CATCHWORDS TAXATION - employee share schemes - trustee of scheme instructed by employee to apply for shares - shares registered in name of trustee and transferred to employee after scheme conditions met - whether shares issued to employee for purpose of Income Tax Assessment Act 1936 sub-s 26AAC(15A). Administrative Appeals Tribunal Act 1975 s 44 Income Tax Assessment Act 1936 s 26AAC; sub-ss 26AAC(5), 26AAC(15), 26AAC(15A), 26AAC(15B) Central Piggery Co. Ltd. v. McNicoll and Central Piggery Co. Ltd. v. Hurst (1949) 78 C.L.R. 594 Commissioner of Inland Revenue v. Barclay's Bank PLC (1994) 13 A.C.S.R. 829 (House of Lords) Commonwealth Homes and Investment Company Limited v. Smith (1937) 59 C.L.R. 443 DEPUTY COMMISSIONER OF TAXATION V. STANLEY CHARLES COULSON NO. WAG91 OF 1994 LEE J. PERTH 10 MARCH 1995 IN THE FEDERAL COURT) OF AUSTRALIA ) WESTERN AUSTRALIA ) DISTRICT REGISTRY ) GENERAL DIVISION ) NO. WAG91 OF 1994 ON APPEAL FROM A DECISION OF THE ADMINISTRATIVE APPEALS TRIBUNAL B E T W E E N: DEPUTY COMMISSIONER OF TAXATION Applicant and STANLEY CHARLES COULSON Respondent MINUTE OF ORDER JUDGE MAKING ORDER: LEE J. DATE OF ORDER: 10 MARCH 1995 WHERE MADE: PERTH THE COURT ORDERS THAT: 1. The decision of the Tribunal be set aside. 2. The Commissioner pay the respondent's costs of the appeal. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT) OF AUSTRALIA ) WESTERN AUSTRALIA ) DISTRICT REGISTRY ) GENERAL DIVISION ) NO. WAG91 OF 1994 ON APPEAL FROM A DECISION OF THE ADMINISTRATIVE APPEALS TRIBUNAL B E T W E E N: DEPUTY COMMISSIONER OF TAXATION Applicant and STANLEY CHARLES COULSON Respondent CORAM: LEE J. DATE : 10 MARCH 1995 PLACE: PERTH REASONS FOR JUDGMENT This is an appeal from a decision of the Administrative Appeals Tribunal ("the Tribunal") which set aside a decision of the applicant ("the Commissioner") disallowing the respondent's objection to an assessment of income tax issued to the respondent by the Commissioner for the year of income ended 30 June 1992. The question of law on which the appeal is made, pursuant to s.44 of the Administrative Appeals Tribunal Act 1975, relates to the proper construction of s.26AAC of the Income Tax Assessment Act 1936 ("the Act"). The relevant facts agreed between the parties were as follows. At all material times since 1972 the respondent was employed by Brambles Industries Limited ("Brambles"). In November 1984 Brambles established the "Brambles Employees' Share Scheme" ("the Scheme"). Employees nominated by Brambles were eligible to participate in the Scheme by instructing Brambles Custodians Pty. Ltd. ("the Trustee") to acquire shares in Brambles on behalf of the employee. The obligations of Brambles, and of the Trustee, were set out in a deed executed by those parties. On or before 26 November 1984 the respondent was nominated by Brambles to be an eligible employee for the purpose of the Scheme and the respondent instructed the Trustee to apply for 5,000 shares in Brambles. The "subscription amount" payable for the shares was $10,750. The respondent paid 10 percent of the subscription amount to the Trustee. The Trustee paid 10 percent of the subscription amount to Brambles. The Trustee paid the remainder of the subscription amount by applying the proceeds of an interest-free loan in that amount advanced to the Trustee by Brambles. The 5,000 shares applied for by the Trustee were "allotted" to the Trustee on 26 November 1984 and entered in the Trustee's name on the share register of Brambles at that time. The market value of the 5,000 shares on 26 November 1984 was $17,250. The respondent paid 10 percent of the subscription amount to the Trustee each year thereafter and the Trustee paid a like amount to Brambles to repay the loan advanced to the Trustee by Brambles. The Trustee received dividends on the shares from Brambles and paid amounts in those sums to the respondent. In about March 1987 Brambles again nominated the respondent as an eligible employee able to participate in the Scheme and the respondent instructed the Trustee to apply for 1,800 shares in Brambles. The subscription amount for the 1,800 shares was $9,889. The Trustee applied and paid for, received and dealt with the shares in a manner similar to that described above in respect of the 5,000 shares. The market value of the 1,800 shares on 4 March 1987 was $14,040. On 29 June 1987 680 bonus shares were "allotted" to the Trustee as part of an issue of bonus shares made by Brambles. The respondent completed payment for the 6,800 shares on 12 July 1991. The market value of those shares on 12 July 1991 was $116,280. The shares were transferred from the Trustee to the respondent and registered in the name of the respondent on 1 August 1991. 