McGain v Federal Commissioner of Taxation

[1966] HCA 34

HIGH COURT OF AUSTRALIA

Barwick C.J., Menzies and Owen JJ.

McGAIN v. FEDERAL COMMISSIONER OF TAXATION

(1966) 116 CLR 172

20 May 1966

Gift Duty (Cth)

Gift Duty (Cth)—Sale of property for present value payable by instalments over lengthy period without interest—Loans of money repayable over lengthy period without interest—"Disposition of property"—Gift Duty Assessment Act 1941-1957 (Cth), s. 4 "disposition of property", "gift"*, s. 17.**

Decision

May 20.
THE COURT delivered the following written judgment:-
This is an appeal against a judgment of Taylor J. dismissing a taxpayer's appeal against a gift duty assessment made in respect of four transactions between J. C. McGain deceased during his lifetime and a family company, John McGain Pty. Limited, in which he was a shareholder and of which he was governing director. The transactions in question took place when J. C. McGain was about eighty-seven years of age. (at p173)

2. The first transaction was the sale by McGain to the company of land, including factory premises, worth in all 21,500 pounds for the sum of 21,500 pounds payable as to 500 pounds on 8th May 1959 when the land was to be, and was in fact, transferred, and the balance over fifty years at the rate of 420 pounds annually. It was stipulated that no interest should be paid upon outstanding balances. (at p173)

3. The second transaction was the sale by McGain to the company of plant, etc. and stock upon the factory premises sold as aforesaid worth in all 9,614 pounds 8s. 6d. for the sum of 9,614 pounds 8s. 6d. payable as to 500 pounds on 8th May 1959 and as to the balance over a period of fifty years at the rate of 182 pounds annually. It was stipulated that no interest should be paid upon outstanding balances. (at p173)

4. The third transaction was a loan by McGain to the company of 2,000 pounds repayable over a period of fifty years by instalments of 40 pounds a year. In the agreement for loan, it was stipulated that no interest should be paid upon outstanding balances. (at p173)

5. The fourth transaction was a loan of 4,500 pounds repayable in equal yearly instalments of 110 pounds, the first to be paid on 31st March 1960. In the agreement for loan, it was stipulated that no interest should be paid upon outstanding balances. (at p173)

6. There is no doubt that by the first and second transactions the deceased did dispose of property to the company. It was contended, however, that the two loan transactions involved no disposition of property. This contention we reject. It was admitted that on 5th May 1959 a sum of 2,000 pounds was paid by McGain to the company. It was also admitted that on 3rd July 1959 a sum of 4,500 pounds was paid by McGain to the company. How these payments were made is not disclosed, but whether by cheque or otherwise is immaterial. The fact is that money was paid by McGain to the company. The definition of "disposition of property" in s. 4 of the Gift Duty Assessment Act 1941-1957 (Cth) covers "any . . . payment or other alienation of property . . . ". To pay money by cheque or otherwise is perhaps the most common way of disposing of property and incidentally, of course, of making a gift. In considering the question whether the payment of money to be repaid constituted a disposition of property. Taylor J. analysed the New Zealand case of Commission of Stamp Duties v. Card (1940) NZLR 637 where two justices decided that a loan of money repayable at future specified times was not a disposition of property. In our opinion, the real question for the Court was whether the payment of money by the lender to the borrower constitutes a disposition of property, not whether a loan is a disposition of property. In answering this decisive question, the consideration for the payment is irrelevant. To give a cheque to pay an account is just as much a disposition of property as to give a cheque to make a gift, and it can scarcely be said that a person who gives away 1,000 pounds by cheque has made no gift because there was no disposition of property. The simplest way of lending money is for one person to pay money to another. When this has been done and the question arises whether such a payment constituted a gift, it then becomes necessary to look to the consideration for the payment, but this is an inquiry which arises only after a determination that the payment was a disposition of property. In our opinion, Taylor J. was correct in preferring the view of Smith and Fair JJ. in the New Zealand case as to this and in deciding that the payments of 2,000 pounds and 4,500 pounds made by McGain to the company were dispositions of property. (at p174)

