FEDERAL COURT OF AUSTRALIA Commissioner of Taxation v McNeil [2005] FCAFC 147 INCOME TAX – income according to ordinary concepts – capital gain – CGT event H2 – act, transaction or event occurring in relation to a CGT asset – 'in relation to' – nature of relationship – requirement for asset existing at time of event – taxpayer's asset – announcement by listed public company of 5% of issued share capital – Sell Back Rights issued on 1 for 20 basis – taxpayer shareholder in company – taxpayer giving no direction to acquire or exercise the Sell Back Rights to which she was entitled – Sell back Rights traded on Australian Stock Exchange – absent direction taxpayer entitled to proceeds of sale of Sell Back Rights at conclusion of limited period of trading according to pre-existing formula – whether entitlement created in respect of Sell Back Rights and share of proceeds of sale thereof was income according to ordinary concepts – whether stock market value of taxpayer's unrealised Sell Back Rights subject to capital gains tax – whether proceeds represented a capital gain Corporations Act 2001 (Cth) ss 256A, 256B Income Tax Assessment Act 1915 (Cth) ss 3, 10, 14 Income Tax Assessment Act 1936 (Cth) ss 6(1), 44, 44(1), 47, 108, 108(1) Income Tax Assessment Act 1997 (Cth) ss 3-1, 6-5, 102-5, 102-20, 104-5, 104-10, 104-155, 104-155(1), 104-155(2), 104-155(3), 106-50, 108-5, 112-25, 116-20, 116-20(2), 116-125, 116-20, 118-20 Abbott v Philbin [1961] AC 352 considered Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143 considered Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation (1965) 114 CLR 314 cited Callow v Federal Commissioner of Taxation (1997) 73 FCR 421 cited Commissioner for Internal Revenue v Blott [1921] 1 AC 171 cited Commissioner of Taxation (NSW) v Stevenson (1937) 59 CLR 80 cited Commissioner of Taxation v Brewing Investments Ltd (2000) 100 FCR 437 cited Commissioner of Taxation v Scully (2000) 201 CLR 148 considered Commissioner of Taxation v Slater Holdings Ltd (1984) 156 CLR 447 considered Commissioners of Inland Revenue v Fisher's Executors [1926] AC 395 cited Commissioners of Inland Revenue v Paget (1938) 2 KB 25 followed Dickenson v Federal Commissioner of Taxation (1958) 98 CLR 460 considered Donaldson v Federal Commissioner of Taxation (1974) 3 ALR 516 considered Eisner v Macomber (1920) 252 US 189 cited Federal Commissioner of Taxation v Blakely (1951) 82 CLR 388 referred to Federal Commissioner of Taxation v Comber (1985) 64 ALR 451 cited Federal Commissioner of Taxation v Cook and Sherden (1979) 29 ALR 202 cited Federal Commissioner of Taxation v Cooling (1990) 22 FCR 42 cited Federal Commissioner of Taxation v Miranda (1976) 11 ALR 85 cited Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639 cited Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 approved Federal Commissioner of Taxation v Uther (1965) 112 CLR 630 referred to Federal Commissioner of Taxation v WE Fuller Pty Ltd (1959) 101 CLR 403 cited Gibb v Federal Commissioner of Taxation (1966) 118 CLR 628 cited Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47 cited Hepples v Federal Commissioner of Taxation (1991) 173 CLR 492 cited Macmine Pty Ltd v Federal Commissioner of Taxation (1979) 24 ALR 217 cited Ord Forrest Pty Ltd v Federal Commissioner of Taxation (1973) 130 CLR 124 cited PMT Partners Pty Ltd (In Liquidation) v Australian National Parks & Wildlife Service (1995) 184 CLR 301 considered Read v The Commonwealth (1988) 167 CLR 57 referred to Scott v Commissioner of Taxation (NSW) (1935) 35 SR(NSW) 215 cited Thomson v Federal Commissioner of Taxation (1929) 43 CLR 360 considered Webb v Federal Commissioner of Taxation (1922) 30 CLR 450 cited Stone J, Legal System and Lawyers' Reasonings (Maitland 1968) Parsons RW, Income Taxation in Australia (1985) COMMISSIONER OF TAXATION v HELEN MARY McNEIL N671 OF 2004 FRENCH, EMMETT AND DOWSETT JJ 8 AUGUST 2005 SYDNEY IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N671 OF 2004 On Appeal from a Single Judge of the Federal Court of Australia BETWEEN: COMMISSIONER OF TAXATION APPELLANT AND: HELEN MARY McNEIL RESPONDENT JUDGES: FRENCH, EMMETT AND DOWSETT JJ DATE OF ORDER: 8 AUGUST 2005 WHERE MADE: SYDNEY THE COURT: 1. Orders that the appeal be dismissed. 2. Notes the parties' agreement that there be no order as to costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N671 OF 2004 On Appeal from a Single Judge of the Federal Court of Australia BETWEEN: COMMISSIONER OF TAXATION APPELLANT AND: HELEN MARY McNEIL RESPONDENT JUDGES: FRENCH, EMMETT AND DOWSETT JJ DATE: 8 AUGUST 2005 PLACE: SYDNEY REASONS FOR JUDGMENT FRENCH J: Introduction 1 This appeal by the Commissioner of Taxation (the Commissioner) involves a contest with a 90 year old widow (the Taxpayer) who is a small shareholder in St George Bank Ltd (SGL). She received $576.64 from SGL in 2001 in connection with a capital reduction which it undertook in that year. Although there is a certain incongruity about the protagonists in this appeal, it is a test case which raises issues about the correct taxation treatment of the issue of Sell Back Rights by SGL to its existing shareholders in 2001. The Sell Back Rights, which were issued on a 1 for 20 basis were in effect 'put options' under which each shareholder could require SGL to buy back 5% of his or her shares at a premium price of $16.50. However no shareholder was required to actually acquire a legal or beneficial interest in the Sell Back Rights or to exercise them. They were traded on the Australian Stock Exchange (ASX) and shareholders who gave no directions in respect of their entitlements were paid the proceeds of trading activities in relation to the Rights which were conducted for their benefit by a merchant bank. 2 The question which falls for determination in this appeal is whether the creation of the entitlement to the Sell Back Rights and the payment of the proceeds in relation to it constituted income or a capital gain in the hands of the shareholder. Conti J held at first instance that they were neither. 3 For the reasons which follow, I am of the opinion that the entitlement and the payment of the proceeds were neither income according to ordinary concepts nor a capital gain and that the Commissioner's appeal must be dismissed. The appellant should pay the respondent's costs of the appeal. Factual background 4 The Taxpayer has been a widow since 1975. She lives in Sydney. Since 1987 her main source of income has been dividends from shares, interest from term deposits and debentures and an annuity. At the commencement of 2001 she held 5,450 shares in SGL which had been a publicly listed company since 1992. She acquired the shares between 1987 and 1997. Some were acquired through rights issues. On 12 January 2001 SGL announced its intention to carry out an off-market buy-back of ordinary shares from its shareholders to the extent of about 5% of its then issued capital. That is it intended to buy back one ordinary share for every 20 ordinary shares held as at 23 January 2001. The buy back price was fixed at $16.50 per ordinary share. That represented a premium of 18.9% over the price of the shares on the ASX as at 10 January 2001, which was $13.88. It represented a 17% premium on historically high share price of $14.10. The $16.50 paid in respect of each ordinary share was to be debited by SGL to its share capital account. The total number of shares involved was 22,788,461. 5 Each person who was a shareholder as at 23 January 2001, known as the Record Date, was to be entitled to a 1 for 20 issue of Sell Back Rights, ie the right to sell back one ordinary share in SGL at $16.50 for every 20 shares held at 23 January 2001. The Sell Back Rights themselves were listed on the ASX and were traded from 19 February 2001. Shareholders who wanted to exercise or dispose of any of the Sell Back Rights were required to complete a direction form and return it to SGL by 5pm on 16 February 2001. The directions that could be given were: (i) a direction to SGL that the shareholder wished to exercise all of his or her entitlements to Sell Back Rights; (ii) a direction that some or all of the Sell Back Rights be transferred to the shareholder. Shareholders who gave no direction would still benefit from the Sell Back Rights. There was also a category of Excluded Shareholders who were foreign shareholders and persons who held their shares under SGL employee share schemes. They were in effect treated in the same way as shareholders who gave no direction. The Rights relevant to shareholders who gave no direction would be sold to a merchant bank, Credit Suisse First Boston Australia Equities Ltd (CSFB). The non-directing shareholders would receive the net proceeds of that sale calculated according to a formula, set out later in these reasons, called the Sale Mechanism Price. 6 The Taxpayer was one of those who gave no direction in relation to the Sell Back Rights. She received $2.12 for each Sell Back Right allotted to her. That sum was calculated according to the Sale Mechanism Price formula. She had a total of 272 Sell Back Rights allocated to her in respect of her 5,450 shares in SGL. That represented one Sell Back Right for every 20 shares she held. The total sum remitted to her in respect of her Sell Back Rights was $576.64 The market value of the Sell Back Rights at the date of issue was $1.89. 7 In her income tax return for the year ended 30 June 2001 the Taxpayer included $576 by way of receipts made up of: . $514 as ordinary income under s 6-5 of the Tax Act . $62 as a capital gain representing the difference between the sell price received from the Sell Back Rights ($576) and their cost base calculated by reference to their market value ($514). She was assessed by the Commissioner on the basis that she had derived assessable income, according to ordinary concepts of income, in the sum of $514 or $576.64. She was assessed in the alternative on the basis that she had received a capital gain of $514. 8 The Taxpayer objected to the assessment contending that the sum of $514 was not assessable as ordinary income under s 6-5 of the Income Tax Assessment Act 1977 (Cth) (the ITAA 1977) or as a capital gain. She took no objection to the inclusion of $62 as a capital gain. The Commissioner disallowed her objection. His stated reasons were: 'Mrs McNeil was granted 272 Sell Back Rights on 19 February 2001. The grant of the Sell Back Rights is assessable as ordinary income under section 6-5 of the Income Tax Assessment Act 1997 (ITAA 1997). The amount to be included in assessable income for each Right granted is its market value at the time of the grant. The market value of each Right is $1.89, and accordingly Mrs McNeil is assessable on an amount of $514.00. Alternatively, the grant of the Rights is a CGT event H2, and a capital gain of $514.00 arises under subsection 104-155(3) of the ITAA 1997. This decision is in accordance with Class Ruling CR 2001/75.' The Taxpayer appealed against the disallowance of her objection. On 14 April 2004 Conti J allowed the appeal, set aside the Commissioner's objection decision of 31 October 2002 and allowed the Taxpayer's objection of 19 June 2002. His Honour remitted the matter to the Commissioner for reassessment according to law. The Commissioner appeals against that judgment. Before turning to the judgment at first instance, it is helpful to set out in summary the relevant documentation. The transaction documents 9 The transaction documents under which the buy back was implemented were entered into on 12 January 2001. They were: 1. A Sell Back Rights Deed Poll made by SGL in favour of Participants defined as Record Date Shareholders, Sell Back Right Holders, CSFB and St George Custodial Pty Ltd (Custodial). 2. A Deed Poll (Shareholders) made between SGL and Custodial. 3. A Deed Poll (Excluded Shareholders) made between SGL and Custodial. 4. A CSFB Deed Poll made by CSFB in favour of Sale Mechanism Participants, SGL and Custodial. The Sale Mechanism Participants, defined in the Sell Back Rights Deed Poll referred to shareholders who did not give directions as to the exercise or transfer of their Sell Back Rights and also to Excluded Shareholders. 10 The general operation of the transaction documents was conveniently set out in overview in the Taxpayer's written submissions and it is convenient to follow that overview. In so doing some reference to Excluded Shareholders has been omitted. The transaction documents broadly operated as follows: (a) SGL covenanted to grant to Custodial on or before the listing date, for the absolute benefit of each Record Date Shareholder, not being an Excluded Shareholder (ie being a Participating Shareholder) one put option 'a Sell Back Right' in respect of each 20 ordinary shares held at 5pm on the Record Date: cl 2(a) of the Sell Back Right Deed Poll. (b) SGL's covenant referred to in subparagraph (a) was subject to: (i) a right of revocation by SGL at any time prior to the listing date; and (iii) the ASX agreeing to list the Sell Back Rights on or before the listing date – cl 2(a) and cl 3 of the Sell Back Right Deed Poll. (c) an Information Memorandum which was dispatched to Participating Shareholders on or around 29 January 2001 contained a form of direction (a 'Direction Form') – cl 1.1 of the Sell Back Right Deed Poll; (d) Direction Forms sent to Participating Shareholders varied depending on whether the Participating Shareholders were: (i) Participating Shareholders being Issuer Sponsored Holders – these Participating Shareholders were sent a Direction Form entitled 'Direction Form for Issuer Sponsored Holders Only'; (ii) Participating Shareholders not being Issuer Sponsored Holders, but being CHESS Holders (Clearing House Electronic Subregister System) - these Participating Shareholders were sent a Direction Form entitled 'Direction Form for CHESS Holders Only'. The Taxpayer was a Participating Shareholder, being an Issuer Sponsored Holder and was forwarded a Direction Form entitled 'Direction Form for Issuer Sponsored Holders Only'. The remainder of this overview applies only to Participating Shareholders who were Issuer Sponsored Holders. (e) Subject to subparagraph (g) the Direction Form made provision for Participating Shareholders: (i) to exercise their respective (prospective) entitlements to Sell Back Rights against SGL (and thus to participate in the buy back at $16.50 per ordinary share in SGL); (ii) to have all of their respective (prospective) entitlements to Sell Back Rights transferred to them; or (iii) to have some of their respective (prospective) entitlements to Sell Back Rights transferred to them by ticking the appropriate box on the Direction Form and returning the Direction Form to SGL by 5pm on the Election Date. A Participating Shareholder who completed and returned the Direction Form to SGL by that time and date was taken to have given a 'direction' – cls 2 and 3 of the Deed Poll (Shareholders). (f) Given that the covenant of SGL referred to in subparagraph (a) was subject to the conditions referred to in subparagraph (b) the 'entitlement' of a Participating Shareholder who gave a direction remained a prospective entitlement as at 5pm on the Election Date. If a Participating Shareholder gave a direction an interest in a Sell Back Right would vest in the Participating Shareholder on the listing date: cl 2 of the Sell Back Right Deed Poll and cl 2 of the Deed Poll (Shareholders). (g) Upon the grant of the Sell Back Rights by SGL on the Listing Date, Custodial was to hold the Sell Back Rights, to which each Participating Shareholder who gave a direction was entitled, on a separate trust for each such Participating Shareholder: cl 2.1 of the Deed Poll (Shareholders). (h) The Direction Form contained in the Information Memorandum despatched to Participating Shareholders provided, inter alia: 'If you choose to do nothing and wish to receive proceeds (if any) equal to the Sale Mechanism Price for your Sell Back Rights, do not return this Direction Form. (emphasis as in Direction Form) (i) A Participating Shareholder who did not give a direction became a 'Remaining Shareholder' (also known as a 'non-acceptance shareholder'): cl 1.1 of the Sell Back Right Deed Poll and cl 1.1 of the Deed Poll (Shareholders). (j) A Remaining Shareholder did not obtain an interest in a Sell Back Right: cl 2(c) of the Sell Back Right Deed Poll, cl 3.2 of the Deed Poll (Shareholders) and cl 3 of the CSFB Deed Poll. They had vested initially in Custodial on trust and were then sold back to CSFB. (k) Each Remaining Shareholder obtained a chose in action, namely the right to compel the due administration of a trust. The trust property included the Sell Back Rights that were not the subject of a direction by a Participating Shareholder. These Sell Back Rights were granted upon terms that they would be transferred by Custodial to CSFB. CSFB was required to sell them or acquire ordinary shares in SGL and to exercise the Sell Back Rights which it held. The net proceeds of the sale or exercise were to be divided among the Remaining Shareholders and Excluded Shareholders: cl 3.2 of the Deed Poll (Shareholder), cl 3 of the Deed Poll (Excluded Shareholder) and cl 3 of the CSFB Deed Poll. (l) The amount ultimately payable to each Remaining Shareholder and each Excluded Shareholder was calculated in accordance with the 'Sale Mechanism Price' as defined in cl 1.1 of the CSFB Deed Poll. (m) The Sale Mechanism Price was calculated in accordance with the following formula: SMP = A + B C The variables in the formula were defined as follows: A = The aggregate of the amounts received by CSFB from the sale on the ASX of Sell Back Rights which were not the subject of direction by a participating shareholder and Sell Back Rights relating to excluded shareholders. NB the definition of the latter category is not relevant for present purposes. B = The amount paid by SGL (in buying back shares) minus (the cost of acquiring those shares on the ASX). C = The aggregate of the Sell Back Rights referred to in A. (n) In the case of a Participating Shareholder who did give a direction and so had the legal title to a Sell Back Right transferred to him or her but who did not exercise the Sell Back Right or dispose of the Sell Back Right to a third party by 5pm on the Cut-off Date (20 March 2001), the Sell Back Right was deemed to have been transferred by Custodial to CSFB and the Net Proceeds of Sale (as defined) accounted for to the shareholder. The Net Proceeds of Sale was determined pursuant to a formula: cl 2(c) and cl 8 of Schedule 1 of the Sell Back Right Deed Poll and cl 9 of the CSFB Deed Poll. 11 The rights comprised in Sell Back Rights were identified in the Sell Back Right Deed Poll which provided in cl 6: (a) 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 on and subject to the Terms. (b) For the avoidance of doubt, Sell Back Rights shall not confer on the Sell Back Right Holder any right to dividends or other accretions or rights which are declared, paid, made or issued by St George in respect of Shares.' The word 'Terms' was defined in cl 1.1 as meaning 'the terms and conditions of the Sell Back Rights set out in Schedule 1'. Clause 1 of Schedule 1 of the Sell Back Right Deed Poll provided that: 'Rights Conferred (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. 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 subject to satisfaction of the Sell Back Right Conditions by the Sell Back Right Holder. (c) Sell Back Rights automatically lapse if they have not been exercised by 5pm on the fourth Business Day after the Cut-off Date. (d) Exercise of a Sell Back Right must be made in accordance with clause 4 of these Terms.' 12 The sale and purchase of Sell Back Rights could only be done during the 'Trading Period' (Schedule 1 cl 2(a)). The 'Trading Period' was defined in the transaction documents as the period commencing at the opening of trading on the Listing Date, which was Monday 19 February 2001, and ending at the close of trading on Tuesday 13 March 2001. 13 The exercise of a Sell Back Right required the Holder to complete and sign an Exercise Notice to be returned to SGL before either the Election Date or the Cut-off Date which were respectively 16 February 2001 and 20 March 2001 (Schedule 1 cl 4). The circumstances under which either of those dates applied are not material for present purposes. Upon the exercise of a Sell Back Right the Holder would have agreed to SGL buying back the Buy Back Shares (Schedule 1 cl 5(ii)) and would be taken to have given SGL necessary ancillary authorities and appointments to effect the buy back. For each Sell Back Right validly exercised, SGL was to pay to the Holder the Buy Back Price on the final payment date which was 2 April 2001. 14 In relation to unexercised Sell Back Rights cl 8 provided: 'Unexercised Sell Back Rights (a) In relation to each Unexercised Sell Back Right each Unexercised Sell Back Right Participant is taken to have: (i) transferred to CSFB its Unexercised Sell Back Rights in accordance with clause 9 of the CSFB Deed Poll; (ii) agreed to receive the Net Payment in consideration for this transfer; and (iii) automatically and irrevocably appointed each officer of St George that Unexercised Sell Back Right Participant's attorney to execute any documents or do any thing necessary to transfer to CSFB the Unexercised Sell Back Rights. (b) Notwithstanding any other provisions in this Deed Poll, CSFB shall exercise any Unexercised Sell Back Right in accordance with clause 4(a) or (b) of these Terms (as the case may be) at any time up to 5pm on the fourth Business Day after the Cut-off Date for the purposes of clause 9(c) of the CSFB Deed Poll and to the extent provided therein.' Statutory Framework 15 The relevant provisions of the ITAA 1997 are set out below. In relation to assessable income the relevant provision is s 6-5: 'Income according to ordinary concepts (ordinary income) (1) Your assessable income includes income according to ordinary concepts, which is called ordinary income. (2) If you are an Australian resident, your assessable income includes the ordinary income you derived directly or indirectly from all sources, whether in or out of Australia, during the income year. (3) If you are not an Australian resident, your assessable income includes: (a) the ordinary income you derived directly or indirectly from all Australian sources during the income year; and (b) other ordinary income that a provision includes in your assessable income for the income year on some basis other than having an Australian source. (4) In working out whether you have derived an amount of ordinary income, and (if so) when you derived it, you are taken to have received the amount as soon as it is applied or dealt with in any way on your behalf or as you direct.' 