6,800 shares were sold by the respondent on 1 and 2 October 1991 for a total consideration of $120,700. The assessment of income tax issued by the Commissioner for the respondent's year of income ending 30 June 1992 included tax assessed on $95,641, treated as assessable income pursuant to sub-s.26AAC(5) of the Act. The respondent objected to the assessment and contended, in effect, that the only liability to taxation in respect of the value or proceeds of sale of the shares was under Pt.IIIA of the Act in respect of a capital gain made on the disposal of the 1,800 shares "acquired" by the respondent on 4 March 1987. At the relevant time the material parts of s.26AAC read as follows: "26AAC. (1) For the purposes of this section, a taxpayer shall be taken to have acquired a share in a company, or a right to acquire a share in a company, under a scheme for the acquisition of shares by employees if - (a) in the case of a share, the share was acquired by the taxpayer - (i) in respect of, or for or in relation directly or indirectly to, any employment of, or services rendered by, the taxpayer or a relative of the taxpayer; or (ii) as a result of the exercise or operation of a right to acquire the share, being a right that was acquired by the taxpayer in respect of, or for or in relation directly or indirectly to, any employment of, or services rendered by, the taxpayer or a relative of the taxpayer; or (b) in the case of a right, the right was acquired by the taxpayer in respect of, or for or in relation directly or indirectly to, any employment of, or services rendered by, the taxpayer or a relative of the taxpayer. ... (3) A reference in this section to a share in a company, or a right to acquire a share in a company, having been acquired by a taxpayer in respect of, or for or in relation directly or indirectly to, any employment of, or services rendered by, the taxpayer or a relative of the taxpayer includes, but is not limited to, a reference to such a share or right having been acquired by a taxpayer - (a) in pursuance of an agreement, arrangement or understanding under which a company was to issue shares in the company to employees of the company or of another company or to relatives of those employees; or (b) in pursuance of the terms of a trust deed under which a trustee is required or authorized to sell, or otherwise to transfer, shares in a company to employees of the company or of another company or to relatives of those employees. ... (5) Where a taxpayer has acquired during the year of income a share in a company under a scheme for the acquisition of shares by employees, the assessable income of the taxpayer of the year of income includes the value of that share at the time when it was acquired by the taxpayer less the sum of - (a) the amount, if any, paid or payable by the taxpayer as consideration for the share; and (b) if the taxpayer acquired the share as a result of the exercise or operation of a right (whether that right was unconditional or subject to conditions) to acquire the share - the amount, if any, paid or payable by the taxpayer as consideration for the right. ... (15) Where - (a) a taxpayer acquires a share in a company under a scheme for the acquisition of shares by employees; and (b) by reason of any conditions or restrictions (being conditions or restrictions applicable only to shares in the company acquired under such a scheme) attached to, or to the issue of, the share (including conditions or restrictions in relation to the payment of moneys in respect of the share) the right of the taxpayer to dispose of the share is restricted or the taxpayer is liable to be divested of his ownership of the share, the acquisition of the share by the taxpayer shall be deemed for the purposes of this section (other than sub-ss.