FEDERAL COURT OF AUSTRALIA TAXATION - Capital Gains - whether asset was disposed of under a contract - effect of assignment of buyer's rights and obligations - when the contract was made - effect of variation in the contract - effect of change in purchaser - effect of assignee not existing at the time of the making of the original contract - execution of the contract without authority - whether doctrine of ratification is to be applied to determine the date of the making of the contract - effect of conditions precedent CONTRACTS - whether asset was disposed of under a contract - effect of assignment on buyer's rights and obligations - when the contract was made - effect of variation in the contract - effect of change in purchaser - effect of ultimate purchaser not existing prior to the making of the original contract WORDS AND PHRASES - "under a contract" - "time of the making of the contract" Income Tax Assessment Act 1936 (Cth) ss 160A, 160M(1), 160U(1)-(4), 160Z, 160ZO(1) Elmslie v Federal Commissioner of Taxation (1993) 46 FCR 576 Minister for Immigration & Ethnic Affairs v Guo (1997) 144 ALR 567 Dan v Barclays Australia Ltd (1983) 46 ALR 437 Morris v Baron & Co [1918] AC 1 Tallerman & Co Pty Ltd v Nathan's Merchandise (Vic) Pty Ltd (1957) 98 CLR 93 Bolton Partners v Lambert (1889) 41 Ch D 295 Keighley, Maxsted & Co v Durant [1901] AC 240 Davison v Vickery Motors Ltd (in liquidation) (1925) 37 CLR 1 Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537 KIWI BRANDS PTY LTD v COMMISSIONER OF TAXATION (CTH) VG 118 of 1995 and VG 186 of 1995 BEFORE: NORTH J PLACE: MELBOURNE DATE: 12 SEPTEMBER 1997 IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 118 of 1995 GENERAL DIVISION BETWEEN: KIWI BRANDS PTY LTD (ACN 006 973 995) Appellant AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE(S): NORTH J PLACE: MELBOURNE DATED: 12 SEPTEMBER 1997 MINUTES OF ORDER THE COURT ORDERS THAT: 1. The appeal is dismissed with costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 186 of 1995 GENERAL DIVISION BETWEEN: KIWI BRANDS PTY LTD (ACN 006 973 995) Appellant AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE(S): NORTH J PLACE: MELBOURNE DATED: 12 SEPTEMBER 1997 MINUTES OF ORDER THE COURT ORDERS THAT: 1. The appeal is dismissed with costs. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. IN THE FEDERAL COURT OF AUSTRALIA VICTORIA DISTRICT REGISTRY VG 118 of 1995 and VG 186 of 1995 GENERAL DIVISION BETWEEN: KIWI BRANDS PTY LTD (ACN 006 973 995) Appellant AND: THE COMMISSIONER OF TAXATION OF THE COMMONWEALTH OF AUSTRALIA Respondent JUDGE(S): NORTH J PLACE: MELBOURNE DATED: 12 SEPTEMBER 1997 REASONS FOR JUDGMENT HIS HONOUR: There are two appeals before the Court against decisions of the Commissioner of Taxation of the Commonwealth of Australia, the respondent. The first appeal is against a decision, dated 10 January 1995, disallowing the appellant's objection, dated 10 May 1993, against an assessment that a net capital gain of $31,190,703 accrued to the appellant from the sale of the assets of its pharmaceutical and related health care business in Australia to Nicholas Products Pty Ltd (Nicholas Products) in the year of income ended 30 June 1991. The second appeal is against a decision, dated 25 February 1995, disallowing the appellant's objection, dated 22 February 1995, against an amended assessment that a net capital gain of $34,720,106 accrued to the appellant from the said sale in the year of income ended 30 June 1991. The issue in both appeals is whether the capital gain on the sale of the assets of the business was made in the 1991 income year or in the following income year. The appellant contends that the capital gain was made in the 1992 income year. Such a conclusion is very significant for the appellant because it has offsetting losses or deductions in the latter year but not in the former year. The respondent contends that the capital gain was made in the 1991 income year. Resolution of the question of when the capital gain was made depends on the following provisions of Part IIIA of the Income Tax Assessment Act 1936 (Cth) (the Act). THE STATUTORY FRAMEWORK Section 160ZO(1) of the Act provides: "Where a net capital gain accrued to a taxpayer in respect of the year of income, the assessable income of the taxpayer of the year of income includes that net capital gain." Section 160Z provides for methods of calculation of capital gains and subsection (1)(a) relevantly provides: "Subject to this Part, where an asset .... has been disposed of during the year of income: (a) if the consideration in respect of the disposal exceeds the indexed cost base to the taxpayer in respect of the asset - a capital gain equal to the excess shall be deemed for the purposes of this Part to have accrued to the taxpayer during the year of income". Section 160A defines "asset" for the purpose of the Part, subject to any contrary intention appearing, as "any form of property" and then lists a series of specific examples. Section 160M prescribes what constitutes a disposal or acquisition for the purposes of the Part and subsection (1) provides: "Subject to this Part, where a change has occurred in the ownership of an asset, the change shall be deemed, for the purposes of this Part, to have effected a disposal of the asset by the person who owned it immediately before the change and an acquisition of the asset by the person who owned it immediately after the change." The section of central relevance in these appeals is s 160U, which deals with the time of disposal and acquisition of an asset. Subsections (1)-(4) provide as follows: "(1) Subject to the provisions of this Part other than this section, where an asset has been acquired or disposed of, the time of acquisition or disposal for the purposes of this Part shall be ascertained in accordance with this section. (2) If the time of acquisition or disposal as ascertained under a subsection of this section is different from the time of acquisition or disposal as ascertained under a subsequent subsection of this section, the time of acquisition or disposal shall be taken to have been the time of acquisition or disposal as ascertained under that subsequent subsection. (3) Where the asset was acquired or disposed of under a contract, the time of acquisition or disposal shall be taken to have been the time of the making of the contract. (4) Where the asset was acquired or disposed of otherwise than under a contract, the time of acquisition or disposal shall be taken to have been the time when the change in the ownership of the asset that constituted or gave rise to the acquisition or disposal occurred." It was common ground between the parties that subsections (5) to (10) were not relevant to this appeal. BACKGROUND TO THE TRANSACTION Sara Lee Corporation (SLC) is a company incorporated in Maryland in the USA. One of the businesses it operated was a business of manufacturing, marketing and distributing branded, over the counter pharmaceutical products including Aspro analgesics and Rennie antacid, and also non over the counter pharmaceutical products such as prescription pharmaceuticals, radiological and incontinence products. The business