16 Provisions relevant to the application of capital gains tax are as follows: '104-10 Disposal of a CGT asset: CGT event A1 (1) CGT event A1 happens if you dispose of a CGT asset. (2) You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur: (a) if you stop being the legal owner of the asset but continue to be its beneficial owner; or (b) merely because of a change of trustee. (3) The time of the event is: (a) when you enter into the contract for the disposal; or (b) if there is no contract – when the change of ownership occurs. (4) You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the asset's reduced cost base. ... 104-155 Receipt for event relating to a CGT asset: CGT event H2 (1) CGT event H2 happens if: (a) an act, transaction or event occurs in relation to a CGT asset that you own; and (b) the act, transaction or event does not result in an adjustment being made to the asset's cost base or reduced cost base. (2) The time of the event is when the act, transaction or event occurs. (3) You make a capital gain if the capital proceeds because of the CGT event are more than the incidental costs you incurred that relate to the event. You make a capital loss if those capital proceeds are less. ... (5) 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. ... 116-20 General rules about capital proceeds (1) The capital proceeds from a CGT event are the total of: (a) the money you have received, or are entitled to receive, in respect of the event happening; and (b) the market value of any other property you have received, or are entitled to receive, in respect of the event happening (worked out as at the time of the event). Subsection (2) of s 116-20 sets out the 'capital proceeds' from classes of CGT events including CGT event H2. In respect of H2 the capital proceeds are: 'The money or other consideration you received, or are entitle to receive, because of the act, transaction or event.' The judgment at first instance – the income point 17 Conti J found the Taxpayer had a history of long term retention of listed public company shares for the dominant purpose of deriving dividend income from them. Had she sold any of the shares prior to the commencement of the buy back scheme the proceeds of such sale could not have been income according to ordinary concepts. 18 The Commissioner contended that the sum of $514 representing the market value of the Taxpayer's Sell Back Rights as at 19 February 2001 when they began trading on the ASX, was income. His alternative argument was that the sum of $576.64 received by the Taxpayer on 2 April 2001 was income. He argued that the grant of Sell Back Rights was a gain by way of a benefit entitling the Taxpayer to money proceeding from her existing shareholding in SGL and only because she held shares in SGL. It was not a distribution of capital. It did not provide the Taxpayer with any advantage of an enduring nature nor with any profit making structure but merely with items to be traded, that is bought or sold or realised for profit. 19 The Taxpayer argued that receipt of moneys by a shareholder sourced from the funds of the company would not constitute income unless it were a dividend or the product of the employment of, or other services rendered by, that shareholder. She maintained that the benefit received under the Sell Back Rights was not in the nature of a dividend. There had been no dividend declaration by SGL nor was there any other form of detachment of profits of SGL in relation to the payment made to her. 20 His Honour set out the factors which he regarded as governing the characterisation of the proceeds of the Sell Back Rights. They were: 1. The absence of any distribution to the Taxpayer of any profits of SGL or of any funds emanating from or derived out of or representing profits of SGL. 2. The absence of any income severed or detached from the capital or derived from the underlying property of SGL for the purpose of effecting that distribution. 3. The amount of $576 comprised an addition to and formed part of the purchase price paid for the buy back of 5% of the Taxpayer's shareholding in SGL. The earlier emerging but unrealised amount of $514 was prospectively of the same character. Its character was assessed by reference to what might be described as the basic sale price the Taxpayer was entitled to receive from SGL for the disposition in favour of SGL of that percentage of her shareholding calculated at the rate of $16.50 per share. 21 No judicial precedent bore directly upon the characterisation of the respective sums of $514 and $576.64 for income tax purposes in relation to the taxpayer. His Honour said (at [48]): 'Once it is seen that the derivation by the [Taxpayer] of either sum is referrable entirely to her existing shareholding in SGL, the [Taxpayer's] submission to the effect that the absence of a fund or source of profits within SGL, out of which the alleged earlier accrual and the later payment originated, bears decisively in her favour upon the exclusion of either amount from the scope of operation of section 6-5.' He also found much to be said in favour of the further view (at [49]) : '... that the proceeds of disposal of the sell back rights in the [Taxpayer's] hands should bear no different fiscal character to that of the principal sum of $16.50 per share, proffered by SGL to the [Taxpayer] for the sell back of 5% of her shareholding in SGL, by reason of the reasonably (though of course not precisely) analogous nature of the payment of $576.64 to a put option fee paid in the context of a prospective purchase of a capital asset (in contrast of course to a revenue asset), albeit that the payment was calculated and actually paid by SGL to the [Taxpayer] subsequent to the sell back rights trading period ...' 22 His Honour concluded that the proceeds of sale of the Taxpayer's Sell Back Rights were not assessable to income tax pursuant to s 6-5 of the ITAA 1997. It may be taken also that the entitlement valued at $514 was not assessable to income tax on his Honour's findings. The judgment at first instance – the capital point 23 The Commissioner submitted that the grant of the Sell Back Rights attracted capital gains tax as an act, transaction or event which happened in relation to the SGL shares owned by the Taxpayer. That is to say, it was a CGT event H2 within the meaning of s 104-155(1)(a) of the ITAA 1997. It was an act which did not result in an adjustment of the cost base of the Taxpayer's SGL shares so satisfying s 104-155(1)(b). The exception set out in s 104-155(5)(b) did not apply because the grant of the Sell Back Rights did not require the Taxpayer to do anything that was another CGT event. 24 The amount of the capital proceeds were said by the Commissioner to be the amount which the Taxpayer was to receive pursuant to her entitlement to Sell Back Rights which entitlement crystallised upon their issue. The amount was to be the Sale Mechanism Price multiplied by the number of Sell Back Rights attributable to the Taxpayer, that is not less than $514. There were no incidental costs to the Taxpayer and so a capital gain of not less than $514 accrued to her on the Listing Date, 19 February 2001. 25 His Honour set out the Commissioner's contentions and those advanced by the Taxpayer. He rejected the Commissioner's contentions upon the basis of a fairly broad brush approach to the construction of s 104-155. His Honour said (at [63]): 'The complexity of the sell back arrangements put in place by SGL compounds the difficulty presented by a taxing provision as imponderable in scope of expression as section 104-155 of the 1997 Act. I would venture to suggest that the Legislature would not have reasonably contemplated the operation adversely to a taxpayer of circumstances in which a passive investor, such as the applicant, would become exposed to capital gains tax, merely by reason of having decided not to take up, or having omitted to take up, the opportunity of trading in sell back rights by way of sale on the ASX. The only example proffered by the Legislature of an operation of section 104-155 ..., as I have already suggested, would surely be at best an unusual occurrence, and is in any event far removed from circumstances of the kind here arising for consideration. Moreover there is commercial unreality involved in the description of the imputed figure of $514 as 'capital proceeds' within subsection 104-155, in relation to the circumstances of the applicant as an investor and not a share trader, that sum reflecting nothing more than the initial day's average trading transactions on the ASX in the sell back rights. Her status relevantly was that of a so-called 'non-directing or remaining shareholder' .... In those circumstances, it is I think unrealistic and unjustified to postulate that trading in sell back rights on the ASX during the first listing day could have constituted an act, transaction or event occurring in relation to sell back rights the subject of the applicant's ownership, within the scope of para (a) of subsection (1).' His Honour therefore concluded that it was not within what he called 'the objective intention of the Legislature' that the issue of the subject Sell Back Rights, in the circumstances of the Taxpayer's shareholding should qualify for capital gains exposure. 26 His Honour concluded that the relief sought by the Taxpayer should be allowed and the assessment set aside to the extent evident in the conclusions to his reasons. There was no order as to the costs of the proceedings as the parties had agreed in advance that each would bear their own costs irrespective of the outcome. Grounds of appeal 27 There were 18 grounds of appeal and there could have been considerably fewer. In substance the judgment was attacked upon the bases: 1. The Sell Back Rights granted by SGL to Custodial for the benefit of the Taxpayer were assessable income of the Taxpayer quantified at $514. 2. Alternatively, the sum of $576.64 received by the Taxpayer was assessable income. 3. Alternatively, the taxpayer had made a capital gain of $514, the grant of the Sell Back Rights being a CGT event H2 within the meaning of the ITAA 1997. The submissions on the income point 28 The Commissioner relied upon and sought to apply the majority judgment of the United States Supreme Court in Eisner v Macomber (1920) 252 US 189 which was said by the High Court in Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639 at 661-662 to have identified the core of the meaning of income where the character of a gain derived from property is being considered. In Eisner the Supreme Court had referred to the familiar metaphors illustrating the distinction between income and capital: fruit and trees, crops and land, outlet stream and reservoir. Nevertheless it found little to add to the succinct statement that: 'Income may be defined as the gain derived from capital, labor, (sic) or from both combined, provided it be understood to include profit gained through a sale or conversion of capital assets ...'. That definition indicated the characteristic and distinguishing attribute of income. The Supreme Court referred to what it called 'the essential matter' as: '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. Nothing else answers the description.' 29 The Commissioner identified what he described as critical factors going to the nature of the grant of the Sell Back Rights and the proceeds of their sale: 1. The receipt arose from the Taxpayer's shareholding in SGL which she held for the purposes of income. 2. The receipt was severed from her shares which remained in tact and unchanged by the process. SGL did not buy back any of her shares and she did not dispose of any of them. The money was not received by her in consideration for or as an incident of the disposal or alteration of any capital asset that she held. 3. The receipt did not represent a distribution of capital by SGL. 4. The receipt of money was sourced from the trading activities of CSFB. Using the language of Eisner the Commissioner said that the benefit of the Sell Back Rights or the money that was received by the Taxpayer was 'a gain, a profit, something of exchangeable value proceeding from the property [her shares in SGL], severed from the capital [her shares] ... and coming in, being derived, that is, received, or drawn by the recipient (the taxpayer) for her separate use, benefit and disposal'. 30 The payment made to the Taxpayer and other non-directing shareholders did not involve any distribution of the funds of SGL. The funds used to make the payment represented the net proceeds of CSFB from the sale of Sell Back Rights and their exercise in respect of SGL shares which it acquired. It followed that cases which might support the proposition that a distribution by a company to its shareholders as income in the hands of the shareholders only if the distribution is out of the profits of the company, were not applicable. Here, there was no distribution by the company. 31 The Commissioner identified what he said were two errors by the learned trial judge: 1. He characterised the sum received by the Taxpayer by reference to the character of a hypothetical receipt if, contrary to the fact, she had sold shares back to the company. 2. He characterised the sum received by the Taxpayer by reference to the fact that there was no distribution of the profits of the company. 32 As to the first point his Honour did say that the character of the $576.64 actually received and the $514 quantified entitlement was 'derived by reference to what might be described as the basic sale price the applicant was entitled to receive from SGL for the disposition in favour of SGL of that percentage of her shareholding, calculated, of course, at the rate of $16.50 per share. On the second point, his Honour said (at [48]): '... the absence of a fund or source of profits within SGL out of which the alleged earlier accrual and the later payment originated, bears decisively in her favour upon the exclusion of either amount from the scope of operation of s 6-5.' 33 The Commissioner accepted that the question whether a payment was made out of profits is relevant where there is a distribution of funds of the company. In such a case the source of the dividend bears upon the characterisation of the receipts – Commissioner of Taxation (NSW) v Stevenson (1937) 59 CLR 80 at 97-100; Commissioner of Taxation v Brewing Investments Ltd (2000) 100 FCR 437 at 442-443. However the fact that there is not a distribution out of profits does not require the conclusion that the receipt is not income. The payments made to the Non-directing Shareholders were made in discharge of CSFB's obligations under the CSFB Deed Poll from funds representing the net proceeds of CSFB from trading activities carried out by it pursuant to that Deed. 34 The Taxpayer's submissions began with the observation that her shares were held for the purposes of deriving dividends. The legislature had traditionally brought receipts by shareholders within the scope of assessable income by the device of expanding the definition of 'dividend' in the Income Tax Assessment Act 1936 (Cth) (ITAA 1936). But even dividends falling within the deeming provision of the Act could not be assessable income of a shareholder unless, and to the extent to which, they were paid out of the profits of the company – s 4 ITAA 1936; Federal Commissioner of Taxation v Comber (1985) 64 ALR 451. The exclusion of a 'return of paid up capital' is common to both the original and expanded definitions of dividend. 35 It was also submitted that unless there is a detachment by the company of its profits and a distribution of those to the shareholder the receipt to the shareholder is not income according to the ordinary concepts. That principle applies where, as in the present case, the payment is not a dividend. Reference was made to Webb v Federal Commissioner of Taxation (1922) 30 CLR 450, Commissioner of Taxation (NSW) v Stevenson and Federal Commissioner of Taxation v Blakely (1951) 82 CLR 388. 36 The Taxpayer also argued that bonus shares issued by a company to its shareholders are capital not income and cited Commissioner for Internal Revenue v Blott [1921] 2 AC 171; Federal Commissioner of Taxation v WE Fuller Pty Ltd (1959) 101 CLR 403 and Gibb v Federal Commissioner of Taxation (1966) 118 CLR 628. Nor does the concept of income extend to other bonuses given by companies to shareholders which include rights offered in proportion to their shareholding – Federal Commissioner of Taxation v Miranda (1976) 11 ALR 85; Macmine Pty Ltd v Federal Commissioner of Taxation (1979) 24 ALR 217 and Commissioners of Inland Revenue v Fisher's Executors [1926] AC 395 – the latter relating to bonus debentures. 37 The receipt to the Taxpayer was unsolicited. It was voluntary in character but not a gift – Ord Forrest Pty Ltd v Federal Commissioner of Taxation (1973) 130 CLR 124 and Hayes v Federal Commissioner of Taxation (1956) 96 CLR 47. It was submitted that if the receipt were not a deduction within ITAA 1936 it would only be income if it were '... the product of an income-earning activity on the part of the [taxpayer], and therefore to be regarded as income from [the taxpayer's] personal exertion' – Hayes at 54 (Fullagar J). 38 The Taxpayer submitted there was no derivation of income at some antecedent point. She was not entitled to sell that right or any interest in them. Her only right as a Remaining Shareholder was to a prospective share of the net proceeds of the sale and/or exercise of the Sell Back Rights transferred to CSFB. What the Taxpayer had on 19 February 2001 was said to be a chose in action which was the right to compel the due administration of a trust. Even if assignable it was not at that point 'readily convertible into cash'. At that point there would be no income according to ordinary concepts – Federal Commissioner of Taxation v Cook and Sherden (1979) 29 ALR 202 at 212-214. Whether the entitlement to the Sell Back Rights and the moneys paid to the Taxpayer under the scheme were income 39 The word 'income' is not defined in the ITAA 1997. The use of the words 'income according to ordinary concepts' in s 6-5 imports the jurisprudence about its meaning that preceded the enactment of that provision. The Explanatory Memorandum to the Income Tax Assessment Bill 1996 which became the ITAA 1997 stated (at 38): 'Ordinary income is a succinct label for income according to ordinary concepts which is a major concept in the present law. The courts have developed principles for determining what is ordinary income. However there is no complete set of rules for determining that question.' 40 The courts have not developed any clear general test for the characterisation of receipts as income. The term 'income' not being a term of art the inquirer about its meaning and application in particular circumstances is left to 'the ordinary concepts and usages of mankind' – Scott v Commissioner of Taxation (NSW) (1935) 35 SR(NSW) 215 at 219 (Jordan CJ) or '... the sense which it has in the vocabulary of business affairs' – Arthur Murray (NSW) Pty Ltd v Federal Commissioner of Taxation (1965) 114 CLR 314 at 320. 41 In this case the Taxpayer had acquired an entitlement to benefits flowing from the creation and trading of Sell Back Rights in respect of which she never acquired either legal or beneficial title. Other than being a holder of shares in SGL she took no step and none was necessary to establish that entitlement or the subsequent payment based upon it. Neither entitlement nor payment was an incident of her rights as a shareholder at the time that she purchased or otherwise acquired her shares. In this respect the entitlement and payment differed from her entitlement as a shareholder to receive dividends declared by SGL out of profits from time to time. The creation of the Sell Back Rights was a step taken by the company in order to change its capital structure. The entitlements and the payment flowing from it had something of the character of voluntary benefits conferred upon the Taxpayer albeit they accrued to her because of her shareholding as at the Record Date. In these circumstances invocation of the 'ordinary concepts and usages of mankind' or 'the vocabulary of business affairs' is of little or no assistance. A poll of literate business men and women would probably yield a result covered by the Latin phrase 'quot homines tot sententiae'. 42 The Court when called upon to make judgments on circumstances well removed from the core meaning of 'income' as most people would understand it is called upon to apply what Professor Stone designated a 'category of meaningless reference'. In his book, Legal System and Lawyers' Reasonings (Maitland,1968) at 340, Professor Stone listed as one of a number of 'apparently meaningless categories' what he called 'the distinction over an unusually penumbral area between capital and income'. The distinction between capital and income, like that between fact and law, he treated as having become meaningless 'only because applied in so many different fields that an accumulation of decisions at the borderline often banishes real difference between cases assigned to different sides of the line'. Nevertheless, the Court must do its best to make the characterisation as the law requires. 