(4A), (4B), (4C), (4D) and (4F)) to have taken place at the time when the right of the taxpayer to dispose of the share ceases to be so restricted, the time when the taxpayer ceases to be so liable to be divested of his ownership of the share or the time immediately before the taxpayer disposes of the share, whichever first happens. (15A) A taxpayer may elect that sub-section (15) is not to apply in relation to a share specified in the election, being a share issued to the taxpayer after 19 September 1985. (15B) An election under sub-section (15A) in relation to a share - (a) shall be made by notice in writing addressed to the Commissioner; and (b) does not have any effect unless it is lodged with the Commissioner on or before the date of lodgment of the return of income of the taxpayer for the year of income in which the share was issued, or within such further period as the Commissioner allows." The Tribunal found, and it was not in issue on the appeal, that the respondent "acquired" the respective parcels of shares when he obtained beneficial interests therein, namely, on 26 November 1984 and 4 March 1987 respectively. The Tribunal then determined, and again it was not in issue on the appeal, that pursuant to sub-s.26AAC(15) of the Act the date of acquisition was deemed to have been postponed until the respective parcels of shares were free of restrictions on alienation imposed by the Scheme. The Tribunal determined that the date of acquisition, for the purpose of sub-s.26AAC(15), was 12 July 1991 in respect of the 6,800 shares. The assessment issued by the Commissioner was prepared on the assumption that the shares had been acquired by the respondent on 12 July 1991 within the meaning of sub-s.26AAC(5) of the Act. Having determined that sub-s.26AAC(15) applied to defer the date of acquisition to 12 July 1991, the Tribunal then held that the respondent had been entitled to elect, pursuant to sub-s.26AAC(15A) of the Act, that sub-s.(15) did not apply in relation to the shares. The effect of such an election would be that the dates of acquisition of the shares for the purpose of sub-s.26AAC(5) would have been as found by the Tribunal, namely, 26 November 1984 and 4 March 1987 respectively. The Tribunal held that pursuant to sub-s.26AAC(15B) the election, made out of time in July 1993, should be treated as being made within time by extending the period for election by exercising, in the Commissioner's stead, the discretion in that regard provided by the sub-section. The point of construction raised by the Commissioner on the appeal relates to the meaning of the expression "a share issued to the taxpayer" contained in sub-s.(15A). Neither counsel contended that, for the purpose of sub-s.(15A), Parliament intended that the word had a meaning other than that attributed to it in corporations law when used in relation to shares. The Tribunal held that the shares were issued to the respondent on 1 August 1991 when the respondent was entered on the share register of Brambles as the shareholder legally entitled to the shares. That is, the Tribunal treated the word "issued", as used in sub-s.(15A), as of inchoate effect until the legal interest in the shareholding was recorded in the name of the employee as holder of the beneficial interest in the shares. The issue of shares is the culmination of a number of steps taken by a corporation to increase its share capital, involving a decision to offer shares, acceptance of the offer, allotment of shares to an acceptor, creation and delivery of a share certificate and entry in a register of shareholders of the shareholding details recorded in the certificate. As Dixon J. stated in Commonwealth Homes and Investment Company Limited v. Smith (1937) 59 C.L.R. 443 at 461: "But an 'allotment' of shares really bears a double aspect. In the formation of a contract of membership it may be the acceptance of the offer constituted by the application or the making or authorization of an offer or counter-offer accepted by the subsequent assent of the allottee. But it is also the appropriation of a given number of shares to the allottee. Shares are personal property. Allotment, entry in the share register and the sealing and delivery of share certificates are matters of fact which constitute the issue of shares, considered as a form of property." His Honour expanded upon this in Central Piggery Co. Ltd. v. McNicoll and Central Piggery Co. Ltd. v. Hurst (1949) 78 C.L.R. 594 at 599-600: "It thus becomes necessary to decide what the word 'issue' means. It is a word which in other departments of the law has a definite meaning, but not in this. In Levy v. Abercorris Slate and Slab Company (1887) 37 Ch.D. 260, at p.264, Chitty J., in considering the nature of a debenture, said: 'It must be "issued", but "issued" is not a technical term, it is a mercantile term well understood; "issue" here means the delivery over by the company to the person who has the charge.' In Koffyfontein Mines Ltd. v. Mosely (1911) A.C. 409 the House of Lords affirmed