was conducted in 25 countries through 24 subsidiaries or associates of SLC. In Australia, the business was conducted by SLC through the appellant, which was then called Nicholas Kiwi Pty Ltd. In late 1990, SLC determined to sell the business and approached a number of potential purchasers. Those who expressed interest were provided with detailed information about the business. SLC then accepted bids from interested purchasers in an auction process. The number of bidders was narrowed down to the two highest bidders, namely, Roche Holding Ltd (Roche) of Switzerland, and a joint venture of Merck and Johnson & Johnson. Both bidders had been supplied with a draft purchase and sale agreement. The final phase of the auction process was held in New York over three days, commencing on 28 May 1991. The two highest bidders submitted final bids late in the afternoon of 30 May 1991. Roche submitted a final bid higher than Merck/Johnson & Johnson, and this bid was accepted. The purchase and sale agreement was exchanged on 30 May 1991, sometime after midnight. EXECUTION OF THE PURCHASE AND SALE AGREEMENT BY THE APPELLANT Under the auction process, the purchase and sale agreement was to be executed by the buyer immediately after the final bid was accepted, and then exchanged with SLC and its twenty-four subsidiaries and associates. In preparation for the exchange of the executed purchase and sale agreement, SLC procured signature pages executed by its subsidiaries and associates, which pages were to be attached to the purchase and sale agreement. The signature page relating to the appellant was signed by Mr Trevor Patten. He was a director of the appellant and employed as a financial controller. He happened to be in Utrecht in the week before 31 May 1991, attending a financial controllers conference. The SLC legal department took the opportunity of the gathering of financial controllers from all over the world to have signature pages executed. Mr Patten signed because he was asked to do so by a representative of the ultimate owner of the appellant. When he signed the page he did not see the agreement and was not told anything about the document to which the signature page was to be attached. He did not have authority from the board of directors of the appellant to sign the agreement. The SLC legal department was aware that the signature obtained in such circumstances had not been authorised, but considered that any problem over such lack of authority could be remedied by having the subsidiary or associate ratify the agreement. Indeed, on 20 August 1991, the board of directors of the appellant did ratify the execution of the purchase and sale agreement. THE PURCHASE AND SALE AGREEMENT The parties to the purchase and sale agreement made on 31 May 1991 were SLC and each of its twenty-four subsidiaries or associates, including the appellant, as sellers and Roche as the buyer. The purchase price was US$597,681,000. In addition, the buyer was to pay US$200,000,000 in five equal annual instalments as consideration for a covenant by the sellers not to compete for five years. Further, a procedure was specified for defined adjustments to the purchase price as a result of the production of final accounts reflecting the inter-company loan and asset and liability position at the date of settlement. The procedure required the seller companies to produce accounts within sixty days of completion. The buyer was given thirty days to inspect the accounts and deliver any notice of disagreement. The parties were required to attempt to resolve any disagreement in good faith within a further thirty days and, if they could not reach agreement, an arbitration was to be conducted within a further thirty days. The purchase and sale agreement provided for the allocation of the purchase price among the sellers. The price allocated to the appellant for the assets sold by it was US$61,461,000. The purchase and sale agreement defined and identified the subject matter of the sale. In some countries, the particular seller company conducted only the business being sold. In those cases, the subject matter of the sale was identified as the shares in that seller company. In other countries, the seller company conducted other businesses in addition to the business being sold. In such cases, the subject matter of the sale was identified as the assets and/or the intangible rights owned by the seller. The terms "assets" and "intangible rights" were extensively defined. "Assets" was defined as all assets, whether real, personal or mixed, tangible or intangible, absolute or contingent, other than intangible rights, which were separately defined. Then particular types or categories of assets included in the definition were set out. They included specific assets set out in a schedule to the agreement with additions and deletions which occurred prior to closing in the ordinary course of business. They also included machinery, equipment and other property owned by the sellers and located at manufacturing plants of the business, inventories of products, many types of specified books and records, the sellers' rights, title and interests in leases and contracts relating to the business, orders for the purchase of products, the interests of the sellers in vehicles used in the business, and prepaid expenses and deposits attributable to the business. There were a number of specific exclusions from the definition of "assets" including, in relation to Australia, certain real property at Clayton and Chadstone, and the machinery, equipment and other property located at the Clayton and Chadstone facilities. The "intangible rights" were defined in detail and included patents, trademarks, copyright, trade secrets, specifications, formulas and designs. The purchase and sale agreement also provided that the buyer was to assume certain specified liabilities of nominated sellers, including the appellant. It also provided for the sellers to assign to the buyer the rights and obligations under specified contracts, such as supply or manufacturing agreements between a seller and a third party. The completion of the transaction was to occur at a closing meeting which the parties did not expect to occur earlier than 31 July 1991. Section 3.2 in Article III of the purchase and sale agreement provided for the actions to be taken at closing as follows: "On the Completion Date against the payments specified in Section 2.5, (a) Sellers shall transfer to Buyer and Buyer shall acquire from Sellers the Shares, the Assets and the Intangible Rights by delivering such assignments, bills of sale, endorsements, deeds, leases and other instruments and documents of conveyance and transfer in recordable form for each jurisdiction to which such instruments and documents relate, in form and substance reasonably satisfactory to Buyer and its counsel, as shall be effective to vest in Buyer the Shares, the Assets and the Intangible Rights (except to the extent that such Intangible Rights are owned by the Companies or their Subsidiaries [the companies in which the buyer was purchasing the shares in the company, rather than the assets of the company]), including, without limitation: (i) Deeds of transfer or other instruments, including without limitation an assignment and assumption agreement, which will have been duly signed for each Seller and which vest in Buyer the Shares, the Assets and the Intangible Rights (except to the extent that such Intangible Rights are owned by the Companies or their Subsidiaries); (ii) Resolutions of the Board of Management, Supervisory Board, Board of Directors or General Meeting of Shareholders of each of Sellers, and the Companies for acknowledgement [sic] or approval of the transfer of the Shares, the Assets, and the Intangible Rights whenever any such acknowledgement [sic] is required under the Certificates or Articles of Incorporation or Association of Sellers or the Company concerned; (iii) The share registers of the Companies unless such share registers are already in the possession of such Company on the Completion Date; (iv) If and to the extent that any transfer of Shares needs endorsement of certificates by Sellers, the certificates duly endorsed and, if required, with documentary stamps affixed thereto; (v) Deeds of trust for all the 'actions de garantie' or shares held in trust by others in the share capital of a Company and any deeds of transfer signed by such persons unless such are already in the possession of such Company on the Completion Date; (vi) Power of Attorney for each Deed of Assignment relating to the patents and patent applications, trademarks and trademark applications, and registrations, copyrights and copyright applications and registrations, design or model registrations and the other Intangible Rights not registered in the name of or owned by a Company or a Subsidiary or applied for registration in the name of a Company or a Subsidiary, duly signed by Sellers; (vii) The minute books and, if any, the corporate seals of each of the Companies, unless such books or seals are already in the possession of such Company on the Completion Date; (viii) Letters of resignation of all the directors or board members of each Company who remain employees of a Seller or an Affiliated Company of Sellers; (ix) Deeds of Assignment for all Assigned Contracts for transfer of all the rights and obligations thereunder relating to the period after the Completion Date, duly signed for by Sellers. (x) Appropriate documents to give effect to the provisions of Section 2.9 [which deal with the termination of licence agreements with the sellers]. (b) The arrangements and agreements specified in Sections 10.1, 10.2 if any, 10.3 and 10.4 [which relate to agreements by the buyer to supply the seller after completion, and to phase out the use of certain trademarks used by some of the sellers] and the other agreements and instruments contemplated by this Agreement shall be duly signed and delivered by the parties thereto. (c) Buyer shall deliver to Sellers duly executed instruments of assumption with respect to the Assumed Liabilities, in form and substance reasonably satisfactory to SLC and its counsel." Articles IV and VI of the purchase and sale agreement comprise twenty-five sections containing warranties and representations of the sellers covering a wide variety of matters including the ownership of the assets, good title and the condition of the assets, encumbrances, compliance with the law including tax law, the accuracy of the balance sheets, environmental matters, agreements affecting employees and the conduct of the business pending completion. Article VIII provides that the employees of the companies in which shares were being purchased would not be affected by the transaction. Where the buyer was purchasing the assets of a seller company a different arrangement was made. In respect of the appellant, the buyer agreed to offer employment to the fifty-four employees employed prior to the sale on substantially comparable conditions and agreed not to terminate their employment for at least twelve months after the closing meeting, except for specified cause. There was provision in Article IX for foreign investment approval in Australia and other countries. Section 10.6 in Article X required the sellers to use their reasonable best efforts to obtain consents from third parties to the assignment of any assigned contract and detailed the consequences on the closing and purchase price of a failure to obtain such consents. The agreement generally required each of the parties to use reasonable best efforts to make effective the transactions contemplated by the agreement. Section 12.3 in Article XII dealt with assignment, as follows: "12.3 - Assignment; Succession This Agreement shall not be assigned by any party hereto without the prior written consent of the other parties; provided, however, that Buyer may assign any of its rights or obligations hereunder to one or more of its subsidiaries or affiliates without the prior written consent of Sellers; provided further, however,the assignee shall agree to be bound by the terms and conditions of this Agreement and that such assignment shall in no way limit or relieve the assignor or any of the assignor's obligations hereunder. This Agreement shall inure to the benefit of and be binding on and enforceable against the parties hereto and their respective successors and permitted assigns." Section 12.6 allowed for amendments of the purchase and sale agreement only if they were "in writing signed by the parties concerned". AMENDMENT TO PURCHASE AND SALE AGREEMENT The purchase and sale agreement was amended by an agreement (the amendment agreement) executed on 30 August 1991 by the sellers and Roche. The opening words of the amendment agreement stated that it "amends the Purchase and Sale agreement dated May 31, 1991". Section 11 provides: "11. Effect on Agreement. This Amendment to Purchase and Sale Agreement shall be deemed an amendment of the Agreement for purposes of Section 12.6 of the Agreement. Except as provided in this Amendment and in any other agreement executed by the parties on or after May 31, 1991, the Agreement remains in full force and effect." The amendment agreement made a number of changes to the purchase and sale agreement. The overall price was reduced by $296,000 to take account of the fact that the South African part of the transaction was to be taken out of the purchase and sale agreement and dealt with by a separate agreement. There were a number of other changes which did not affect the Australian part of the transaction. In respect of the Australian part of the transaction, the amendment agreement relieved the buyer from its obligation to offer employment to the fifty-four employees of the appellant. Instead, the buyer was obliged to employ only fourteen of the appellant's employees. The buyer was to reimburse the sellers for redundancy payments made by the sellers to the employees who were not employed by the buyer on the basis set out in the amendment agreement. Further, the price allocation for the entire transaction was altered so that the price allocated to the sale of the assets of the appellant was increased by US$1,000,000 to US$62,461,000. Also, the appellant, which was originally recorded as a seller of assets but not intangible rights, was