43 The process of characterisation can begin by the exclusion of various forms of receipt conventionally described as income and easily recognisable as such. The entitlement created and the payment made in this case were not the results of any personal exertion on the part of the Taxpayer. They did not have any element of periodicity, recurrence or regularity about them. Nor were they profits derived from an investment or trading activity on the part of the Taxpayer. Although there was a voluntary character about the creation of the entitlement and the making of the payment they did not attach to any employment or office held by the Taxpayer. These attributes are not necessary features of income but do attach to categories of receipt conventionally accepted as such. 44 The payment was not in the nature of a dividend distributed out of the profits of SGL which would fall within ordinary usage notions of a dividend as income. As Professor Parsons pointed out in – Parsons, Income Taxation in Australia (1985) (at 93): 'One aspect of the notion requires that the distribution received should be produce of a taxpayer's shares or his membership of the company. ... If the form of the distribution is not a payment for the surrender or extinguishment of rights which makes up a share or membership it will be held to be produce of the share or membership.' The present case is not one which the entitlement conferred upon the Taxpayer by reference to the creation of Sell Back Rights could be regarded in any relevant sense as produce of her shares. It was not an entitlement derived from profits earned by the company. It arose out of the decision by the company to reduce its issued capital through a buy back process. 45 There may be an analogy to be drawn between the creation of the Sell Back Rights and the issue of bonus shares to an existing shareholder save that in this case no Sell Back Rights were legally or beneficially held by the Taxpayer. Professor Parsons observed that the issue of bonus shares might be thought to suggest a detachment received by the shareholder which remains the produce of the shares held even though transformed into additional shares. However bonus shares have been treated 'merely as a reframing of the shareholder's interest in the company' and therefore as not constituting income according to general usage. 46 Eisner held that a stock dividend issued to stockholders in proportion to their previous holdings, for profits capitalised, without any distribution of profits, is not income. The Supreme Court asserted its power to look through the form of the corporation and determine the nature of the shareholder's rights in order to ascertain whether he had received income taxable without apportionment. Pitney J, delivering the judgment of the majority in that case, said (at 214): '... we cannot disregard the essential truth disclosed; ignore the substantial difference between corporation and stockholder; treat the entire organization as unreal; look upon stockholders as partners, when they are not such; treat them as having in equity a right to a partition of the corporate assets, when they have none, and indulge the fiction that they have received and realized a share of the profits of the company which in truth they have neither received nor realized.' 47 In Blott, the House of Lords held that, for the purpose of liability to super-tax under the Finance (1909-1910) Act (UK), bonus shares allotted could not be treated as income as they were an addition to the capital of the shareholder. Viscount Haldane pointed to the discretion which a company has to pay dividends out of profits or to capitalise the profits and to pay up capital sums which shareholders, electing to take up unissued shares, would otherwise have to contribute. When the latter course is chosen (at 184): '... the money so applied is capital and never becomes profits in the hands of the shareholder at all.' In Gibb bonus shares issued by a company upon a revaluation, above their book value, of assets not acquired for resale for profit, were held not to constitute income. That an issue of bonus shares made in such circumstances was not income was treated as a matter of settled law – (at 632, Barwick CJ, McTiernan and Taylor JJ). See also Federal Commissioner of Taxation v WE Fuller Pty Ltd, which was discussed in Gibb. 48 The entitlements created and the payment made to the Taxpayer in the present case were in furtherance of SGL's decision to reduce its capital through a buy back of shares. That global objective does not support a classification of the entitlement or the moneys paid to the Taxpayer as income. If anything it tends to support their broad characterisation as a return of capital. Upon closer examination of the precise arrangements, the pay out cannot accurately be described for present purposes by reference to its global objective. There is no suggestion that the Taxpayer relinquished any of her shares. She did not hold or ever exercise the 'put options' constituted by the Sell Back Rights. No doubt the Sell Back Rights notionally attributed to her were ultimately applied to secure a buy back of shares from some other party following the trading of the Rights on the ASX. The payment made was calculated by reference to a Sale Mechanism Price which was in turn based upon the amount realised by CSFB for the sale of the Sell Back Rights on the ASX. This was not a profit making activity. Nor was it undertaken using any property of the Taxpayer to realise the proceeds. The entitlement itself was a product of the capital restructuring process. It was never a property in the hands of the Taxpayer albeit she might be thought to have acquired a chose in action arising out of the transaction documents. Certainly she benefited from the obligations assumed by Custodial to hold the entitlement and from CSFB to market the Sell Back Rights and remit the proceeds. In my opinion neither the core meaning of the term 'income' nor its penumbral applications allow the entitlement created in favour of the taxpayer or the proceeds of that entitlement ultimately received by her to be treated as income according to ordinary concepts. In this respect the Commissioner's appeal fails. The submissions on the capital point 49 The Commissioner submitted, by way of alternative to his argument on the income point, that the grant of the Sell Back Rights for the benefit of the Taxpayer involved the creation of a taxable capital gain in her hands. He submitted that the grant constituted a CGT event H2. It was an 'act, transaction or event'. It occurred 'in relation to' a CGT asset owned by the Taxpayer, namely her SGL shares. But for those shares, the Sell Back Rights would not have been granted for her benefit. Section 104-155(1)(b) was satisfied because the act, transaction or event did not result in an adjustment to the cost base of her shares. 50 The capital proceeds from a CGT event H2 are set out in the table in s 116-20(2). The Sell Back Rights were granted to Custodial for the Taxpayer's benefit. She was entitled to receive money because of that grant. Either the value of the benefit or the money she received constituted the 'capital proceeds' of the grant. On that basis the Commissioner argued that the grant of the Sell Back Rights constituted a CGT event H2 within s 104-155 of the Act for which the capital proceeds were $576.64. 51 The Taxpayer submitted that the 'asset' referred to in the definition of CGT event H2 in s 104-155(1)(a) must be an asset of the taxpayer. She referred to a division of views in the High Court on this question in relation to s 160M(7) of the ITAA 1936 in Hepples v Federal Commissioner of Taxation (1991) 173 CLR 492. Section 160M(7) was the predecessor, in ITAA 1936, of s 104-155. It was amended after Hepples by the Taxation Laws Amendment Act (No 4) 1992 (Cth). The Explanatory Memorandum for the Bill for that Act said: 'The amendment will therefore provide for subsection 160M(7) in its future operation to be limited to situations where the act, transaction or event takes place in relation to an asset owned by the taxpayer.' On the basis that s 104-155 was intended to do no more than s 160M(7) of the ITAA 1936 it was submitted that it must be concerned with assets of the taxpayer only and not assets owned by somebody else. 52 The Taxpayer also referred to Federal Commissioner of Taxation v Cooling (1990) 22 FCR 42 in which Hill J, referring to the pre-amendment form of s 160M(7), said (at 67): '... it is clear that the consideration received or to be received by the taxpayer must be derived by reason of the relevant act, transaction or event. There must be a causal connection between them. The use of the word "consideration" suggests that there will be some contractual relationship between the recipient and some other person giving rise to a receipt or entitlement to receive that consideration, be it a monetary consideration or otherwise.' (emphasis in judgment) 53 It was submitted for the Taxpayer that the act, transaction or event relied upon in the CGT event H2 cannot itself be the 'consideration' received 'because of' that act, transaction or event within the meaning of the definition of capital proceeds in s 116-20(2). 54 The relationship between the act, transaction or event and the asset of the taxpayer must be 'real' – Callow v Federal Commissioner of Taxation (1997) 73 FCR 421 at 427 (Kiefel J). The Taxpayer submitted that as a Remaining Shareholder she had been entitled on 2 April 2001 to an aliquot portion of the net proceeds realised by CSFB by reference to her being on the SGL Register at the Record Date which was 23 January 2001. She could have disposed of her shares at any time after the Record Date and still had been entitled to the benefit of the Sell Back Rights under the Transaction Documents. On this basis it was said that neither the grant of the entitlement nor the receipt of the proceeds was an act 'in relation to' an asset of the Taxpayer which was in existence at the time of each of those occurrences. Whether the grant of the Sell Back Rights or the receipt of the proceeds of their sale involved a capital gain 55 The definition of CGT event H2 in s 104-155(1) reflects the language of the former s 160M(7) of the ITAA 1936. That subsection, shown in both its pre-amendment and post 1992 amendment form, was as follows: '160M(7) [Entitlement to receive money or other consideration] Without limiting the generality of subsection (2) but subject to the other provisions of this part, where – (a) an act or transaction has taken place in relation to an asset or an event affecting an asset has occurred; and (a) either: (i) an act or transaction has taken place in relation to an asset, whether or not affecting the asset; or (ii) an event affecting an asset has occurred; where, in a subparagraph (i) case in which the asset was affected or in any subparagraph (ii) case, it does not matter whether the asset was affected adversely or beneficially, or neither adversely nor beneficially; and (b) a person the person who owned the asset at the time of the act, transaction or event has received, or is entitled to receive, an amount of money or other consideration by reason of the act, transaction or event (whether or not any asset was or will be acquired by the person paying the money or giving the other consideration) including, but not limited to, an amount of money or other consideration – (i) in the case of an asset being a right – in return for forfeiture or surrender of the right or for refraining from exercising the right; or (ii) the use or exploitation of the asset, the act, transaction or event constitutes a disposal by the person who received, or is entitled to receive, the money or other consideration of an asset created by the disposal and, for the purposes of the application of this Part in relation to that disposal – (c) the money or other consideration constitutes the consideration in respect of the disposal; and (d) the person shall be deemed not to have paid or given any consideration, or incurred any costs or expenditure, referred to in paragraph 160ZH(1)(a), (b), (c) or (d), (2)(a), (b), (c) or (d) or (3)(a), (b), (c) or (d) in respect of the asset,; and (e) the person is taken to have acquired and owned the asset immediately before the disposal.' 56 In Hepples' case, decided before the amendments to s 160M(7), a taxpayer agreed with his employer, for a sum of $40,000, that he would not, for two years after the termination of his employment, disclose to third parties or himself use certain trade secrets or special processes or compete with the employer. He also agreed to assign to the employer any patent protection and any invention made by him resulting from the use of the special processes. The sum paid in consideration of these promises was held not to be part of his assessable income by reason of s 170M(7). 57 Brennan J said (at 508): '... the asset referred to in par (a) is necessarily an existing asset when the act or transaction in relation to it takes place or the event affecting it occurs.' Mason CJ agreed with that proposition at 498. Deane J said (at 516-517): '... the provisions of s 160M(7) should be construed as confined to a case where the person who has received the money or other consideration was, immediately before the deemed disposal, the owner of the pre-existing asset referred to in the sub-section.' Upon that construction of s 160M(7) his Honour held it to be inapplicable to the case where the suggested existing 'asset' for the purposes of the subsection was the goodwill and trade secrets which were owned by the employer and not by the appellant. See also Dawson J at 519-520, Toohey J at 522, Gaudron J at 528 and McHugh J at 540-541. McHugh J, in language applicable to the present case said (at 540): 'The starting point in any analysis of an action, 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, unless the language of the statute clearly indicates that it is established.' His Honour went on to say (at 541) that although the words 'in relation to' can be of wide import in the statutory context of s 160M(7) a coincidental or mere connexion was not enough. It was necessary that there be a direct connexion between the act or transaction which had taken place and the asset. This was reflected in the observations of Hill J in Cooling already cited at 67. In Callow Kiefel J (at 427) said, in similar vein: 'The words "in relation to", used to connect the relevant transaction with an asset, would appear to be very broad. But, in the context of a subsection which concerns some dealing which gives rise to payment, such that it is to be deemed a disposal of the asset or rights associated with it, a closer connection must be required.' Her Honour referred to what Toohey J and McHugh J said in Hepples and what was said by Hill J in Cooling and added (at 427): 'The need for there to be a real or direct connection with the asset to which the agreement, or the covenants contained within it, refers, is reinforced, in my view, by the following reference to an "event affecting an asset" in par (a) having occurred.' 58 In my opinion neither the creation of the entitlement in respect of the Sell Back Rights nor the payment of proceeds derived from that entitlement could be said, at the respective dates of their creation and payment, to have occurred in relation to a CGT asset then owned by the Taxpayer. That is because the Taxpayer's ownership of the SGL shares at the time of those events was irrelevant to their occurrence. They were not acts, transactions or events which happened in relation to her ownership of the SGL shares in the real or direct sense that the section requires. 59 I accept also that the act, transaction or event cannot be the money or consideration received for the purposes of identifying capital proceeds from CGT events H2. The Commissioner's submissions appear to involve that contention. Conclusion 60 For the preceding reasons the Commissioner's appeal fails on both the primary and alternative basis and the appeal should be dismissed. I certify that the preceding sixty (60) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice French. Associate: Dated: 8 August 2005 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N671 OF 2004 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: COMMISSIONER OF TAXATION APPELLANT AND: HELEN MARY MCNEIL RESPONDENT JUDGES: FRENCH, EMMETT & DOWSETT JJ DATE: 8 AUGUST 2005 PLACE: SYDNEY REASONS FOR JUDGMENT EMMETT J: 61 At all relevant times, ordinary shares in the capital of St George Bank Limited ('the Company') have been listed for quotation on Australian Stock Exchange Limited ('ASX'). This appeal concerns certain income tax consequences of an off market buy back by the Company of approximately one-twentieth of those shares. 62 As at 5 pm on 23 January 2001, the respondent, Helen Mary McNeil ('the Taxpayer'), held 5,450 ordinary shares in the capital of the Company. On 2 April 2001, the Taxpayer received a payment of the sum of $576.64 in connection with the buy back. 63 On 14 November 2001, the appellant, the Commissioner of Taxation ('the Commissioner'), issued to the Taxpayer a notice of assessment under the Income Tax Assessment Act 1997 (Cth) ('the 1997 Act') for the year ended 30 June 2001. The Notice of Assessment was for an amount calculated on the basis that the whole of the sum of $576.64 was assessable income of the Taxpayer. On 19 June 2002, the Taxpayer lodged notice of objection against the assessment. On 31 October 2002, the Commissioner made an appealable objection decision, disallowing the objection. 64 On 8 November 2002, the Taxpayer commenced a proceeding in this Court by way of appeal from the appealable objection decision. On 14 April 2004 a judge of this Court upheld the appeal and made the following orders: '1. The application be allowed. 2. The objection decision dated 31 October 2002 be set aside and the objection of the [Taxpayer] dated 19 June 2002 be allowed. 3. The matter be remitted to the [Commissioner] for reassessment according to law.' On 5 May 2004 the Commissioner filed Notice of Appeal to the Full Court from those orders. THE TAXPAYER AND THE BUY BACK 65 The Taxpayer is an Australian resident, who retired from her last working position in 1976. From 1987, the Taxpayer's principal income has been from share dividends, interest on term deposits and debentures and an annuity/pension. She acquired her 5,450 shares in the capital of the Company in several parcels prior to 2001. The first parcel was acquired in 1992 when St George Building Society Limited converted from a building society into a company limited by shares. That entity is the Company and it subsequently changed its name to its present name. 66 On 12 January 2001, the Company announced that it proposed to buy back 22,786,937 of the ordinary shares in its capital, representing 5 per cent of its issued capital. The buy back was to be achieved by granting to every person who was a Shareholder as at 5 pm on 23 January 2001 the right to require the Company to purchase 1 share for every 20 shares held at that time, for $16.50 per share. On 10 January 2001, shares in the Company were traded at $13.88. The highest price at which shares in the Company had previously been traded was $14.10. Thus, the right to require the Company to purchase a share for $16.50 had some value, equal to the amount by which $16.50 exceeded the market value of shares in the Company. 67 A series of instruments ('the Scheme Instruments') was entered into by the Company and others in order to give effect to the proposed buy back ('the Buy Back'). The Scheme Instruments, each of which is stated to be a deed poll, were as follows: * Deed Poll (Shareholders), expressed to be made on 12 January 2001 by the Company and St George Custodial Pty Ltd ('Custodial'); * Sell Back Right Deed Poll, expressed to be made on 12 January 2001 by the Company; * Deed Poll (Excluded Shareholder), expressed to be made on 12 January by the Company and Custodial; * CSFB Deed Poll, expressed to be made on 12 January 2001 by Credit Suisse First Boston Australia Equities Limited ('CSFB'). The pertinent provisions of the Scheme Instruments are summarised in the Schedule to these reasons. Terms used in these reasons are used in the same way as in the Scheme Instruments. 68 On 29 January 2001, the Company sent to all Shareholders of the Company a copy of a booklet ('the Buy Back Booklet') by which the Company offered the opportunity of participating in the Buy Back. In the Buy Back Booklet, the Company said it was issuing one Sell Back Right for every 20 shares held at 5 pm on Tuesday, 23 January 2001. Each Sell Back Right conferred a put option on the holder, being an option to require the Company to purchase one share in its capital for $16.50. The Buy Back Booklet explained that each Shareholder had three choices in relation to Sell Back Rights as follows: (1) exercise Sell Back Rights. (2) deal with the Shareholder's entitlement to Sell Back Rights; (3) do nothing. 69 The Buy Back Booklet set out a timetable for the implementation of the Buy Back as follows: Event Date Determination of how many Sell Back Rights you have [Record Date] 5.00pm on Tuesday, 23 January 2001 Buy-Back booklet sent to you Monday, 29 January 2001 Final date for you to lodge your Direction Form [Election Date] 5.00pm on Friday, 16 February 2001 Trading of Sell Back Rights starts on a deferred settlement basis [Listing Date] Monday, 19 February 2001 Despatch of Sell Back Rights holding statements/advice and exercise form Tuesday, 20 February 2001 Trading of Sell Back Rights on a T+3 basis starts on ASX Tuesday, 27 February 2001 Last day to have your broker buy or sell Sell Back Rights lend of Trading Period] Tuesday, 13 March 2001 Final date for exercise of Sell Back Rights [Cut-off Date] 5.00pm on Tuesday, 20 March 2001 Completion of the Buy-Back and [the Company] announces the number of Shares it has bought back 5.00pm on Wednesday, 28 March 2001 Proceeds to be despatched to participants in the Buy-Back Monday, 2 April 2001 70 The Buy Back was intended to give flexibility to Shareholders, such that, if they did not wish to sell their shares in the Company, they would nevertheless be entitled to participate in certain benefits of the Buy Back. Thus, persons who were Shareholders at the Record Date could either sell one in twenty shares to the Company for $16.50 or retain all of their shares and participate in any benefit that might arise by reason of the fact that the Buy Back Price was expected to be in excess of the market value of the shares. 