McCathie v Federal Commissioner of Taxation

The executrix and executors of the will of David Henderson McCathie (the appellants) appealed to the High Court against the Federal Commissioner of Taxation's (the respondent) valuation of shares held by the deceased in McCathies Pty. Ltd. for the purposes of Federal estate duty. The deceased held a significant number of A, B, and C class shares in the proprietary company. The appellants valued the shares at £28,792, while the Commissioner's amended assessment valued them at £69,801.

The primary legal issue before the court was to determine the true value of the deceased's shares in McCathies Pty. Ltd. as at the date of his death, 7th August 1940, for the purpose of assessing Federal estate duty. This involved considering various factors, including the company's profitability, its assets, the nature of its business, and the rights attached to the different classes of shares, as well as the potential impact of events subsequent to the date of death on the valuation.

Williams J. reasoned that the real value of shares in a company depends more on its earning capacity and profits than on liquidation value. He considered the company's financial history, its substantial assets including a prime retail property, and its investments. The court found that the company's reported net profits were depressed by factors such as structural alterations to its premises, excessive directors' fees, and potentially inefficient management. The court adjusted for these factors, particularly the exorbitant directors' fees, to ascertain the company's reasonable earning capacity. It was held that evidence of events subsequent to the date of death could be considered to determine the proper weight to attach to circumstances existing on the material date. The court concluded that the Commissioner's valuation of £69,801, or approximately 18s. 3d. per share, was not excessive, and that a purchaser could reasonably anticipate a six per cent return on their investment at this price.

The appeal was dismissed with costs.