added as a seller of intangible rights, namely, patents for Ibuprofen Taste Masking, sold for US$10,000, and Aspro Fast Clear, sold for US$31,000. And, importantly, in the price allocation schedule, the purchaser of the assets from the appellant is shown for the first time as Nicholas Products, described as "(new company)". ASSIGNMENT BY ROCHE TO NICHOLAS PRODUCTS By a letter dated 30 August 1991, from Roche to SLC, Roche advised that it had assigned some of its rights and obligations under the purchase and sale agreement to certain subsidiaries and affiliates, and that they had agreed to be bound by the terms and conditions of the purchase and sale agreement. One of the assignments was made to Nicholas Products in relation to the sale of assets, assigned liabilities and assigned contracts by the appellant. Nicholas Products was incorporated on 25 June 1991 but Roche only became a shareholder in Nicholas Products on 28 August 1991. The letter dated 30 August 1991 was the first formal notification of the assignment received by the sellers. DEED OF ASSIGNMENT On 30 August 1991, a deed of assignment was executed by the appellant and Nicholas Products, in the following terms: "DEED OF ASSIGNMENT made as of August 30 1991, by NICHOLAS KIWI PTY LTD, a company organized and existing under the laws of Australia (the 'Seller'), to NICHOLAS PRODUCTS PTY LTD, a company organized and existing under the laws of Australia (the 'Buyer'), pursuant to a Purchase and Sale Agreement among Sara Lee Corporation, the other Sellers named therein and Roche Holding Ltd ('Roche'), dated May 31, 1991, as amended (the 'Agreement'). All capitalized terms not defined herein shall have the meanings ascribed to them in the Agreement. W I T N E S S E T H : WHEREAS, all of the conditions precedent provided in the Agreement have been satisfied or waived or otherwise provided for; WHEREAS, the Agreement provides for the Seller to assign and transfer to Roche all of its interests in the Assets and the Intangible Rights; WHEREAS, the Agreement provides for the Seller to assign and transfer to Roche all of its rights under the Assigned Contracts; and WHEREAS, Roche has assigned to the Buyer pursuant to Section 12.3 of the Agreement certain of its rights and obligations under the Agreement. NOW, THEREFORE, in consideration of the sum of US $62,461,000 paid by the Buyer to the Seller pursuant to the terms of the Agreement at or before the execution and delivery hereof (the receipt and sufficiency of which is hereby acknowledged), subject to Section 10.6 of the Agreement, the Seller does hereby sell, convey, assign, transfer and deliver to the Buyer, its successors and assigns forever, all of the Seller's right, title and interest in and to the Assets, the Intangible Rights (excluding any letters patent, patent applications and the inventions covered thereby) and the Assigned Contracts, to have and to hold such Assets, Intangible Rights and Assigned Contracts unto the Buyer and its successors and assigns, to and for its or their use forever. This instrument shall inure to the benefit of the Buyer and its successors and assigns and shall be binding upon the Seller and its successors and assigns, effective immediately upon its delivery to the Buyer. This Deed of Assignment is delivered pursuant to the Agreement and it shall not alter, supercede [sic], augment, abridge or affect any provision of the Agreement. In the event of any conflict between the terms of the Agreement and the terms hereof, the terms of the Agreement shall be controlling. IN WITNESS WHEREOF, this Deed of Assignment has been duly executed and delivered as of the date first above written." DEED OF ASSUMPTION OF LIABILITIES AND CONTRACTS Also on 30 August 1991, a deed of assumption of liabilities and contracts was executed by the appellant and Nicholas Products, in the following terms: "DEED OF ASSUMPTION OF LIABILITIES AND CONTRACTS made as of August 30, 1991 by NICHOLAS PRODUCTS PTY LTD, a company organized and existing under the laws of Australia (the 'Buyer'), in favour of NICHOLAS KIWI PTY LTD, a company organized and existing under the laws of Australia (the 'Seller'), pursuant to a Purchase and Sale Agreement among Sara Lee Corporation, the other Sellers named therein and Roche Holding Ltd ('Roche'), dated May 31, 1991, as amended (the 'Agreement'). All capitalized terms not defined herein shall have the meanings ascribed to them in the Agreement. W I T N E S S E T H : WHEREAS, all of the conditions precedent provided in the Agreement have been satisfied or waived or otherwise adequately provided for and the Seller has concurrently herewith sold, conveyed, assigned, transferred and delivered to Roche certain Assets and Intangible Rights; WHEREAS, the Agreement provides for the Seller to assign and transfer to Roche all of its interests in the Assets and the Intangible Rights; WHEREAS, the Agreement provides for Roche to assume the Assumed Liabilities of the Seller; WHEREAS, the Agreement provides for Roche to assume all of the Seller's obligations under the Assigned Contracts; and WHEREAS, Roche has assigned to the Buyer pursuant to Section 12.3 of the Agreement certain of its rights and obligations under the Agreement. NOW, THEREFORE, in partial consideration of the sale, pursuant to the Agreement, by the Seller to the Buyer of the Seller's right, title and interest in and to the Assets and the Intangible Rights (excluding any letters patent, patent applications and inventions covered thereby), the Buyer hereby assumes, undertakes and agrees to pay, perform and discharge, in accordance with their terms, all of the Assumed Liabilities of the Seller. In partial consideration of the assignment and transfer of the Assigned Contracts, pursuant to the Agreement, by the Seller to the Buyer, the Buyer hereby accepts the assignment and transfer of the Assigned Contracts and assumes, undertakes and agrees to pay, perform, and discharge, all duties, obligations and liabilities of the Seller under the Assigned Contracts existing or arising on or after the date hereof. This Deed of Assumption of Liabilities and Contracts shall inure to the benefit of the Seller and its successors and assigns and shall be binding upon the Buyer and its successors and assigns, effective immediately upon its delivery to the Seller. This Deed of Assumption of Liabilities and Contracts is delivered pursuant to the Agreement and it shall not alter, supercede [sic], augment, abridge or affect any provision of the Agreement. In the event of any conflict between the terms of the Agreement and the terms hereof, the terms of the Agreement shall be controlling. IN WITNESS WHEREOF, this Deed of Assumption of Liabilities and Contracts has been duly executed and delivered as of the date first above written." The first task in determining the time of the disposal of the assets of the business of the appellant for the purpose of the Act is to determine whether s 160U(3) or (4) governs the matter. This, in turn, depends on whether the assets were disposed of under a contract or whether they were disposed of otherwise than under a contract. I now turn to that issue. WERE THE ASSETS DISPOSED