71 The Scheme Instruments provided a mechanism whereby the Sell Back Rights of those Shareholders who did not elect either to deal with their entitlements or to exercise the Sell Back Rights, were to be sold by Custodial and the proceeds distributed to such Shareholders. Each Buy Back Booklet was accompanied by a Direction Form that specified the name and address of the Shareholder, the number of shares in the Company held by the Shareholder at the Record Date and the number of Sell Back Rights that the Shareholder was to be granted. If the Shareholder wished to deal with Sell Back Rights or to exercise Sell Back Rights, the Shareholder was required to complete the Direction Form and return it to the Company no later than 16 February 2001, the Election Date. 72 In late January or early February 2001, the Taxpayer received a copy of the Buy Back Booklet, which informed her that she had been granted 272 Sell Back Rights. The Taxpayer read only part of the Buy Back Booklet. She understood that she could, at her option, sell up to 272 of her shares for $16.50 per share. She did not realise that, if she did not accept the offer to require the Company to buy 272 of her shares, she could nonetheless sell her Sell Back Rights. Nor did she realise that, if she did not respond to the offer made by the Buy Back Booklet, those Sell Back Rights would be sold and she might receive money for them. She decided not to sell any of her shares in the Company and took no further action. 73 On 19 February 2001, the Company granted Sell Back Rights in performance of its obligations under clause 2(a) of the Sell Back Rights Deed Poll. In particular, 272 Sell Back Rights were granted to Custodial for the absolute benefit of the Taxpayer. The Taxpayer could not obtain legal title to her Sell Back Rights since the Election Date had passed and she had not given a Direction to the Company, by completing a Direction Form. 74 Trading in Sell Back Rights on ASX commenced on 19 February 2001 and ceased on 13 March 2001. On listing, the Sell Back Rights were first quoted at $1.89 each, the buy back price of $16.50 being above the market price of shares in the Company at that time. On that basis, the Taxpayer's 272 Sell Back Rights had a realisable value of $514. However, there was no evidence that the value of shares in the Company decreased as a result of the grant of the Sell Back Rights. 75 In fact, the Taxpayer's 272 Sell Back Rights were sold by Custodial to CSFB pursuant to clause 2(c) of the Sell Back Rights Deed Poll. The Taxpayer's Sell Back Rights were then sold by CSFB on ASX and, in due course, the proceeds were paid to Custodial. The Taxpayer's Sell Back Rights realised the sum of $576.64. The Taxpayer did not receive any further correspondence about the Buy Back until she was informed, on or about 2 April 2001, that she was entitled to $576.64, being the proceeds of the sale by Custodial to CSFB of her Sell Back Rights. On that date, the amount of $576.64 was deposited directly into her bank account with the Company. 76 The Taxpayer concedes that the sum of $62.64, being the difference between $514 (the realisable value of her Sell Back Rights at the date of grant) and $576.64 (the proceeds of realisation of her Sell Back Rights) was assessable income as a capital gain. However, the Commissioner contends that the whole of the sum of $576.64 was income according to ordinary concepts and was therefore assessable income. Alternatively, the Commissioner contends that the whole of the sum of $576.64 was a capital gain. The Taxpayer contends, as the primary judge held, that the value of the Buy Back Rights was not assessable income in her hands according to ordinary concepts. She also contends, as the primary judge held, that there was no capital gain, except to the extent of the sum of $62.64 just mentioned. INCOME ACCORDING TO ORDINARY CONCEPTS 77 The question of whether the value of the Sell Back Rights granted to the Taxpayer constituted income according to ordinary concepts, is not without difficulty. For reasons that are very persuasive, the Primary judge concluded that neither the value of the Sell Back Rights nor the proceeds of their realisation was income. Ordinarily, one would be slow to reach a conclusion different from that reached by a judge so experienced in tax matters as is the primary judge. However, I have reached a contrary conclusion. 78 Income can be considered as the gain derived from capital, from labour or from both combined; it should also be understood to include profit gained through the sale or conversion of capital assets. The essence of income derived from property is not that it is a gain accruing to capital, nor a growth or increment of value in the investment; rather, it is 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/taxpayer for the separate use, benefit and disposal of the recipient taxpayer– see Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639 at [65]. 79 The Sell Back Rights that were granted to the Taxpayer on 19 February 2001 would not have been granted to her if she had not been the holder of 5,450 ordinary shares in the capital of the Company as at 5.00 pm on the Record Date. Thus, because she was the holder of such shares, the Taxpayer was afforded an opportunity to acquire from the Company put options in relation to 272 shares in the Company. That opportunity was afforded when she received the Buy Back Booklet. The Taxpayer did not avail herself of the opportunity. Nevertheless, by the operation of the Scheme Instruments, the opportunity afforded to her was availed of on her behalf. The proceeds of doing so, namely the sum of $576.64, were paid to the Taxpayer in accordance with the Scheme Instruments. 80 The Taxpayer could have availed herself of the opportunity to require the Company to buy up to 272 shares from her for $16.50 in respect of each share. She would then have been required to sell such shares to the Company. Further, the Taxpayer could have disposed of 272 of her shares in the Company at any time after receipt of the Buy Back Booklet by selling them on ASX. Rather, she preferred to retain all of the shares she held in the Company. 81 Had the Taxpayer availed herself of the opportunity afforded to her by the Company to require the Company to buy up to 272 of her shares or if she had sold her shares on ASX, she would have received proceeds of sale. Had she availed herself of the Sell Back Rights granted by the Company and exercised the put options, she would have received proceeds equal to $16.50 per share. If she sold her shares on ASX, the proceeds would have been the quoted price less the costs of sale. The proceeds generated by the former course would have been greater than the proceeds generated by the latter course. To the extent that the proceeds exceeded the cost of her shares, the Taxpayer may have derived a profit, which may have been income. 82 In either of those circumstances, the Taxpayer would have had fewer shares than she now has. However, after 2 April 2001, the Taxpayer still held the 5,450 shares in the Company that she had held at the Record date. Those shares had a value as at 2 April 2001, which may have been more or less than the value that they had as at the Record date. There does not appear to have been evidence on that question. 83 The sum of $576.64 that the Taxpayer received from the realisation of her Sell Back Rights was clearly not a gain derived from her labour or services. It was in no sense derived from any effort on her part. Rather, the sum represented the proceeds of the realisation of a benefit conferred upon the Taxpayer by the Company. The primary question is whether the proceeds of the realisation of the benefit conferred by the Company on the Taxpayer, by the grant of Sell Back Rights on 19 February 2001, was income according to ordinary concepts. 84 The Company could have asked its Shareholders to agree to a reduction of its capital, by cancelling one share for every 20 shares held and returning $16.50 for each share cancelled. Such a return of capital would not have been income in the hands of a Shareholder according to ordinary concepts. It would have represented the proceeds of realisation of that share. If such a course had been adopted by the requisite majority of Shareholders, there would have been no option for individual Shareholders. The shareholding of each Shareholder would have been reduced by 5 per cent. On the other hand, the Company would still have conferred some benefit on each of its Shareholders, because the return made by the Company to its Shareholders in respect of each cancelled share would have been in excess of the market value of that share. Nevertheless, as explained below (at [33]), if the amount returned was debited to a share capital account, the amount would not have been assessable income. 85 The Company did not part with any of its property by reason only of the grant of Sell Back Rights. Further, the sum of $576.64 received by the Taxpayer was not paid by the Company. Nor was it paid from any property of the Company. Rather, the Company undertook an obligation to each Shareholder, for which it received no specific consideration from the Shareholder, to pay a sum for an asset or property of the Shareholder greater than its market value. 86 In one sense, it might be said that the Company made a gift to its Shareholders by undertaking to buy back shares in its capital at a future time for a price greater than the market value of the shares. On the other hand, the holder of a share in a company has a right to have the assets of the company used and applied in the various ways in which the Company's constitution expressly or implicitly requires or authorises. The distribution of money of a company to its members is one of the ways usually authorised by the constitution of a company. Such a return of capital by a company to its members is an effectuation or realisation of the rights obtained by the acquisition of the share in the same way as the distribution of a dividend by the company. The consideration given by the member is the payment up of the share capital in satisfaction of the liability of the amount of the share incurred on allotment. A share is a chose in action such that, upon its transfer, those rights are transferred to the new member. Thus, as a matter of company law, there was no gift by the Company to its Shareholders by agreeing to buy back its own shares (see Archibald Howie Pty Ltd v Commissioner of Stamp Duties (1948) 77 CLR 143 at 152). 87 By granting Sell Back Rights to its Shareholders, the Company conferred on those Shareholders the capacity to obtain a benefit without disposing of, or parting with, any of their shares in the Company. Of course, the Company could do that only if a sufficient number of Shareholders were prepared to part with a sufficient number of shares to enable CSFB and others to acquire a sufficient number of shares to be in a position to exercise Sell Back Rights granted for the benefit of Shareholders who did not elect to exercise Sell Back Rights. 88 It was completely irrelevant whether or not any Shareholder held shares in the Company on the Listing date, being the date of grant of Sell Back Rights on the Election Date. A Shareholder who sold all of that Shareholder's shares on the day after the Record Date was still given the right to require the Company to buy a fixed number of shares. If a Shareholder who had sold all shares wished to exercise the Shareholder's Sell Back Rights, the Shareholder could have done so by buying more shares on the ASX in order to be in a position to satisfy its obligations, upon exercising Sell Back Rights, to transfer shares in exchange for $16.50 per share. 89 The Company did not grant to Shareholders the right to sell particular shares. More specifically, the Company did not grant to Shareholders the right to sell the shares held by them as at the Record Date. Rather, the Company simply stipulated, in one sense arbitrarily, that it would grant Sell Back Rights to a finite class of persons. That class was those persons who happened to be Shareholders of the Company at 5 pm on the Record Date. Putting aside the extent of the power conferred on the Company by the Corporations Act 2001 (Cth) to grant a put option in respect of its own shares, the Company could, in theory, have granted a put option to any person, whether or not a Shareholder. However, there would be a real question as to the propriety of a grant of put options that had intrinsic value, such as the Sell Back Rights had, to any persons, other than Shareholders in their capacity as members of the Company. To do so would have been to make a gift to such persons. However, for the reasons indicated above, there was no gift by the Company, in granting such rights to Shareholders. 90 By granting Sell Back Rights to the Taxpayer, the Company conferred on the Taxpayer the right to require the Company to buy 272 shares in its capital for a price in excess of the market value of the shares. By doing so, it created for the Taxpayer the opportunity of obtaining a benefit equal to that excess. It granted that benefit to the Taxpayer, by reason of the Taxpayer's holding shares in the Company. By the Buy Back, the Company enabled its shareholders to obtain that benefit, at the ultimate expense of the Company, while at the same time retaining their shares in the Company. The Company did so by creating a market in the right to receive that benefit independently of the market in relation to shares in the capital of the Company. 91 Notwithstanding that, when the benefit was actually conferred by the Company, the Taxpayer was not required to be a Shareholder. The benefit, at the time it was granted, was a gain or profit proceeding from the shares in the Company held by the Taxpayer as at 5 pm on the Record Date. Thus, the benefit of the grant of the Sell Back Rights was a benefit derived from shares in the Company held by the Taxpayer. It was a benefit conferred simply because the Taxpayer happened to be a Shareholder of the Company at a particular moment. Being a holder of shares in the Company was the criterion for the grant of the benefit. In that sense, the benefit proceeded from the Taxpayer's shares. 92 The benefit derived from shares can be divorced from the shares themselves. For example, when a company declares a dividend, it confers a benefit on persons who are shareholders at a specified date. The dividend may be payable at some later time. The shares may be sold on the basis that the buyer receives the benefit of the dividend. That is, the shares are sold 'cum div'. Alternatively, the shares may be sold at a later time on the basis that the seller retains the benefit of the dividend. That is, the shares are sold 'ex div'. In the same way, the benefit of the Sell Back Rights was divorced from the shares in the Company in respect of which the Sell Back Rights were granted. Nevertheless, the benefit proceeded from these shares. 93 The relevant concept of 'income' is that to be found in the relevant legislation. For the year ended 30 June 2001, the relevant year of income for present purposes, the relevant legislation was the Income Tax Assessment Act 1936 (Cth) ('the 1936 Act'). Under the 1936 Act, there was a regime in place for the taxation of certain distributions by companies. Thus, under s 44(1), the assessable income of a shareholder in a company was to include, relevantly, dividends paid to the shareholder by the Company out of profits derived by the Company from any source. Under s 6(1) of the 1936 Act, the term 'dividend' included any distribution made by a company to any of its shareholders, whether in money or other property, and any amount credited by a company to any of its shareholders, as shareholders. However, the term 'dividend' did not include: * moneys paid or credited by a company to a shareholder or any other property distributed by a company to a shareholder, where the amount of the moneys paid or credited, or the amount of the value of the property, was debited against an amount standing to the credit of the share capital account of the company; or · moneys paid or credited, or property distributed, by a company for the redemption or cancellation of redeemable preference shares, if the amount is debited to the company's share capital account. 94 Section 108 of the 1936 Act contained anti-avoidance measures. Under s 108(1), where a payment was made to an associated person of a private company, so much of the amount paid as, in the opinion of the Commissioner, represented a distribution of profits was to be deemed to be a dividend paid by the Company out of profits derived by the Company. 95 Section 47 of the 1936 Act dealt with distributions to shareholders of a company by a liquidator in the course of winding up the company. Such distributions were to be deemed to be dividends paid to the shareholders by the company out of profits derived form it, to the extent to which the distributions represented income derived by the Company, other than income that had been properly applied to replace a loss of paid up share capital. 96 Underlying that regime, relating to the assessability of distributions by a company to its shareholders, was the distinction between the concept of a payment out of profits derived by the company and the concept of payment out of amounts standing to the credit of the share capital account of the company. There was a critical distinction drawn between the share capital of a company and distributable profits, being amounts in excess of the share capital. While capital profits, as well as trading profits, were distributable, share capital was not distributable according to company law principles, without the approval of the Court. Any distribution of the share capital could only be effected with the approval of the Court. Consistently with such company law principles as to maintenance of capital, a company could not buy, or give financial assistance in connection with the purchase of, its own shares. The Buy Back, involving, as it does, the purchase by the Company of its own shares, is inconsistent with the company law principles concerning maintenance of capital that underlay the regime found in ss 44 and 47 of the 1936 Act. 97 At the time of the grant of the Sell Back Rights to the Taxpayer, a benefit was conferred upon the Taxpayer although no payment, or distribution, or crediting was made by the Company at that time. However, from that time, the Company was obliged to buy 272 shares in its capital if the Sell Back Rights were exercised. It agreed to buy back that number of shares at a price that exceeded the market value of the shares at the time of the grant of the Sell Back Rights. 98 To the extent that the benefit that was conferred upon the Taxpayer by the grant of the Sell Back Rights was a distribution by the Company, that distribution cannot be identified as having being paid either out of profits derived by the Company or out of capital. If the price to be paid by the Company for the buy back of its shares was in excess of the market value of the shares, it is at least possible that there was a distribution that could be characterised as a payment out of profits derived by the Company, as distinct from a payment debited to share capital account. 99 Certainly, the Taxpayer received no money or property form the Company upon the grant of the Sell Back Rights. Even the sum of $576.64 that was paid to her on 2 April 2001 did not come from the capital Company's assets directly. Further, after the completion of the Buy Back on 28 March 2001, the Taxpayer continued to be the holder of 5,450 ordinary shares in the Company. That represented a higher proportion of the total number of shares in the Company than as at 23 January 2001. In addition, the Taxpayer had received the sum of $576.64 by reason of the fact that she had held 5,450 ordinary shares in the Company as at 23 January 2001. 100 There was no evidence as to the value of the Taxpayer's shares in the Company following completion of the Buy Back as compared with their value on the Record Date or the Listing Date. While the sum of $576.64 was not paid out of the funds of the Company, it was a benefit generated by reason of the obligation undertaken by the Company to buy back shares in its capital, by paying out of its own property, a price in excess of their market value at a relevant time. The payment of $576.64 was not in any sense consideration received by the Taxpayer for the disposition of her shares, because she did not dispose of them. There was no evidence that the value of her shares in the Company was diminished, by the operation of the Buy Back, by the amount of $576.64 or by any other amount. 101 However, the payment of $576.54 is something that proceeded from the Taxpayer's shares in the Company. The benefit of the Sell back Rights was derived from the Taxpayer's shares. The mechanism adopted by the Company, of buying back its own shares, was designed to give each Shareholder a benefit equal to the difference between the Buy Back price of $16.50 and the market value of shares in the Company. That benefit was one that proceeded, and was derived, from the shares held by the Shareholder at the Record Date. I consider that the benefit derived by the Taxpayer from the grant of the Sell Back Rights to her, of $576.64, was income according to ordinary concepts. CAPITAL GAINS TAX 102 In the light of that conclusion, it is not strictly necessary to deal with the Commissioner's alternative contentions in relation to Part 3-1 of the 1997 Act. However, since the matter was argued in full, I shall say something about the provisions in question. 103 Part 3-1 of the 1997 Act deals with 'capital gains and losses: general topics'. Under s 104-155(1) of the 1997 Act, which is within Part 3-1, CGT Event H2 happens if, relevantly, an act, transaction, or event occurs in relation to a CGT asset that a taxpayer owns. Under s 104-155(2), the time of CGT Event H2 is when the act, transaction or event occurs. Under s 104-155(3), a taxpayer makes a capital gain if the capital proceeds because of the CGT event are more than the incidental costs the Taxpayer incurred that relate to the CGT event. 104 The table in s 116-20(2) of the 1997 Act sets out what the capital proceeds from CGT Events F1, F2 and H2 are. That table provides that the capital proceeds from CGT Event H2, being 'receipt for event relating to a CGT asset', are the money or other consideration that the taxpayer received, or is entitled to receive, because of the act, transaction or event. 105 It is common ground that the Taxpayer's shares in the Company constituted a CGT asset. If there was an act, transaction or event in relation to the Taxpayer's shares, it occurred on 19 February 2001. Further, it is common ground that, if CGT Event H2 happened, the Taxpayer did not incur any incidental costs that relate to that event. The question is whether the grant of Sell Back Rights to the Taxpayer on 19 February 2001 can properly be characterised as a receipt for an event that occurred in relation to the Taxpayer's shares in the Company. 