McGain v Federal Commissioner of Taxation

[1965] HCA 41

HIGH COURT OF AUSTRALIA

Taylor J.

McGAIN v. FEDERAL COMMISSIONER OF TAXATION

(1965) 112 CLR 523

30 July 1965

Gift Duty (Cth)

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

Decision

July 30.
TAYLOR J. delivered the following written judgment:-
In 1959 John Collins McGain, now deceased, and a company which was incorporated in April 1958 - John McGain Pty. Limited - took part in four transactions which according to the respondent attracted liabilities on the part of the deceased to pay gift duty pursuant to the Gift Duty Assessment Act 1941-1957 (Cth). (at p524)

2. The first of these transactions was the sale by the deceased to the company of certain lands at Marrickville, upon which a cottage, factory premises and other improvements were said to be erected, for the sum of 21,500 pounds , or such greater sum as should be determined by the Commissioner of Stamp Duties as the true value of the property the subject of the sale. It is agreed by the parties that no greater amount was determined by the Commissioner as the true value of the property. By the terms of sale the purchase money was expressed to be payable to the deceased as follows: "(1) On completion which shall take place on the Eighth day of May 1959 the Purchaser shall pay to the Vendor the sum of Five Hundred Pounds on account of purchase money and on completion the Vendor shall transfer the property sold to the Purchaser and the provisions contained in this Contract as to payment of the balance of purchase money shall remain in full force and effect notwithstanding such completion. (at p524)

3. (2) The balance of purchase money shall be paid by yearly instalments of Four Hundred and Twenty Pounds, the first of which yearly instalments shall commence and be made on the Thirtieth day of April 1960, thereafter such yearly instalments shall continue to be paid on the Thirtieth day of April in each and every year until the balance of purchase money shall be fully paid and satisfied and if necessary any adjustments shall be made in the amount of the last yearly instalment at the time of payment thereof. (at p524)

4. (3) No interest shall be paid on the balance of purchase money from time to time remaining owing by the Purchaser to the Vendor hereunder." (at p524)

5. On 8th May 1959 the said lands were conveyed by the deceased to the company and the sum of 500 pounds was paid by the company to the deceased. (at p524)

6. The second transaction was concerned with plant, machinery, motor vehicles and stock on hand contained in the factory premises referred to and these items were the subject of an agreement for sale by the deceased to the company for 9,614 pounds 8s. 6d. By the agreement the purchase money was payable, as to 500 pounds thereof, on or before 8th May 1959 and, as to the balance, by annual instalments of 182 pounds each, the first of such instalments being payable on 30th April 1960. By cl. 1 (c) of the agreement no interest was to be payable on the balance of purchase money from time to time remaining owing by the company to the deceased. (at p525)

7. The third and fourth transactions were loan transactions. On 6th July 1959 the deceased entered into an agreement which recited that the deceased had agreed to lend to the company the sum of 7,500 pounds upon the terms and conditions thereinafter appearing. Thereafter by cl. 1 of the agreement it was provided that in consideration of the sum of 2,000 pounds paid by the deceased to the company on or before the execution of the agreement the company covenanted with the deceased that it would repay the said sum of 2,000 pounds by continuous equal yearly instalments of 40 pounds each to be paid on the last day of September in each and every year thereafter until the said principal sum of 2,000 pounds should be fully paid and satisfied "the first of which yearly payments shall commence and be paid on 30th September 1959". By cl. 2 the deceased agreed to lend to the company the further sum of 5,500 pounds within the period of six months from the date of the agreement, "any such sums being multiples of 500 pounds as the company may require". In respect of the said further sums amounting to 5,500 pounds to be advanced by the deceased to the company in accordance with the provisions of cl. 2, the company covenanted with the deceased that it would repay such further sums advanced by continuous yearly instalments of 110 pounds each to be paid on the last day of March in each and every year thereafter until the said further sums "to be advanced as aforesaid are fully paid and satisfied the first of which yearly payments shall commence and be paid on 31st March 1960" (cl. 3). By cl. 4 no interest was to be paid by the company to the deceased on the said sum of 2,000 pounds or on any such further sums advanced by the deceased to the company or upon the balance from time to time remaining owing to the deceased by the company. (at p525)