OF "UNDER A CONTRACT"? The concept of the disposal of an asset "under a contract" is a simply expressed concept which is concerned with the proximity of the relationship between the disposal and the contract. It is useful to commence by examining that relationship in the circumstances of this case. In doing so, I will treat the disposal as the act of delivery of the deed of assignment and the deed of assumption of liabilities and contracts at the closing meeting, because the parties argued the case on that basis. The question then is whether the deeds were made "under" the purchase and sale agreement as amended. In the recitals, the deeds are both expressed to be made under the purchase and sale agreement as amended. It is significant that the purchase and sale agreement expressly required the deed of assignment and the deed of assumption of liabilities and contracts to be delivered at the closing meeting. Section 3.2 (a)(i) and (c), relevantly, provided that, at the closing meeting: "(a) Sellers shall transfer to Buyer .... the Assets and the Intangible Rights by delivering such .... deeds .... as shall be effective to vest in Buyer the .... Assets and the Intangible Rights .... including, without limitation: (i) .... instruments .... which will have been duly signed for each Seller and which vest in Buyer .... the Assets and the Intangible Rights .... (c) Buyer shall deliver to Sellers duly executed instruments of assumption with respect to the Assumed Liabilities, in form and substance reasonably satisfactory to SLC and its counsel." The operative part of both deeds provided that the deeds were delivered pursuant to the purchase and sale agreement as amended and did not alter, supersede, augment, abridge or affect any provision of the purchase and sale agreement. They further provided that, in the event of any conflict between the terms of the purchase and sale agreement and the particular deed, the terms of the purchase and sale agreement were to be controlling. The deeds were not understandable without reference to the purchase and sale agreement as amended. For instance, the deed of assignment was expressed as a transfer of "the Assets, the Intangible Rights .... and the assigned contracts". These items, which made up the subject matter of the transaction, were defined and specified in the purchase and sale agreement as amended. The payment of the purchase price was expressed to be "pursuant to the terms of the purchase and sale agreement as amended". These terms were very extensive and included the giving of warranties by the sellers and the buyers, promises for further cooperation to effect the transaction and provisions concerning the future employment of existing employees. Payment of the purchase price was made expressly subject to section 10.6 of the purchase and sale agreement, which provided for the sellers to use their reasonable best efforts to obtain the consents to the assignment of contracts with third parties. In other words, the deeds were not free-standing. They depended on the purchase and sale agreement to give meaning and substance to the transaction. Their purpose was to finalise the transaction. They were part of an elaborate process of documentation at the closing meeting necessary to implement the agreement. In my view, the provision for the deeds in the purchase and sale agreement, the dependence of the deeds on the purchase and sale agreement and the function of the deeds as part of the implementation of the transaction all show that the deeds were made "under" the purchase and sale agreement as amended. Although this worldwide transaction was extremely large and complex - approximately 277 documents were delivered at the closing meeting - the type of structure of the transaction is well known. Provision in an agreement for finalisation at a settlement to occur later is often found in commercial transactions, and is the usual structure of conveyancing transactions. The time period between the making of the agreement and the settlement allows detailed arrangements for implementation, such as the preparation of transfer documents, to be attended to. The parties to an ordinary conveyancing transaction would doubtless say that the transfer completed at settlement was "under" the contract of sale of land. Such response provides some confirmation of the conclusion that the disposal in the present case was "under a contract" . Mr Shaw QC, who appeared with Mr de Wijn as counsel for the appellant, contended that an asset was only disposed of under a contract if the contract directly effected the disposal. In the present case, the purchase and sale agreement as amended did not directly effect the disposal. It provided for, or even required, the delivery of the deed of assignment and the deed of assumption of liabilities and contracts, but the deeds themselves directly effected the disposal. The deeds lacked the necessary closeness of relationship with the agreement for it to be said that they were made under the agreement. The appellant relied on the construction of the words "under a contract" in s 160U(3) provided by Wilcox J in Elmslie v Federal Commissioner of Taxation (1993) 46 FCR 576. In particular, at 592, his Honour said that the contract referred to was one that: ".... directly effected the acquisition. It is necessary to disregard any earlier contract obliging one or both parties to the acquisition to enter into the immediately operative contract." However, his Honour's formulation must be seen in the context of the issue in Elmslie. In that case, four stockbrokers, who conducted business in partnership in Sydney, determined to incorporate their practice and to sell a share to a foreign shareholder. As a result of discussions with the foreign shareholder, the brokers and the foreign shareholder agreed to take up shares in a company which would then conduct the broking business. A document called "Heads of Agreement" was signed by 3 July 1985, which set out the terms of the agreement in a general way. It included the following: "(1) The name of the member corporation to be Valder Elmslie Jardine Fleming Limited (VEJF) and to be owned as to 50% by JF [Jardine Fleming (Australia) Pty Limited] and 50% by Messrs Valder, Elmslie, Moore and Moyes. ...... (20) This Heads of Agreement is subject to the signing of a formal agreement as between the partners of VE and JF." The capital gains tax legislation applied to assets acquired after 20 September 1985. On 17 September 1985, most of the detailed agreements contemplated by the heads of agreement were executed. In October 1985, the four brokers and the foreign shareholder applied for shares in the company which was to conduct the business. On 7 November 1985, the directors of that company resolved to allot the shares. One question to be determined was the date on which the brokers had acquired the shares. The Commissioner of Taxation argued that the shares were acquired on 7 November 1985. His Honour stated the Commissioner's argument, at 588, as follows: "Counsel say that, in each case, a contract came into existence on 7 November 1985, when the board of directors resolved to allot shares in accordance