106 The Commissioner contends that the grant of Sell Back Rights for the benefit of the Taxpayer that occurred on 19 February 2001, by reason of her holding shares in the Company on the Record Date, was a CGT event, being, in particular, CGT Event H2. He says that the whole of the sum of $576.64 was capital proceeds because of the CGT event and that, accordingly, the Taxpayer made a capital gain. Alternatively, the Commissioner says that the value of the rights granted on the Listing date was consideration the Taxpayer received, or was entitled to receive, because of the grant of Sell Back Rights on the Listing Date. 107 One could not quarrel with the proposition that the grant, by the Company for the benefit of the Taxpayer, of Sell Back Rights that occurred on the Listing Date, was an act, transaction or event. The question is whether it can be said that it was an act, transaction or event in relation to the Taxpayer's shares in the Company. The preferable conclusion is that it was an act, transaction or event that occurred in relation to the Taxpayer, being a Shareholder of the Company as at the Record Date. 108 In order to attract capital gains tax, there must be some juridical act by the relevant taxpayer that gives rise to receipt of money or an entitlement to receive money. That is demonstrated by the other parts of the table in s 116-20(2) of the 1997 Act. Thus, in relation to CGT Event F1 (granting, renewing or extending a lease), the capital proceeds are any premium paid or payable to a taxpayer for the grant, renewal or extension. Similarly, the capital proceeds in respect of CGT Event F2 (granting, renewing or extending a long term lease) is the greatest of: (a) the market value of the estate in fee simple or head lease, worked out when the relevant taxpayer grants renews or extends the lease; and (b) what would have been the market value if the taxpayer had not granted, renewed or extended the lease; and (c) any premium paid or payable to the taxpayer for the grant, renewal of extension. 109 That is to say, it is clear that the capital proceeds in relation to CGT Event F1 and CGT Event F2 are money or other consideration received by a taxpayer, or that a taxpayer is entitled to receive, because of an act, transaction or event initiated by the taxpayer, namely a grant renewal or extension of a lease, or long term lease, by the taxpayer. Similarly, CGT Event H2 must involve some juridical act by the taxpayer; not the passive receipt by a taxpayer of a benefit from a third party. Capital Proceeds are not money received by a taxpayer by reason of some act, transaction or event initiated by another person, whether or not the act, transaction or event occurs in relation to an asset owned by that taxpayer. 110 It cannot be said that the sum of $576.64 was money received by the Taxpayer or that the Taxpayer was entitled to receive, because of the grant of Sell Back Rightsthat occurred on 19 February 2001. The sum of $576.64 was the Taxpayer's share of the proceeds of realisation of the Sell Back Rights that were granted on the Listing date. It was not money the Taxpayer received because the Sell Back Rights were granted to her by the Company. The sum was not capital proceeds from a GCT event. Accordingly, it was not assessable under Part 3-1. 111 Further, the grant of Sell Back Rights could not constitute receipt for an act transaction or event, in circumstances where the grant itself is the only act, transaction or event. The proceeds must be something apart from the act, transaction or event, since there must be something received, or that a taxpayer is entitled to receive, because of the act, transaction or event. CONCLUSION 112 The present appeal should be upheld. The orders of the primary judge should be set aside. In place of those orders, there should be orders that the appeal from the Commissioner's appealable objection decision be dismissed. The parties have agreed that there be no order as to the costs of the proceeding before the primary judge or of the appeal. SCHEDULE THE SCHEME INSTRUMENTS DEFINITIONS 113 In the Scheme Instruments, the following terms have the meanings indicated: * 'Applicant' means a Participating Shareholder who directs Custodial to transfer the shareholder's Participating Sell Back Rights before 5 pm on the Election Date. * 'ASX' means Australian Stock Exchange Limited; * 'Buy Back Date' means Wednesday, 28 March 2001; * 'Cut Off Date' means 20 March 2001; * 'Directed Sell Back Rights' means all the Participating Sell Back Rights that Participating Shareholders direct Custodial to transfer to them; * 'Direction' means a direction given by a Record Date Shareholder, other than an Excluded Shareholder, in the form of a Direction Form, pursuant to clause 3.1 of the Deed Poll (Shareholders). * 'Direction Form' means a form appropriately labelled accompanying the Buy Back Booklet. * 'Disposed CSFB Sell Back Right Amount' means the total amount CSFB receives for selling the Sell Back Rights on ASX less disbursements. * 'Election Date' means 16 February 2001; * 'Excluded Shareholder' means a person who is resident in a country other than Australia or New Zealand or holds shares pursuant to various employee and executive share plans of the Company; * 'Gross Sale Mechanism Participant Payment' means the sum of the Retained CSFB Sell Back Right Amount and the Disposed CSFB Sell Back Right Amount. * 'Listing Date' means 19 February 2001; * 'Non Acceptance Shareholder' means a Remaining Shareholder. * 'Non Acceptance Shareholder Participation' means, for each remaining shareholder, remaining sell back rights under the Deed Poll (Shareholders). * 'Participant' means each of the following: (a) a Record Date Shareholder; (b) a Sell Back Right Holder; (c) CSFB; (d) Custodial. * 'Participant Entitlement' means the number of Sell Back Rights to which each Participating Shareholder is entitled; * 'Participating Sell Back Rights' means all Sell Back Rights granted in respect of Participating Shareholders. * 'Participating Shareholders' means all Shareholders other than Excluded Shareholders at 5 pm on the Record Date; * 'Proceeds' means the proceeds of sale of the Participant Entitlement pursuant to clause 3.2 being the pro rata proportion of the net proceeds received by CSFB from selling or exercising the Remaining Sell Back Rights. * 'Record Date Shareholder' means a person who is registered as a holder of shares in the Company at 5 pm on the Record Date. * 'Remaining Shareholders' means Participating Shareholders who do not give a Direction in the form of the Direction Form for all Participating Sell Back Rights. * 'Record Date' means 23 January 2001; * 'Retained CSFB Sell Back Rights Amount' means the gross consideration due to be received from the Company for buying back shares relating to the exercise of Sell Back Rights that CSFB continues to hold. * 'Sale Mechanism Participant' means, relatively, each Non Acceptance Shareholder. * 'Sell Back Right' means an option granted by the Company on the terms and conditions set out in the Sell Back Right Deed Poll; * 'Sell Back Right Holder' means a person who is registered as a holder of Sell Back Rights. * 'Shares' means fully paid ordinary shares in the capital of St. George. * 'Shareholder' means the holder of a Share. SELL BACK RIGHT DEED POLL 114 By clause 2(a), the Company relevantly covenanted that it would, on the Listing Date, grant to Custodial for the absolute benefit of 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 Custodial under the Deed Poll (Shareholder). Clause 2(b) provided that a Record Date Shareholder, other than an Excluded Shareholder, could obtain legal title to a Sell Back Right only by: (i) giving a Direction to Custodial by completing the Direction Form; and (ii) returning the duly completed Direction Form to the Company's share registry; by 5 pm on the Election Date, 16 February 2001. 115 Under clause 2(c), a Shareholder as at the Record Date who does not complete the Direction Form and return it to the Company by 16 November 2001 is a Non Acceptance Shareholder. Clause 2(c) relevantly provided that each Non-Acceptance Shareholder Participation was to be sold to CSFB, pursuant to the CSFB Deed Poll, on the basis that CSFB could deal with those Participations pursuant to the CSFB Deed Poll. 116 Clause 3 provided that the Company could, at any time prior to the Listing Date, revoke its obligations under the Sell Back Right Deed Poll, including its obligations to grant Sell Back Rights under clause 2(a). 117 By clause 6, the Company acknowledged and agreed that each Sell Back Right constituted a separate and distinct binding obligation on the Company in favour of a Sell Back Right Holder on and subject to the terms and conditions set out in Schedule 1. Schedule 1 relevantly provided as follows: '1. Rights Conferred (a) Each Sell Back Right confers on the Sell Back Right Holder a put option to require [the Company] to purchase one Share at the Buy Back Price [$16.50 per share]… (b) On the exercise of a Sell Back Right…, [the Company] must acquire from the Sell Back Right Holder one Share at the Buy Back Price… … 4. Exercise of Sell Back Rights (a) To exercise a Sell Back Right…, the Sell Back Right Holder must complete and sign the Exercise Notice,… and return the form to [the Company's Share Registry] so that it is received not later than: (i) where the Exercise Notice is [in relation to all rights], 5 pm on the Election Date; or (ii) where the Exercise Notice is [in respect of shares registered in the Issue Sponsored Subregister], 5 pm on the Cut-off Date. … 5. Effect of Exercise By… completing, signing and returning an Exercise Notice in accordance with clause 4(a)… The Sell Back Right Holder will have exercised Sell Back Rights… in respect of the number of shares registered in the Sell Back Right Holder's name at the Buy Back Date which are specified in the Exercise Notice… and will have agreed to the Company buying back [that number of shares] and the transfer of [that number of shares] to the Company…' DEED POLL (SHAREHOLDERS) 118 By clause 2.1, Custodial declared that it holds each Participant Entitlement on separate trusts absolutely for each Participating Shareholder. Under clause 2.2(a), Custodial was to hold the Participant Entitlement absolutely for the Participating Shareholder unless and until directed under clause 3.1. Under clause 2.2(b), where a Direction has not been received from a Participating Shareholder in respect of all its Participating Entitlement before the Election Date, Custodial must act in accordance with clause 3.2 and hold the Proceeds absolutely for the Participating Shareholder. 119 Clause 3.1 provided that, if Custodial receives a direction in the form of a Direction Form, Custodial must, as soon as reasonably practicable, transfer, to the Applicant who gave the direction, the legal title to that Applicant's Directed Sell Back Rights. Under clause 3.2(a), Custodial must sell the remaining Sell Back Rights for each trust to CSFB. (CSFB must deal with the Sell Back Rights in accordance to the CSFB Deed Poll.) Under clause 3.3, Custodial undertakes to each Participating Shareholder that it will transfer the Directed Sell Back Rights to the Applicants and sell the remaining Sell Back Rights for each trust to CSFB and pay to Remaining Shareholders the Proceeds in accordance with the Directions of the Participating Shareholder. DEED POLL (EXCLUDED SHAREHOLDER) 120 This instrument contains provisions in relation to Excluded Shareholders designed to deal with those shareholders in an analogous way to the way in which the rights of Participating Shareholders are dealt with under the Deed Poll (Shareholders). CSFB DEED POLL 121 Under clause 2, CSFB's obligations are subject to the Sell Back Rights being granted by the Company and ASX agreeing to list the Sell Back Rights for quotation on or before the Listing Date. Clause 3 is expressly stated to be subject to clause 2. 122 Under clause 3(a), CSFB: (i) consented to the sale by Custodial to it of the CSFB Sell Back Rights for the Gross Sale Mechanism Participant Payment; (ii) must use reasonable endeavours 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 Non-acceptance Shareholder Participation. 123 Clause 3(b) provided that the obligation of CSFB under clause 3(a)(iii) would be satisfied by: (i) CSFB sending to the Company and Custodial a statement of the Gross Sale Mechanism Participant Payment identifying certain particulars; (ii) CSFB depositing with the Company the Disposed CSFB Sell Back Amount, in sufficient time so that the Company is able either to despatch to each Sale Mechanism Participant a cheque or transfer funds by electronic transfer for the benefit of the relevant person. 124 Under clause 3(c), CSFB has a discretion, which it will exercise in accordance with clause 3(d), whether it offers for sale on ASX in accordance with clause 3(a)(ii) all or any CSFB Sell Back Rights. Under clause 3(d), CSFB agrees that the exercise by it of such discretion will be made acting in good faith in order to maximise the Gross Sale Mechanism Participant Payment. I certify that the preceding sixty-four (64) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Emmett. Associate: Dated: 8 August 2005 IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY N 671 OF 2004 ON APPEAL FROM A SINGLE JUDGE OF THE FEDERAL COURT OF AUSTRALIA BETWEEN: COMMISSIONER OF TAXATION APPELLANT AND: HELEN MARY McNEIL RESPONDENT JUDGES: FRENCH, EMMETT AND DOWSETT JJ DATE: 8 AUGUST 2005 PLACE: SYDNEY REASONS FOR JUDGMENT dowsett j: INTRODUCTION 125 This is an appeal from a decision of Conti J, setting aside an appealable objection decision of the appellant (the "Commissioner") in connection with the assessment of income tax payable by the respondent (the "Taxpayer") for the year ended 30 June 2001. The appeal concerns the treatment for tax purposes of benefits received by the Taxpayer as the result of a scheme (the "Scheme") pursuant to which St George Bank Ltd ("SGL") sought to acquire 5 per cent of its issued shares. The Taxpayer held a small parcel of such shares. SGL shares were listed on the Australian Stock Exchange. THE SCHEME 126 On or about 12 January 2001, SGL announced that, pursuant to the Scheme, it proposed to buy back 22,786,937 shares, representing 5 per cent of its then issued capital. The price was to be $16.50 per ordinary share, involving a cash outlay of about $375 million. On 10 January 2001, SGL shares were traded at $13.88. Historically, the highest price for the shares had been $14.10. All registered shareholders, as at 5.00 pm on 23 January 2001, were entitled to participate in the Scheme. However some shareholders could participate only in a limited way. They were: ® shareholders having registered addresses outside of Australia or New Zealand; and ® employees of SGL holding shares under an employee share plan. 127 Alternative arrangements were made with respect to these shareholders, to whom I will refer as "Excluded Shareholders". They were so described in the relevant documentation. As the Taxpayer was not in either category, it will be necessary to make only passing reference to such arrangements. TIMETABLE 128 SGL sent to shareholders an explanatory memorandum (the "Buy Back Booklet") entitled 'Buy-Back: A St George capital management initiative'. It contained the following timetable for implementation of the Scheme: Event Date Determination of how many Sell Back Rights you have [Record Date] 5.00pm on Tuesday, 23 January 2001 Buy-Back booklet sent to you Monday, 29 January 2001 Final date for you to lodge your Direction Form [Election Date] 5.00pm on Friday, 16 February 2001 Trading of Sell Back Rights starts on a deferred settlement basis [Quotation Date] Monday, 19 February 2001 Despatch of Sell Back Rights holding statements/advice and exercise form Tuesday, 20 February 2001 Trading of Sell Back Rights on a T+3 basis starts on ASX Tuesday, 27 February 2001 Last day to have your broker buy or sell Sell Back Rights [end of Trading Period] Tuesday, 13 March 2001 Final date for exercise of Sell Back Rights [Cut-off Date] 5.00pm on Tuesday, 20 March 2001 Completion of the Buy-Back and St.George announces the number of Shares it has bought back 5.00pm on Wednesday, 28 March 2001 Proceeds to be despatched to participants in the Buy-Back Monday, 2 April 2001 DocumentATION 129 The Scheme was effected by the following four documents: ® Sell Back Right Deed Poll, executed by SGL; ® Deed Poll (Shareholders), executed by SGL and St George Custodial Pty Ltd ("Custodial"); ® Deed Poll (Excluded Shareholders), executed by SGL and Custodial; and ® CSFB Deed Poll, executed by Credit Suisse First Boston Australia Equities Limited ("CSFB"). 130 As can be seen, the description "deed poll" was used loosely in some cases. I will summarize briefly the effect of each of these documents. Sell Back Right Deed Poll 131 Pursuant to this document, SGL undertook to grant to Custodial on 19 February 2001 (the "Listing Date") one Sell Back Right for every 20 shares held by each shareholder, including the Excluded Shareholders, as at 5.00 pm on 23 January 2001 (the "Record Date"). A Sell Back Right conferred a '… put option to require [SGL] to purchase one Share at the Buy Back Price'. Sell Back Rights were to lapse automatically if not exercised by 5.00 pm on '… the fourth Business Day after the Cut-off Date', the Cut-off Date being Tuesday, 20 March 2001. Custodial was to hold each parcel of Sell Back Rights and the subsequent proceeds of sale for the benefit of the relevant shareholder (other than Excluded Shareholders) pursuant to the Deed Poll (Shareholders). There was a mechanism for the transfer of unexercised rights to CSFB. It was to sell them for the benefit of the relevant shareholders. The Sell Back Rights held on behalf of the Excluded Shareholders (which rights were described as 'Excluded Shareholder Participation') were to be held pursuant to the Deed Poll (Excluded Shareholders) with which I will deal at a later stage. 132 SGL's obligation to grant the Sell Back Rights was conditional upon: ۰ The Rights being listed for quotation on the Australian Stock Exchange ("ASX"); and ۰ SGL not revoking "its obligation" at any time prior to 19 February 2001 and giving notice of such revocation. Deed Poll (Shareholders) 133 This document identified the conditions upon which Custodial was to hold the Sell Back Rights granted to it for the benefit of shareholders other than Excluded Shareholders. Part 3 identified the obligations owed by Custodial to such shareholders. Those obligations varied, depending upon action taken by each shareholder in response to the Buy Back Booklet. Each shareholder received, with the Buy Back Booklet, a Direction Form. The form sent to shareholders whose shares were in the Issuer-Sponsored Subregister maintained by SGL differed from that sent to shareholders holding shares '…in a CHESS Holding …'. It is not necessary to consider the meaning of either description. The Taxpayer was in the former category. The relevant Direction Form identified (in Box A) the number of Sell Back Rights to which she was entitled. Each entitled her to sell back one share. The Buy Back Booklet invited the Taxpayer to do one of the following: ® do nothing and thereby receive what was described as the Sale Mechanism Price for the Sell Back Rights; or ® exercise the Sell Back Rights, thus agreeing to sell back the relevant number of shares; or ® call for the transfer to her of the Sell Back Rights so that she could exercise or sell them; or ® have some only of those Rights so transferred. 134 If a shareholder elected to sell his or her shares, Custodial had no further obligation in connection with his or her Sell Back Rights. If a shareholder elected to take a transfer of his or her Sell Back Rights or some of them, Custodial was to effect such transfer. If the shareholder elected to do nothing (in other words if the Direction Form was not returned), then Custodial was to transfer his or her Sell Back Rights to CSFB, which company would either sell them on the stock exchange or exercise them by accepting the offer to purchase. In the latter case CSFB would have to acquire sufficient shares in order to do so. If a shareholder elected to take a transfer of some only of his or her Sell Back Rights, the balance would be sold to CSFB on the same basis. The net proceeds derived by CSFB were to be divided amongst the relevant shareholders proportionately. Deed Poll (Excluded Shareholders) 135 As I have previously observed, SGL was obliged to grant Sell Back Rights to Custodial to be held on behalf of Excluded Shareholders. Custodial was to sell these rights to CSFB. CSFB was to sell or exercise them. Such exercise would involve the purchase of the necessary shares. The net proceeds were to be paid to the relevant Excluded Shareholders proportionately. CSFB Deed Poll 136 CSFB undertook to use reasonable endeavours to sell the Sell Back Rights transferred to it. It retained a discretion as to whether not to offer them for sale on the stock exchange. If any remained unsold, CSFB was obliged to use reasonable endeavours to purchase shares in the ordinary course of trading on the ASX, up to the number of shares that SGL would have been obliged to buy back if all the retained Sell Back Rights were exercised. However it was not obliged to acquire shares at more than the price offered to shareholders by SGL less disbursements incurred in connection with the purchase. CSFB was obliged to pay to each shareholder the net proceeds from the realization of that shareholder's Sell Back Rights. CSFB had a similar duty with respect to Sell Back Rights transferred to shareholders but not exercised prior to 20 March 2001 (the "Cut-off Date"). Such rights were automatically transferred to CSFB for that purpose. Facts 137 Since 1987, the Taxpayer has derived her principal income from share dividends, interest on term deposits and debentures, and an annuity/pension. Prior to 2001 she had acquired 5,450 shares in the capital of SGL. 138 In late January or early February 2001, the Taxpayer received the Buy Back Booklet. She read only part of it and understood that she could, at her option, sell up to 272 of her shares to SGL for $16.50 per share. She did not realize that if she did not accept the offer, she could nonetheless sell her Sell Back Rights, or that if she did not respond to the Buy Back Booklet, those Rights would be sold and that she would receive money for them. She decided not to sell her shares and took no further action, disposing of the relevant documentation. She did not recall receiving any further correspondence until she was advised by SGL, on or about 2 April 2001, that she was entitled to $576.64, being the proceeds of the sale of her 272 Sell Back Rights by Custodial to CSFB. On that date, such amount was deposited directly into her bank account with SGL. The class ruling 139 On 5 December 2001 the Commissioner released Class Ruling CR 2001/75 concerning the tax liability of SGL shareholders who derived benefits under the Scheme. The Commissioner determined that: '21. Although the [Sell Back] Rights were granted for the benefit of shareholders for nil consideration, they had a value because possession of a Right entitled the holder to sell SGL shares back to SGL for a price which exceeded the market value of SGL shares.' 