8. The amount of 2,000 pounds referred to in cl. 1 of this agreement was advanced by the deceased to the company on 5th May 1959, that is to say, approximately two months before the date of the agreement, and no question arises concerning any moneys advanced after the date of the agreement. However, three days before the lastmentioned date an amount of 4,500 pounds was advanced by the deceased to the company and for the prupose of his amended assessment the respondent has treated this sum as if the rights and obligations of the parties in connexion with the advance were governed by the terms of the agreement. To this the appellant takes exception pointing out that there is nothing in the case to show whether it was or was not the intention of the parties that their rights and obligations in respect of this loan should be governed by the agreement. I observe, however, that the agreement shows on its face that it was lodged for stamping not later than 6th July 1959 and it is not unlikely that it was executed some days before and dated immediately before it was lodged. But, however this may be, the exception now taken was not the subject of an objection to the assessment; on the contrary the relevant objections seem to proceed upon the basis that both loans were governed by the agreement of 6th July 1959 and this being so the exception now taken cannot, in my view, be entertained. (at p526)

9. It will be observed that in respect of all the transactions to which I have referred, with the exception of the loan of 4,500 pounds, the company's obligations were to extend over a period of fifty years. Under the first two agreements the purchase money in each case was, apart from the initial payment, to be paid by fifty annual instalments and under the third agreement the loan of 2,000 pounds was to be repaid by annual instalments extending over a like period whilst the sum of 4,500 pounds , if treated as a "further sum" advanced under cl. 2, was to be repaid by annual instalments extending over a period of forty years. (at p526)

10. By s. 4 of the Act "gift" is defined to mean "any disposition of property which is made otherwise than by will (whether with or without an instrument in writing), 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." The expression "disposition of property" is also the subject of definition. It means, inter alia, any conveyance, transfer, assignment, settlement, delivery, payment or other alienation of property and "without limiting the generality of the foregoing" it includes transactions falling within any of a number of specified categories. Section 17 of the Act provides that where any disposition of property is made and consideration in money or money's worth passes from the disponee to the disponor but the disposition constitutes a gift for the purposes of the Act by reason of the consideration not being, or, in the opinion of the Commissioner, not being, fully adequate, the value of the gift shall, for the purposes of the Act, be the extent of that inadequacy. (at p527)

11. What happened in the present case was that the respondent treated the consideration provided by the company in each of the transactions in question as not being fully adequate and he thereupon proceeded to ascertain, pursuant to s. 17, "the extent of that inadequacy" by calculating the value as at the date of each transaction of the company's promise to make the stipulated future payments. The rate of discount applied in making these calculations was seven per cent per annum and the result is shown on the annexure to the adjustment sheet which accompanied the amended assessment. This annexure sets out the following particulars:

"Realty valued at 21,500 pounds 0 0 Less: Consideration being - (a) Cash deposit 500 pounds 0 0 (b) the present value as at 8th May 1959 of the right to receive 50 consecutive annual payments of 420 pounds on 30th April in the years 1960 to 2009 inclusive 5,805 pounds 0 0 6,305 pounds 0 0

Gift of inadequate consideration 15,195 pounds 0 0 Plant, Machinery, Trading Stock etc. 9,614 pounds 8 6 Less: Consideration being - (a) Cash deposit 500 pounds 0 0 (b) the present value as at 8th May 1959 of the right to receive 49 consecutive annual payments of 182 pounds on 30th April in the years 1960 to 2008 inclusive and a final payment of 196 pounds.8.6 on 30th April 2009 2,516 pounds 0 0 3,016 pounds 0 0