with the applications dated 28 October 1985; in each case, this was the contract 'under' which the shares were acquired. Counsel argue that it makes no difference whether the contract under which the allotment was made was a contract that the parties had previously agreed to make; the words 'under a contract', in s 160U(3), are to be narrowly interpreted, attention being confined to the immediately empowering instrument rather than a more remote source of authority." The brokers argued that the shares had been acquired under the heads of agreement on 3 July 1985. His Honour stated the critical question and his answer, at 590, as follows: ".... whether the statutory formula 'under a contract' encompasses a contract that envisaged, or provided for, the acquisition of the asset - or even required a party or parties to undertake the transaction that constituted the acquisition of the asset - but was not the means by which the asset was actually acquired. I have reached the conclusion that this question must be answered in the negative, with the result that the acquisition of the subject shares cannot be said to have taken place before 7 November 1985." As part of the first reason for his conclusion, Wilcox J said, at 591: "Although I accept that the parties intended that the Heads of Agreement document would have immediate force in respect of their relationship, they clearly expected that there would be a later transaction between each of them and VEJF wherein each would offer to subscribe for a parcel of shares, the numbers of which had yet to be agreed but would observe the proportions stated in cl 5 of the Heads of Agreement. That clause spoke of equity or subordinated debt 'to be subscribed in the same form and ratio by all shareholders' (original emphasis). The parties to the document must have expected that each offer would be supported by an application form complying with the relevant Articles of Association and a tender of payment of the appropriate sum (otherwise the company would lack the agreed capital); and that this offer would be accepted by the directors, on behalf of the company, in a formal allotment resolution. The later contracts of allotment were an essential part of the plan agreed in June. They cannot be treated as unnecessary formalities and a conclusion reached that the source of the shares was the Heads of Agreement document." His Honour's second reason for the conclusion appears at 591-2, as follows: "It will be noted that the word 'contract' is in the singular. The assumption is that a contractually-acquired asset will be acquired under only one contract, the date of which will precisely fix the date of acquisition of the asset. This assumption is irreconcilable with the notion that it is enough that there be a contract that envisages or requires the acquisition of the asset. In a particular case there may be several contracts that contemplate or require a party to acquire an asset. Those contracts may bear different dates. If subs (3) extended to all those contracts, and not just to the contract that directly got in the asset, it would provide a multiplicity of dates in respect of one asset. Unless all the dates happened to fall within the same quarter, the legislation would become unworkable in relation to that asset. It seems to me that, for the legislation to work satisfactorily, it is necessary for the Courts to confine the words 'under a contract', in s 160U(3), to the contract that directly effected the acquisition. It is necessary to disregard any earlier contract obliging one or both parties to the acquisition to enter into the immediately operative contract." His Honour then said, at 592: "This approach is consistent with the interpretation given in decided cases to analogous phrases, such as 'under an enactment' and 'under this lease'. I have already referred to some of these cases. They demonstrate that the word 'under' usually imports a direct connection between the relevant act and the instrument. ... In the same way, the contract under which an asset is acquired, within the meaning of s 160U(3), is the contract through whose operation the asset changes ownership." The lack of a sufficiently close relationship between the heads of agreement and the allotment arose from the fact that the heads of agreement envisaged a further agreement by the company to allot the shares to the brokers and the foreign shareholder. It could not be said that the allotment was made under the heads of agreement because, according to the heads of agreement, there was to be a further agreement for that purpose. In that sense, the heads of agreement did not directly effect the acquisition, it was not the "immediately empowering instrument", it was not the "means by which the assets were actually acquired", it was not the "immediately operative contract" and it did not have the "necessary direct connection with the acquisition". Each of these formulations derive their meaning from the context in which it was used. The context of the present case is quite different from the context in Elmslie. The purchase and sale agreement as amended did not contemplate any further agreement concerning the terms of the disposal. It contemplated only a machinery for implementing the agreement by delivery of the deed of assignment and deed of assumption of liabilities and contracts. It is true that section 12.3 contemplated the possibility of an assignment of the buyer's obligation under the purchase and sale agreement. However, this was only if the assignee agreed to be bound by the terms and conditions of the purchase and sale agreement. The assignment in the present case did not mean the purchase and sale agreement was subject to a further agreement by the assignee, in the same way that the heads of agreement was subject to a further agreement in Elmslie. The further agreement in Elmslie was to establish the terms of the disposal and that further agreement was to govern the transaction. The present case involves an assignment by which the only agreement of the assignee which was contemplated was an agreement to accept the very terms of the purchase and sale agreement itself. That is to say, the assignee was to assent to the existing agreement and not to the terms of any further agreement. To take phraseology such as "the direct effect" of a contract from the context in which it was used in Elmslie to the present case is to run the risk of straying from the words of the statute itself. As the High Court (Brennan CJ, Dawson, Toohey, Gaudron, McHugh and Gummow JJ) said in Minister for Immigration & Ethnic Affairs v Guo (1997) 144 ALR 567, at 576-577: "Nevertheless, it is always dangerous to treat a particular word or phrase as synonymous with a statutory term, no matter how helpful the use of that word or phrase may be in understanding the statutory term." One difficulty with the reference to "the direct effect" is that it is an expression of variable meaning. With these qualifications, even if the phrase "under a contract" can be better understood by regarding it as requiring that the disposal be directly effected by the contract, in my view, a sufficiently direct effect