140 After considering various aspects of the Scheme, the Commissioner considered the position of shareholders who had not returned their Direction Forms to Custodial. Such shareholders were subsequently referred to in the ruling as "Remaining Shareholders". I will adopt the same nomenclature. At pars 33-34 the Commissioner concluded: '33. The grant of a Right by SGL is assessable as ordinary income of … Shareholders pursuant to section 6-5 of the [Income Tax Assessment Act 1997 (Cth) ('the 1997 Act')]. The income was derived by shareholders on 19 February 2001, the date the Right was granted. 34. The amount to be included in assessable income for each Right granted is its market value at the time of the grant. The market value of each Right is $1.89.' 141 In other words, the Commissioner considered that the receipt of Sell Back Rights was the receipt of income according to ordinary concepts. The parties agree that the price of the rights on the first day of trading was $1.89. The Commissioner asserts that this was also their value on the date of grant. 142 The Commissioner also concluded that the grant of the Sell Back Rights conferred a capital gain. Section 102-5 of the 1997 Act provides that a taxpayer's assessable income includes his or her net capital gain for the income year. Section 102-20 provides that a taxpayer makes a capital gain pursuant to s 102-20 '… if and only if a CGT event happens. The gain or loss is made at the time of the event.' 143 "CGT events" are listed in s 104-5. If a relevant fact situation fits into more than one such event, then that which is most specific to the situation applies. There are exceptions to that rule. The CGT event identified by the Commissioner as relevant for present purposes is that defined in s 104-155 which provides: '(1) CGT event H2 happens if: (a) an act, transaction or event occurs in relation to a CGT asset that you own; and (b) the act, transaction or event does not result in an adjustment being made to the asset's cost base or reduced cost base. (2) The time of the event is when the act, transaction or event occurs. (3) You make a capital gain if the capital proceeds because of the CGT event are more than the incidental costs you incurred that relate to the event. You make a capital loss if those capital proceeds are less. (4) The costs can include giving property: see section 103-5. However, they do not include an amount you have received as recoupment of them and is not included in your assessable income. Exceptions (5) CGT event H2 does not happen if: (a) the act, transaction or event is the borrowing of money or the obtaining of credit from another entity; or (b) the act, transaction or event requires you to do something that is another CGT event that happens to you; or (c) a company issues or allots shares; or (d) the trustee of a unit trust issues units in the trust; or (e) a company grants an option to acquire shares or debentures in the company; or (f) the trustee of a unit trust grants an option to acquire units or debentures in the trust.' 144 The expression "CGT asset" is defined in s 108-5 as follows: '(1) A CGT asset is: (a) any kind of property; or (b) a legal or equitable right that is not property. (2) To avoid doubt, these are CGT assets: (a) part of, or an interest in, an asset referred to in subsection (1); (b) goodwill or an interest in it; (c) an interest in an asset of a partnership; (d) an interest in a partnership that is not covered by paragraph (c).' 145 The Commissioner observed at [65] of the ruling: 'In our view, the grant of the Rights by SGL to [Custodial] for the absolute benefit of each shareholder would constitute an act, transaction or event in relation to the shares that the shareholder owns, in terms of paragraph 104-155(1)(a). The act, transaction or event does not result in a cost base adjustment, and paragraph 104-155(1)(b) does not apply.' 146 The Commissioner also concluded that none of the exempting provisions of s 104-155 applied and that the date of the CGT event was 19 February 2001, the date on which the rights were granted to Custodial. Subsection 116-20(2) provides that the capital proceeds from a CGT event H2 are: 'The money or other consideration you received, or are entitled to receive, because of the act, transaction or event.' This section applies to a CGT event H2 subject to certain modifications which are not presently relevant. See ss 116-25 and 116-30. The Commissioner fixed the capital proceeds as being the market value of the Rights as at 19 February 2001 and asserted that value as being $1.89, again the amount at which, as the parties agreed, the Rights were traded on the first day of trading on the stock exchange. However, pursuant to s 118-20, the amount of any such capital gain is to be reduced to zero if the amount is otherwise income for the purposes of s 6-5, as the Commissioner asserts in this case. 147 The Commissioner also concluded that the sale of Sell Back Rights by Custodial to CSFB was a CGT event A1. Pursuant to s 104-10: '(1) CGT event A1 happens if you dispose of a CGT asset. (2) You dispose of a CGT asset if a change of ownership occurs from you to another entity, whether because of some act or event or by operation of law. However, a change of ownership does not occur: (a) if you stop being the legal owner of the asset but continue to be its beneficial owner; or (b) merely because of a change of trustee. (3) The time of the event is: (a) when you enter into the contract for the disposal; or (b) if there is no contract – when the change of ownership occurs. (4) You make a capital gain if the capital proceeds from the disposal are more than the asset's cost base. You make a capital loss if those capital proceeds are less than the assets reduced cost base. …' 148 Section 106-50 provides: '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.' 149 The reference to 'this Part' is to Part 3-1 of the 1997 Act, which part includes s 104-10. The Commissioner concluded that as each Remaining Shareholder was "absolutely entitled" to the relevant Sell Back Rights granted to Custodial in connection with their respective shareholdings, they were taken to have disposed of the rights to CSFB. The amount of the relevant "capital proceeds" for the purposes of s 116-20 was $2.12 per right, being the amount received from CSFB. The amount of the capital gain was derived by deducting from that figure the value of the right at the time of acquisition ($1.89), showing a capital gain of 23 cents per right. The application of s 116-20 to a CGT event A1 is also modified by ss 116-25 and 116-30. However it is not necessary to consider that aspect. The Taxpayer's tax return 150 The Taxpayer included in her return of income for the year ended 30 June 2001, amounts totalling $576.00 derived as follows: ® the sum of $514 as ordinary income pursuant to s 6-5 of the 1997 Act, calculated as the value of 272 Sell Back Rights at $1.89 each; and ® the sum of $62.00 as a capital gain pursuant to CGT event A1, derived from the disposition of 272 Sell Back Rights at $2.12 each, from a cost base of $1.89 each. 151 The Commissioner assessed the taxpayer's tax liability accordingly. The Taxpayer objected to the inclusion of the sum of $514.00 in her assessable income but not to the inclusion of the sum of $62.00. The Commissioner disallowed the objection, and the Taxpayer appealed. At first instance 152 Before Conti J, the Commissioner asserted that the sum of $576.64 or, alternatively, the sum of $514.00 was income pursuant to s 6-5. The Commissioner also submitted that the grant to the taxpayer of Sell Back Rights was a CGT event H2, yielding a capital gain of $514.00. As the Taxpayer accepted that the sum of $62.00 was correctly included in her assessable income, it was not necessary for his Honour to consider whether the sale of Sell Back Rights by Custodial to CSFB was a CGT event A1. Income according to ordinary concepts – s 6-5 153 At first instance, the Commissioner advanced three arguments in support of the proposition that either the sum of $514.00 or the sum of $576.64 was income according to ordinary concepts. Firstly, he submitted, by analogy to cases concerning share options granted to employees, that the value of Sell Back Rights should be treated as income according to ordinary concepts. See Abbott v Philbin [1961] AC 352 and Donaldson v Federal Commissioner of Taxation (1974) 3 ALR 516 at 531. 154 Secondly, the Commissioner submitted that the Sell Back Rights were '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 Taxpayer] for [her] separate use, benefit and disposal; that is income derived from property.' In this regard, the Commissioner relied on Eisner v Macomber (1920) 252 US 189 at 206-207 and Federal Commissioner of Taxation v Montgomery (1999) 198 CLR 639 at [65] – [66]; 155 It was submitted that the amount of $576.64 should be treated as income according to ordinary concepts for the following reasons: (i) the amount of $576.64 represented a gain made by the Taxpayer as an incident of her existing shareholding; (ii) the Taxpayer received that amount as part of the Scheme; (iii) the Taxpayer's entitlement to receive the amount arose because of her existing shareholding; (iv) save for remaining an existing shareholder, the Taxpayer was required to do nothing, and in fact did nothing, in order to gain the money she received; (v) the money was a product of her shareholding, which remained unaltered and unaffected by the Scheme; the feature built into the scheme was a value that could be made available to shareholders without altering the nature of their capital assets; and (vi) the money which the Taxpayer received did not provide her with any advantage of an enduring nature, or with a profit-making structure, and did not represent an accretion in or to any profit-making structure. 156 As to the cases concerning employee share options, Conti J observed at [34] that in those cases,'[t]he context of employment of the taxpayer was fundamental to the acknowledgement of that principle in the circumstances of both cases.' I take that statement to mean that his Honour considered that in each case, the grant of the options was a form of remuneration for employment, a feature which led to the characterization of the grant as income. That feature was not present in this case, and so his Honour considered that those cases were of no assistance for present purposes. 157 At [42] Conti J summarized the Taxpayer's submission concerning the applicability of s 6-5 to the case as follows: '… the receipt of moneys by a shareholder, being money sourced from the funds of the company in which that shareholder had a shareholding, will not constitute income unless the same comprises a dividend, or not being a dividend, is the product of the employment of, or of other services rendered by, that shareholder.' 158 His Honour then dealt with the authorities and concluded at [47]: 'The fiscal characterisation of the proceeds of realisation of the sell back rights granted to the [Taxpayer] is in my opinion to be made in light of the following factors: (i) as emphasised by senior counsel for the [Taxpayer], the absence of any distribution to her of any profits of SGL, or of any funds emanating from, or derived out of, or representing, profits of SGL; (ii) as further emphasised by senior counsel for the [Taxpayer], the absence of any income severed or detached from the capital, or derived from the underlying property, of SGL, for the purpose of effecting that distribution; and (iii) the amount of $576 comprised an addition to, and formed part of the purchase price paid for the buy back of 5% of her shareholding in SGL, and the earlier emerging (though not of course realised) amount of $514 was prospectively of the same character; that character was derived by reference to what may be described as the basic sale price the [Taxpayer] was entitled to receive from SGL for the disposition in favour of SGL of that percentage of her shareholding, calculated of course at the rate of $16.50 per share.' 159 At [48] his Honour continued: 'Once it is seen that the derivation by the [Taxpayer] of either sum [of $514 or $576.64] is referable entirely to her existing shareholding in SGL, the [Taxpayer's] submission to the effect that the absence of a fund or source of profits within SGL, out of which the alleged earlier accrual and the later payment originated, bears decisively in her favour upon the exclusion of either amount from the scope of operation of section 6-5. The weight of authority cited by senior counsel for the [Taxpayer], to which I have earlier referred, is I think decisive of the section 6-5 issue in favour of the [Taxpayer].' 160 His Honour also observed at [49]: '… there is I think much to be said in favour of the further view … that the proceeds of disposal of the sell back rights in the [Taxpayer's] hands should bear no different fiscal character to that of the principal sum of $16.50 per share proffered by SGL to the [Taxpayer] for the sell back of 5% of her shareholding in SGL, by reason of the reasonably (though of course not precisely) analogous nature of the payment of $576.64 to a put option fee paid in the context of a prospective purchase of a capital asset (in contrast of course to a revenue asset), albeit that the payment was calculated and actually paid by SGL to the [Taxpayer] subsequent to the sell back rights trading period … '. 161 His Honour concluded that the proceeds of sale of the applicant's Sell Back Rights were not income pursuant to s 6-5. Capital Gains Tax 162 As I have observed, the Taxpayer accepted that the sum of $62.00 had been correctly included in her assessable income as a capital gain but objected to the inclusion of the amount of $514, representing the Commissioner's assessment of the market value of the Sell Back Rights at the time they were granted to Custodial. The Commissioner's submissions generally reflected his earlier ruling. Conti J concluded that Parliament had not intended that a taxpayer be exposed to capital gains tax merely because he or she took no step in connection with an offer of participation in a scheme of this kind. His Honour also concluded that it was commercially unrealistic to treat the amount of $514 as a capital gain, given that the Taxpayer was an investor and not a share trader. Grounds of appeal 163 The Commissioner's grounds of appeal are extensive, focusing upon inferences allegedly drawn by his Honour and his interpretation of the relevant sections of the legislation. No particular purpose would be served by canvassing the grounds in detail. It will be more useful to address the outline of argument. Counsel for the Commissioner identified the issues as follows: '(a) whether the value of the Sell Back Rights which were granted by SGL to [Custodial] for the benefit of the [Taxpayer] on 19 February 2001 (and which had a market value of $514 on that day) was income according to ordinary concepts in the hands of the taxpayer …; (b) whether the money which the taxpayerreceived on or about 2 April 2001 in connection with the share buy back scheme established by SGL (an amount of $576.64) was income according to ordinary concepts in the hands of the taxpayer …; (c) in the alternative, whether the grant of Sell Back Rights by SGL to [Custodial] for the benefit of the taxpayer … was a CGT Event H2 within s 104-155 of the [the 1997 Act], and therefore whether either: (i) the value of the Sell Back Rights as at the date of grant ($514); or (ii) the money which the taxpayer received or was entitled to receive because of the grant (an amount of $576.64) is to be included in her assessable income for the year ….' Income according to ordinary concepts – s 6-5 164 The Commissioner's primary position is that the value of the Sell Back Rights at the date of grant or the cash received from CSFB was income according to ordinary concepts pursuant to s 6-5. This argument depends substantially upon the decision in Eisner to which I have referred above and in particular, upon the following passage which appears at 206-207: 'The fundamental relation of "capital" to "income" has been much discussed by economists, the former being likened to the tree or the land, the latter to the fruit or the crop; the former depicted as a reservoir supplied from springs, the latter as the outlet stream, to be measured by its flow during a period of time. For the present purpose we require only a clear definition of the term "income", as used in common speech, in order to determine its meaning in the amendment, and, having formed also a correct judgment as to the nature of a stock dividend, we shall find it easy to decide the matter at issue. After examining dictionaries in common use (Bouv. L.D.; Standard Dict; Webster's Internat, Dict; Century Dict.), we find little to add to the succinct definition adopted in two cases arising under the Corporation Tax Act 1909 … "Income may be defined as the gain derived from capital, from labour, or from both combined," provided it be understood to include profit gained through a sale or conversion of capital assets, to which it was applied in the Doyle Case …. 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 meaning; 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. Nothing else answers the description.' 165 The passage was referred to with apparent approval in Read v The Commonwealth (1988) 167 CLR 57 at 67 and by the majority of the High Court in Montgomery at [65] – [66]. 166 The Commissioner points to the following considerations as being relevant to the characterization of the receipt of the Sell Back Rights or moneys in exchange therefor as income: (a) Receipt of the Sell Back Rights arose from the Taxpayer's shares in SGL which shares she held for the purpose of producing income; (b) The Sell Back Rights were severed from her shares which, throughout, remained intact and unchanged; (c) SGL did not buy back any of the Taxpayer's shares, and she did not dispose of any of them; (d) The moneys were not received by her in consideration of, or as an incident of the disposal or alteration of any capital asset; (e) The Taxpayer's receipt of the Sell Back Rights and/or moneys did not represent a distribution of capital by SGL; and (f) The moneys were received from the trading activities of CSFB. 167 Adopting the language of Eisner, the Commissioner submits that either the benefit of the Sell Back Rights, or the moneys received in exchange for them, constituted '… a gain, a profit, something of exchangeable value proceeding from[the shares in SGL]severed from the capital [the shares] …, and comingin, being derived, that is, received or drawnby the [the Taxpayer] for [her]separate use benefit and disposal'. 168 The Taxpayer submits that: ® Traditionally, where the legislature proposes to tax moneys other than dividends received by shareholders in that capacity, it has expanded the definition of "dividend" so as to include the receipts in question or has used a deeming provision. ® A '… return of paid up capital …' is expressly excluded from various definitions of "dividend" in the 1997 Act. A buy-back of shares is now a permitted method of reducing issued capital. ® According to general principles, only profits detached from the company and distributed to shareholders will be income according to ordinary concepts. ® Bonus shares and other bonuses granted in proportion to shareholdings are capital, not income. ® A receipt by a shareholder, not being a dividend as defined in the 1997 Act, will only be income if it is the product of income-earning activity by the recipient. The receipt of $576.64 from CSFB did not fit that description. ® As to the receipt of Sell Back Rights, the Taxpayer was never entitled to them or to any interest in them. She became entitled only to participate in the proceeds of the transactions carried out by CSFB. The value of such participation would vary depending upon whether CSFB sold the Sell Back Rights or exercised them. Net proceeds, and therefore the Taxpayer's return, could not be determined until that process was complete. As at 19 February 2001, the Taxpayer had only a chose in action, namely the right to compel the due administration by Custodial of the trust. It was not readily convertible to cash at that date and so was not income according to ordinary concepts. Capital Gains Tax 169 The Commissioner submits that pursuant to subs 104-155(2), the grant of Sell Back Rights was an act, transaction or event occurring in relation to the Taxpayer's shares. She held the relevant shares both on 23 January 2001 (which was the date at which entitlements were determined) and on 19 February 2001 when the Sell Back Rights were granted. Pursuant to subs 116-20(2), the capital proceeds from that event were: 'The money or other consideration you received, or are entitled to receive, because of the act, transaction or event.' 170 It is submitted that both the Sell Back Rights and the proceeds from their realization fit this description. The Commissioner expressly disavows reliance upon the sale by Custodial to CSFB of the Taxpayer's Sell Back Rights as a CGT event. 171 The Taxpayer submits that, for the purposes of subs 104-155(2), the capital proceeds must be received by reason of the act, transaction or event comprising the relevant CGT event. This implies a causal connection. It is also submitted that the word "consideration" in subs 116-20(2) implies that the receipt must be as the result of a contractual relationship between the recipient and some other person. The relevant act, transaction or event constituting the CGT event H2 cannot also be the consideration received "because" of that act, transaction or event. 