the decision of the Court of Appeal sub. nom. Mosely v. Koffyfontein Mines Ltd. (1911) 1 Ch. 73. Fletcher Moulton L.J. (1911) 1 Ch., at pp.82-83 deals with the creation of shares as distinct from the issue of shares. Farwell L.J. (1911) 1 Ch., at p.84 points out that 'the words "creation," "issue" and "allotment" are used with three different meanings familiar to business people as well as to lawyers.' His Lordship says:- 'There are three steps with regard to new capital; first it is created; till it is created the capital does not exist at all. When it is created it may remain unissued for years...When it is issued it may be issued on such terms as appear for the moment expedient. Next comes allotment. To take the words of Stirling J. in Spitzel v. Chinese Corporation (1899) 80 L.T. 347, at p.351 he says: "What is an allotment of shares? Broadly speaking, it is an appropriation by the directors or the managing body of the company of shares to a particular person."' Speaking generally the word 'issue' used in relation to shares means, where an allotment has taken place, that the shareholder is put in control of the shares allotted. A step amounts to issuing shares if it involves the investing of the shareholder with complete control over the shares. In re Ambrose Lake Tin and Copper Co. (Clarke's Case) (1878) 8 Ch. D. 635 makes that quite clear. Cockburn L.C.J. said:- (1878) 8 Ch. D., at p.638 'inasmuch as the term "issue" is used, it must be taken as meaning something distinct from allotment, and as importing that some subsequent act has been done whereby the title of the allottee becomes complete, either by the holder of the shares receiving some certificate, or being placed on the register of shareholders, or by some other step by which the title derived from the allotment may be made entire and complete.' Cotton L.J. (1878) 8 Ch. D., at p.641 speaks of the steps by which the allottee becomes complete master of the shares. Thesiger L.J. (1878) 8 Ch. D., at p.642 says that:- 'there is no magic to be attributed either to an allotment or to the issue of certificates, but in each case the Court must look at all the circumstances of the case, and see whether practically and substantially there has been an issue of shares at a time when there was not a contract registered.'" (See also Commissioner of Inland Revenue v. Barclay's Bank PLC (1994) 13 A.C.S.R. 829 (House of Lords).) Counsel for the respondent submitted that on the facts of this case, involving schemes for the acquisition of shares in the employer company by employees of the company, issue of the shares did not take place until legal and beneficial interests coalesced upon transfer of the legal interests of the Trustee to the respondent on 1 August 1991. But unless it is contended that the word "issued" as used in sub-s.(15A) bears a meaning other than that used in corporations law, such a submission is not tenable. Completion of the issue of shares in a corporation is not delayed until registration of the name of the holder of the beneficial interest in the shares has been recorded on the share register of the company. In the present case the Trustee applied for the shares and the allotment took place upon allocation of shares to the Trustee. Issue of the shares occurred upon the sealing of share certificates, delivery of those certificates to the Trustee and registration of the shares in the name of the Trustee as shown in the certificates. At that point the Trustee took control of the shares from Brambles. The fact that the Trustee did not have an absolute interest in the shares it had applied for did not change the character of the acts of Brambles which constituted the issue of shares by Brambles to the Trustee. It follows that the Tribunal erred in concluding that sub-s.(15A) applied to the facts of the respondent's case and in determining that the Commissioner's disallowance of the respondent's objection to the assessment of income tax should be set aside. The Tribunal's decision must be set aside and an order made that the respondent pay the Commissioner's costs of the appeal. I certify that this and the preceding eleven (11) pages are a true copy of the Reasons for Judgment of his Honour Justice Lee. Associate: Date: APPEARANCES Counsel for the Applicant: J.D. Allanson Solicitor for the Applicant: Australian Government Solicitor Counsel for the Respondent: R.W.F. Sceales Solicitors for the Respondent: Sceales Conway Date of Hearing : 9 February 1995 Date of Judgment : 10 March 1995