exists in the present case between the deeds that effected the disposal and the purchase and sale agreement as amended under which those deeds were made. It is not part of the approach of Wilcox J in Elmslie that a disposal occurs under a contract only if the contract itself operates as the transfer of the property in question. Conditions precedent Mr Shaw also argued that, in order for the disposal to be "under a contract", the contract had at least to be specifically enforceable when made. Section 9.1(c) of the purchase and sale agreement provided: "9.1 - Conditions Precedent to Obligations of Buyer The obligation of Buyer to consummate the transactions contemplated in this Agreement is subject to the fulfillment [sic], prior to or at the Closing, of each of the following conditions (any or all of which may be waived by Buyer): ...... (c) the receipt of all foreign investment approvals in Australia and France and all antitrust approvals in France and the United Kingdom if required in connection with the transactions contemplated by this Agreement". Thus, the purchase and sale agreement was not specifically enforceable when made because it was subject to the conditions precedent that the sale be approved by government bodies in France, the UK and Australia. These approvals were not obtained until 9 July 1991, 12 July 1991 and 21 August 1991 respectively. On Mr Shaw's argument the purchase and sale agreement had to directly affect the disposal of the assets in order that the disposal be held to have been "under a contract". He concluded that the existence of the conditions precedent prevented the contract having the required direct effect. Such as effect existed only if the contract was specifically enforceable when made. In my view, s 160U(3) does not require the contract to be specifically enforceable when made. It does not direct attention to the conditions existing at the time of making. Indeed, the section depends on the disposal having occurred. It requires an inquiry to be made by looking back from the time of the actual disposal. At that point, after the transaction is completed, the question is asked whether the disposal occurred under a contract. In the case of a conditional contract, the conditions will have been satisfied to allow the disposal to have occurred. It is immaterial that, in this case, the conditions were satisfied after 30 June 1991. The conditions were conditions precedent to performance and not conditions precedent to the formation of the contract: see Perri v Coolangatta Investments Pty Ltd (1982) 149 CLR 537, at 552. Disposal still occurred "under the contract" even though it was conditional when made. THE TIME OF MAKING THE CONTRACT Having found that the assets were disposed of by the appellant under a contract for the purposes of s 160U(3), the next question is when the contract was made. This is the time of disposal for the purposes of calculating the capital gain. The appellant relied upon several arguments to support the conclusion that the contract was not made on 31 May 1991. I will now deal with these arguments. Variation By 30 August 1991, the terms of the purchase and sale agreement as it applied to the Australian business had been altered in a number of respects. The price allocated to the sale of assets had been increased by US$1,000,000. The obligation of the buyer to take over 54 employees had been changed to require the buyer to take over only 14 employees. Roche had assigned its rights to Nicholas Products and Nicholas Products had agreed to accept the liabilities under the purchase and sale agreement, thereby changing the buyer of the Australian assets from Roche to Nicholas Products. Mr Shaw contended that the disposal of the business could not properly be described without reference to the changes made on 30 August 1991. Even though the purchase and sale agreement contained some of the terms of the disposal, the amendment agreement and the assignment to Nicholas Products contained other terms of the disposal of the business. For the purposes of s 160U(3), the contract under which the disposal occurred was the purchase and sale agreement as amended. Mr Shaw argued that contract was not made until the last of the amendments had been made. This only happened on 30 August 1991. In other words, he argued that when a contract is varied it is "made" at the time of the last variation. The legal analysis of the effect of a variation of a contract is found in discussions of the distinction between a variation of a contract and a rescission of a contract. In Dan v Barclays Australia Ltd (1983) 46 ALR 437, Mason CJ, Brennan and Deane JJ said, at 448: "The distinction between rescission and variation is discussed in such cases as Tallerman & Co Pty Ltd v Nathan's Merchandise (Vic) Pty Ltd (1956) 98 CLR 93; Morris v Baron and Co [1918] AC 1 and British and Beningtons Ltd v NW Cachar Tea Co [1923] AC 48. Variation of an existing contract, whilst it in one sense always gives rise to a new contract, does not always result in a substituted contract which, in order to operate, must necessarily rescind the contract which is varied. Variation may take the form of rescission of some of the terms of an existing contract but if that is to have the effect of rescission of the whole contract, the rescission must be express or by necessary implication and the determining factor must always be the intention of the parties as disclosed by contract when varied: see Tallerman & Co Pty Ltd v Nathan's Merchandise (Vic) Pty Ltd, supra, per Taylor J at 143-4." The same distinction is referred to by Lord Dunedin in Morris v Baron at 25-26, as follows: "The difference between variation and rescission is a real one, and is tested, to my thinking, by this: In the first case there are no such executory clauses in the second arrangement as would enable you to sue upon that alone if the first did not exist; in the second you could sue on the second arrangement alone, and the first contract is got rid of either by express words to that effect, or because, the second dealing with the same subject-matter as the first but in a different way, it is impossible that the two should be both performed. When I say you could sue on the second alone, that does not exclude cases where the first is used for mere reference, in the same way as you may fix a price by a price list, but where the contractual force is to be found in the second by itself." The terms and content of the amendment agreement and the assignment from Roche to Nicholas Products disclose that the parties did not intend that the purchase and sale agreement would be rescinded. On the contrary, for instance, the amendment agreement expressly states that it was to be an amendment of the purchase and sale agreement. Where the original contract remains on foot but in a changed form, is the contract made at the date of the original contract or the date of the last change? Some guidance may be obtained from the judgment of Dixon CJ and Fullagar J in Tallerman & Co Pty Ltd v Nathan's Merchandise (Vic) Pty Ltd (1957) 98 CLR 93, at 112, as follows: "The rule with regard to contracts made by correspondence is indeed only a