172 The Taxpayer also submits that there must be a "real relationship" between the act, transaction or event and the relevant CGT asset. The Taxpayer's entitlement to participate in the Scheme depended upon her shareholding as at 23 January 2001. Had she disposed of her holding after that date, and before the due date for the grant of Sell Back Rights to Custodial, SGL would, nonetheless, have been obliged to grant such Rights to be held on her behalf. She would still have benefited from the transfer of those rights to CSFB and its subsequent dealings with them. In that case, the grant would not have been an act, transaction or event in relation to an asset which the Taxpayer then owned. It is further submitted that although the Taxpayer owned her shares as at the date of grant, it is unlikely that Parliament intended that liability to capital gains tax should vary, depending upon whether the relevant shareholder retained or disposed of his or her shareholding between 23 January 2001 and19 February 2001. The Taxpayer advances a similar argument in answer to any attempt by the Commissioner to identify the receipt of money by the Taxpayer from CSFB's transactions as a CGT event H2. I do not understand the Commissioner to have advanced that case. 173 It is also submitted that there is a further anomaly in the Commissioner's argument. A shareholder who acquired and disposed of his or her Sell Back Rights would be given the benefit of a deemed cost base equal to the value of the Sell Back Rights on the date of grant and would pay capital gains tax only on the difference between the ultimate sale price and that deemed cost base. A shareholder in the Taxpayer's position does not receive a similar "deduction". The scheme and income according to ordinary concepts 174 Subsection 6-5(1) provides: 'Your assessable income includes income according to ordinary concepts, which is called ordinary income.' There is no further definition. 175 For present purposes, the question is whether, as a result of the Scheme, the Taxpayer derived income according to ordinary concepts. As the majority (Gaudron, Gummow, Kirby and Hayne JJ) observed in Montgomery at [69], the answer to this question necessarily involves a detailed examination of the transaction in question. In my view, that examination should not be limited to the grant of the Sell Back Rights in isolation from the circumstances which led to such grant. 176 Prior to SGL's decision to buy back 5 per cent of its issued shares, the Taxpayer's shareholding entitled her: ۰ to participate in the distribution of any dividends; and ۰ in the event of a winding up, to participate in any excess of assets over liabilities. 177 The effect of the Scheme, if successfully implemented, was to be a reduction of SGL's paid up capital and a disbursement of some of its assets. A shareholder who accepted the offer would dispose of assets, ie some of his or her shares, receiving in return, his or her paid up capital plus a further sum. The "benefit" of the offer could be assigned by recipient shareholders. If a shareholder assigned the benefit of the offer, he or she would receive the net proceeds of the assignment but would retain his or her shares. 178 The Commissioner's case assumes that in the latter case, the relevant shareholding would remain unchanged, that the proceeds of sale were produced by the Taxpayer's investment without any diminution in its value. This assumption is made superficially more attractive by the fact that sale of the Sell Back Rights led to the Taxpayer receiving money from a third party, not from SGL. However it is obvious that the only reason for purchasing Rights would be in order to exercise them by selling shares to SGL. That was an attractive opportunity because SGL was offering an amount which was well above the prevailing market price. A purchaser of Sell Back Rights would pay a price which reflected, to some extent at least, the gain to be made by selling shares to SGL, which gain was to be derived from the assets of SGL. By creating Sell Back Rights, SGL ensured that shareholders who chose not to sell their own shares would nonetheless participate indirectly in the distribution of SGL assets which was an essential element of the Scheme. The special sense in which I use the expression "distribution of SGL assets" is obvious. 179 In argument, the Taxpayer submitted that the grant of Sell Back Rights was not a gift by SGL to its shareholders. That is certainly true. In my view, the importance of this submission was not always clearly recognized in argument before us. For that reason, it is appropriate to set out certain passages from the cases which explain the point and identify some of its ramifications. 180 In Archibald Howie Pty Ltd v Commissioner of Stamp Duties (NSW) (1948) 77 CLR 143, the High Court considered a distribution in specie of a company's assets. Dixon J said at 152-153: '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 implicitly 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 the dividend. The consideration given is the payment up of the share capital in satisfaction of the liability for the amount of the share incurred on allotment. … From the standpoint of company law the division of the capital of a company into shares and the payment up of shares issued are regarded as respectively significant and real. The shareholder contributes the amount of the share to the capital of the company. This contribution measures his right to any return of capital which the company may make either as a going concern or in a winding up. Subject to any regulation the articles may make as to the basis upon which assets in excess of share capital may be distributed, the amount of the share determines the proportion in which he shares with other shareholders in a distribution of excess assets.' 181 At 156-8, Williams J said: 'In Borland's Trustee v. Steel Bros. & Co. Ltd …, Farwell J., in a passage which Lord Russell of Killowen in Inland Revenue Commissioners v. Crossman … described as an accurate exposition of the nature of a share, stated that a share is the interest of a shareholder in the company measured by a sum of money for the purpose of liability in the first place and of interest in the second, but also consisting of a series of mutual covenants entered into by all the shareholders inter se in accordance with … the Companies Act … a share is an interest measured by a sum of money and made up of various rights contained in the contract, including the right to a sum of money of a more or less amount … . Lord Russell himself said in Crossman's Case … that the nature of the property in a share is that "it is the interest of a person in the Company, that interest being composed of rights and obligations which are defined by the Companies Act and by the memorandum and articles of association of the company." Such rights include the right to participate in dividends whilst the company is a going concern and the right to participate in the distribution of assets available for the shareholders upon a winding up. They also include the right to receive capital in excess of the wants of the company which the company resolves to distribute upon a reduction of capital. Such a reduction requires to be confirmed by the court mainly to ensure that the creditors will not be prejudiced but also to ensure that the reduction will not operate unfairly between the shareholders. Distributions of profits to shareholders by way of dividend or of capital upon a winding up or upon a reduction of capital are usually made in money. But where the articles so provide in the case of dividends or upon a winding up, and where the special resolution so provides in the case of a reduction of capital, the distribution may be made in specie. Except in the case of a compulsory liquidation, all these distributions originate in a voluntary act on the part of the company. But when the company voluntarily declares a dividend it becomes indebted to the shareholders for the sums they are entitled to be paid … . When the company goes into voluntary liquidation s 282 of the Companies Act provides that the property of the company shall be applied in satisfaction of its liabilities, and subject to that application shall, unless the articles otherwise provide, be distributed among the members according to their rights and interests in the company. When the company voluntarily passes a special resolution to pay off capital in excess of the wants of the company and the special resolution takes effect, the company becomes indebted to the shareholders to whom the money is payable in the same manner as it becomes indebted upon a declaration of dividend … . The decision of Byrne J. that the debts for unpaid dividends and unpaid capital are specialty debts may be open to criticism. But there is no reason to doubt his statement that "when you have to consider the question of dividends and unpaid returns of capital the shareholders' claims depend in each case on their rights which arise out of the articles of association" … . In each case the shareholders become legally entitled in due course to part of the sum of money of more or less amount to which Farwell J. referred in the passage cited … . A company obtains capital by the issue of its shares. These shares cannot be issued at a discount but may be issued subject to the payment of their nominal amount or at a premium. The amount payable may be satisfied by the payment of money or by some other proper consideration. But all shares must be paid for in full by money or money's worth. When the person to whom the shares are allotted pays or assumes the liability to pay for the shares in money or money's worth, full consideration in money or money's worth moves from him to the company for all the rights which he acquires under the memorandum and articles of association. Amongst the most valuable of these rights are the rights to share in the distributions of moneys and assets already mentioned. The declaration of a dividend and the taking effect of a special resolution to return capital create debts because the shareholders have acquired the legal right to be paid these moneys for valuable consideration. If the moneys were not payable as debts but as gifts the shareholders would have no legal rights to sue for them. The authorities already cited show that the shareholders have these legal rights. They are legal rights which flow from the original issue of the shares. They are ingredients in the chose in action which each original shareholder purchased from the company. If an original shareholder sells and transfers his shares the transferee upon registration "will become legally entitled to all the rights of a member, e.g. the right of attending meetings and voting and of receiving dividends" … .' 182 In Ord Forest Pty Ltd v Federal Commissioner of Taxation (1974) 130 CLR 124 at 150, Gibbs J said: 'Where a company makes a bonus issue, or a new issue at a price below the real value of the shares, to persons who are already shareholders, there will ordinarily be no want of full consideration. In such a case, speaking generally (for of course there may be special circumstances that make a difference), the making of the new issue of shares is no more than "a fulfilment or satisfaction of the rights of the shareholder as such" … , and the payment up of the share capital when the original shareholding was allotted provided the consideration for the acquisition of the rights which the shares conveyed, and therefore for any subsequent distribution of capital or profits in satisfaction pro tanto of those rights. …' 183 His Honour then referred to the decision in Archibald Howie and continued at 151: '… The reasoning of the members of the Court in [Archibald Howie] 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.' 184 At 155-157, Mason J said: '…no element of gift can be involved in an allotment of shares, whether bonus shares or shares allotted for a cash consideration, to shareholders of a company in proportion to their existing shareholding. In such cases, notwithstanding the absence of any payment or the existence of a discrepancy between the value of the shares and the price paid for them, the allotment is made to a member in satisfaction of the rights which he enjoys as a shareholder of the company under its memorandum and articles of association.' 185 His Honour then referred to Archibald Howie and continued: 'Where the articles of association entrust to the directors power to issue the unissued capital of the company, the power is a fiduciary power to be exercised bona fide in the interests of the corporators as a whole …. When issuing shares which have a value greater than the consideration payable for them the directors must give close consideration to the rights of the shareholders under the memorandum and articles, including the right of a shareholder to participate in the distribution of the company's assets on a winding up or on a reduction of capital, for an issue of shares made otherwise than on the footing that shareholders will participate proportionately may significantly affect the value of the rights of existing shareholders. An issue of bonus shares, or of shares having a value greater than the consideration payable for them, to shareholders in proportion to their existing holdings, is therefore in a very real sense a satisfaction of their existing rights. A comparison of the situation of a shareholder before and after a new issue is made indicates that no gift to a shareholder arises when a company allots to shareholders bonus shares or for a cash consideration shares having a greater value than the amount payable for them in the course of making a new issue to shareholders in proportion to their existing holdings. In the case of a bonus issue there is no accretion to the assets of the company. The shareholders' proportionate right to participate in the distribution of the assets on a winding up or on a return of capital remains unaffected. In the case of the issue of shares for cash the assets of the company are increased only by the total value of the consideration payable in respect of the allotment. Consequently the amount which the shareholder can expect to receive on a distribution of the assets of the company is increased, but it is increased only by the amount of the consideration which he has provided for the allotment of the new shares which he acquires. 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. The situation is not altered when an existing shareholder alienates for a consideration his right to take up a new share; the company in allotting the new shares satisfies what has become the allottee's right to participate in the new issue and it receives from him the amount payable in respect of the allotment of the new share.' 186 In examining the Scheme, one must keep in mind the legal context in which it was designed and implemented. Shareholders had contractual and statutory rights as against SGL and inter se. In buying back one of its shares, SGL was buying the relevant shareholder's right to participate in dividends and in any surplus of assets over liabilities in a winding up. In this case, it seems that those rights were worth more than the paid up value of the share. The market price reflected the market's assessment of that value, but SGL offered an even greater amount. One must proceed upon the basis that SGL's offer reflected the Board's assessment of the true value of the shares. It is unlikely that the Board decided to buy the shares at a price above the amount which it considered to be their true value. Presumably, the Board considered that the market was under-valuing the shares. For this reason, the offer was attractive to some, perhaps many, shareholders to whom market price was more important than the possible return from a notional winding up. 187 What, then, was the purpose of the arrangement concerning the shareholders who did not accept the offer? It is conceivable that it was designed as a convenient mechanism for ensuring that the 5 per cent target was achieved. However it is significant that those who designed the Scheme considered that there would be a worthwhile market for the Sell Back Rights, probably because the offer was well above the market price. Clearly, SGL considered that shareholders who chose not to sell should, nonetheless, be able to participate in the benefit of the Scheme. Given that such benefit cannot be characterized as a gift, one must ask why that view should have prevailed. The only likely answer is that as the Scheme involved the disbursement of company assets, there was at least a possibility that the outcome would be disadvantageous to such shareholders, either because the value of their shares on an asset-backing basis might be reduced (perhaps because the Board erred in assessing the value of the shares) or because the Scheme might have an adverse effect on the market price of the shares. 188 The Scheme was apparently authorized pursuant to Part 2J.1 of the Corporations Act 2001 (Cth). Section 256A provided that the rules prescribed in that Part were designed inter alia, to protect the interests of shareholders in a company by seeking to ensure fairness "between them". Section 256B authorized a reduction in capital only if it 'is fair and reasonable to the company's shareholders as a whole …'. The only reasonable inference is that the Board considered that it was fair that shareholders who rejected the offer should nonetheless receive some benefit. That can only have been because of the risk of some loss of the kind which I have identified. 189 I should make one other observation concerning the Scheme. The Commissioner's submissions assume that it had no effect on the Taxpayer until the Sell Back Rights were settled on Custodial on 19 February 2001. However, in my view, the Scheme affected her rights as a shareholder from the time at which the Board resolved to implement it. Subject to the possibility of revocation of that decision, and subject to the satisfaction of the conditions to which the Scheme was subject, the shareholders then became entitled to have the Scheme implemented, and their prior rights as shareholders were adjusted accordingly. 190 To my mind, neither the approach adopted by the Taxpayer nor that adopted by the Commissioner offers an accurate description of the effect of the Scheme upon the Taxpayer. In effect, she could choose between selling her shares or selling the Sell Back Rights. Had she sold the shares, she would have received the amount of the paid up capital represented by each share plus a further amount derived from SGL's funds. In the second case, she would receive the price which other shareholders or potential shareholders were willing to pay in order to acquire the Sell Back Rights, presumably with the intention of exercising them. Had the Taxpayer chosen to sell her shares to SGL, the legal consequences would have been clear. She would have exchanged the relevant shares for a sum of money. By choosing not to sell, the Taxpayer lost her right to accept the offer or to call for the transfer of the Sell Back Rights to her. In exchange she acquired the right to receive the net benefits of their sale. The question is whether the value of that right or the price paid for it by an assignee was income according to ordinary concepts. 191 The Commissioner has not sought to treat the benefit received by the Taxpayer as a dividend pursuant to s 44 of the Income Tax Assessment Act 1936 (Cth) (the '1936 Act'). Since Commonwealth income tax was first imposed in 1915, income from dividends has been expressly included in a Taxpayer's assessable income by provisions such as s 44. See Income Tax Assessment Act 1915 (Cth) (the '1915 Act'). Section 10 of the 1915 Act imposed income tax upon '… taxable income'. In s 3, that term was defined to mean 'the amount of income remaining after all deductions allowed by this Act have been made.' Pursuant to s 14(b), the income of any person included 'dividends, interest, profits or bonus credited or paid to any member, shareholder or debenture-holder of a company …'. Thus, although the definition of "income" in s 3 described that which is now described as income according to ordinary concepts, it was thought necessary to identify dividends as income and therefore to be included in assessable income. Later Commonwealth taxing legislation has adopted the same approach to the treatment of dividends. Dividends may, and often will, be income according to ordinary concepts. However, because of this tradition of special treatment, the case law relating to dividends may not always be helpful in considering whether or not particular dividends should be so treated. As much appears from the reasons of Kitto J in Federal Commissioner of Taxation v Uther (1965) 112 CLR 630 at 634, approved by the Full High Court in Commissioner of Taxation v Slater Holdings Ltd (1984) 156 CLR 447. It may be of assistance to set out some brief passages from Uther. 192 A company had reduced its share capital by paying Ł2 per share for ordinary shares of Ł1 each, all of which were fully paid up. The Commissioner assessed a shareholder to tax upon the footing that the difference between the amount received and the amount paid up on the share was assessable income under the provisions of the Act. At first instance the trial judge concluded that the distribution was of a capital nature and that no part of the sum was assessable to income tax. At 634, Kitto J observed: '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 and extinguishment of some of his shares. The shares were the shareholders' capital: so, necessarily, was the money that took their place. … 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).' 