7. The next question is whether the dispositions of property which were made, or any of them, were to any and, if so, to what extent, gifts. A gift means "any disposition of property . . . made . . . without consideration in money or money's worth passing from the disponee to the disponor, or with such consideration so passing if the consideration is not, or, in the opinion of the Commissioner, is not, fully adequate" (s. 4 supra). Here, in the case of each disposition of property, there was consideration in money or money's worth passing from the company to McGain and the question is whether the consideration so passing was, or was in the opinion of the Commissioner, fully adequate. (at p174)

8. The first two transactions can be dealt with together. The consideration which passed to McGain ("the disponor") from the company ("the disponee") was a cash payment and a promise to pay the balance of the purchase price over fifty years without interest. In our opinion, the section requires that attention should be given to the character of the consideration passing at the time of a disposition by a "disponor" to a "disponee". The money which in each case would form the instalments to be paid in the future did not pass from the company to McGain when he transferred the land and the other assets to the company. What passed at that time was, in part, a promise to pay. Authority for this proposition is to be found in Fadden v. Federal Commissioner of Taxation (1945) 70 CLR 555 . There it was decided, when a father transferred shares to his children for consideration of a stated sum which was not paid, a promise to pay upon demand was to be inferred. Latham C.J., with the concurrence of Rich and Dixon JJ. said : "Section 4 refers to money or money's worth. I do not regard those provisions as excluding the ordinary law of the land that a promise may be good consideration for the transfer of property. In this case, the documents imply a promise to pay, that is, a promise to pay an amount of money which the case shows is the full value of the property. The promise to pay is immediately enforceable although it has not been enforced for a period of about three years . . . . the present position is that the consideration for the transfer of the shares is to be found in each case in a promise to pay the full value, such promise being immediately enforceable" (1945) 70 CLR, at pp 558, 559 . Here, in each of the first and second transactions, therefore, the consideration passing from the company to McGain was, except for the cash paid, a promise to pay future instalments. Can it be said that this promise, together with the money paid, was the equivalent of the property transferred? Taylor J. decided it could not, and we agree with him. The inadequacy here arises from the very terms of the promise itself - that is, that the present value of the property, less the cash payment, should be paid over fifty years without interest. A property today worth 21,500 pounds is obviously worth more than 500 pounds and a promise to pay 420 pounds a year for fifty years without interest. Likewise, equipment valued at 9,614 pounds 8s. 6d. is worth much more than 500 pounds cash and 182 pounds a year for fifty years. (at p175)

9. Similarly, the promises to repay in the future and without interest were not adequate consideration for the payments of 2,000 pounds and 4,500 pounds. It is not open to doubt that a promise to repay 2,000 pounds by instalments of 40 pounds over fifty years without interest is not adequate consideration for a present payment of 2,000 pounds. So it is with the payment of 4,500 pounds. (at p175)

10. Counsel for the appellant sought to gain some comfort from the fact that the disponee was a family company but, to our minds, this does no more than afford an explanation why the transactions took the form they did. (at p176)

11. The transactions here under consideration involve the transfer of assets, that is, land, plant, stores or the payment of money, in return for a promise to pay money with or without an immediate payment of some money and, in applying the statutory definition of "gift", it seems to us no more is required than a comparison of the value of what was promised or paid with the value of what was given. A simple comparison of this sort would not always be possible - for example, where part of the consideration for the transfer of property is a promise to enter into, and work in, partnership with the transferor. In cases such as this, the determination whether fully adequate consideration has passed for a disposition of property poses a more difficult problem than that with which we are faced in this appeal, and it seems to us that the cases relied upon by counsel for the appellant, such as Robertson and Another v. Commissioner of Inland Revenue (1964) NZLR 484 and Finch v. Commissioner of Stamp Duties (1929) AC 427 , fall into this category and do not assist in the determination of this case. (at p176)

12. Taylor J. decided that the value of the promise in each case was to be ascertained by the application of an appropriate discount rate and accepted evidence that nine per cent was a fair discount rate. As the rate applied by the Commissioner was only seven per cent, his Honour considered that the appeal should be dismissed. It was asserted before us that the Commissioner's rate of seven per cent was too high but, upon the evidence, this could not be maintained and his Honour's decision was clearly correct. (at p176)

13. In our opinion, the appeal should be dismissed. (at p176)

Orders

Appeal dismissed with costs.