Gift of inadequate consideration 6,598 pounds 8 6 Loan 2,000 pounds 0 0 Less: Consideration being the present value as at 6th July 1959 of the right to receive 50 consecutive annual payments of 40 pounds on 30th September in the years 1959 to 2008 inclusive 582 pounds 0 0

Gift of inadequate consideration 1,418 pounds 0 0 Loan 4,500 pounds 0 0 Less: Consideration being the present value as at 6th July 1959 of the right to receive 40 consecutive annual

payments of 110 pounds on 31st March in the

years 1960 to 1999 inclusive and a final payment of 100 pounds on 31st March 2000 1,500 pounds 0 0

Gift of inadequate consideration 3,000 pounds 0 0"

(at p527)

12. For the appellant it is contended that in each transaction the consideration provided by the company was fully adequate and that in reaching the contrary conclusion the respondent did not proceed according to law "but misconceived and misapplied the law and his decision thereon was arbitary and capricious and otherwise not according to law". Additionally it is the appellant's contention that the two loan transactions did not involve a disposition of property within the meaning of the Act. These are the primary contentions of the appellant and it is convenient to deal, first of all, with the latter proposition. (at p528)

13. There is no doubt that when a loan of money is made by one person to another the property in the money lent passes, upon the loan being made, from the lender to the borrower. There is, upon payment to the borrower, a disposition of the money lent notwithstanding the fact that the borrower may have undertaken to repay the amount of the loan and I can see no reason why the wide words of the definition of "disposition of property" - "any conveyance, transfer, assignment, settlement, delivery, payment, or other alienation of property" - does not fairly comprehend a payment by a lender to a borrower of a sum of money agreed to be lent by the former to the latter. There is, however, authority to the contrary. In Commissioner of Stamp Duties v. Card (1940) NZLR 637 , a case to which I was referred by the appellant, the Supreme Court of New Zealand had before it for consideration s. 39 of the Death Duties Act 1921 (N.Z.). Johnston J., in the first instance, held that loans of money repayable at future specified times were not a disposition of property within the meaning of that provision, a section which is in many respects similar to the definition of "disposition of property" in the GiftDuty Assessment Act. But the latter provision does present differences which in my view preclude the adoption of the reasoning which led Johnston J. to his conclusion. Upon the form of the New Zealand section the learned judge said that the question before him was "not the bare one whether there has been a payment, a conveyance, transfer, assignment, or other alienation of property, but whether there has been such a transaction which directly or indirectly diminishes the value of the estate of one and increases the value of the other" (1940) NZLR, at p 643 . On appeal Myers C.J. reached the same conclusion observing that he could not think "that any reasonable person would regard as an alienation by the lender a sum of money which was merely lent and was to be repaid to him in full" (1940) NZLR, at p 649 . Ostler J. thought that s. 39 was "concerned solely with a disposition of property in the nature of an alienation by which the disposer diminishes the value of his own estate and increases that of the person to whom the disposition is made" (1940) NZLR, at p 651 . With respect to those learned judges, I doubt the validity of these observations but whatever validity they may have in relation to the statutory provision which they had under consideration, they are of little assistance in solving the present question. The definition of "disposition of property" in the Australian Act is not, except as to par. (f), concerned with transactions having the effect of diminishing, or made with the intent to diminish, a person's property; it is concerned simply with defining what is to be regarded for the purposes of the Act as a disposition of property. The observations of Myers C.J. would, it would seem, admit as a disposition of property a loan upon terms that a lesser sum should be repayable but not if it was repayable in full. Likewise Ostler J's. remarks would not admit as a disposition of property any alienation of property made for full value. However these views were not entertained by Smith J. and Fair J. who on this point approached the problem in a manner which commends itself to me. The former pointed out - and this is true of the provisions which I have to consider - that "The statute seems . . . to be framed on the assumption that you must first of all have a disposition of property as defined by s. 39 before you can begin to inquire as to the adequacy of the consideration. When you can inquire, the disposition is, by s. 38 (1), a gift if the consideration is not fully adequate. But where the disposition is made for a consideration in money or money's worth which is inadequate, then by s. 38 (2) it is deemed to be a gift only to the extent of the inadequacy" (1940) NZLR, at p 654 . I also adopt as appropriate to the Australian Act the observation of the same learned judge that "a loan of money, whether secured or unsecured, is a disposition of property within s. 39. From the point of view of the lender, he has paid over or alienated his money in return for a promise to repay the whole or part of it in money or money's worth. Upon this view the loan of money constitutes a payment or other alienation within par. (a) of s. 39" (1). Indeed I see no reason why the question of the adequacy of the consideration provided in any transaction should ever enter into the problem of determining whether it constitutes a disposition of property within the wide and general terms of the definition. This is a material factor for consideration only when it becomes necessary to determine whether a disposition of property, as defined, constitutes a gift within the meaning of the Act. (at p530)