193 In other words, Kitto J accepted that the excess of the amount received over the amount paid up on each share was not income according to ordinary concepts. Another aspect of his Honour's reasons is of assistance in understanding the development of the law in this area. At 638- 639, his Honour considered the earlier decision of Fullagar J in Federal Commissioner of Taxation v Blakely (1951) 82 CLR 388, a decision which was relied upon to some extent in argument in the present case. The importance of this passage is that it highlights a change which had taken place in the legislative treatment of dividends for income tax purposes. Kitto J considered that Fullagar J had, in Blakely, failed to recognize the change, observing: 'The amending Act had repealed s 16B, and replaced it with a new s 16AA in terms similar to those of the present s 44(1), a new s 16AB which need not be discussed, and a new s 16B in terms similar to those of the present s 47. It is important to see what this means. The need to enact the original s 16B (in 1928) had been made clear by Burrell's Case …, which had shown that a distribution to shareholders by a liquidator in a winding up is, in the hands of the shareholders, necessarily of a capital nature, whether the moneys or other assets distributed represented, from the company's point of view, capital or income. What s 16B did was to include in the shareholder's assessable income any amount received by him in such a distribution to the extent to which it represented income of the company (with an exception). Capital though it was in the hands of the shareholder, its inclusion in his assessable income was made a consequence of the income character (from the company's point of view) of the source from which it was taken by the liquidator. The 1934 Act carried a similar notion into the field of distributions made by a company while still a going concern. This it did by enacting simultaneously the definition of "dividend" and the 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 section 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 distribution should be made.' 194 Although Kitto J was in dissent in Uther, his Honour's reasons were, as I have said, expressly approved by Gibbs CJ (Mason, Brennan, Deane and Dawson JJ concurring) in Slater at 457. Thus it can be seen that an amount received by way of dividend may be liable to taxation by virtue of the statutory treatment of dividends but not income according to ordinary concepts. 195 In my view, three cases offer guidance in resolving the present question. The first is the decision of the Court of Appeal in Commissioners of Inland Revenue v Paget (1938) 2 KB 25. The facts of that case bore some similarity to those of the present case. Ms Paget held bearer bonds issued by the City of Budapest and by the Kingdom of Yugoslavia. The former bonds yielded interest which was payable in pounds sterling in London and in certain other countries in their respective currencies. In 1931, the Royal Hungarian government forbade the payment of interest in accordance with the terms of the Budapest bonds. The Municipality was directed to deposit with the Hungarian National Bank the local currency equivalent of all amounts due. Access to this fund was controlled by the Bank. It issued bond holders with coupons in Hungarian currency but such funds could be used only for specified purposes within Hungary. In the case of the Yugoslav bonds, interest was payable half-yearly in American dollars in New York. In 1933 the government of Yugoslavia revealed that it was unable to pay interest on the bonds in full and proposed to meet part of the interest by issuing coupons in Yugoslav currency payable in Belgrade, the use of such funds being governed by local regulations. There was a market in London for the sale of both the Budapest and Yugoslav coupons. Ms Paget sold her coupons at considerably less than their face value. The Commissioners sought to assess the proceeds to income tax as income according to ordinary concepts. Sir Wilfred Greene MR said at 35: 'The [Inland Revenue Commissioners] … claimed in the alternative that the purchase price of the coupons was "income arising from securities out of the "United Kingdom" and was charged with income tax … . There are two sub-divisions of this argument. … The second is that Miss Paget was directly assessable in respect of the purchase price. The latter of these two contentions can be disposed of quite shortly. The purchase price received by Miss Paget was not income arising from the bonds at all. It arose from contracts of sale and purchase whereby Miss Paget sold whatever right she had to receive such income in the future as well as her right to take what was offered by the defaulting debtors. It is, in my opinion, quite impossible to treat this as equivalent in any sense to "income arising from" the bonds.' 196 At 44-45, Lord Romer said: 'In these circumstances, the only question to be decided is whether the proceeds of sale of a right to receive income in the future can be treated as income for the purpose of the Income Tax Acts. The question thus broadly stated plainly admits of but one answer; and that answer must be in the negative. The proceeds of the sale for a lump sum of an annuity, for instance are capital in the hands of the vendor and not income. And this is true even when the subject of the sale is not the annuity for its whole duration but the right to be paid the annuity for a number of years or even for one year. Nor is it any less true because the purchaser will pay less for an annuity that will be subject to a deduction of income tax in his hands than he would be for a tax free annuity. Nor is it any the less true because in many cases the net income when paid to the purchaser is not income in his hands. In the case, for instance, of a man carrying on the business of dealing with coupons, the sum collected by him on cashing a coupon will be merely a trade receipt and not income. … [T]he interest represented by the coupon cannot be regarded as forming part of the total income of anybody. …' 197 At 46 his Lordship continued: 'The transactions appear to have been bona fide transactions of sale and purchase. The moneys received from them by Miss Paget were held by Finlay J to be simply the purchase price of the coupons and in no sense income from foreign securities. In my judgment he was right in so holding, and the appeal should be dismissed with costs.' 198 Similarly at 48, MacKinnon LJ observed: 'What Ms Paget sold was the possibility of making some money abroad upon the acceptance of these offers. The money she so received is said to be "income from securities". If Budapest had offered, in lieu of paying interest due on the bonds, to hand over so many quarters of wheat for each coupon, Miss Paget might have realized some money by selling her coupons to a corn dealer with foreign trade connections. The Attorney-General did not shrink from the proposition that the money she received from the corn dealer would be "income from a security outside the United Kingdom". This was logical, but in my opinion, irrational. The fundamental fact is that no interest or dividends have been paid on these securities out of the United Kingdom. The debtors have defaulted.' 199 The High Court (Mason ACJ, Wilson, Brennan, Deane and Dawson JJ) effectively approved the decision in Paget in Federal Commissioner of Taxation v Myer Emporium Ltd (1987) 163 CLR 199 at 219, where the Court observed, concerning that decision: 'The purchase price of the coupons was not interest nor were the benefits which purchase of the coupons conferred on the dealers. What Miss Paget sold was, as MacKinnon LJ described it …, "the possibility of making some money abroad" by accepting in lieu of the promised interest certain payment in local currency or a mixture of US dollars and funding bonds. The coupons were the sole source of the possibility of making some money abroad; they were the sole source of the expectation of substitutionary payment. The substitutionary payment offered by the defaulting borrowers (or the expectation of obtaining that payment) on production of the coupons was not regarded as interest and the sale of the coupons was not by way of assignment of a right to interest by way of transfer of the instruments of title to the substitutionary payment. The coupons had come to represent, like a contract to pay an annuity, the sole source of the expected payment. Lord Romer … drew that analogy, treating the sale for a lump sum of an annuity as an instance of a sale of a right to receive income in the future, the proceeds of which are not treated as income.' 200 The Court then continued: 'Unlike the sale of the coupons in Paget, the sale of a right to interest severed from the debt is not a sale of a tree of which the future payments are the fruit.' 201 The significance of this passage will be more obvious after a consideration of the decision in Myer. In that case, the holding company of the well-known retailing group lent a substantial amount of money to another company in the group for a period of seven years at 12.5 per cent per annum interest. Three days after making the loan, the holding company assigned to an unassociated financier, pursuant to arrangements entered into before the loan was made, 'the moneys due or to become due as the interest payments' under the loan agreement and interest thereon. The consideration for the assignment was the immediate payment of $45.37 million, calculated as the value at the date of assignment of the right to interest over the period of the loan. The group carried on business mainly in the areas of retail trading and property development. The borrower was to operate as a finance company within the group. The loan had been derived largely from funds representing the proceeds of sale by the holding company of another subsidiary newly formed for the purpose of holding the group's real assets. 202 The question was whether or not the consideration paid for the assignment formed part of the holding company's assessable income for the relevant year, either as income according to ordinary concepts, or as profit arising from the carrying on or carrying out of a profit-making undertaking or scheme. Only the first aspect of the case is presently relevant. Further, much of the judgment concerns or reflects the fact that the transaction took place in the context of the clearly commercial activities being carried on by the group, a circumstance which is not presently relevant. 203 At pp 217-218, the Court considered the nature of interest, pointing out that the right to receive interest on money is not itself an asset, at least for tax purposes. Thus disposition of such a right is not the disposition of a capital asset. In Paget the subject matter of the assignment was not the right to receive interest, but the right to receive something quite different. Their Honours observed at 218: 'The source of interest is never the mere covenant to pay. Interest is not like an annuity. Annuity payments are not derived from the money paid for the annuity; they are derived solely from the annuity contract. And so, when a contract right to be paid an annuity is sold for a price, the proceeds of sale are ordinarily capital in the hands of the vendor ….' 204 When the High Court observed that: 'Unlike the sale of the coupons in Paget, the sale of a right to interest severed from the debt is not a sale of a tree of which the future payments are the fruit', it was highlighting the fact that the sale in Paget was of the substituted rights which had not proceeded from the bonds. On the other hand, in Myer, the assignment was of interest which was 'referable to' the loan. 205 In Montgomery, the High Court considered the receipt by a partnership of solicitors of a payment designed to induce them to enter into a lease of commercial premises from which to conduct the business of the partnership. The majority of the Court (Gaudron, Gummow, Kirby & Hayne JJ) at [117] concluded that such inducement constituted '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 … .' 206 Their Honours observed at [118]: 'To put the matter another way, the firm used or exploited its capital (whether its capital is treated for this purpose as being the agreement to take premises or its goodwill) to obtain the inducement amounts.' 207 Before setting out the extract from Eisner which I have previously quoted, the majority observed as follows at [63] – [64]: '[63] Nearly a century ago Lord Macnaghten begged pardon for reminding his listeners that "[i]ncome tax … is a tax on income. It is not meant to be a tax on anything else" … . But, as Jordan CJ said in Scott v Federal Commissioner of Taxation … : "The word 'income' is not a term of art, and what forms of receipts are comprehended within it, and what principles are to be applied to ascertain how much of those receipts ought to be treated as income, must be determined in accordance with the ordinary concepts and usages of mankind, except in so far as the statute states or indicates an intention that receipts which are not income in ordinary parlance are to be treated as income, or that special rules are to be applied for arriving at the taxable amount of such receipts." … [64] Because the distinction between income and capital has so often been considered by the courts, attempts to classify a particular receipt often proceed by seeking to draw analogies with decided cases. … That approach is often helpful, but resort to analogies should not be permitted to obscure the essential nature of the inquiry which is to determine whether "in ordinary parlance" the receipt in question is to be treated as income. As Jordan CJ made plain, the references to "ordinary parlance" and to the "ordinary concepts and usages of mankind" are no mere matters of ritual incantation; they identify the essential nature of the inquiry.' 208 In Paget, the subject of the assignment was not interest, but the proceeds of sale of something substituted for the right to receive interest. It seems to me that in the present case, the Sell Back Rights and the moneys received from their sale were not derived from the Taxpayer's shares but from the Scheme which varied the entitlements attached to those shares. In Myer, the High Court explained why, in Paget, the proceeds of sale were not income according to ordinary concepts. In my view, the same reasoning leads to the same result in the present case. Nothing in Montgomery suggests a different outcome. 209 Without overlooking the warning concerning arguments by analogy to which I have referred above, my conclusion is, at least in part, supported by analogy to three other situations. The first is that described in Montgomery as concerning 'payments received by a taxpayer on its agreeing to give up part of its profit-earning structure'. At [100], the Court referred to Dickenson v Federal Commissioner of Taxation (1958) 98 CLR 460 where the High Court treated such payments as being of a capital nature. The second analogy is with the treatment of moneys received from the creation of profits ŕ prendre or similar rights. See Thomson v Federal Commissioner of Taxation(1929) 43 CLR 360. A third analogous situation is that in which a person receives compensation for the compulsory acquisition of part of his or her interest in an asset, particularly land. The scheme and Capital gains tax 210 Subsection 102-5(1) of the 1997 Act provides: 'Your assessable income includes your net capital gain (if any) for the income year. … ' 211 The net capital gain for an income year is to be calculated by deducting from capital gains made during that year, capital losses made during that year or previous years. Section 102-20 provides: 'You can make a capital gain or capital loss if and only if a CGT event happens. The gain or loss is made at the time of the event.' 212 The various CGT events are described in Div 104. The Commissioner presently relies upon event H2. In effect, a CGT event H2 occurs if: ۰ an act, transaction or event occurs in relation to a CGT asset that the Taxpayer owns; and ۰ the act, transaction or event does not result in an adjustment being made to the assets cost base or reduced cost base. 213 The Taxpayer accepts that her shares constituted a CGT asset and has not suggested that any relevant act, transaction or event resulted in adjustment to their cost base or reduced cost base. I will return to this aspect at a later stage. Pursuant to subs 104-155(3), there will be a capital gain if the capital proceeds because of the CGT event are more than the incidental costs incurred relating to that event. Pursuant to subs 116-20(2), the capital proceeds from a CGT event H2 are: 'The money or other consideration you received, or are entitled to receive, because of the act, transaction or event.' 214 In the present case the matter has proceeded upon the basis that no relevant incidental costs were incurred by the taxpayer. 215 Obviously, the first step is to identify any CGT event H2. Such an event must be 'in relation to a CGT asset', in this case the Taxpayer's shares. It follows from what I have said previously that the decision by SGL to enter into the Scheme was itself an event occurring in relation to the Taxpayer's shares. However the Commissioner has not suggested that such decision, of itself, produced a capital gain. I need not consider whether, in those circumstances, the decision was a CGT event H2 which yielded no capital gain or simply not such an event. The next event which occurred in relation to the shares was the failure by the Taxpayer to notify any election to SGL. Again, the Commissioner does not suggest that this, of itself, yielded any capital gain. The third event was the grant to Custodial of the Sell Back Rights to be held on behalf of the Taxpayer. This is the event upon which the Commissioner relies. However the Taxpayer submits that her entitlement to such grant arose pursuant to the terms of the Scheme as a result of her having held shares on 23 January 2001. The Sell Back Rights were not granted until 19 February 2001. Thus it is submitted that the grant did not occur "in relation to" the shares. There is much to be said for that argument. 216 The expression "in relation to" is capable of very wide import, describing even quite tenuous relationships between different concepts or entities. As the majority of the High Court (Brennan CJ, Gaudron and McHugh JJ) observed in PMT Partners Pty Ltd (In Liquidation) v Australian National Parks & Wildlife Service (1995) 184 CLR 301 at 313: 'Inevitably, the closeness of the relationship required by the expression "in or in relation to" in s 48 of the Act – indeed, in any instrument – must be ascertained by reference to the nature and purpose of the provision in question and the context in which it appears.' 217 In Commissioner of Taxation v Scully (2000) 201 CLR 148 at [40], the majority (Gaudron ACJ, McHugh, Gummow and Callinan JJ) took a similar approach to the expression "in respect of". 218 Section 104-155 appears in legislation designed to impose tax upon benefits which have traditionally been described as 'capital gains'. It might be thought that at its highest, the expression 'an act, transaction or event … in relation to a CGT asset' describes any event capable of affecting the capital value of the particular asset. Such an approach is indicated by par 104-155(1)(b) and subs 104-155(3). The issue of the Sell Back Rights to Custodial was not capable of affecting the value of the Taxpayer's shares simply because any such effect had already occurred, being caused by SGL's decision to enter into the Scheme and the failure of the Taxpayer to make any election pursuant thereto. The issue of the Sell Back Rights merely gave effect to a legal obligation which had already arisen under the Memorandum and Articles of Association of the company and pursuant to the decision of the Board, taken in conjunction with the other circumstances to which I have referred. However it is not necessary finally to determine whether or not that broad approach to the meaning of the expression "in relation to" in s 104-155 accurately reflects its meaning. 219 Pursuant to subs 104-155(3) a capital gain is to be measured by reference to the amount of the capital proceeds 'because of the CGT event'. As I have observed "capital proceeds" means: 'The money or other consideration you received, or are entitled to receive, because of the Act, transaction or event.' 220 If, as the Commissioner submits, the act, transaction or event was the issue of the Sell Back Rights, then that event did not, of itself, result in the Taxpayer receiving any money or any entitlement to receive money. The question, then, is whether the Taxpayer received or was entitled to receive the Rights as "consideration" because of the relevant event, namely the grant of the Rights to Custodial. It may be possible to distinguish between the grant of the Rights and the Rights themselves so that the Rights could be described as "consideration" received "because of" the CGT event H2. However such a usage would be inconsistent with the approach to the term "consideration" adopted by the High Court in Scully at [25] – [26]. The Court considered that the term usually involved some element of exchange. In any event, the real point is that no benefit flowed to the Taxpayer from the grant of the Rights. The Taxpayer was already entitled to participate in the Scheme. The grant was merely a mechanism designed to facilitate realization of that entitlement. Whatever the precise meaning of the word "consideration" it cannot, in this context, describe something which is of no value. 221 I have previously observed that the Taxpayer did not submit that there had been any adjustment to the cost base or reduced cost base of the shares at any relevant time. The absence of such adjustment is a necessary element of a CGT event H2. On my view of the facts, it may be that at some stage, the Taxpayer's assets, namely the shares, were split into two, the shares (with attenuated entitlements) and the Sell Back Rights. If so, then s 112-25 may have applied, leading to adjustment of the cost base and/or reduced cost base. It is not necessary that I consider this matter. Conclusion 222 In my view the primary Judge was correct in concluding that the Taxpayer did not derive income according to ordinary concepts as a result of her participation in the Scheme, and that receipt of the Sell Back Rights did not result in a capital gain arising from a CGT event H2. The appeal should be dismissed with costs. I certify that the preceding ninety-eight (98) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Dowsett. Associate: Dated: 8 August 2005 Counsel for the Appellant: Mr G Davies QC Mr M Moshinsky Solicitor for the Appellant: Australian Government Solicitor Counsel for the Respondent: Mr D H Bloom QC Mr J H Morrison Solicitor for the Respondent: Mallesons Stephen Jaques Date of Hearing: 12 November 2004 Date of Judgment: 8 August 2005