particular application of a more general rule that a contract is to be regarded as made at the place where that act or thing was done or said which finally created the contractual obligation: cf Muller & Co's Margarine Ltd v Commissioners of Inland Revenue (1900) 1 QB 310. But what is the position where a contract is concluded in one place and subsequently varied by agreement in another place? There is only one contract, and one would think it clear that that contract must, if it ever becomes material to inquire where it was made, be regarded as made at the place where it was originally concluded. The variation affects the content of the obligation but not the obligation itself. The place where the parties assumed that obligation, and became bound to one another, is the place where their contract was really made." Whilst this passage dealt with the place of making a contract which was varied, the same approach applies in principle to the time of making a contract. In my view, the contract under which the disposal of the assets of the Australian business was effected was made, for the purposes of s 160U, when the original obligations to dispose of the business were assumed on 31 May 1991. The identity of the purchaser Mr Shaw submitted the contract could not have been made on 31 May 1991 because s 160U is concerned with the ascertainment of the time of making an actual disposal. The actual disposal was made to Nicholas Products. It was not incorporated until June 1991. It was first shown as a purchaser in the amendment agreement of 30 August 1991. Its identity as a purchaser was notified to the sellers by a letter dated 30 August 1991. Mr Shaw argued that it would be a strange result if the disposal was found to have occurred in May 1991 at a time when the purchaser was not in existence. Section 160U is concerned with the contract under which the disposal took place. While the section is concerned with the ascertainment of the time of the disposal, it provides a particular way of fixing that time. The time is to be ascertained "in accordance with this section". The scheme is provided "for the purposes of this Part". Then, s 160U(3) specially provides for the circumstance where the disposal is under a contract. The following sections provide for other circumstances, such as where the disposal is not under a contract. The terms of s 160U(3) fix a time which the section recognises may not be the time of the "real" disposal, in the sense of the time of the transfer of the property which is the subject of the disposal. Thus, the section provides that the time of disposal, fixed in accordance with the section, "shall be taken to have been" the time of making the contract. The terms of the section recognise that the time fixed in accordance with the section may not reflect the time at which the actual transfer of the assets occurred. In the present case, the contract under which the disposal took place provided for the assignment of rights to another purchaser (section 12.3). The contract under which the disposal took place did not change merely because the right to assign was exercised. There was no new contract between the appellant and Nicholas Products. Instead, the rights and obligations of the appellant, Roche and Nicholas Products continued to be governed by the purchase and sale agreement as amended. The disposal continued to be under the original contract. Nicholas Products became bound by the original contract only upon the assignment. As Nicholas Products was incorporated prior to this assignment, the time of that incorporation does not affect the determination of the contract under which the disposal occurred. Thus, the fact that Nicholas Products was not in existence on 31 May 1991 did not prevent 31 May 1991 being the time of the making of the contract under which the relevant assets were disposed. The effect of the ratification of the purchase and sale agreement It is common ground that the execution of the purchase and sale agreement by the appellant on 31 May 1991 by Mr Patten was without the authority of the appellant. The authority was given by the board of directors when it resolved to ratify the execution of the purchase and sale agreement on 20 August 1991. Mr Shaw contended that, as a result of these events, the purchase and sale agreement was not made until 20 August 1991, for the purposes of s 160U(3). In response, Mr Young QC, who appeared with Mr Maxwell, for the respondent, contended that the ratification dated back to 31 May 1991. He relied on Bolton Partners v Lambert (1889) 41 Ch D 295, in which Cotton LJ said, at 306: "The rule as to ratification by a principal of acts done by an assumed agent is that the ratification is thrown back to the date of the act done, and that the agent is put in the same position as if he had had authority to do the act at the time the act was done by him." Thus, the doctrine operates so that a contract becomes binding on the principal as if the principal had been a party originally. In Keighley, Maxsted & Co v Durant [1901] AC 240, Lord Macnaghten said, to the same effect, at 247: "And so by a wholesome and convenient fiction, a person ratifying the act of another, who, without authority, has made a contract openly and avowedly on his behalf, is deemed to be, though in fact he was not, a party to the contract" - and see also Isaacs J, in Davison v Vickery Motors Ltd (in liquidation) (1925) 37 CLR 1, at 19. The question in this case then arises whether the doctrine of ratification is to be applied to determine the date of the making of the contract for the purposes of s 160U(3). For the appellant, it was argued that s 160U(3) was concerned with the date upon which the contract was made in fact. There was no room for the operation of a doctrine based on a fiction. The doctrine provides for a party to be treated as if a contract had been made at the earlier time, whilst the section is concerned with when the contract came into existence. I do not accept this argument. The doctrine of ratification is a doctrine of general law. The section provides no basis for the conclusion that the doctrines of general law do not apply. Rather, it relies upon the notion of contract and thereby imports general law concepts, such as the law concerning the formation of contracts. The operation of the doctrine of ratification goes directly to the question of the making of the contract. There is no material distinction between the operation of the doctrine, which identifies the date from which a party becomes bound, and the concern of s 160U(3), which is the time when the contract was made. CONCLUSION In the result, the appeals will be dismissed with costs. I certify that this and the preceding twenty-three (23) pages are a true copy of the Reasons for Judgment herein of the Honourable Justice North Associate: Dated: 12 September 1997 Counsel for the Applicant: Mr B J Shaw QC with Mr J de Wijn Solicitor for the Applicant: Arthur Robinson & Hedderwicks Counsel for the Respondent: Mr N J Young QC with Mr C M Maxwell Solicitor for the Respondent: Australian Government Solicitor Date of Hearing: 29-30 April, 1 May 1997 Date of Judgment: 12 September 1997