14. In Card's Case (1940) NZLR 637 the Court was also divided on the question whether a loan of money repayable in full without interest at some future time answered the description of a gift. Again, the definition of "gift" in the New Zealand Act was similar in terms to the definition of that expression in the Australian Act. Ostler and Smith JJ. considered that in such a case the consideration could not be said to be otherwise than fully adequate. The former observed that "in a loan of money even if no interest is charged, there is fully adequate consideration in money or money's worth. The consideration is the promise by the borrower to repay an equivalent sum to the sum lent" (1940) NZLR, at p 652 . And he added at a later stage that "where fully adequate consideration has been given for the loan by a promise to repay the whole of the principal, the question as to whether any or what interest has been charged is, in my opinion, irrelevant" (1940) NZLR, at p 653 . Smith J. said that "A loan without interest repayable in full does not diminish the value of the loan. It merely fails to increase the value of the loan or of the estate of which it is a part. For the purposes of the Act, the lender's estate is neither increased nor diminished. To escape liability, the lender need not, like the man in the parable, increase his pound: it is sufficient if his transaction is the equivalent of keeping it laid up in a napkin. So a consideration which maintains his pound without increase is fully adequate. A loan of money repayable in full without interest is accordingly one which is made for a fully adequate consideration" (1940) NZLR, at pp 655, 656 . Fair J., however, came to the contrary conclusion. (at p530)

15. In my respectful view the observations which I have quoted are not of real assistance in solving the problem whether the transactions in question in this case constituted gifts. As I see the problem I have to determine whether the consideration in money or money's worth which passed from the company to the deceased was not fully adequate, or, whether there were any grounds upon which the respondent could have formed the opinion that it was not. The appropriate inquiry which I think should be first made on this branch of the case is to ask what was the consideration which so passed. To this inquiry there is one ready negative answer - it was not money. It was, in each case, a promise by the company to make payments and repayments extending over a period of many years. What the deceased got in return for each disposition was a contractual promise enforceable from time to time in accordance with the agreed terms. As such, it was money's worth. But, as such, was it fully adequate consideration? I should think that the only way in which this inquiry can be answered is by asking whether the consideration in money's worth was a fair equivalent for the property the subject of each disposition and this, of necessity in a case of this character, involves a comparison of the value of the consideration with the value of the property of which the deceased disposed (cf. Attorney-General v. Boden (1912) 1 KB 539, at p 561 and Attorney-General v. Earl of Sandwich (1922) 2 KB 500, at p 520 ). To my mind it is obvious that the value of a contractual right to the payment at some remote future time of a specified sum is not the specified sum itself; it is a lesser sum which can be and commonly is ascertained by the application of an appropriate discount rate. In the present case I am satisfied on the evidence of Mr. Alexander, notwithstanding the submissions of counsel for the appellant on this point, that the rate applied by the Commissioner was, in the circumstances of the case, completely reasonable, that the consideration in money's worth passing from the company to the deceased in respect of each disposition was not fully adequate, that there was in each case a gift by the deceased to the company and that the extent of the inadequacy in each case was as assessed by the respondent. That being so, the appeal should be dismissed. (at p531)

Orders

Appeal dismissed with costs.