveyancing rather than the more precise meaning of the law of simple contracts. The difference is perhaps not very material because the consideration must be in money or money’s worth. But in the law of simple contracts it is involved with offer and acceptance: indeed properly understood it is perhaps merely a consequence or aspect of offer and acceptance. Under s 66 the consideration is rather the money or value passing which moves the conveyance or transfer.”

7 Dr Sorensen, who appeared for the defendant, submitted that it was $114,139,649 that moved the notional transfer. He pointed out that the vendors required this amount come what may. The inducement to part with the shares was the receipt of this amount and it mattered not how it was made up. If no dividend was declared, the entirety would be payable. If a dividend was declared, the vendors still required payments totalling that amount.

8 In Commissioners of Inland Revenue v Glasgow and South Western Railway Co (1887) 12 App Cas 315, a railway company required a sale to it of land and buildings under its statute. A jury assessed compensation in a specified amount for the value of the land, a specified amount for the value of the buildings and a further specified amount as compensation for loss of business. A deed was executed reciting the required acquisition, the finding of the jury as to compensation, the payment by the respondent of those amounts and a disposition to the respondent of the property. It was held that the amount of compensation for loss of business was part of the consideration for the sale of the premises and liable to ad valorem duty accordingly.

9 Dr Sorensen submitted that this case was authority for the proposition that consideration for a transfer may include an amount other than that which is stipulated by the parties as the purchase price. I do not think the decision goes so far. The deed of conveyance having recited receipt of each of the three amounts, their Lordships took the view that the sum of the amounts constituted the consideration or the value of the land.

10 In Central and District Properties Ltd v Inland Revenue Commissioners [1966] 2 All E R 433, the appellant was the subsidiary of a company, 98% of the shares of which were held by two of its directors. A merger arrangement was entered into whereunder the holding company became a subsidiary of the appellant and the holding company and the directors transferred shares in the appellant to an independent issuing house. In order to entice the preference shareholders of the holding company to exchange those shares for preference shares in the appellant, the issuing house issued low paid negotiable letters of entitlement to the shares in the appellant transferred to the issuing house by the holding company and its directors. There was an exemption from stamp duty on transfers of shares involved in a merger if the consideration for the acquisition consisted, as to not less than 90%, in the issue of shares by way of exchange. The House of Lords held that the consideration included the value of the letters of entitlement with the consequence that the exemption did not apply.

11 Dr Sorensen submitted that the decision was authority for the proposition that consideration which moves a transfer may include an offer made to the transferor by a person other than the transferee. I do not read the decision in that fashion. Their Lordships took the view that the appellant adopted and made itself responsible for the offer to issue the letters of entitlement. The appellant warranted performance by the issuing house and there was, in consequence, consideration passing from the transferee. As Lord MacDermott said at 442:

“The option offer did not move directly from the appellant company, but it nevertheless moved from it, indirectly, because the appellant company promised, and promised contractually, that that offer would be made in the events which happened. That promise being part of the consideration moving from the appellant company, the option offer was to be taken into account in applying condition (c) and that means that the condition has not been satisfied and that there is no exemption.”

12 In Royal Insurance Company v Watson [1897] AC 1 the transferees of an insurance business agreed to take into their service the transferor’s manager at a fixed salary with liberty to commute it for a calculated sum. The transferees retained the manager’s services for a short period and then paid a lump sum in commutation of his salary. The House of Lords rejected a claim to deduct the amount in estimating the company’s profits for income tax purposes. They regarded the agreement to pay the commutation money as part of the consideration for the transfer of the business. Likewise, the defendant submits, the agreement to “fund” the payment of the dividend was part of the consideration for the notional transfer.

13 Mr Durack SC, who with Mr Charles, appeared for the plaintiff submitted that whereas in one sense it could be said that what moved the notional transfer was $114,139,649, nonetheless, if a Dividend Amount was established, the Purchase Price was reduced by that amount and it was the Purchase Price that constituted the consideration.

14 In Davis Investments Pty Ltd v Commissioner of Stamp Duties (NSW) (1957-1958) 100 CLR 392 the appellant, a holding company, bought shares from its subsidiary at their par value when their market value was much higher. The court held that, notwithstanding that the value of the appellant’s investment in its subsidiary dropped by the difference between the market value and par value of the shares, the transaction was a transfer for a price and, accordingly, was exigible as a transfer for a bona fide consideration less than the unencumbered value of the shares. Dixon CJ said at 408-409:

“But here, for their own purposes the parties have given the transaction the form of the sale at a price. Had it not been for the situation occupied by the two companies one to another it might not have been possible, or at all events lawful, to transfer at such prices. In a practical sense doubtless the transaction was “moved” by that circumstance. But within the meaning of the words in s 66(3A) would the consideration moving the transfers – the consideration “upon” which the transfers are made – be anything but the price the parties chose to adopt? After all we are dealing with a transfer on sale. To go beyond the price may be to prefer realism to formal expression, but it means going to the circumstances warranting the parties in fixing the price they chose and that is not necessarily the same thing as consideration. It cannot be denied that it is an attractive view that the consideration in money or moneys worth “upon” which the transfers would be made consists of all the essential elements involved in the change of rights effected by the transfer, involving as it does the effectuation of pre-existing rights. But, notwithstanding some hesitation, I have reached the conclusion that, in the circumstances of the present case, it is the price which must for the purposes of stamp duty be regarded as the consideration upon which the transfers would be made.”

15 Mr Durack submitted that if in a practical sense the notional transfer was moved not only by the payment of the Purchase Price but also by the “funding” of InterTan, that did not alter the analysis of the transaction as an agreement for sale of the shares for $88,555,552 and a loan of $25,584,097.

16 Neither party could point to any authority in which moneys paid for the acquisition of a valuable right were held to constitute consideration for the acquisition of other property. In my view, when Sir Owen Dixon spoke of “the money or value passing which moves the conveyance or transfer” he was referring to money or property that passed away from the purchaser for the acquisition of rights in the property conveyed or transferred and in no other rights. In the instant circumstances, the “funding” of InterTan led to the plaintiff obtaining a debt. The loan was not, in my view, money passing from the plaintiff in moving the share acquisition. It was money passing from the plaintiff to acquire the debt. The plaintiff paid $114,139,649 as consideration for the acquisition of two assets: one the shares, the other the debt. What moved the acquisition of the shares was the Purchase Price of $88,555,552.

17 If a purchaser paid $100 million for shares under an agreement that provided for a subsequent variation in purchase price depending upon valuations of assets, and $10 million was refunded after that process, the consideration for the transfer was $90 million. If the purchaser paid $90 million for the shares, lent the company $10 million to pay a dividend and the company immediately sold an asset and repaid the $10 million, the purchaser was out of pocket by only $90 million. Again, the consideration for the transfer was $90 million.

18 Not only was Watson a decision under a different statutory regime, but also it lacked the element of acquisition of an additional valuable right. When the appellant commuted the manager’s salary, it did not gain a new right. It rid itself of an on-going liability. The case is of little assistance in the instant circumstances.

19 I am of the view that the consideration for the notional transfer was $88,555,552 and that was the dutiable value of the shares in terms of s 21(1)(a) of the Duties Act 1997. The plaintiff’s review of the defendant’s decision succeeds. The defendant’s decision should be set aside. The plaintiff’s objection to the assessment should be allowed and the assessment should be set aside. The matter should be remitted to the defendant for determination in accordance with these reasons. The parties are to bring in short minutes of orders in accordance with these reasons. I will hear the parties on costs.

Last Modified: 01/06/2003